Sunset For The Consumer Web?
By Todd Hixon
A Kinder, Gentler Sunset; photo (c) Todd Hixon.
In recent months a number of influential voices have declared the consumer web boom of the last 6–7 years (going back to the emergence of Facebook) to be over. Fred Wilson of Union Square Ventures is a well-known example (link). Fred’s post stirred up a nice debate including rebuttals from start-up investing luminaries such as Dave McClure (link). You can get a sense of the energy in this debate by typing “Fred Wilson” plus “consumer web” into Google.
I don’t imagine I have the last word to say about this. But I’ll offer a couple of observations.
Marquee consumer web successes (Facebook, Twitter, etc.) plus the much reduced cost of building a web-based service and attracting users in six-figures has produced a big surge in such businesses. I suspect that this helped drive the recent angel investing bloom. Angels funded 66,000 companies in the U.S. in 2011, up from 36,000 companies in 2002 (source).
The result is a very big inventory of early stage consumer web companies out there, looking for follow-on financing, strategic deals, customers, and exits. As a simple matter of supply and demand, many of them are not getting much love.
This over-supply compounds with the unique and seductive nature of consumer web businesses: for an investment of low $ millions you can create a whole lot of activity and engagement with a service. [But, these businesses typically have modest revenue; monetization often requires much more scale.] At times the market has paid well for this: remember the business that were sold on a “dollars for eyeballs” basis in the 1999 Internet boom?
Today one is far less likely to get paid for audience alone: businesses are judged heavily on revenue and even that antique concept, profit. Buyers have their pick from many options and are busy sorting through them. A lot of these businesses are product line extensions for the buyer’s consumer web platform: they enhance the offer, but they are not essential, and making is always an alternative to buying. Consumer web businesses that have, for example, a well-developed and innovative service and a million users, but only modest revenue, encounter difficulty getting decent offers from logical acquirers.
That helps me understand why B2B is looking better these days. “Big Data” is driving a wave of innovation that benefits enterprise, enterprise markets have been out of favor with (hence neglected by) VCs in recent years, and, despite the well-known costs, cycle times, and frustrations of selling to the enterprise, it’s a good way to get revenue: when you make the sale you almost always get a check. A fledgling B2B business will typically have a revenue stream and a customer set that acquirers can analyze.
The consumer web has not descended into darkness, however. Innovation continues at a rapid pace, and the big guys do not cover all the bases. For example, we are seeing interesting second-generation e-commerce businesses that have direct revenue and margin streams (not dependent on monetizing an audience).
However, the bar for consumer web has gotten much higher. Attrition among the private consumer web companies will be high. Follow-on investors are right in most cases to tie their interest to revenue level and momentum. Start-ups will need to either succeed on conventional financial metrics or have a breakthrough value proposition, like social networking, that, realistically, comes along only a few times in a decade.
[This post first appeared at blogs.forbes.com/toddhixon on January 9, 2013.]