Venture Capital firms come in many shapes and sizes, some focus on particular geographies, some on specific products and others on a specific stage of the growth phase.
For a startup or an app publisher, VC funds can provide the boost needed to advance to the next step of the growth ladder. However, it helps to keep in mind that whenever any VC firm invests in a startup, it does so with the aim of maximizing its Return on Equity (ROE). Simply put, they want to make sure that the money they invest will come back to them X times over and not go down the drain.
Therefore, when pitching to VCs, it is essential to demonstrate how the company will endeavor to ensure a healthy ROE and app store data can be a useful tool in order to do so.
Here are a few suggestions for how app store data can be leveraged when pitching to a VC:
Venture Capital firms will most likely try to estimate the size of the opportunity that the startup or an app is trying to seize before investing in it. This involves approximating the overall and immediate market size, and the rate at which it is growing.
Market size: App store data can help define market size, a proxy for growth potential. For example, since the beginning of 2016, the United States has seen more than 1.7 billion app downloads generating more than $1.2 billion in revenues. Of the 1.7 billion downloads, nearly a third were for the “Social Networking” category followed by “Productivity” and “Business”; each constituting more than 100 million downloads. The bigger the market the bigger the potential user base and potential ROE.
That being said, an app’s market might not comprise an entire category or be estimated at hundreds of millions of downloads, instead it is usually very narrow and limited to a couple of apps. In either case, sizing and segmenting the market, however big or small, is crucial for defining the growth potential to a VC.
Market growth: A market is usually defined in terms of one of three stages: growth, mature or decline. Similar to traditional markets, in the case of app store categories, top apps in fast growing categories often witness a fast appreciation in ROE. Therefore, before going to a prospective investor it is critical to study the market conditions and determine if it’s the best time to enter or expand.
As an example, in Q4, 2015 the ‘Business’ category grew by 65% compared to the previous quarter. For a top business app developer about to go into a new funding round, this is a key point to highlight on the VC pitch.
App store data can help quantify these competition variables for the VC pitch. Google maps being a leader in the ‘Navigation’ category is common knowledge, but with app store data it can be concluded that it had nearly 3 times the downloads of its nearest competitor in the same time period. These figures are important for estimating what it would take to break into the top charts. For example, the minimum amount of downloads required to break into the overall top 10 chart for January, 2016 in the U.S. was nearly 3.5 million.
App store data can help determine the market shares of the competition.
A firm with a realistic strategy is not only more likely to capture a considerable portion of the market share, but also more likely to secure VC funds. App tiers, a metric for competitiveness, is a great way to show degrees of market concentration (i.e. if it’s a monopoly or an even playing field) and define respective competition strategy. It is similar to the Herfindahl–Hirschman Index (HHI) used to assess the level of competition that exists in various industries.
Ideally, a VC firm would expect to see different market strategies for different levels of competition. For example, an app in a monopolistic market should show its plan for tackling the behemoth in that market. Or if the market is evenly distributed, outlining the unique value proposition can be a good idea. Therefore, as observed on the graph above, the market strategy for an app in a highly concentrated category, such as “Navigation” will be different compared to “Lifestyle” or “Shopping” which have lower levels of concentration.
Legacy performance and forecasts
For conventional businesses, proof of success and financial stability can be found in historical balance sheets and income statements. Similarly, for app publishers, historical downloads, approval ratings and revenues provide an indication of the health of the firm and are key points which need to be on a VC pitch. This data showcases what a publisher has achieved so far with or without previous rounds of funding. For some paid apps, this data can also help in forecasting future revenues.
Let’s look at the example of 7 Minute Workout Challenge.7 Minute Workout Challenge, an app launched by Fitness Guide Inc. in July, 2013 had revenues which mirrored downloads. Should they choose to forecast revenues for a VC pitch, by forecasting downloads they may be able to estimate their revenues.