This guest post is written by Eyal Bino, founder of the Worldwide Investor Network, a NYC-based ecosystem focused on helping early stage, non-US-based technology startups shorten the path to funding and acceleration in the US market.
Over the past two years I’ve come across hundreds of international tech startups interested in expanding to the U.S. market and raising funds from New York- or Silicon Valley-based investors.
Many of these startups focus their ventures on consumer-oriented apps or web technology. Some offer new ways to order food online, for example, while others give users yet another way to share photos. The entrepreneurs behind these products are convinced that their solutions are exactly what users have been searching for.
Meanwhile Apple announced in December 2012 that its developer community has created over 775,000 apps for iPhone, iPad, and iPod Touch users worldwide. Look on that number for a moment and then ask yourself: How many of these app makers are getting the market traction and revenue stream they need to survive? Moreover, are any of them attracting any meaningful funding? Some of them are. The vast majority are not.
As RTP Ventures senior managing director Kirill Sheynkman said at a recent conference: “We do not need another music discovery application.” And he’s right. Investors typically look for opportunities in markets where there are no established winners and high potential for growth. Yet many international startups try to recreate the wheel and develop solutions targeted at saturated markets rather than ones with high growth potential and greater opportunity for differentiation.
While there are some noteworthy international startup success stories in the consumer web and mobile apps space – think Waze (Israel), Hootsuite (Canada), Spotify (Sweden), Club Penguin (Canada) – most big success stories coming from outside of the U.S. have focused primarily on enterprise-class solutions.
Here are a few reasons why international startups should keep this focus rather than develop consumer apps.
The evidence speaks for itself – international companies are thriving in the enterprise tech market. From the more prominent success stories like Skype (Estonia), ICQ (Israel), MySQL (Sweden) to recent examples like Anobit (Israel, acquired by Apple for around $400M), startups that develop robust, enterprise-class technologies are well-positioned to produce revenue and in many cases get acquired.
Developing a company around core enterprise technology typically takes more time and effort than what’s required to develop a consumer app, but the return can be significant. As engineering resources and talent grow increasingly expensive and hard to obtain in NY and Silicon Valley, the value of having great engineers developing strong technologies overseas at reasonable cost becomes very attractive for US and international startups looking to expand their lineup of solutions and grow their talent base.
It’s easier to get meaningful traction in the enterprise market. That’s a big one. With so many consumer applications already available in every conceivable product category, the competition for user adoption is daunting — to say the least. Also, where a year or two ago investors looked for a benchmark of 100,000 downloads to confirm proof of concept at the “A Round” level, today that download number is closer to a million.
In contrast, when an enterprise software startup signs 5-10 key customers, they immediately become more attractive to investors. Typically this also translates into recurring revenue rather than a one-time fee on a download. It makes a big difference.
Make the app the extension of your product, not the core of it. Being focused on the enterprise doesn’t mean you can’t still be creative and mobile-minded. As our world grows increasingly “always on,” enterprise customers expect a level of mobile-optimization that allows them to administer IT systems remotely. This is especially important in the new era of cloud-enabled IT, where virtually every customer-administrated function is performed remotely, and often via a mobile interface.
It’s all about the ecosystem. Ask the teams at Instagram, Evernote, Twitter, and Zynga, and they’re likely to agree that it’s easier to achieve consumer app success in Silicon Valley. Doing so in other parts of the world is much harder. The list of challenges is long, ranging from being geographically removed from target markets to differences in business cultures and ineffective business development.
So if you’re an international tech startup looking to build a consumer app, you might want to increase your odds for success by moving to the Valley and competing with the best. Or you can stay right where you are and focus your efforts on the enterprise market. While not easy, the payoff could be quite rewarding.