Why Angels Continue to Invest in Consumer Internet Deals

Less Due Diligence is Required in Consumer Internet

I was looking through my portfolio of investments the other day and realized I have been over-investing in consumer Internet deals.  Of the many companies I have invested in over the last six months (including 750 Industries, AdRocket, GoodRec, Huddler, LabPixies, Lefora, Mechanical Zoo, Offbeat Guides, OtherInbox, Play Megaphone, SnapTalent, Yotify, and more) only three are not B2C.  Why?   I’ll try to explain.

Like many angels, I have been trying to diversify and actively trying NOT to invest in consumer Internet companies.  I run a B2B company and have an affinity for building strong technology for the enterprise.  And I have seen a lot of good enterprise software, SaaS, services, and other deals that I couldn’t pull the trigger with.  Most other angels are in the same boat.  Here’s why . . .

Consumer internet companies require a lot less due diligence than almost any other company.  And that’s important for most angel investors who generally invest as a hobby and devote less than 2% of their time to the investments (I personally spend my Saturdays talking to potential companies instead of doing other hobbies like golf).  That means angels cannot spend a lot of time evaluating a technology or a team.  They need to look at the product quickly and make a decision.  Many angels make a yes/no decision in just one meeting.  

With such little due diligence, it makes investing in enterprise software extremely difficult.  At the angel stage generally all the team has are its bios and a slide deck.   They product might still be months (and sometimes years) away.  That makes investing without doing due diligence ultra risky.

Consumer Internet is much more capital efficient (at least in the beginning).   Most angel investors in consumer Internet deals invest AFTER the product is already built (not before).  This is important because as an investor you can see if they have a good product and it can eliminate some of the technology risk.  In fact, one of the biggest problems with many start-ups is that they never actually ship.  Just shipping something good can massively increase the chance of success. 

Sometimes the product already has users who you can talk to about their experiences.  Even when a product has no users, by playing with the product you can imagine how people WILL use it.  It is much harder to do that in the enterprise without extensive interviews.

When I met the founders of Meebo three years ago it was obvious they would become a super company.   In fact, I have still never seen anything more obvious.  There were three rock-star founders (two of which are engineers).  They had no money.  But they built a product that is really HARD to make.  And they had users who absolutely loved the product.  My entire due diligence was talking to the founders for an hour, using the product, and calling a few third-party people to get references on the integrity of the founders.   The Meebo team continues to impress me today.   

That said, all this means consumer Internet companies are probably over invested in because it is much easier to invest.  A smart investor with more time should probably focus elsewhere to increase their returns.  And the schleps like me who invest only as a side hobby will likely continue in the consumer world, even if we see a downturn there.  

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