They aren’t generating lots of buzz at South by Southwest. They don’t make that cool new app all your friends insist you just have to get. But there is one very interesting thing to say about the start-ups that cater to the rather mundane needs of other businesses: They are really good at making money.
Venture capitalists have tended to overlook B2B start-ups in favor of trendier consumer companies in the social-local-mobile space. But that has begun to change.
Big-name investors such as Paul Graham and Chris Dixon have touted the merits of B2B companies. In August, Dave McClure and his incubator, 500 Startups, even hosted a conference dedicated to unsexy start-ups.
“I think a lot of the investment world realized that, after jumping in a little too quickly, maybe we’re spending a lot of money on mobile strategies that are not really getting big quickly or monetizing well,” says McClure. “I think some folks decided to go back to the things that were comfortable and made money.” Imagine that.
Compared to consumer tech start-ups with uncertain revenue models that are dependent on massive amounts of users, B2B start-ups are more straightforward.
For Mike Marian, co-founder and CEO of Synapp.io, an Atlanta start-up that helps businesses optimize their e-mail marketing, the biggest perk of being a B2B is the near-immediate market validation. “We started in January, and we’re self-sufficient off our own revenue as of July,” he says. The six-employee company now has more than 1,000 paying customers.
Likewise with Firefly, a start-up that makes a browser-sharing tool that helps businesses with their customer support operations. “Sign up 10 or 100 customers, and you have a self-sustaining business,” says Dan Schipper, co-founder of Firefly and current senior at the University of Pennsylvania. He and his co-founders have managed to do just that. Launched in late 2012, Firefly has signed deals with a number of customer support and financial services companies, making it profitable since Day One and generating six-figure revenue.
Of course, the great irony is that as VCs have gotten turned on to the attractiveness of B2B, the companies themselves are in the enviable position of not having to rely on outside funding.
“We’ve turned down three term sheets so far because we can support our team and our product without taking any money that we don’t feel is the right fit,” says Marian. “That is a huge advantage.”
The Beautiful and the Damned
On the other hand, these three hot consumer start-ups turned ugly when their business models fizzled:
March 2011-December 2012
Funding Raised: $41 million
Hot Industry: Online photo sharing
The buzz: Sequoia Capital, Bain Capital, and Silicon Valley Bank all backed this photo-sharing-app company led by serial entrepreneur Bill Nguyen.
What went wrong: Dubbed “the start-up from hell” by The Atlantic Wire, Color imploded under a lawsuit that alleged toxic culture, poor leadership, and shady bookkeeping.
Funding Raised: Unknown
Hot Industry: Online chat
The buzz: Russian high school dropout Andrey Ternovskiy was wooed by Silicon Valley VCs offering million-dollar buyouts.
What went wrong: How do you monetize 50,000 naked men? Ternovskiy hasn’t found the answer, nor has he found a way to stop traffic from plummeting.
October 2007-May 2013
Funding Raised: $850 million
Hot Industry: Electric-vehicle charging stations
The buzz: Named one of Time’s most influential people in 2009, Israeli entrepreneur Shai Agassi had a bold vision to reinvent the electric-car infrastructure.
What went wrong: Winning over both carmakers and drivers is a daunting task. The company lost $459 million in 2012 and brought in only $6.9 million in sales. It declared bankruptcy in May.