(Editor’s note: Consultant Jonathan Klein takes a look at investment numbers, and suggests investing in mobile is more attractive than social networking.)
Did you know that there were 219 major Hollywood movies released in 2005? Why 219? Why not 419? You could argue the reason is supply. There are only so many good scripts, actors, and directors. However, if you happened have seen The Island, Bewitched, or Stealth (given their numbers, odds are you didn’t), it would seem that supply ran out well before 219. I actually believe that demand is a far bigger factor. People have a certain amount of time and money available for movies and that amount holds pretty steady. It turns out that 200 to 250 is the number of movies that the market can support.
The same logic holds true for venture funded companies. Corporations can only absorb so much new technology. Advertisers have only so much money in their budget. Consumers can only spend so many hours online. Ultimately, demand determines how many venture investments the market can support. The Internet bubble serves as a cautionary tale of what happens when investment outstrips demand. No one wins. Not even companies with great people and ideas. The pie only expands so fast and when there are too many start ups, demand is divided into too many little slices to create successful companies.
Understanding the demand side of venture • measuring venture investments from the point of view of the end customers companies are targeting • is one of the goals of my company’s new quarterly Follow the Money report. Our Q2 report shows overall investment levels in IT appear to be healthy. However, drilling down one level reveals a steep rise in consumer investing and drilling down one more level provides a great example of one segment with healthy levels of investing and one that may be overheated.
During Q2, nine companies received funding to provide consumers services via their mobile phones while 25 social networking companies received funding. Unless you are willing to believe that social networking presents nearly three times the revenue opportunity for start ups as mobile services (which seems unlikely), there are only two conclusions • either VCs are underinvested in mobile or social networking is overheated.
Maybe the market can absorb all of these social networking companies, but the evidence points toward social networking being overheated.
The final conclusion • Unless the social networking company you are considering joining or investing in has a secret sauce, you’re better off going mobile.
4 Comments
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David G. said:
Like supply, demand might be too elusive to measure as well for many startups in emerging markets, such as social networking and mobile. As Jonathan’s second reasoning alluded to, factors such as timing, technology, policy, team, and maybe weather all play some some roles in determining the “right” number of startups that should be invested in a given industry. This could be a good example of the VC social networking investment throughput theory.
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Jonathan Klein said:
I agree that strict quantification of demand and supply in the venture market is extremely difficult to quantify. However, there are some clear factors such as the rapid emergence of a new market and low barriers to entry which signal a likely gold rush. As I alluded to at the end of the post and expand on in my blog http://topblog.toplinestrategy.com, I believe there are still good opportunities in Social Networking, but they will be companies that establish very different models than the early success stories like MySpace.
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Steve said:
Startup evaluators rely on market size as a key investment issue because overall market demand represents the highest possible revenue potential - and a startup can not expect to own 100% of the market. This article well articulates another input in the equation - how much money (and how may companies) are going after that market. I can say from experience that it is hard enough to start any company and define yourself - two dozen other startups spending millions to get their differentiated message out does not help.
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Sanjay said:
Nice Article.
Where can I find information on what ideas and
problems in mobile space are being solved. I am
not looking for any secret receipe … just high level
info about services/products to come in mobile.
Thanks.
