The Harsh Reality of Mobile Investments

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.

Mobile appstore downloads

89% of Mobile Apps are free

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.
App Download Distribution - Android

App Download Distribution – Android

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.

  1. 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.
  2. 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:
    1. Real time navigation – Waze – Ever got stuck in a traffic jam and just wondered how long the traffic jam is ?
    2. 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:

  1. Need to scale through “the chasm” with little funding and so their business needs to bear close to zero dollars acquisition cost.
  2. 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”.

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About shanishoham

After 14 years of General Management and incubating/scaling new businesses & organizations for enterprises (established a $55M mobile business and a $100M/400 employees global division), I became an investor Today I’m a board member/mentor with 5 incubators & micro-VCs and involved with many other private & public incubators around the world. I also founded a VC firm named 2020 and I'm a member with a number of angel groups so i get to see & work with many startups, innovation centers and other parties across the ecosystem. I’m an alumnus of the Stanford Graduate School of business - Sloan Master in Management program, a 10 months intensive program for 57 carefully selected experienced Executives and leaders from all around the world.

8 comments

  1. warero

    Reblogged this on ProduSoul.

  2. RE: Evernote

    Just to nitpick a little. Evernote has taken $250mm in funding (a staggering amount) to generate ‘approximately’ a $100mm in revenue. Personally I think that number is high. They have 45mm users but not all are paying. I’d put the paying amount at 10% which is 4.5m real customers. So i’d put revenue somewhere around the $50m or less a year mark. Also look at the number of funding rounds – the old adage of beware the C round is in the rear view mirror as they’re now on E and F rounds. I also think this is part of the reason they’ve been forced to introduce an Enterprise product which is priced at 3 times the yearly regular user.

    Building a sustainable profitable company with a durable solution is incredibly difficult. Personally I think Evernote is the gold standard for users. For corporate users – not so much, unless you’re the IT department and don’t mind your employees data in the cloud.

    Now back to mobile. Here’s the core problem – buy ANY mobile device today and do NOT add any apps for 30 days. You’ll quickly see that the OEM’s own all the critical MUST have apps that force a purchase decision. Think of it as a minimum app list. Then for the rest of it they simply farm it out to developers who end up with no ‘sustainable advantage’.

    Think about this as well – the browser. Every MAJOR browser OEM has prevented anyone from extending the mobile browser. Therefore they collect all the search revenue that comes from the Mobile web. The only alternative is to build your browser which is incredibly difficult (we know because we’ve build 2). So in every case you’re locked out (via the OEM) from driving new innovation. I wrote a blog about this: http://www.3pmobile.com/is-there-room-for-another-browser-in-the-marketplace-the-right-question-to-ask-ourselves/

    So what’s the solution? Twofold… identify a real market need with an identifiable customer (by name) and then build a solution for that problem set that generates measurable, sustainable, profitable revenue from volume. Do all of this for less than $10mm so that dilution is kept to a minimum while driving significant value/valuation. Also you’re going to need patents, and your solution will have to ‘impact the business model’ of the OEM’s so that they’re forced to pay attention to your product.

    Do that on Mobile and you’ll exit for a great IRR.

  3. Thorsten Claus

    As always, just saying an industry is not compelling because there is a lot of noise or failure or “on average” it’s not making money is a bad idea. Especially for venture capital. Apparently, on average, VC funds lost money in the past decade (though I’m not sure how much, of if this is true, the link escapes me right now).

    So no more restaurants (too many failures), no more mining (too expensive), no more elections (too many losers), no more search innovation, no more cloud computing, …

    Starting apps is cheap, becoming successful is expensive. Starting apps without a business model or a clear path for revenue potential is also possible. And your statistics look like that many apps start out exactly like that. Having said that, I do like platforms and “enablers”, I guess it’s a telco thing 😉

    • Thorsten, well said. Apps are cheap to start, which makes many of them a nice lifestyle business, few grow to significant size and many times those are the ones with a clear need and a scalable model.

      Just to clarify, i don’t think the industry is not compelling. On the contrary. I think there are many opportunities to capitalize on. I just pointed out to segments that are potentially more compelling and some things to think about, if one is going the pure app route.

      Thanks for the comment.

  4. (@cranstone) all the analysis and planning and business school history lessons don’t change the fact that Evernote is word processor cut down to the mobile landscape. Updating legacy apps to today’s need is nice, but does not have the same value and ability to make it big as new apps. The same goes for traditional business models. They do not take advantage of new ways to make revenue in a new landscape. The one thing that all these discussions misses out, is innovation, creativity and doing something that nobody has done. That could be integration, adoption or a whole new way of doing things (Facebook is just another way of attracting people to read your gibberish without creating a mailing list 🙂 Either way, updating legacy apps or creative innovation, most of the really successful products tend to succeed because they are new, good (i.e. quality) and are useful. All the other stuff that the biz school history lessons give us, are secondary. Sad that all these investors and analysts missed that angle. Otherwise, nice discussions and good writing 🙂 !!

    • Thanks for the compliments!
      What you were referring to as innovation is what I referred to as “taking experience to the next level”. I think there are companies like Waze, Sidecar, Lemon doing that. I’d love to see more such innovation.

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