Tap Your Phone, Get Stuff (Including Funding)

Uber Economy by Schalf

Earlier this week, Steve Schlafman, an investor with RRE in New York City, created this imageabout all the various startups that offer consumers the ability to order goods and services directly from their phones. These startups — Uber is the prime example — turn our phones into remote controls. I call it, “tap your phone, get stuff.” And if we look at the list, we see many startups that have not only raised decent early-stage rounds of financing, but some of them are quite big. I’m writing this week’s column for people who want to build mobile businesses.

Right now, this seems to be the best category to start building in mobile today. I’ll explain why below. Briefly, it’s hard to breakout with a game, and less likely to be funded early. Photosharing and location-based apps need something special out of the gate to get funded, but then require explosive growth — I can already think of one seeded photosharing app that raised about $2 million from Valley angels, launched after a private beta, and is most certainly in a deadpool right now. Messaging apps or other apps with network effects (like marketplaces) could use a jolt, and I think we’ll see more rolling out soon, but those require time to build liquidity, especially across two mobile platforms. And, then, we have this category — “tap your phone, get stuff.” Out of the box, it just works.

Investors are voting with their dollars. Look at the image above. How many names you not only recognize, but how many of these apps you use. Investors want to fund these apps!

Investors are really only following consumer demand. Consumers want to be able to order stuff from their phone, quickly. They’ll often pay a premium (in-app) to do so.

The consumer-facing products for this class of apps doesn’t take as long to build. Apps in these categories are often more straight-forward. I do not mean to suggest this is all easy, but beyond a few screens and settings, consumers often don’t need more than that.

The consumer doesn’t need to spend much cognitive energy on these apps. Once a startup presents a service to the consumer, grabs their payment and credit card information, and accepts the promise of the user, most of the work to fulfill that service is done without the consumer knowing or seeing anything. Yes, I know you can see Ubers and Lyfts driving around on your phone, but most often, consumers leave the app in which they initiated the transaction and are kept up-to-date through a mix of text messages and/or push notifications.

Software here is mostly a back-of-the-house operation in these apps. On the backend, the best startups in this category build different forms of software to manage these logistics and keep things efficient. This usually includes systems that route requests to those who will fulfill them, crossing the web to mobile and back again.

Speaking of fulfilling requests, those are usually completed by humans enabled by software. Right now, with the bottom-third (or so) of the labor force in a mix of freelance, hourly, or contract employment (if employed at all), startups are competing for labor at a fierce rate. In the Bay Area, where many of these services start, it’s not unusual for companies in this category to have more consumer demand than they can handle, all constrained by the fact that they can’t hire enough drivers, enough skilled workers, and so forth. With mobile, thankfully, workers can work when they choose, and startups can access labor at the edge of the network, often at will.

These mobile apps often control the financial transaction. Businesses in this category that can use mobile to find equilibrium in the market for specific goods and services can be rewarded with decent margins, and if there’s enough market activity, those margins can add up quickly and snowball — just ask Uber and Lyft.

And, voila, there you have a mobile-first business. Now, I don’t mean to trivialize that each step of the process is easy, but given the conditions in mobile right now, these are the businesses that are working earlier in their life cycle, these are the businesses that consumers understand, want, and talk about with their friends, and these are the businesses that investors have figured out fast enough to open their checkbooks if they see things working in real life.

Yes, serious long-term questions persist. Will only a few special startups figure out how to optimize their local models and expand them geographically, like Uber masterfully has? Will all these swiss army knife services consolidate into a single brand eventually? With fewer barriers to entry, will competition fragment services geographically, stifle expansion, and ultimately reduce the size of the pie? In the face of such competition, what will keep consumers (and employees) loyal? But, in the long-term, we’re either all dead — or your mobile company will be. Either way, when it comes to mobile-first, and given the funding climate, I can’t think of a better category to launch in. As you see on Schalfman’s chart, many categories are crowded, so if you venture down this path, make sure to present a different kind of solution or different market. I know it seems crowded, but I’m convinced other non-obvious opportunities exist. If you see them, please do get in touch.

Haywire is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2014 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus