Tim Merel is the founder of investment bank Digi-Capital.
It’s no secret that mobile Internet is disrupting technology markets, and according to McKinsey it could drive trillions of economic value within a decade. Gartner forecasts that mobile apps revenue will grow 5 from $15 billion in 2012 to more than $70 billion in 2016. So “thar’s gold in them thar hills.”
This is a huge opportunity, but it’s also a huge challenge. Even mobile app companies with millions of downloads can struggle to raise money in the current market (particularly mobile games, which currently generate ~3/4 of all mobile app revenues). Angels, accelerators, incubators and crowdfunding are great to get you started, but aren’t the solution for the “difficult” second album – Series A funding. The much talked about “Series A Crunch” (unfortunately not a breakfast cereal) means that there are >5x the number of unfunded early stage companies across industries today compared to 2008, and those make for tough odds even in a hot market.
So how do early stage mobile companies escape the Series A Crunch?
At Digi-Capital our deal flow is around 1,000 deals annually across America, Asia (China, Japan, South Korea) and Europe. Much of that comes from early stage mobile apps, mobile games and mobile technology companies, so we like to think we have a feel for the market. Our experience and pattern matching have guided us to focus on the 7 habits of highly effective mobile fundraisers:
1. Product meta-design
What do you need to demonstrate beyond beautiful graphics and great functionality/gameplay? Investors can look at a range of factors, including user interface/experience, user progression/conversion, user segmentation and app balancing, social co-operation, smartphone/tablet specific functionality, post-release content updates, sales events tied to content promotion, testing (user, black/white box), analytics, rapid low-cost development cycles, agile development, business model (including free vs paid), monetization balancing, app discovery, distribution (both local and global), localization, community management, virality/organic user acquisition, cross-platform approach, tech differentiation (hard to copy quickly) etc.
2. Product portfolio approach/roadmap
Are you a single product company, with a big investment in one product (i.e., more like Evernote)? Are you a platform developing multiple products, with low capital intensity per product launched (i.e., more like Supercell)? Is there something in your approach which can produce more than a single product success? Is your approach best for the types of investors you are targeting (VCs often prefer platforms/portfolios, industry investors can be more comfortable with one-way bets on products they deeply understand)? How can you persuade investors that the risk they might take on you is worth the potential reward?
3. Mobile sector/genre growth dynamics
Are you aiming at a sector/genre within the market that is growing or shrinking? Are you opening a new part of the market, or flying into the teeth of bigger, better funded competitors? Are you focused on iOS, Android or both? What about OTT (KakaoTalk, Line, WeChat, WhatsApp)?
4. Team track record and dynamics
Have you succeeded before? Have you failed before and survived? (Spoiler alert: that’s a good thing) Do you have everyone you need on the team to succeed? Beyond designers and engineers, who is your money person? Who in your team knows how to acquire users organically? Who on your team knows the snakes and ladders for your sector/genre (could be in the core team, or a mentor)?
5. Mobile money metrics/analytics
What are the mobile money metrics that could take you into the top 1% of mobile app companies by revenue? Digi-Capital ranks apps using its proprietary data set in terms of lifetime value, 7 day retention rate, ARPDAU, sessions per day, 3 day retention rate, ARPDPU, % of paid conversion in first 30 days, sessions in first 7 days/following 7 days, % of paid conversion in first 90 days, second session conversion rate, % of paid conversion in first 7 Days, sessions per week, average session length (minutes), and % of organic to paid users. Where do you rank against the best?
6. Company upside potential and downside protection
What is your company’s upside potential where investors could help (e.g., realize growth potential, partnerships, team augmentation, analytics, mentoring, outsourcing)? Where is the downside protection for investors in your company (e.g., underlying asset value, team, IP, user base, brand, marketshare, switching costs, commercial relationships, predictable revenue)?
7. Fundraising and exit relationships
Who are the VCs and industry investors investing in mobile apps today? Which mobile app categories are they investing in? What advantages and challenges do you face with each of them? Why could they want to invest (or not want to invest) in you? How do you get them to come to you, rather than you going to them? (Spoiler alert: that’s a really good thing). If they won’t come to you, how do you get to them? How do you pitch like an expert, not a newbie? Who might buy your company after you’re a hit, and how are you building relationships with them (VCs want an exit, IPOs are rare, industry investors want to own you)?
A lot to think about, but hopefully this might give you a better idea of how to increase your chances of raising Series A funding for your early stage mobile company. Get it right and you could do well, get it wrong and you risk being disrupted out of existence.
Tim Merel is the founder of Digi-Capital, an investment bank for games, apps, digital media/services and tech/telecoms across America, Asia (China, Japan, South Korea) and Europe.
Digi-Capital advises mobile internet, games & digital clients across America, China, Japan, South Korea and Europe... read more »
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