Why Mobile Business Apps are Attractive to Venture Capitalists

The allure of making millions, perhaps even billions, of dollars developing mobile apps for the consumer market is obvious. Instagram just got a cool $1 billion from Facebook. Path has a $250 million valuation. Even Twitter was started as a mobile, text messaging-based service.

Venture capitalists are always on the lookout for the Next Big Thing when it comes to consumer apps. But fledgling entrepreneurs may find a higher likelihood of creating a sustainable business and attracting VC dollars in the business-to-business (B2B) market.

The Allure of the Consumer

Consumer apps are sexy. Mobile developers and designers working on the top consumer mobile apps are considered rock stars in Silicon Valley. The Path team has been widely commended for its app’s user interface. Instagram created a huge community for wannabe hipsters. These developers are highly sought after, well-respected and are going to get paid big time.

But for every Foursquare, there are hundred of startups that meet an inglorious end. Succeeding in consumer mobile is difficult. Consumers expect things to be free, or very cheap. The ability to monetize consumer mobile apps depends entirely on scale. Build a user base and squeeze revenue through whatever means possible – be it ads, in-app purchases or paid downloads. Venture capitalists are willing to give seed rounds or Series-A rounds to consumer mobile apps only if there looks like a way the service might be able to scale. â¨

“If you build Instagram or the equivalent, that sort of thing can happen to you. You can go from zero to hero sort of almost overnight. That is never going to end, by the way. That has sort of been the story with media. Not just in the mobile world but in the Web world and the film world and the television world and the music world for a really long time,” said Kevin Spain, general partner at Emergence Capital.

But Emergence Capital does not look for consumer apps. In its decade of existence, the VC firm has focused exclusively on B2B applications, getting in on venture rounds for Salesforce, Box, Yammer and others. Spain said the VC firm is willing to look at the “unsexy” element that is B2B because there is value to be had in the realm.

“The hits are really big, but guess what? Then there is everybody else. That is the 99%,” Spain said. “We are starting to see a lot of entrepreneurs that maybe a year ago were starting to develop consumer apps that are now starting to think about business-oriented apps. You can still build really big, successful businesses here, by the way. Look at Salesforce, look at SuccessFactors and countless others.”

The advantage of building a B2B mobile app over a consumer app is that, from the start, there is a target for revenue. In many ways, the freemium world of consumer apps relies on a strategy of “build an awesome product, tack on a monetization method, and pray.” This can prove to be difficult. Only a handful of companies are going to be able to make meaningful money, or make meaningful exits, developing for the consumer world.

Is B2B for You?

Spain and Emergence Capital are not B2B evangelists. The firm is not actively trying to change entrepreneurs’ minds on what they should build. If an entrepreneur walks into Emergence’s offices and says they are 50/50 on whether to go consumer or business, the firm will state its case for business and let the entrepreneur decide. Emergence’s advice would sound something like what Spain told ReadWriteMobile in a phone interview earlier this week:

“If you are successful in executing, there is a greater likelihood that you are going to be successful and have a winning outcome than if you go down the consumer path. Maybe the highs aren’t quite as high. There is not a B2B company out there that is worth the $100 to $200 billion that Facebook is going to be worth. Not anything that has been created recently, at least. That is OK. If you build a business that is worth $10 billion, that is still a pretty big win. If you can do that with a higher probability, I think for developers that seems like a smarter path to take,” Spain said.

There are opportunities in several B2B categories. One is to find an existing category with an incumbent business and try to outdo it in the mobile realm. As an example, Spain said that a mobile CRM solution could potentially disrupt Salesforce. This route can be difficult, though, because a purely mobile solution has to be head and shoulders above the incumbent to gain enterprise market share.

What excites firms like Emergence Capital more is the ability to create a new category of mobile B2B app.

“Mobile is a new platform, fundamentally. The Web was the last platform, client-server was the platform before that. So, if you think about client-server, there were entirely new classes of applications that came into being. You think about spreadsheets and word processing programs,” Spain said. “Whole new mobile-centric B2B application categories [are what] we are much more energized and excited about. We think that is where the really, really big wins will probably come from.”

Spain mentioned health care as an area ripe for B2B mobile disruption. The health care industry, as a complete vertical (from physicians to insurance, pharmaceuticals, hospitals and hospice etc.), is the biggest single industry in the United States. Many of the mobile applications for health care are still consumer-related, not fundamentally trying to change how business is conducted.

The barriers for B2B mobile health care apps remain high. A doctor once told me, “my staff told me that if we go completely digital, they would all quit.” And that was in a Web-based world. Imagine adding the mobile niche, and the headache blowback likely intensifies. Health care, as an institution, is the hardest industry to move in the U.S.

For entrepreneurs and app developers, consumer products are sexier and offer the biggest potential rewards. The safer bet, though, may be to look toward enterprise customers.

“Fundamentally, in the business world, you build companies to serve other businesses that solve real problems. Businesses that have money in the bank are happy to have people solve their problems for them – and pay them for that privilege,” Spain said.

â¨ Healthcare and B2B images courtesy Shutterstock.