Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Rebecca Lovell
While hosting a table at EU last week, I found that inquiring entrepreneurs wanted to know: what industries would fare well (or badly) in this economy? Let’s take a look at where we spend money in a recession. “Alcohol and lipstick” (wisdom from my colleague Jon Jacobson). “Movies, video games and getting hammered” (keen insight from one of my favorite entrepreneurs, who shall remain unnamed). Agreed- we all want to dull the pain, get distracted, and spend money on the little things that make us feel special (I might not be able to afford that Diane von Furstenberg dress, but that Viva Glam M.A.C.lipgloss really pulls an outfit together). How does this translate to angel investing? Having lost track of my crystal ball, I tapped into our mountain of data as well as some local experts.
Hot: 15% of Alliance of Angels applicants are in the consumer products and retail space, but so far they’ve accounted for 20% of our investments year to date. A bit of a surprise, given that brand-building is expensive, the battle for shelf-space is brutal, and margins can be low. It’s those rare entrepreneurs who beat the odds and capture our investors’ imaginations who have done well. One case in point for affordable luxury is Julep Nail Parlor— though like everyone else they’re creatively cutting costs, Julep is on target to open their fourth location, and bookings are as busy as ever. CEO Jane Park attributes their continued success to the “staycation” phenomenon, and the dfferentiating social aspect of their premium parlor services.
Not: Geoff Entress, formerly of Madrona Venture Group and an active angel investor, voices concerns about the area of consumer electronics. “I just bought one of the new Netbooks, which are very cool, but anything consumer-focused is likely to be hit hard (witness Circuit City bankruptcy), and holding inventory is going to be increasingly expensive.
In or out? Entress cites limited interest in mobile right now; “long carrier and OEM sales cycles have always spooked investors, which will only be worse now.” For the counterpoint, Eric Monsowitz of Maveron (focused on transforming the consumer experience) is bullish on new devices such as the Android, iPhone and RIMM creating “enormous opportunities.”
Hot: 14% of AoA applicants were in b-to-b software, but this segment represents a disproportionate 25% of our investments to date. I will note that the investments our group made in this space were in companies that were already generating revenue. Entress suggests that here, and with software-as-a-service, there may still be interest for companies with revenue, but not so much if funding is for pre-sales development.
Not: 25% of the companies who apply to us for funding are in web services/Web 2.0….yet represent only 8% of year-to-date investments. Why? Given low barriers to entry, it’s easier to throw your hat in the ring. Competition will be fierce. You may be convinced you’ve created a niche in this crowded space, but if you think you’re the only game in town, chances are there are four start-ups in the Bay Area doing the same thing. To paraphrase Silicon-Valley-vet-turned-author-and Cornell professor John Nesheim, companies that do well in a recession have customers who “get it”, want it , and see your uniqueness, immediately.
Five minutes ago: Science experiments. Unless it’s clean energy. Entress: I have been surprised to hear many investors I wouldn’t expect to be interested in this space to be considering it. Huge market, but maybe they are all “Kleiner – philes” and read the NY Times piece from a few weeks ago.
This is the part where I should take Marcelo’s advice and boldly declare the winners and losers. Sorry Marcelo– sometimes you win, sometimes you lose, and sometimes it rains.
On this rainy day, the experts can agree only that deals will attract dollars when they’ve demonstrated quicker path to profitability, lower risk, and intuitive adoption by users.
Note: In the meantime, feel free to call the author if you need anyone to conduct personal due diligence on a distillery or a new shade of lipstick.
