Venture capitalists still 'like' the consumer internet, but when it comes to where they're putting their money, consumer internet startups are competing harder for funding dollars.
According to Dow Jones VentureSource, the amount invested in consumer internet companies declined 42% in the first three quarters of 2012. Part of the reason: venture firms have been forced to take stock of their investments as consumer internet darlings like Facebook, Groupon and Zynga have been battered by the public markets.
But there's more to the story. As Fred Wilson of Union Square Ventures observes, the consumer internet has changed.
"We are almost 20 years into the consumer web and we have large platforms that are starting to suck up a lot of the oxygen," he writes. "google, facebook/instagram, amazon, microsoft, apple, twitter, ebay, yahoo, AOL, craigslist, wordpress, linkedin together make up a huge amount of the time spent online, particularly in the english speaking world."
Wilson does note that "there are still occasional new entrants into this list." He points to Tumblr and Pinterest as examples, but suggests that consumer behavior is starting to "ossify" and that new entrants will find it more and more difficult to grow a large user base.
Nothing new under the sun?
The net-net as Wilson sees it (consumer behavior, coupled with the rapid shift to a mobile, which has a competitive and complex landscape), has made it more difficult for consumer internet startups to gain traction. That, in turn, makes it harder for them to get the funding they may need to take their services to the next level.
So is the consumer internet boom of the past decade over? Should entrepreneurs skip the consumer internet and set their sights on enterprise markets, which are attracting more and more attention and investment?
For starters, it's worth pointing out that 'consumer internet' is a broad term. Entrepreneurs hoping to build the next Facebook might have a significantly higher barriers to success, but the maturity of the social media market hasn't stopped entrepreneurs from making a mark in the ecommerce space, for instance.
And while it might be easy to fall victim to the belief that certain markets are tapped out or past their prime, young companies are proving day in and day out that there is almost always room for innovation. Case in point: while Zynga's struggles make headlines, a startup you have probably never heard of, Supercell, is building "social games with actual gameplay and strategy" -- and making a mint doing it. By some estimates, two of its mobile games are pulling in more than $500,000 a day in revenue.
None of this means that Fred Wilson may not have a point when he suggests that consumer internet startups will face a more challenging environment, but perspective matters.
If your goal is to raise money from venture capitalists by following the latest trend, trying to compete with the Google, Facebook or Twitter may be a less-than-compelling-proposition. But if your goal is to build a real business, there's arguably never been a better time to look at the consumer internet. After all:
- There are literally billions of people with access to the internet.
- Mobile channels, while often challenging to navigate, give companies the opportunity to reach and interact with consumers in ways never before possible.
- Large numbers of consumers, particularly those in developed nations, are increasingly comfortable buying physical and digital goods online.
- While the costs of building a great website aren't zero, an abundance of open source technologies means most consumer internet startups won't have to reinvent the wheel and even the tiniest startups today have access to capabilities few venture-backed startups could afford a decade ago.
None of these things guarantee success on the consumer internet, but a less mature and arguably less competitive consumer internet landscape didn't guarantee every startup a successful outcome a decade ago either.
So when Wilson writes, "the wind that has been at our back for 7-8 years in consumer internet is no longer there," caveat emptor: there's still plenty of wind out there -- if you're traveling on the right path.