So you’ve started a mobile app startup

Mobile apps are fascinating. The technology. The problems being solved. The users. The immediacy. The psychology. Everything.

As of July 2015, there are almost 4 million apps on the leading app stores [1].

Furthermore, worldwide app revenue is poised to hit $45 billion USD this year [2].

And finally, in the fourth quarter of 2014 the 100 million+ smartphone users in the U.S. used an average of 26.7 apps per month, spending more than 37 hours on them collectively.

There has never been a more buoyant time to raise. Furthermore, the availability and diversity of funding (angel, accelerator, seed, crowdfunding, VC, etc.) is great for entrepreneurs. I think we are in unprecedented times, in terms of deal flow for seed rounds.

A recent study [3] by Statista highlighted:

Despite the ever-growing number of app choices available, there’s a limit to how many apps people actually use. Or to put it differently, there’s an app for every need but there’s no need for every app.

The above poses the question, is it really all happy bits and bytes in the world of mobile app startups?

There’s a limit to
how many apps
people actually use.

News reports on mobile app startups shutting their doors are just as common as funding announcements.

This year alone: Secret, FrontBack, Homejoy, Exec & Everpix, collectively raising over $100m, are just a few that chose to shut up shop.

I agree with Andrew Chen’s post “Mobile app startups are failing like it’s 1999”. And I agree with Andrew in that they aren’t failing because of a potential bubble, nor because the fundamentals of app based businesses are wrong. Andrew finishes his article stating:

How things work today:

> Raise funding with an idea and impressive founders
> Spend 6 months building up a product
> Submit to the app store and launch with much PR fanfare
> Fail to hit product/market fit
> Relaunch with version 2.0, 6 months later
> Add Facebook Open Graph
> Try buying installs with Tapjoy, FreeAppADay, etc.
> Repeat until you run out of money

How can we stop the madness? What can do we do to combine the agility we learned in the past decade with the requirements of the App Store?

If we can answer this question, we’ll be much better off as an industry.

Why the “madness” in the first place?

I attribute three key reasons (there are many more):

1. The approach to metrics by many founders, CEOs and investors. Specifically what they’re analysing, optimising for & extrapolating
2. Attempting to scale too fast, taking on too much growth capital. Meaning that they have to sacrifice everything for top-line growth to satisfy investors
3. Timing, as suggested by Bill Gross, is the single biggest reason startups succeed or fail (followed by team / execution, the idea, the business model & funding)

The approach to metrics of many founders, CEOs and investors

How do we actually define app success? Are we looking at the correct metrics?

The usual success criteria that you’ll hear are:

• LTV > CAC (e.g. positive unit economics)
• Financial metrics such as Gross Margin, Payback Period, etc.
• Signup growth rate (MoM)
• Average revenue per user (ARPU)
• 1D, 7D & 30D retention +/- 20% variance (e.g. flat)
• Stickiness (DAU / MAU)
• Number of screen views (if CPM based)
• Session length & number of app opens per week

The above list could go on, and on. And interestingly, you’ll see a mixture of revenue focused metrics and engagement focused metrics — either can provide enough reassurance.

It’s also obvious that you can mould & optimise the statistics, or a subset of statistics, to support your argument & give you a false sense of security. But you’ll only be fooling yourself. And eventually you’ll go through the cycle that Andrew mentioned in his post.

“Torture the data, and it will confess to anything.”- Ronald Coase.

So what should we be looking at? Are the above metrics wrong?

This might sound like a cop-out, but it really depends on a mixture of the following:

• What industry are you in?
• What problem are you trying to solve?
• What’s a realistic total addressable market (TAM)?
• How much of the TAM can you take? 10% within 1y, 2y, 5y?
• What’s the cap on funding to make an exit likely & plausible?
• Is it a high value one use per week app or an addictive low value app with multiple uses per week?
• Should you be taking on venture funding, or should the business remain independent, or a smaller family & friends round?

So whilst the metrics that most people look at are supportive and point you in the right direction, I think the macro picture sometimes gets lost. E.g. Yes, you can have reassuring metrics — but are those 27 apps that people actually use, going to expand to 28 because of yours? If you’ve launched a mass market B2C app, then awesome — at least the expectations are clear up-front.

Attempting to scale too fast, taking on too much growth capital

Taking on external funding is a huge decision, and likely needed for many entrepreneurs to get an idea off the ground, be it $20k or $2m.

The crucial factor is, who you raise from (knowing their expectations, how active they will be, and how much control they have as a result of their investment) and at what pre-money valuation.

Again, it’s all down to strategy, total addressable market and what you personally want to achieve as a founder — and a whole bunch of other variables.

There is not one formula that fits everyone.

Pretend you’re a VC with $100M fund and you make a $2M investment into Mobile App Corp at a $3M pre-money valuation. Suppose the company never raises additional capital & you are striving for a 10x exit ($5M post x 10 = $50M).

To achieve that $50m (simplistic & best case) exit, you’d need to have EBITDA of ~$3.3m per year (taking 15 P/E multiple). That’s a pretty huge target each year, for just a $2m investment.

It instantly becomes the core focus.

What’s more, to have a content life, and a happy board — all the metrics and growth curves need to be smooth and showing positive incremental increases. Which in reality, is really really difficult.

There’s a reason 9 out of 10 startups fail.

So please, be careful when deciding on the ultimate strategy for your business. Should FrontBack have attracted outside capital (at the magnitude it did) and try to become a social network generating tonnes of cash? I don’t know enough of the specifics to comment but Fredd, the founder, recently wrote in his post-mortem:

While we’ve seen exciting results with some communities, for most of the new members it takes too much time and effort to understand why Frontback is different, resulting in an infrequent use of our product. After discussions with our team and investors, we realized that we couldn’t reach the critical numbers that would make Frontback a sustainable social network.

Timing

Bill Gross has founded a lot of startups, and incubated many others — and he got curious about why some succeeded and others failed. So he gathered data from hundreds of companies, his own and other people’s, and ranked each company on five key factors. He found one factor that stands out from the others, timing.

Timing accounted for 42% of the difference between success and failure.

To back up the importance of timing Bill gives the examples of Airbnb & Uber:

the company came out right during the height of the recession when people really needed extra money, and that maybe helped people overcome their objection to renting out their own home to a stranger.

Same thing with Uber. Uber came out, incredible company, incredible business model, great execution, too. But the timing was so perfect for their need to get drivers into the system. Drivers were looking for extra money; it was very, very important.

Bill says in summary, that execution matters a lot. The idea matters a lot. But timing might matter even more. And the best way to really assess timing is to really look at whether consumers are really ready for what you have to offer them. And to be really, really honest about it, not be in denial about any results that you see, because if you have something you love, you want to push it forward, but you have to be very, very honest about that factor on timing.

Closing words

I set about writing this article to highlight areas where confusion can arise between founders & investors. I am still very bullish on mobile, I actually think we are only just getting started. But be realistic in valuations, objectives & achievable market penetration- that way you will make your life a whole lot simpler.