Areas of Mobile VC Investment

I recently conducted a deep-dive into VC investment trends in the mobile and smartphone space. There has clearly been a marked increase in investment activity in this sector since the smartphone revolution led by the iPhone started off in 2H 2007.

To understand which mobile subsectors these VC investment dollars have been going, I looked through VentureXpert data of all available VC investment transactions in the US since Jan 2008. I first filtered down that long list to all mobile transactions using some key words on the company description. I then filtered down to select only early to mid stage investments, giving a total of 87 startup companies meeting these criteria. I then manually classified each funded company’s line of business into one of few areas (such as content, infrastructure, enterprise etc). The final results are below:

The resulting breakdown is not unexpected (and aligns with recent analyses of iPhone investments), but here are some interesting highlights:

• The largest bucket was that of content-focused startups. This includes content production companies such as Booyah, location focused companies such as Buzzd and interactive TV providers such as kyte
• There’s an uncomfortably large crowd in the venture funded mobile payment/mCommerce space. The hope here is to disrupt the $60B credit card space, and more investments continue to be announced as we speak
• Lot of activity in other consumer focussed or related areas such as gaming, social media, advertising.
• Hardware and network infrastructure continue to be bellweathers of VC mobile investments, as the need for both larger pipes and better device components continues to explode.
• There has been an uncanny lull in spaces such as enterprise-focused mobile companies and those focused on areas such as smart homes/ sensor networks. There are both potentially large markets, but VCs have shied away from these areas – which in my experience is largely due to adoption challenges, lack of precedents in these areas.

My view is that these enterprise focused mobile plays should see a lot more activity shortly – as other spaces continue to get overcrowded, and the smartphone value proposition (beyond email) percolates deeper into the enterprise. The Smart home and sensos network space also appears close to its inflexion point (finally).

How does this align with what you have seen?

PS: Classifying companies into narrow functional areas is highly subjective. First of all, it’s hard to even classify startups as ‘mobile focussed’ or otherwise, as many digital media and internet startups have a sub-focus on mobile. Second, the functional buckets I have chosen are arbitrary. The goal was to have a broad picture of the space, for which this should suffice.

Micropayments – huge opportunity ahead?

Micropayments are creating a brand new revenue stream for digital media, mobile and technology companies. An easy payment mechanism such as automatic billing significantly lowers the bar for making small purchases (up to a few dollars) on the web. For such small payments, it turns out, the bar is oftentimes not the users’ willing to pay. Rather, the showstoppers have been the overhead (pulling out credit card, filling up digits into the form, and the transaction processors’ minimum fee) and uncertainty associated with such transactions. Systems that remove these overheads and uncertainities by giving the user a seamless, trustworthy payment and billing mechanism are well positioned to unleash a huge new revenue stream on the web.

Apple’s iTunes and iPhone apps are the best examples of this. The seamless purchase mechanism and small amounts involved transform the user’s software purchase decision from a meditated one into an impulse purchase. The result is the ongoing “Gold Rush” where thousands of paid apps are being downloaded hundreds of thousands of times for a few dollars each. What does this signify for similar platforms on the web?

There is an immense potential to monetize online media and content through micropayments. Online micropayment systems have been around for almost as long as the Internet. However, several factors prevented first generation micropayment systems from taking off, including a) Lack of differentiated short-form content and applications that users would pay small amounts of money for b) Lower comfort with online credit card transactions c) Lack of trustworthy micropayment systems that presented a seamless experience to the user and were widely adopted.

However, with the wave of online apps (including those on social networking platforms) and the iTunes-iPhone mindset, all of the three factors above seem to be changing substantially. There is a large variety of apps, music, videos that is now legally available. And customers are more comfortable using their credit cards online, thanks to the increasingly high adoption rates of online ticketing and travel. 

