Start-up Entrepreneurs' Blog

When is a Consumer Internet Start-up Good from the Investors’ Viewpoint?

July 15, 2010

Earlier this week, I attended a venture capital meeting on the consumer Internet and I am going to share with you some of the investors’ perspective.

What makes a good consumer Internet start-up?

The product must speak to the consumer in a way that delights them. It can’t be the technology that’s talking.  This is a big mistake of many start-ups teams because they tend to have such strong backgrounds in technology.

Consumer Internet companies don’t get it right the first time. These start-ups must have the ability to produce fast iterations, to interpret the response of their users after each release, and to modify their product until they get it right.   Developing good metrics and listening to what these numbers are saying is imperative to guiding the company and the product development in the right direction. After all, the consumer Internet is about reaching and capitalizing on the masses, thereby the need to quantify the desires of the aggregate into a single product. If the start-up is offering a service that the consumer only pays $50 per year to use, you need a lot of users to make the business viable.

Success is determined by the business model, not the technology.  It’s more about getting the mix correct.  Consumer Internet offerings can’t create a massive change in the way people do things today, and it’s necessary to be able to cost effectively acquire customers.

One indication of success is whether there is a strong, simple, and easily describable value proposition. If the start-up can’t succinctly convey what the product is and why someone should use it, it’s hard to gain traction from word-of-mouth, personal referrals, or user reviews. 

It’s easy for the major players in an industry to duplicate a product technically. With consumer Internet products, there’s a lot of value in the networking effect because it’s not easily copied. 

What would be considered fundable?

Investors prefer to see an early stage company that has already introduced the product into the marketplace and there is some initial traction with early customers. They also want the beginnings of a core team to be in place.  

Investors want to fund companies developing platforms, not start-ups based upon offering new features or add-ons.  However, consumer Internet start-ups don’t often begin with the platform, it evolves over time and through interactions with consumers.  The most likely path is for a start-up to first create a product that customers want and love, and in the second phase, the start-up’s experience evolves the product into a platform.

Entrepreneurs should listen when they pitch their start-up to investors and none will invest.  A consumer Internet start-up can be started for a low cost. Entrepreneurs often mortgage their houses and drain their savings trying to build a start-up that no one would invest in.  They should take a step back and reconsider the proposition.  Venture capitalists evaluate many proposals where it seems as though a group of technologists brainstormed about ideas and whatever was the best idea, valid or not from a business perspective, is what they propose.  That said, it is not unusually to contact many, many investors and only find 1 or 2 interested. There is a fine line between saying no one is interested and the entrepreneur hasn’t contacted enough investors.

What is a desirable end result?

Consumer Internet IPOs are usually big deals for venture capitalists. Consumer products are much less attractive because these start-ups don’t return nearly as much.  In terms of acquisitions versus IPOs, acquisitions are often done when the company’s revenue is less than $30 million, and beyond that point, the start-up has to target an IPO strategy.   Start-ups expecting to be acquired should look to the angels to provide funding, whereas the later start-ups should seek out the venture capitalists.

Filed under: Start Up Funding

Tags: consumer internet, start up, start-up funding trends, start-up investors