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Trendy Start-ups Are Hot--Until They're Not
 

Follow consumer fads, and you may get a serious case of whiplash. One investor explains why he only has eyes for enterprise companies.

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For years, a focus on consumers has been the byword among successful tech start-ups. It seemed as though everyone wanted to become the king of personal apps. Facebook cashed in huge and then bought Instagram for a billion dollars. Foursquare has the attention of potential investors, and Twitter is on the IPO crowd's drool list. Etsy, Tumblr... the list goes on.

But there have been misses. Music service Pandora continues to struggle to make money, even as its customer base has grown. High-flying Zynga has been taken down some notches. There's a basic problem in pursuing the business-to-consumer model, says Gordon Ritter, general partner of B2B focused VC group Emergence Capital Partners: volatility.

"[C]onsumer investments are fundamentally fickle," Ritter says. "They run up very quickly. When you're on the right side of those curves, it's the best place in the world to be. But when they turn, they turn badly."

See: Facebook

That was a significant part of the problem for Facebook last year. Not only did the markets not see the continued revenue growth they sought, but according to Ritter, younger users are shifting away from it to other platforms.

"Wherever these people now go is going to suck the interest out of Facebook," Ritter says. "You'll hear these giant sucking sounds and even if it has growth ahead, it won't be the place to be. I think consumers will be out of favor for the next two years. Then it will creep back in and have another amplitude wave in three or four years."

Try Enterprise?

One possible strategy for entrepreneurs is to consider a B2B play. Even though it, too, has swings in popularity, they typically aren't as high as those of B2C concepts. "Think of enterprise as being much more a steady as she goes with small bursts of fundamental trends within the enterprise," Ritter says. When there are changes, usually they happen slowly enough to see the shift ahead of time, giving you and your company enough room to maneuver.

That doesn't mean go after an enterprise-focused business simply to make fundraising easier over the next few years. It's far more important to have a coherent business strategy that takes into account a vital potential market and your own particular expertise and background. But if there is a possible B2B twist, consider it. Remember, during the California Gold Rush, the people who really made money were those who sold equipment and supplies to the prospectors.

IMAGE: Flickr/johnnymip
Last updated: Jan 29, 2013

ERIK SHERMAN's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.
@ErikSherman




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