It is a question of blood sweat and apps to get to a one billion dollar valuation for your app. The 7-step formula is clear and simple; like all recipes and plans success lies in implementation.
In a recent workshop we ran with George Berkowski the challenges of creating (and being rewarded for) a successful mobile app were discussed in a practical and constructive manner. Trading in his engineering skills he has successfully built tech and app business. In summary there are certain contextual aspects to be aware of, a 7-step process that affects choice of business model, investment levels, shareholdings and valuations. The economics are compelling for the winners.
Mobile is the digital platform of the now and immediate future. Mobile and data penetration has increased to over 85% for the world’s population; in just 20 years! In some countries and communities the figure is close to 100%. Industry observers, Justin Jenk amngst others, have estimated that we now spend over 15 hours a day on average linked to the Internet; of which 3 hours are on our smartphones. Ben Evans has written some incisive posts on the implications of this addition.
There is also a psychological effect, amplified by smartphones. These devices elicit positive feelings of being connected, excited, curious and productive a typical smartphone user checks his/her device 150 times a day! The bulk of it. App related revenues (many remain free to use or poorly articulated freemiums). Over 80% of smartphone traffic is app related: Facebook and games account for nearly 50%. The app landscape is competitive (see diagram below). Currently there are over 2 million individual apps available for downloading. In 2013 there were 102 billion apps downloaded. The average smartphone owner makes use of just 26 of them! The winning aps can be characterized by having a retention rate of over 50% (eg that 50% of the original users have used it more than twice a month after the initial downloading).
Do the maths!
The economics are daunting to find that billion dollar app. But it is out there.
The reality is that there is only a 0.07% chance of success to enter the “billion dollar app” club.
These billion dollar winners are usually the product of a third of fourth attempt by the entrepreneur. It takes about seven years from concept to sale or IPO valuation. By that stage the successful app has 50 million average users. The profile is a serial venturist, 37 years old and with the experience of three previous ventures. There are numeroius ways to build your own app, some in less than 45 minutes!
The stories of Facebook, Tindr as well as Hailo vs Uber and Angry Birds vs Candy Crush all provide excellent reference cases that help provide concrete examples of the recipe. Thes cases can be found at info@raktas.
George and friends’ recipe
1. Develop a great idea. This is all about finding an unserved or underserved segment. As with all good ideas think disruption. This app idea must be encapsulated in short, say seven word statement, that captures and communicates this distinctive and unique offering. “An elegant solution to a big need”. Related to the big need, the app must have a memorable a catchy and compelling name. At this stage one should be starting to assemble the team for the journey to a beta launch (step 4). A three person team is critical, each one focused on: keeping to the relevant vision, building or overseeing the app, finally someone to build users volumes.
2. Convert the idea into an App. Before any programing begins, storyboard out the user experience (UX). This will reveal where the gaps and overlaps are. Borrow liberally from best in class but look for features and wrinkles that will make your chosen app distinctive; better yet, compelling. Design is everything.
3. Test and Iterate to workable offering for the app and the business. For the app, go out and speak to 500 potential users. Begin with the storyboard. Work in their comments. Then start the programming to get to an alpha version that functions. Choose one operating system initially and make it work! There are different merits to starting with either iOS or Android – do the homework as to determine which is a better system for the target users. The alpha version should contain no obvious nor cataclysmic glitches, open and run easily, be intuitive to use and not take more than (15) 30 seconds to start using it. Be clear about the Intellectual Property Rights (IPR). For the business model there are 5 generic ones to consider – decide and build accordingly.
4. Fit to chosen Product/Market. Using the alpha version to blowtorch your app to ensure that there really is some take-up. The industry speaks of a “friendly user test”. Put the app out there amongst friends & family and return to Step 3 to get your alpha ready for its beta version. The team should now be in place. One’s metrics remain standard and must be managed: Trial – Repeat – Referral-Revenue. There are some service providers who offer plug-in, one step support: crèches rather than the more vacuous incubators and accelerators
5. Acquire users. The ‘war stories’ all suggest that the successful apps were magically adopted – not quite true. It is difficult and expensive to push a noodle; pull it! From Steps 3 and 4 you should have developed a following of 500-1,000 friendly users who will be the apps initial mavens. Friends & Family, app store users and Top-10 charts remain the most important sources of conquest users. Thus the title, icon, description, screenshots and keywords all become critical to make your chosen app stand out. Managing social media and selective media activity (and spend) will help generate and drive traffic. The critical objectives are download-trial-repetitive use –referral. This provides validation for concept. Now to convert traffic into revenues.
6. Covert users to customers. The chosen business model dictates the nature of revenue generation. Pricing remains a misunderstood tool, as has been discussed extensively elsewhere. Essentially one needs to two price points: free to encourage trial; and then some outrageous price point for distinctive value. One should always have an eye to competitive offerings; seeking to differentiate through service and value, not cost. The latter path leads to commoditization and loss for you and the chosen sector.
7. Snowball customers to customers. If the app has a true value-add to users then they will repeat and refer it to others. The topical ‘freemium’ model is a powerful one. Regardless, one needs a pricing strategy and appropriate price points.
Whatever the likes of McKinsey and Accenture write, the VC world has confidence in the following five business models. The economics are clear. Don’t trade between the models. Pick the most appropriate one.
- Gaming (eg Angry Birds): pay per download
- E-commerce (eg Uber): transaction based
- Consumer/B2C (eg Instagram): advertising based
- Software (eg Dropbox): pay for service
- Enterprise/B2B (eg Workday): solutions for businesses
It is interesting to note that valuations do not vary much between the various models. The business models provide the basis to attract volumes, deliver service and capture value.
Investments, shareholdings and valuations
By Step 4 one will probably have spent/invested between USD 20,000-200,000.
Steps 5 and beyond one enters the world of Communications, Marketing, Advertising and PR. There are short-cuts that can be provided by digital marketing, native techniques and that elusive, but ever sought after, word-of- mouth that makes an offering going “viral”.
All things being equal this pre-money/angel/seed stage valuations for an USD 200,000 investment could be USD500-800,000. At the Friends & Family stage the creators should be aiming to own between 10-25% of the company. Make sure that all the appropriate legal protections are in place and do consider Founder vesting rights. Keep it safe but simple.
Cash flow remains the byword for valuations. However in the tech, dot.com, mobile world that metric becomes somewhat obscured. Execution and delivery are the watchwords for dollars.
The observed rule of thumb is that with 30 million average monthly users one can expect an app to garner a valuation of USD 1 billion and above. From 2004 to the present day there have only been 43 of these. The venture capitalists and markets are looking for a combination of numbers (a form of proof of concept) and momentum (the take-up is leading to that sort of volume). A good proven app can expect a valuation of USD1 million; a step better and one could hope for a valuation in excess of USD 5 million at a fully funded start-up.
Valuations are just as much a function of numbers/momentum as well as a defensive bet. Users, as with all consumers, are fickle. The established gorillas are petrified to loose volume and share to upstarts. For example Google is only 12 years old and its members sometimes reflect wistfully in public that by 2020 it might be a company of the past – such as Netscape, MySpace and AOL.
An interesting observation is that regardless of the chosen business model – the billion dollar apps all have roughly similar metrics.
- Find that elegant solution to the big need
- Continue burnishing the idea
- Apps reflect people’s behaviour
- Get the right team
- Monetize – revenues and business
Feel free to contact us at Raktas or check out related posts at justinjenk.com
[author] [author_image timthumb=’on’][/author_image] [author_info]Justin Jenk is business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or justinjenk.se[/author_info] [/author]