Like many of you, I read every blog written by Chris Dixon and Fred Wilson. In the last 24 hours, they’ve both written posts which nicely summarize the problem in investing in consumer mobile apps, and also discuss the implications associated with them. Given my interest in mobile (both in work and investing), I wanted to unpack their arguments a bit, and also suggest a slightly modified definition of *what* is in a downturn mode in mobile.
Chris Dixon says the implications are serious for investors. [post] Dixon asserts “new mobile incumbents” will have outsized power, making distribution — which is already hard — even harder for upstarts, that the mobile gatekeepers show little incentive to loosen their grip, and it could even result in blocking new frontiers like Bitcoin-related apps. To take it a step further, Fred Wilson dubs it “The Mobile Downturn.” [post]
From an investment perspective, it’s important to keep in mind that these statements are very valid in the context of venture capital and returns. What I’ve observed in mobile technology is that “mobile” can mean different things to different people, and it’s important to define the terms up front so as to limit any confusion. Dixon and Wilson are likely referring to consumer mobile applications in their critiques, which are valid — even most of the larger funds have elected to sit back and wait to see what breaks out on consumer mobile and they paying up to invest into growth versus trying to predict what will be the signal in a noisy app market. I have been trying to write here and on my Sunday column that for consumer mobile, it’s usually one of four categories that has a chance to win — games, apps leveraging the camera, network effect products, and online-offline services.
So, I think Wilson is right about a “downturn” in early-stage consumer mobile apps. The scale possible (as exemplified by Whatsapp) is real, yet achieving that scale or anything close to it — which is a requirement of institutional venture capital — is getting harder for all the reasons Dixon rightly pointed out. The end result in the market is that there are lots of mobile startups that end up as acqui-hires or small cap exits and then a few in the billion-dollar+ plus range, and some out of orbit. The grass can be so green on the other side that people (and investors) have flooded the market with both money and apps — a trend Facebook (and soon Twitter) is capitalizing on all the way to the bank.
All this said, there are, of course, many other areas of mobile that aren’t effected in this way. Think of middleware companies which help mobile developers optimize integration processes, or development cycles, or streamline SDKs. Or, think of items that can extend from the phone (usually through hardware) that may become a new wave, though requires a lot of money to compete in. Down to the hardware level, just think about how much innovation Apple is cramming into their next generation of iPhones with M7, TouchID, and Beacons…we are literally in the first inning of this specific game around these new sensors.
The business model of venture capital is to time investments ahead of the market such that at least one (or hopefully more than one) deliver the outsized return to create that grand slam and/or to return the fund with high performance. In this context, a “downturn” in consumer mobile could be perceived as something where some investors view the space as “mature” in the sense that breakout opportunities are potentially constricted. In those instances, as he writes, venture capital will seek higher beta outcomes, especially in places that don’t have gatekeepers like Google and Apple. However, this is not to say that mobile on the whole is in a “downturn” — it’s just the consumer application side, specifically those apps which are not in one of those four categories listed above. Of course, consumer mobile apps get a LOT of attention, so maybe this is the beginning of the correction the market needs in order to improve its vision about both the possibilities and the challenges ahead. While Apple and Google control so much of this right now, things could change in the future (I don’t know how), and distribution channels for consumer apps may open up again.