The 4 Categories of Apps, and Why 3 of Them are Terrible Places to Invest

By Scott Johnson , written on May 24, 2012

From The News Desk

It’s no surprise that every venture capitalist I know has watched mobile app deal flow ramp up since the iPhone debuted. But lately, it has gotten out of control.

This is partly to do with the fact that there were more than 60,000 companies that attracted angel investment in 2010 according to the Center for Venture Research and now they need more money. But the truth is, mobile apps accessing the cloud comprise the greatest platform for innovation ever -- they can actually automate and vastly improve the way we live. And the price Facebook paid for InstaGram has done nothing to discourage entrepreneurs from jumping into the fray.

To make better sense of this crush of deal flow at our firm, I developed a four-category framework to distinguish a flash-in-the-pan from a promising big business. I am using a wave metaphor as each category builds, crests, breaks and finally fizzles:

As an early stage investor, the trick is to invest ahead of the obvious trends -- be the first, dominate a category. Create a brand without fighting through noisy, crowded, overbuilt markets. So right now, I have my eye on apps targeting life process automation -- that wave is just starting to build and will be quite a wave to surf. But before diving into that, a word about each category, what it is, and my reasoning behind the stages I have assigned each.

1. Basic Needs. The first iPhone had most of your basic needs covered right out of the gate: email, maps, texting, browser, camera, photo viewing, music, all the familiar apps we use every. Except for news readers like Flipboard, I can’t think of a “basic need” app launched in the last few years that anyone cares about. Hence, my view that this category of killer apps has essentially fizzled from an investor point of view.

2. Niche Apps. Concurrent with the launch of the iPhone SDK, the independent developer community began cranking out lightweight or small audience “niche apps," the first of which was called “Flashlight” which had a single function of lighting up the screen brightly.

The creativity here is astounding. There are bird identifiers (I use Petersons), night sky guides (Pocket Universe), tide charts (Tide Graph) and casual games (Cut The Rope).  Some of these had mainstream success including Tap Tap Revenge by Tapulous, which was acquired by Disney in 2010, and Rovio, which is still riding high with their Angry Birds Franchise. This cornucopia of the small and/or obscure led to Apple's often quoted “there’s an app for that” campaign (and the parodies that followed).

The smartphone community has a great time consuming niche apps, like peanuts in a bowl. Apps in this category continue to be produced, in ever increasing numbers, and won’t ever stop, which is why I say this category is cresting, massively. But it is also a horrible place to place investment bets. Picking the handful of big business wins from the ocean of apps in this category is a fool’s game. The only reasonable investor opportunity here is “selling shovels to the gold miners”, or in this case helping app developers build, market, monetize and analyze their apps. In other words, developer tools -- an opportunity I will leave to the likes of Adobe.

3. Web Extensions. With a new gateway to the Web came the obvious need for online businesses to extend their content or service to mobile. Every online business, spanning a spectrum of areas Expedia, Facebook, Ebay, Amazon, Acuweather, New York Times -- developed an app. This category has largely run its course and the wave is breaking -- every website that really needs a smartphone or tablet presence has one at this point. And, since these are not new businesses, this was never an opportunity for venture investment, except specialty IT services companies.

4. Life Process Automation. This one is just getting going, and really excites me as a venture investor. The Web automated several life processes. Making travel arrangements (Expedia), finding a date (eHarmony), buying a thing you need (Amazon) and selling stuff you no longer need (eBay). But location aware handhelds can automate process so much better. First, they are location aware down to a few meters. Second, they enable complete spontaneity. And third, the small screen has a simplifying effect on the interface, and with a few taps we can automate something that 10 years ago would have been impossible.  Instagram is a great example of this: simple, location aware, spontaneous, and powerful.

My thinking around this framework was catalyzed when I heard about Appy Couple which is automating wedding planning. Airbnb, Uber, Hotel Tonight, these are all amazingly simple and powerful life process automators. I suspect a few years down the road we will see “Baby Sitter Tonight” so those that used Appy Couple remain “Appy” as parents of a 2 year old and an infant.

Of Course falls in this category of Life Process Automation, and was so compelling, we gave them seed funding. The company plans meals for you and delivers the ingredients “ready to make” in a bag, to your doorstep. They are just beginning app development, but imagine tapping on pictures of the recipes you want to cook once a week instead of planning, listing ingredients, shopping, storing, retrieving, measuring and then watching excess rot in your fridge.

This new wave of life assisting apps moves beyond basic utilities to actually enforce best practices, impart expertise, make intelligent suggestions, organize your data for you, and perform complex tasks with a single button push. Like Business Process Automation in the 1990s helped companies learn to use computers and networks to operate efficiently, Life Process Automation is going to radically change how we go about our daily lives. I hope we all use the extra time doing something away from a screen!

[Graphic Concept by Scott Johnson; Graphic Illustration by Hallie Bateman]