Internet Consumer: The Cycle Has Turned

There’s a silent but intense winnowing happening right now in venture capital.  As the WSJ reported here, many start-ups are having a hard time raising follow-on financing:

Just under half of the 165 companies in the consumer information services sector that raised first rounds in 2010 have raised a subsequent equity round and fewer than one-quarter of those who raised a first round last year have done so.

Specifically, the funding of Internet Consumer and mobile companies is down 42%. That’s because, while seed rounds are happening, the dollars going to follow-on financing rounds are way down.  This is a topic about which I co-hosted a panel at the recent MassTLC unConference: seed rounds are easy, but how do you get sustainable financing from the VC community?

“Sector rotation” happens often among start-ups.  A sector becomes “hot,” but it eventually cools down.  We’re seeing that right now in the Internet Consumer space.

IMO, I think the winners will be the companies able to find a space with few substitutes.  In other words, a unique value proposition. Whether cycles ebb and flow, success always comes down to the same thing: you create real value for a customer.


2 thoughts on “Internet Consumer: The Cycle Has Turned

  1. Interesting point, Jo. When I read it, my first reaction was to wonder, “what if the reason that follow-on financing rounds are way down is due to the fact that Internet Consumer and mobile companies, after having been launched with a seed round or ‘first round’ financing, simply do not need another round of VC financing? Is it possible that their business models enable them to get to cash flow positive based solely on the seed/first round? Sure, they may not have the dry powder to get bigger faster, but what if some of these companies have simply chosen to grow organically, without taking another dilution hit?”

    The WSJ article gives a hint, but doesn’t provide a real basis for comparison. “If recent history is any indication, many consumer information services companies will stick around whether or not they raise additional venture investment. Of the 140 companies that raised first rounds in 2007 or 2008 and hadn’t raised another round as of September, just over half were still in business as private entities. Of the rest, 39 had been acquired, one went public and the rest were out of business, in bankruptcy or had their assets acquired.”

    So, roughly speaking, 50% of these companies have survived 4-5 years with just the seed/first round of financing. 29% have been acquired or gone public, with just 21% having whiffed (though, some of those acquisitions may have been just picking through bones, though the WSJ apparently distinguished between being “acquired” and “had their assets acquired.”).

    Would a 50% survival rate, combined with a 29% success-or-quasi-success rate, be considered a good outcome, by your standards? I don’t have a good metric against which to compare, for those companies that did raise follow-on funding.



Leave a Reply