Editor's note: Originally published on July 25, 2014
Digi-Capital forecasts mobile internet will grow >3x to $700B by 2017, driven by mCommerce (>$500B), consumer apps (>$70B), enterprise mobility (>$50B) and mobile web advertising (>$40B), as detailed in our new Mobile Internet Investment Review Q2 2014.Click to enlarge
Despite mobile internet records of more than $47B M&A and $14B investment in the last 12 months, with over 20 “billion dollar” companies in the space already, picking the difference between “hot” and profitable acquisitions and investments can be hard for acquirers, investors and entrepreneurs alike. This isn’t helped by the noise level around some sectors.Click to enlarge Click to enlarge Click to enlarge
Digi-Capital’s Investment Quadrants try to mitigate some of the “hotness” factor, instead taking a data driven approach to identifying high investment potential sectors. The results might not be what you think…
Let’s start by explaining what we mean by “high investment potential”. We are looking for an apparent mismatch between forecast revenue and both investment and consolidation activity relative to that revenue. In other words, if a sector looks like it will be big, and there are relatively lower investor competition and more remaining exit opportunities, then it might be worth considering.
The methodology compares three sets of numbers for each sector:
- Revenue forecast 2017F: Could it get really big both in absolute terms and relative to other sectors? Could you invest in a rising tide, which hopefully lifts all boats?
- Investment in the last 12 months: How competitive has investment been compared to other sectors? Could you invest in a blue ocean, not a red one?
- M&A in the last 12 months: How much consolidation has there been so far compared to other sectors? Could you invest for exit, or might it be too late already?
The underlying data and analysis are detailed in our Mobile Internet Investment Review Q2 2014.
It’s important to note that this analysis does not tell you if any specific sector or company is a good or a bad investment. It is not an exhaustive analysis considering all factors, instead analysing the data purely in terms of revenue forecasts, investment and M&A. So buyer beware (apologies for the weasel words).
When looking at the Investment Quadrants, the rule of thumb is to think of the top as being more interesting than the bottom, and the right as being more interesting than the left. This also helps to understand the relative prioritization of the quadrants from I to IV, and the sectors’ positions relative to each other in this analysis.
In terms of where each mobile internet sector might fit, here’s a starter:
Quadrant I (higher relative investment potential, with relatively lower investor competition, and more remaining exit opportunities)
- App Store/distribution
- Business apps
- Education apps
- Productivity apps*
Quadrant II (medium relative investment potential, with relatively lower investor competition, but fewer remaining exit opportunities)
- Enterprise mobility/B2B apps
- Mobile advertising/marketing
- Mobile games
- Messaging apps
- Navigation apps
Quadrant III (medium relative investment potential, with relatively higher investor competition, but more remaining exit opportunities)
- Lifestyle apps
- Medical apps*
- News apps*
- Social networking apps
- Travel/transport apps
Quadrant IV (lower relative investment potential, with relatively higher investor competition, and fewer remaining exit opportunities)
- Entertainment apps
- Finance apps
- Health & fitness apps
- Photo & video apps
- Utilities apps
(* Sector doesn’t appear on the chart as M&A value for the last 12 months wasn’t available)
Some folks might see this as controversial, particularly if their company’s sector or investments don’t appear in Quadrant I. Again this analysis isn’t saying that any sector, company or investment is good or bad, but simply compares data across sectors in a broadly consistent way. There could be great successes from any sector, and each opportunity should be looked at case by case based on the facts.
However, recent mobile internet acquisitions, investments, IPOs and valuations indicate that some investors could be taking a similar view, while others might be more interested in the “hotness” (see detailed transactions in the Review).
Whether you agree with this world view or not (and it’s certainly open to interpretation and discussion), the underlying data is what it is. It can’t be ignored, so you might as well consider it. Next time someone tells you, “XYZ apps are hotter than the Sun,” you might ask them if they have the numbers to back it up.
Disclosure: No positions