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Innovation Economy

A few paydays, a lot of lessons learned

Blockbuster deals like Facebook’s acquisition of WhatsApp are rare for startups in the mobile tech sector. While entrepreneurs say making apps is easy, finding markets isn’t.

DAVID W CERNY/Reuters

Blockbuster deals like Facebook’s acquisition of WhatsApp are rare for startups in the mobile tech sector. While entrepreneurs say making apps is easy, finding markets isn’t.

On the casino floor, the winners make more noise. Coins cascading into slot machine trays and cheers from the blackjack table resonate; the players with empty wallets shuffle away quietly.

The same phenomenon exists in the world of startups. The social media pit echoed last week with a single number: $19 billion. That’s the unbelievable amount, in cash and stock and potential bonuses, that Facebook paid for a four-year-old mobile messaging startup called WhatsApp. You hear much less from the startups struggling, trying new tacks, and running out of money. All of them — and their investors — want desperately to be the next WhatsApp, Instagram, or Angry Birds.

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Most will instead have what entrepreneurs like to call a “learning experience.”

In 2011, the same year that WhatsApp raised its first significant venture capital funding — $8 million — a Lexington startup called Wikets also raised $1.5 million. Wikets’ funding came from one old firm, Battery Ventures, founded in Boston in 1983, and one new one, Andreessen Horowitz, which has on its team the techie who brought you the Netscape browser back in the early days of the Web.

WhatsApp, Wikets, and a few hundred thousand other startups are all obsessed with how obsessed you are with your smartphone. It follows you to work, lunch, the store, the gym, and everywhere else. It’s on your bedside table when you go to sleep. So entrepreneurs see the opportunity for apps on the phone to change the way you do, well, everything. And investors put $3.7 billion into US mobile startups last year, according to the research firm CB Insights, hoping to create a new crop of icons to occupy your phone’s screen.

Building apps is relatively simple and inexpensive, but getting someone to download and use them regularly “is a very intense challenge,” says entrepreneur Steven Kane. “There are literally millions of apps available, almost all free, with thousands of new apps released every day. The typical mobile app is lucky if people use it for more than one day.”

Kane’s Back Bay startup, LuckyLabs, has raised just over $5 million, and has seven employees. Initially, it launched apps like Lucky Bingo, trying to get players to spend a buck here and there on virtual currency. But its newest release, Scantopia, invites players to scan items that have a UPC bar code, at home or in a store.

You can win actual money for just randomly scanning, but Kane hopes the app will supply insights to marketers about the kinds of things you keep in your fridge, and the locations where you shop. Getting marketers to pay for those insights, or run promotions through the app, is the eventual business model.

Boston-based Directr raised $1 million and launched a free app in 2012 to help people use smartphones to produce polished short videos. But earlier this year, Directr shifted its focus, and launched a version for small businesses.

“Consumers have two or three times a year when they are willing to invest time in making a good video memory, like a vacation or a holiday,” says cofounder Max Goldman. Directr also found that consumers’ attention span when using apps is extremely short: “They want a quick hit and they’re out,” Goldman says.

Businesses, on the other hand, were using the Directr app to produce videos to promote real estate listings or special events at restaurants. So the company now offers a range of business-oriented packages, which include customer support, priced at $25 a month up to $400 a month.

Wikets was launched by a team of entrepreneurs who previously built a very successful company called BladeLogic, which created software to help large companies run data centers more efficiently. BladeLogic, based in Waltham, went public in 2007, and was acquired for $800 million the following year by BMC Software of Houston.

Wikets’ goal was to become your go-to app for making recommendations about products, similar to the way Yelp collects reviews about businesses and restaurants.

You could “follow” other Wikets users who shared your tastes. The hope at Wikets was that recommendations would lead to purchases, and the company would be able to collect referral fees from merchants like Amazon.com or eBay when people bought stuff.

“We managed to get it up to 300,000 users,” says cofounder Vijay Manwani. “But it was very clear to us that we needed to get to tens of millions of users to make money.” The company, which only employed five people, quietly shut down last summer.

But “we learned a ton from Wikets,” Manwani says. One lesson: “You can create melodies, but not symphonies, on the phone. People like very purpose-built apps like Uber,” which can summon a taxi with a single click. “You need a clear function, rather than trying to do something broad like capture recommendations across all these product categories,” he says.

There are startups in Boston gaining steam by focusing on a single function, like LoseIt, which helps users shed pounds. The Boston company, founded in 2008, charges $39.99 a year for the premium version of its app. LoseIt has 10 employees, and chief executive Charles Teague says he has raised several million dollars, from backers like General Catalyst and UnitedHealth Group, the insurer.

The smartphone app arena “can feel like a replay of the Web 1.0 era, when lots of companies had users, but not everyone had real business models,” says Teague. But the mobile phone, he adds, is “such a powerful platform that there’s so much opportunity.”

In 2012, when Facebook bought the photo-sharing app Instagram, “everyone was starry-eyed,” Manwani says. “A really good, really small team had put together a really nice app,” and Facebook thought it was worth $1 billion.

In 2014, following the WhatsApp acquisition, mobile entrepreneurs are 19 times more starry-eyed.

Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner.
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