When pre-revenue startups with less than 15 employees like Instagram have 10-figure exits in less than two years, it’s reasonable to ponder how today’s app economy compares to the dot-comedy of the late nineties.
One of the first people I recently asked was Matt Murphy, the partner at Kleiner Perkins Caufield & Byers who manages the venture capital firm’s $200 million iFund. Murphy joined KPCB in 1999, during the peak of the last tech boom, and since 2008 has overseen more than two dozen investments in app-oriented startups. Portfolio companies of the iFund, conceived as “a collaborative initiative with Apple,” include Square (a 2+-year-old mobile payment service rumored to be valued at $4 billion), Path (a mobile-specific social network that just raised $30 million at a reported $250 million valuation) and Flipboard (a socially-driven news app that raised $50 million a year ago.)
While Murphy acknowledges that valuations for leading app companies are hitting “a breathtaking level” and that we are in the midst of the “biggest shift of user behavior” since the early days of the web, there are a lot of differences with the current generation of digital pioneers.
Here are five of them.
1) The app obsession is around products, not companies
During the last boom, it was about raising a lot of money to start a company that would attack a fertile industry that presumably was in need of reinvention. The actual product or service that enabled this reinvention would come later (if at all).
Today, says Murphy, “there is a lot more appreciation on the product, the designers, the data scientists and the engineers. They are the rock stars… With APIs, all of these amazing products are now talking to each other.”
Murphy cited Path as a company that’s initial product “didn’t work so well” when it launched in November of 2010. The app, which was seeded with $2.5 million from prominent angel investors, attracted only 30,000 users in its first year. Last December, a product overhaul helped Path to evolve from “a fairly mundane scrapbook” to a social networking powerhouse that had a 10X increase in users within a month. New features included a complete redesign, better sharing, and a tool that tracks every aspect of daily activity. The mobile-only social network, also on Android, now has approximately 3 million users.
“They came back with an amazing, beautiful design and it mushroomed,” Murphy said. “It’s not about being the best capitalized company [Kleiner participated in Path’s $8.5 million second round in February of 2011]. Great product wins, and this is a combination of design, user experience, use case, simplicity, and viral mechanics.”
2) Management teams must pivot and iterate more “extremely quickly”
To Murphy, the “leading indicator” of an app company’s success is the “sensibility to iterate extremely quickly. Good companies will hang in there, be creative, listen and be smart enough to pivot.”
Before Instagram was a game-changing photo-sharing application, it was Burbn, an HTML5 check-in app that had little chance of competing with foursquare. Only after it pivoted to photo-sharing did the company “catch lightning in a bottle”, Murphy said. And Instagram isn’t the only company to do so.
Draw Something developer OMGPOP started off in 2006 as a multiplayer gaming website with mixed success before it started developing mobile apps. By some accounts, the company was on the verge of shutting its doors shortly before Draw Something debuted earlier this year. Lucky for them they did not as Draw Something became an overnight sensation that reached one million users faster than Angry Birds, Instagram or any other title since the App Store debuted nearly four years ago. In March, OMGPOP was acquired by social gaming powerhouse Zynga for a figure believed to be around $200 million.
“If you get it right you can scale quickly, and you’re not going to get it right through dollars but at the product level,” Murphy said.
3) Apps are about more than just “reinventing the obvious”
Whereas the early days of the commercial Internet were largely about disintermediating generations-oldindustries by “digitizing the supply chain to buy and sell”, Murphy believes there is a bigger opportunity this time around. “It’s about reinventing how people spend time,” he said.
The entrepreneur that sits across the table from Murphy trying to raise money from the iFund to seed or expand a venture must, for lack of a better phrase, think different.
“What is the unique insight that is driving your innovation?” Murphy asks prospective portfolio companies. “Have you thought enough about it to have a contrarian point of view or have deep insight that others don’t have?”
Here Murphy pointed to Path co-founder, David Morin, a Facebook alumnus who wanted to build an entirely different kind of social network. Morin consulted with Oxford University anthropologist Robin Dunbar to study how many meaningful relationships an individual could actually have in their social network. Path restricts the number of contacts any one user can have at 50, which is a primary differentiator of the service and perhaps why it is so popular among those with Facebook fatigue.
4) Mobile gaming is “more profound” than anything on the Internet
As an investor in Zynga, Murphy has direct exposure to mobile and web-based gaming. Zynga has a “huge mobile business”. Draw Something developer OMGPOP and Angry Birds developer Rovio Entertainment are poster children for how games can take off on mobile devices in ways not possible on the commercial web (particularly during its embryonic days of the late nineties) or any other platform.
As cited above, OMGPOP nearly called it quits after scores of its web-based titles failed to take off and generate revenue to support operations. Five months after its release, Draw Something generated more than 20 million downloads (many at $1.99) and OMGPOP CEO Dan Porter was bragging about making six-figures per day. While Rovio Entertainment was comparatively more successful than OMGPOP before debuting its household name title on the iPhone in 2009, it’s unfathomable that the once obscure Finnish developer would be valued for as much as $6 billion without the success of Angry Birds and its offspring.
5) The app space has more innovation and “less hubris”
While venture capital is flowing liberally into pre-revenue app companies, it’s rare for developers to raise significant rounds without putting their products in the hands of real users.
“Given the choices and the Darwinian environment,” says Murphy, “it’s very important to not be too beholden to one view of the world.”
App companies are not “pre-ordained” based on the reputation of the founders or the amount of capital they raise. The one notable exception cited by Murphy was the photo-sharing app developer Color Labs, which raised $41 million before its first app hit iOS and Android devices. The company shuttered its first app, called Color, a few months after launching in March 2011 as users found it complicated and to some a threat to privacy. Color Labs has since released the much less ambitious Color for Facebook earlier this year.
“Most companies today are starting with a lot less hubris,” Murphy said.
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