Investors these days are shifting their interest from consumer-focused start-ups to enterprise-focused start-ups. This is because the last few years have seen a gradual collapse of the former type because of a mix of global macroeconomic factors and increasing worries associated with the unproven business models of internet consumer start-ups.
They have been hit pretty badly by valuation markdowns by investors and there are serious doubts about the profitability of these start-us. Industry bigwigs also are of the opinion that B2B start-ups need lower amounts of capital to expand and they are profitable in a shorter time as compared to cash-intensive, loss making consumer start-ups. Investors and venture capitalists all looking for greater returns on their investments than they are currently getting from the consumer-focused start-ups.
Indian companies like Freshdesk, a cloud-based customer support platform that was founded with the mission of enabling companies of all sizes to provide great customer service, or Moglix, an online platform and e-commerce one-stop company specializing in B2B procurement of industrial tools have seen great success in obtaining funding and growing in an environment where consumer-based internet companies are either stagnating or reporting losses. The success of these companies is motivating other entrepreneurs to enter this space and is encouraging investors to look at funding this sector more seriously.
Why enterprise-focused space?
What is the reason for this shift in focus? Why are venture capitalists considering the enterprise-focused space? One big reason is the losses being faced by consumer-focused organisations – the losses are on the investors’ – they stand to lose their money as the markets get flooded with me-too products which lower prices and hence profits.
Attempts by them to hold on to their market shares have resulted in unwise business decisions and loss in company equity and value. B2B companies, on the other hand, do not have to deal with retaining customers or offering price-offs to bring consumers in.
Vetting and selecting companies
As a result investors have become a lot more careful about vetting and selecting companies based on their business models and rate of return on investment. Industry sources say that while the unit cost of acquiring customers is higher in B2B start-ups than in B2C companies, since the former have far fewer customers, total costs are lower.
Traditionally, investors and venture capitalists have spread their funds between B2C and B2B enterprises but the scenario is changing quite definitely. So what are the main factors that inspire them to invest in enterprise-focused start-ups?
Products that are ready
Investors do not want to put their money in where it takes time to build a consumer base and earn profits. They look for products that are ready to hit the market, have higher profit margins and are desired by customers.
They want companies that generate money from the first day in business. B2B companies bring in higher revenues just by sheer size of transaction, especially for enterprise solutions. A good B2B company does its research early on, it identifies market gaps where it can offer niche products and it grows its customer base along with the growth and modification of its products and launch of new customer-focused products.