Players to watch out

Besides Apple, there are a number of players who are positioned to take advantage of this trend. Here is an attempt to capture some of the categories:

• Startups such as Spare Change and Tinker which are enabling monetization of social network apps and blogs. Space Changeis apparently already processing $30M of micropayments annually. Expect to see social networks such as Facebook and MySpace start their own competing micro payment systems, or buy some of these small players.
• Mobile phone companies, which already have billing relationships with customers are really well positioned to build micropayment systems of their own. Indeed, Apple is eating what could have been AT&T and Verizon’s lunch, had they given up their walled-garden approach as the times evolved.
• Similarly, ISPs and Cable companies such as Comcast/CIM have an opportunity to create or integrate micropayments into their broadband customer sites, use micropayments to monetize some of the premium content on their new media sites, and charge customers directly through their monthly bills. 
• Other usual suspects who have customer relationships and/or customers’ credit card numbers include Internet giants Google, Yahoo, Microsoft, Amazon and Ebay/Paypal, and eCommerce providers.

Review of current consumer themes in Internet, media and mobile

New ideas and startups don’t necesarily succeed by trying to drastically change consumer behavior. Instead, they succeed more often by identifying shifts that are happening in consumer behavior and needs, and then leveraging then capitalizing upon them with slick execution.

A framework that can help identify, assess and classify potential opportunities is to look for dominant consumer themes that are taking shape across a broad spectrum of products and industries. These themes represent major shifts in consumer behavior, and can  help identify new products and services that consumers are ready to adopt now, or will be in a few years.

Here’s a shot at listing some major current themes in consumer behavior evolution, which are applicable to the Internet, media and mobile sector:

• Hyperdifferentiation and Personalization: We are in an era where consumers are asking for products that are more and more differentiated, and at the same time more personalized to their tastes.
• Convergence: As the complexity of types of media and access mechanisms increases, the human need for simplicity keeps creating opportunities for various types of convergence – convergence of access device (e.g. TV content on mobile phone), convergence of media types (e.g. blurring boundary between TV content and online videos), convergence of desktop software and web services (e.g. SaaS).
• Acceptability of new communication mechanisms: In the beginning, there were phone calls, email and personal web pages. Then came SMS, social network pages, blogs, personal videos, twitter, video twitter… whats next?
• Consumers also want to be Producers: User-generated content (blogs, videos, music etc) represents a major shift in consumer behavior from the early Internet model, where most consumers were happy being just consumers. Even though the percentage of consumers who contribute content may still be low (less than 20% of YouTube users ever contribute a video), the key theme is that consumers are now ready and eager to consume content created by other non-professional users.
• Community: The advent and popularity of the Internet took away a little bit from real-world social interactions, as an entire generation grew up spending enormous amounts of their leisure time in front of screens. However, humans are social animals, and the human need for social interactions and affiliation has given rise to an entirely generation of online tools that relicate real-world social behavior - ranging from social network platforms to people search tools to match-making sites.

Then there are some evergreen themes, that have always been around, but which keep acquiring a different flavor with each generation of new technology. These themes include:

• Information Organization: As the amount of information that is available continues to grow exponentially, opportunities for new mechanisms to organize that information keep on arising. Version 0 was Yahoo-type directories. Version 1 was google-type horizontal search. The current frontiers seeing a lot of action are vertical search (e.g. Indeed for jobs, Kayak for travel), social discovery tools (e.g. StumbleUpon, Digg etc), recommender systems (like the ones used by Amazon for instance). One area where we could see more action in this domain the near future is more comprehensive Personal Information Management.
• Ease of Use or Lower Cost: Anything that helps me simplify what I already do, or lowers the costs of what I do in some way is always attractive.

These, of course, are all very broad themes. But they can provide us a good framework to look for opportunities. We can cross-index these themes with the major macro trends and structural changes that I laid out in a previous post, to have a matrix that we can classify currently evolving opportunities into.

In a few posts, I’ll start delving into each theme, with the end goal of identifying upcoming players that are well positioned for harnessing those themes.