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Betting Everything on Mobile

For some Silicon Valley investors, mobile computing is the only thing worth betting on.

Though the purchase price is an anomaly, the message behind Facebook’s $1 billion agreement to buy photo-sharing application Instagram is not: apps are where the money is.

It’s a sentiment echoed by countless startups now writing software applications for smart phones and tablets. All are hoping for a share of the $6 billion in revenue that Forrester Research says apps generated in 2011 from purchases and ads. Forrester expects app revenues to double this year, to $12 billion—an incredible figure for a market not yet four years old.

The mobile market’s size and fast pace have convinced some investors to focus on it exclusively. The venture capital firm Kleiner Perkins Caufield & Byers, for instance, is investing $200 million from its so-called iFund in mobile software. Now some startup incubators and accelerators (which trade funding and sometimes office space for a stake in new companies) are also switching to an all-mobile model, among them Tandem Capital and Archimedes Labs.

But could it be risky to put all your eggs in one mobile basket? Overall, the odds of runaway success are very low. In March Apple said it had paid developers about $4 billion since launching its app store in 2008, but that money was split among some 340,000 apps, according to Distimo, a market research company in the Netherlands. Distimo estimates that the average app currently pulls in just $20 a day, or around $7,300 a year.

Even so, Altimeter Group mobile analyst Chris Silva says it’s a good moment for entrepreneurs to focus on mobile applications, since the market is still changing very rapidly. It’s still not even certain which devices and operating systems will be most important in a year or two. “It’s going to be a completely different picture, I think, even 18 months from now,” Silva says.

To date, app stores including Apple’s App Store and Google’s Android Market (now called Google Play) have recorded over 35 billion downloads. The stores, which made it easier to distribute mobile apps to millions of potential customers, are what jump-started the current growth in mobile-only startups, says Doug Renert, cofounder of Tandem, an accelerator in Burlingame, California, that provides seed funding and temporary office space to mobile startups.

Before the advent of app stores, a company developing software for mobile phones would have had to convince wireless carriers to add their product to their “deck”—essentially, the applications included on a phone or the links preloaded in the phone’s browser. Suddenly, Renert says, “a small startup had just as much ability to get a product out there in the hands of millions of people as a large company and, in some ways, [had] even more of an advantage because they can change quickly and iterate quickly.”

The rapid addition of high-tech features and sensors—slick touch screens, gyroscopes, accelerometers, ever-improving digital cameras, and means for making in-app purchases—has also played a big hand in the growth of mobile startups. “All these things really disrupted every industry,” Renert says. “And disruption means opportunity for startups.”

Tandem, which was created in 2007, decided to take advantage of this shift; in 2011 it began investing exclusively in startups working on mobile software. Tandem invests $200,000 in each startup it accepts in exchange for about 10 percent of the company’s common stock. Among the startups in its portfolio are BitRhymes, which has gained about 2.5 million users for its versions of Bingo and other phone games aimed at women.

Jeanette Cajide, cofounder and CEO of Blurtt, whose recently released iPhone app lets users express themselves with pictures and text, hopes that working with an incubator will help her startup catch on, too. She’s trying to be realistic about Blurtt’s prospects, though, saying she doesn’t believe in “the whole Instagram story.”

“There’s a lot of serendipity and a lot of relationships and a lot of things that had to come into play for that to be what it was,” she says.

Cajide is a participant in Archimedes Labs. The incubator environment was attractive, she says, because of its focus on mobile and the experience of its team, which includes veteran entrepreneur and TechCrunch cofounder Keith Teare.

Teare, Archimedes Labs’ chief product officer, started the mobile incubator and accelerator in early 2011 with some friends and partners. Archimedes Labs invests mostly in its own ideas—such as Teare’s upcoming social app—but Teare says it’s considering funding more outside startups later this year.

With over 550,000 apps in the App Store and 450,000 in Google Play, counting both paid and free software, it’s hard for app makers to stand out from the bunch, or even to keep existing users’ attention. Most apps are not going to be blockbusters, and as the number of programs grows, it could become more difficult to succeed.

Entrepreneurs like Teare say the best apps will always find an audience—and bring in revenue. What’s more, he doesn’t see better alternatives than betting on apps. The software on mobile devices is “fundamentally different” from what we’d use on a computer, Teare argues. People want to download apps and have them perform specific functions, rather than getting those same functions on the Web at large.

“I think this is the start of a software and hardware revolution, in the same way the desktop PC was,” he says.

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