Just a decade ago, few would have guessed that virtual goods could create a real market. Then the smartphone age sparked a whole new universe of ephemeral, yet lucrative, commerce. "People have gotten much more comfortable with the idea of paying for things that are virtual," says Joost van Dreunen, the co-founder and CEO of SuperData, a gaming research firm. For startups in this fast-growing market, the goods may be fake, but the sales are real.
Some of the most promising new areas of business are hidden behind what can sound like Millennial smartphone-speak: Kimoji! Color bombs! Bitcoin! But these terms--meaning, respectively, Kim Kardashian images, Candy Crush aids, and digital currency--represent some of the biggest breakthroughs in the virtual goods economy, which now accounts for more than $100 billion in global sales, van Dreunen estimates. "We're attributing value to things that have no inherent value," he says.
Here are four ways that you, too, may be able to capture the real spending on fake things:
Stickers and emoji: Replace words with pictures
You probably already fill some of your text messages with emoji, those digital images that range from sad faces and broken hearts to suggestive produce and party hats. Their more commercial cousins are "stickers," which can be tailored to specific events, brands, or people--like the wildly successful Kardashian line, which made more than $2.8 million in global revenue in 2016, according to market researcher Sensor Tower.
Who is making money: App makers, marketers, and branding firms can most easily jump into the sticker industry.
How to do it: If your core business is apps, consider designing a line of stickers to sell via the stores run by Apple and Google. Most sticker makers don't charge much, usually 99 cents to $1.99 per collection (minus the stores' 30 percent cut). The payoff is slim if you're doing this on your own, so many app makers get involved only once they have a paying client on board--usually a company or a celebrity who commissions stickers and the related "keyboard" technology.
Who's succeeding: Big tech companies like Facebook dominate, but there is some room for startups. Vivian Rosenthal, the founder of New York City-based sticker-tech firm Snaps, has worked with clients including Pepsi, Nike, Heidi Klum, and Kim Kardashian. Yet Rosenthal says that celebrity content makes up only a small portion of her sales: "The bigger opportunity we're seeing is for brands" to create stickers for advertising, she says. Since launching in 2011, Snaps has signed deals with more than 100 companies, each of which pays from $10,000 to $100,000 per month for its own tailored keyboards and related products.
The risks: Since revenue per transaction is so small, it's a race against time to acquire enough customers. That's part of what doomed Hi-Art, a New York City startup that made stickers for some celebrity musicians. "We still weren't growing enough that we were profitable on in-app purchases alone," says co-founder Brian Lederman. His advice: Move quickly to strike distribution deals with big messaging services, such as Line, Kik, or WeChat. Those third parties may pay to license your content, which they can then distribute to their hundreds of millions of users.
Mobile gaming: Waste time more efficiently
More than 138 million Americans play mobile games, most of which are free to download--and many then pay for small in-app purchases that help them win those games more quickly. (Thanks, color bombs!)
Who is making money: Mobile game studios. Some other developers of recreational apps, including online dating services and language-learning programs, also benefit from this free-to-play, pay-to-advance model.
How to do it: If you've designed and published a mobile game, you might expect to earn about $25 per paying player per month from in-app sales, according to mobile marketing company Swrve. The challenge is to find and keep those big spenders: Overall, just 1.9 percent of players make purchases on mobile games. Here, again, the app stores will take 30 percent off the top.
Who's succeeding: Traditional game publishers like Electronic Arts are investing serious cash in mobile games; more recent winners include Activision's King, the maker of Candy Crush, and Jam City, the seven-year-old private Los Angeles game developer previously known as SGN. Jam City counts 45 million users across hundreds of titles, and says it's on track to do $400 million in annual sales; one of its products is Cookie Jam, a series of puzzles that charges users for extra lives or moves. The company has entire teams dedicated to tracking players' progress and coming up with new levels and obstacles, says Jam City co-founder Josh Yguado: "What's beautiful about the mobile gaming industry is that you have so much day-to-day understanding of what virtual goods users are purchasing, and at what point they're dropping out."
