Roughly a third of the startups I see in a given week are mobile apps. Some of the most recent ones include a gamified alarm clock, a mobile app to manage one’s online brand, one that monitors your sleeping pattern and numerous niche social network related apps. Not to mention the number of events related networking apps. Some of them are in the tens of thousands of downloads. Some crossed the 1M downloads line.
The harsh reality is that very few mobile apps get funded.
The economies of mobile apps are just not compelling:
- 89% of mobile app downloads are free.
- 35% of mobile apps will generate total revenue of $1-$500 (Vision Mobile’s Developer Economics 2012 study).
- Average annual revenues per app: Android – $33K, iOS – $44K.
- Average total revenue per download is $1.19 on Android – Ice Cream Sandwich (September 2012). I suspect that number is double on iOS but still relatively low.
- Only 2% of mobile apps cross 1M downloads line.
So on average reaching $10M annual revenues requires a mobile app to reach close to 10M downloads and perform 250 times better than the average mobile app. The probability for that is 1%-2%.
Let’s take Evernote as a case in point. Based on Phil Libin’s Fouders Institute showcase, Evernote is making 25 cents/month/active user, which sums to $3/year/active user. With 25M downloads back in 2010 and, assuming a 20%-40% conversion to active, Evernote is just closing $15M-$30M annually (discounting growth throughout the year). So one of the top mobile apps has crossed the $10M annual revenues roughly three years after it was founded. Today by the way, with roughly 45M users Evernote’s revenues are estimated at over $100M.
So where did $700M of VC funding go to in Q2 ’12?
There are still numerous opportunities that take advantage of the growing mobile ecosystem and scale. I’ll mention few of them.
- Mobile platforms – With over 1.5B smartphones and over 600,000 apps, a new ecosystem has evolved with opportunities. App discovery (Quixey) , mobile payment (Stripe), simplified SDKs (Urban Airship) , analytics (Mixpanel, Flurry), monetization (Admob, Inmobi, InnerActive), location based services – LBS (Mixer Labs), security (Lookout), testing (TestFlight), design and development are just a few to mention. These platforms compete over the attention of thousands of customers -mobile app developers, who, together can offer great reach.
- Mobile services – I tend to differentiate between mobile apps/features, such as an app that shows the time around the world, and use cases that call for a mobile usage, such as Siri. There are use cases that take the user experience to a new level due to their mobile nature. Two such examples are:
- Real time navigation – Waze – Ever got stuck in a traffic jam and just wondered how long the traffic jam is ?
- Business location- Yelp – How many times have you searched for a business but forgot the exact address ? Ever went by a business by chance and wondered what others think about it before walking in ?
These are just two examples of solving a need and taking the mobile experience to a new level.
I tend to favor those services that can also gather and leverage valuable data. Onavo, is a case in point. The app reduces mobile users’ data consumption through a compression technology, while at the same time gather information about phone usage (apps, usage during the day etc.).
Generally speaking, most investors recognize an opportunity to generate value within the ecosystem and evaluate opportunities based on that and no just based on revenues (e.g Whatsapp).
Finally, companies that can replicate high growth, virality, engagement and monetization benchmarks across numerous apps. I recently met with a company that developed a mobile game and attracted about 5M downloads in a few weeks, with well above average conversion to active ratio. Investing in a single app that doesn’t generate revenues doesn’t make much sense, but investing in a company that replicates blockbusters with high engagement numbers and can reach high accumulative download rate is interesting, especially if a fraction of them convert to paid.
Choosing your path
In summary, most mobile apps are a nice lifestyle business generating tens of thousands of dollars but not a venture backed business that can grow to significant size. Entrepreneurs who choose to develop mobile apps need to keep in mind the two liabilities they decide to take:
- Need to scale through “the chasm” with little funding and so their business needs to bear close to zero dollars acquisition cost.
- The vast majority of apps will not cross the chasm, with only a handful succeeding beyond making tens of thousands of dollars of revenue per year.
If you do decide to build an app based startup, developing some solid technological edge, that ideally can bring value before it scales to hundreds of thousands of users, or finding a way to generate significant value within the ecosystem, can be key to building a sustainable company in the ”sea of apps”.