The Decline of Consumer Web VC funding

Lots of angst today following this WSJ article, the key point being:

Overall the amount invested in consumer information services was off 42% in the first nine months as the difficulties of newly public Internet companies such as Facebook and Zynga cast doubt on the business models and valuations of social media companies.

Fred Wilson, always very interesting to read, argues it is driven by 3 main trends - summarised below:

1) the consumer web has matured. we are almost 20 years into the consumer web and we have large platforms that are starting to suck up a lot of the oxygen..... but consumer behaviors are starting to ossify on the web and it is harder than ever to build a large audience from a standing start.

2) the consumer is moving from desktop/web to mobile/app. we've talked about this transition ad naseum on this blog....(but) strong product market fit is no longer enough to get to a large user base. You need to master the "download app, use app, keep using app, put it on your home screen" flow and that is a hard one to master.

3) the momentum/late stage investors have moved from consumer to enterprise. there is a large pool of money in the venture capital asset class that is opportunistic, momentum driven, and thesis agnostic. this pool is driven largely by the public markets. this pool of capital was "all in" on consumer web/social web in the 2009-2011 time frame. it drove a lot of activity throughout the venture capital markets because each layer of the VC stack (angel, seed, Srs A, Srs B, Srs C, etc) needs to be aware of what the next layer up wants to fund. when the momentum/late stage wanted web/social, the layers below gave them web/social. now that the momentum/late stage wants enterprise, we should expect the layers below to give them enterprise.

The last point is in my opinion the crux of Fred's post, but he doesn't address the "why" it has shifted - and I think this comes down to the WSJ's point - the demand is falling because the returns (outside of the insiders) are as virtual as the products.

Those more wedded to the Consumer Web VC model disagree fervently:

Recent articles by the WSJ, Fred Wilson, & others are noting a shift in investor interest to enterprise and away from consumer. If true, this is a huge error… at least for entrepreneurs, angels, and smaller funds. There is no better time than the present to build cheap & scalable software-based businesses that make money. And while there is lots of new potential for using consumer marketing techniques in the enterprise, let’s not be too hasty in digging an early grave for the Interwebs, shall we?

Having been in the valley for over twenty years, and an investor in startups for almost ten, I’ve seen at least 2 investor cycles of switching back & forth from consumer to enterprise. While i agree with Fred it’s helpful to know what themes downstream investors are funding, IMHO most VCs switching from consumer to enterprise are clueless about why they’re doing so.

Perhaps they are, but I would argue that the market is behaving totally rationally here - "Return On Investment" is still deeply unfashionable among the Consumer InterWebzerati as the profits are as virtual as the products, but it is becoming increasingly clear to investors that the current business model for the Consumer Web is a busted flush* - Freeconomic market grabs plus a great IPO/exit to the dumb money only works for a while until the dumb money catches on, and "everything sold through iTunes" is hardly better. Facebook in my view stopped the Consumer Web VC party bubble.

(*It always was, as we showed in 2008, but we underestimated how far greed and "mass dumbness" can go in pushing a market)