Consumer startups are dead. Long live consumer startups. – Info Entrepreneurship

Consumer startups are dead. Long live consumer startups.

As a consumer startup investor, it’s humbling how hard it is to determine what are the right consumer companies to invest in and then go earn the privilege of working with those talented entrepreneurs. Most of the investment decisions we make end up being wrong. But when the decision is right, that right can be a really big success. In fact, investors depend on that right decision being outsized to make up for all the wrong decisions we inevitably make along the way. That’s just the nature of our business — it’s hits driven — which is why I take particular interest in understanding if there’s something limiting the creation of hit consumer companies. Is the Consumer Rebellion over? Has the Empire put an end to the next wave of breakout consumer startups being founded?

One word: no.

The Empire’s advantages — network effects, preferred distribution channels, and talent resources — are incredibly formidable, but not insurmountable. Let’s try and overcome them one at a time.

Network Effects

The network effects of the Empire are arguably their most frightening advantage. The value provided by network effects grows exponentially. And at the scale of the Empire companies, the user benefits are so tremendous that it’s incredibly hard to build an alternative that delivers enough value to be competitive.

So what’s the solution? Simply avoid competing.

Mobile users are so savvy and product fluent these days that they are comfortable using multiple services simultaneously. The average mobile user:

Again, that’s the average user (not just the advanced users) who is regularly switching between multiple services instead of staying on a single service, even in the categories that the Empire dominates. So to gain traction in a consumer category, a disruptive startup does not have to defeat and displace an incumbent defended by a network effects moat. As Sun Tzu once said, “On contentious ground, attack not”. A startup can avoid the direct battle and exist alongside the incumbent because users have proven capable and willing of adopting multiple services.

Distribution

The App Store Top Free Apps list is a barometer for consumer startup success. Every great consumer company since 2008 has appeared on this list so it is closely watched by investors, entrepreneurs, operators, the Rebellion, and the Empire alike. In the beginning, the Top Free Apps list was dynamic, constantly changing with promising contenders for the attention of users. But again, something changed in 2013.

Below, I’ve looked at one day (July 1st) for each year since 2013 and plotted how many new, non-gaming apps made it into the Top 100 and Top 500 apps in the United States. I defined “new” as being launched within the past 2 years, and I excluded gaming apps because rankings fluctuate so heavily for gaming apps that appearing on the list is not a consistent indicator of success.

The trend is clear. On July 1, 2013, there were 171 promising new apps ranked on the Top 500 and 29 that broke through into the Top 100. So while the popular apps were mostly incumbents, new startups occupied 30% of the top spots so there was still competition to be an icon on a user’s phone. But on July 1, 2018, those numbers had dwindled to 55 in the Top 500 and only 4 that cracked the Top 100 list. Now startups are fighting for only 5% of the top spots as the Top Free Apps list is dominated by incumbents. Facebook (4 apps), Google (6 apps), and Amazon (4 apps) EACH have as many apps in the Top 100 list as all the new startups combined.

While the percentage of new apps in the App Store most popular lists is low, the key is that it’s not zero. Every day, a small number of new apps still continue to fight the good fight for consumer attention, and even occasionally win. Here are a few apps that launched in the past 3 years that hit number one in the App Store for at least one day:

• Sarahah
• TBH
• FaceApp
• Hooked
• Face Swap Live
• Live.ly

These companies didn’t just reach number one in a specific category. They hit number one overall, the single most popular app in this entire country, more popular for that moment than the mighty Facebook, Instagram, Snapchat, and YouTube. Over that time frame, there were dozens more consumer apps that made it into the Top 10, capturing the attention of millions of people.

5% may be a small percentage, but again it’s not zero and even more important that 5% rate has held constant for apps in the Top 100 list over the past 4 years. While the door isn’t open as wide as it was before, it’s still open and holding open. Consumer startups still have a chance. For entrepreneurs, a chance is all that we ask for. And in a Rebellion, a chance is sometimes all that’s needed.

Resources

If you go to LinkedIn and search for people with “product” or “engineer” in their job title at any of the FAANG companies, you’ll get about 100,000 results back. That’s a very intimidating number. And the actual number is surely higher than that, and there far more companies in the Empire besides FAANG who all have armies of builders of their own.

Back when I worked at Microsoft, resourcing was both a sign of success and an indicator of success. Your project wasn’t important unless you had a hundred engineers working on it, and it wasn’t going well unless you were getting even more headcount each year. But a wonderful thing is happening with product development: technology is making creating technology easier and cheaper. The Internet got rid of long development, testing, and maintenance cycles that came with dealing in physical media. Cloud and virtualization got rid of having to purchase and operate server hardware. Service based architecture and open source got rid of having to build every part of your product from scratch because you could efficiently leverage the work of others.

Because of the rapidly decreasing time, resources, and costs involved, everyone has a chance to build great products, both the Rebellion and the Empire alike. Technology is no longer a numbers game, and it’s more accessible than ever before, which blunts the resource advantage of the Empire. Take for example Intermedia Labs, the talented team behind the hit app HQ Trivia. In less than one year, they released 3 high quality apps (Hype, Bounce, and HQ Trivia) all funded by a single round of venture funding with an engineering team less than 10 people. Not to be outdone, the folks at Joya Communication released 6 different apps (Cleo Video, FlipLip, Any Video, Evercam, Joya Video, Video Gems) in 3 years before landing on their 7th, the hit app Marco Polo. And that was also on on a single round of funding with a similar small team.

To paraphrase the The Six Million Dollar Man, companies of all shapes and sizes, startups and incumbents alike, have access to the technology. We can rebuild the Consumer Rebellion.