The risks: Remember, a very small segment of users (in Jam City's case, fewer than 10 percent) choose to purchase digital goods, so you need to consistently make new content. "If you think you have the perfect game, and you have a one-track development process, you will almost by definition fail," warns Yguado.
Virtual currency: Spend money on new money
You've probably heard of Bitcoin--but what about Ether, Dogecoin, and Zcash? Most such online-only "cryptocurrencies" aren't controlled by government entities like the Federal Reserve. That has helped them attract a following among digital privacy advocates, investors looking for the next hot commodity, and, yes, less savory elements looking for a digital equivalent of untraceable cash.
Who is making money: Financial services and technology startups, especially those with experience in the complicated and highly regulated financial markets, are best positioned to jump into the world of virtual money--or the related "blockchain" technology that helps it move around the digital universe.
How to do it: Your biggest business opportunity is to start what's known as a digital wallet or an exchange, where you generate revenue by charging fees to buy or sell these virtual assets. (Examples include the San Francisco-based startups Coinbase and Kraken, and the Omaha-based Exodus.) Some startups are looking to the blockchain, developing and selling applications for this new type of financial system. James Gatto, a partner specializing in virtual currency for law firm Sheppard Mullin, calls blockchain-related tech "the greatest value of the whole Bitcoin ecosystem."
Who's succeeding: One of the leading digital currency startups is five-year-old exchange Coinbase. It counts 4.5 million customers, who buy and sell currency on its website. The company has facilitated $5 billion worth of transactions for consumers and institutional investors. "The line between investing and use has been blurred with the advent of digital currencies," says co-founder Fred Ehrsam.
The risks: Regulation! Though the currencies themselves may not be government controlled, those that handle them must navigate U.S. financial rules. Ehrsam estimates that his startup has spent $10 million on red tape, including getting registered by the U.S. Treasury and obtaining money transmitter licenses in dozens of states. (Coinbase is also fielding an IRS probe over users buying Bitcoin to avoid paying taxes.) Another challenge was the time-consuming process of establishing banking relationships to let users sync their financial accounts. As Ehrsam says, "The business is a really hard one to build."
Virtual assistants: Provide invisible help
Think Siri or Alexa: There's a growing demand for digital assistants that can understand spoken requests and perform tasks, such as scheduling a meeting, calling a friend, or making a payment.
Who is making money: Startups that develop machine learning for existing digital assistants stand to make the most money, while some newcomers are creating their own app-based assistants.
How to do it: This new breed of artificial intelligence is built on speech-recognition programs and other quickly evolving technologies. If you have a smart group of programmers eager to take on a sophisticated topic, you could develop and sell a standalone app, or license it to third-party companies for a fee. (Take NextIT, based in Spokane, Washington, which licenses its Alme platform to businesses and also builds custom digital assistants for individual companies.) Or you could sell your whole company: Amazon, Apple, Google, and Microsoft have all recently acquired machine-learning startups--some for hundreds of millions of dollars--to power their own digital assistants.
Who's succeeding: A number of startups are making standalone digital assistants, including the Santa Clara, California-based SoundHound and the Mountain View, California-based EasilyDo. And some entrepreneurs are serial innovators: In 2005, William Tunstall-Pedoe launched what became Evi Technologies, a Cambridge, England-based software maker that eventually created its own digital assistant. In 2012, he sold the company to Amazon for a reported $26 million; now, the e-commerce giant uses Evi's technology to enhance its own digital assistant, Alexa. Tunstall-Pedoe, who left Amazon a year ago, is considering starting another A.I. business. And he sees plenty of room for new A.I.-related startups to find "massive" success: "It's a super exciting space."
The risks: Big, big-name competition. Since the tech giants are already making digital assistants, yours needs to significantly improve on what's widely available. "It would be difficult to create a standard, Alexa-like product unless you have very unique technology," Tunstall-Pedoe says.