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Which types of startups are most often profitable?

One answer: E-commerce, Chrome extensions, mobile apps, enterprise SaaS, SMB SaaS — in that order

I co-run an agency that teaches a hundred startups per year how to do growth marketing. This gives me a unique vantage point: I know which types of startups most often reach profitability.

That’s an important metric, because startups that don’t reach this milestone typically fail to raise additional funding — then die.

Here’s what we’ll learn:

  1. Companies are increasingly living and dying by ads. Because it’s the startup’s approach to customer acquisition — not its business model or market — that most determines its early-stage profitability.
  2. E-commerce companies lend themselves best to ads, and SMB SaaS the worst. Meanwhile, most startup founders in 2019 are starting SaaS companies. They’d benefit from the data we share in this post.
  3. In fact, our agency has found that every other type of business reaches profitability quicker than SMB SaaS, including mobile apps, Chrome extensions and enterprise SaaS.

Our sampling of startups isn’t as biased as startup valuation leaderboards, because we also see those that failed. That’s the key.

You can use our experience to de-risk your startup. That’s what this post explores: How to change your product roadmap to pursue a path more likely to reach profitability.

The startups that frequently reach profitability

Here’s the data my agency is referencing for this post:

  • We train 12+ venture-backed and bootstrapped startups every month. Half are Y Combinator graduates. This is how we study early-stage product-market fit trends.
  • We run ads full-time for between 20 and 30 mature companies per year. On average, each spends $2.5 million annually on paid acquisition. And, on average, each has 30 employees. Our clients include Tovala.com, PerfectKeto.com, SPYSCAPE.com, ImperfectProduce.com, Clearbit.com and Woodpath.com.
  • Our students and clients are roughly evenly distributed across D2C e-commerce, B2B, mobile apps and marketplaces.

When we try to control for founder skill and funds raised, the types of startups that first reach profitability do so in this order:

  1. E-commerce
  2. Chrome extensions
  3. Mobile apps
  4. Enterprise SaaS
  5. Small-to-medium business SaaS

On average, an e-commerce company is more likely to first reach profitability than an SMB SaaS company.

Before I explain why, let me explain how we’re differentiating startups: I use the word “type” instead of “business model” or “markets” because I’ve learned that business model and market are often not the best predictors of success. Instead, it’s your approach to customer acquisition. That’s what typically determines the likelihood of profitability.

Airbnb, Automattic and Pinterest top rank of most acquisitive unicorns

It takes a lot more than a good idea and the right timing to build a billion-dollar company. Talent, focus, operational effectiveness and a healthy dose of luck are all components of a successful tech startup. Many of the most successful (or, at least, highest-valued) tech unicorns today didn’t get there alone.

Mergers and acquisitions (M&A) can be a major growth vector for rapidly scaling, highly valued technology companies. It’s a topic that we’ve covered off and on since the very first post on Crunchbase News in March 2017. Nearly two years later, we wanted to revisit that first post because things move quickly, and there is a new crop of companies in the unicorn spotlight these days. Which ones are the most active in the M&A market these days?

The most acquisitive U.S. unicorns today

Before displaying the U.S. unicorns with the most acquisitions to date, we first have to answer the question, “What is a unicorn?” The term is generally applied to venture-backed technology companies that have earned a valuation of $1 billion or more. Crunchbase tracks these companies in its Unicorns hub. The original definition of the term, first applied in a VC setting by Aileen Lee of Cowboy Ventures back in late 2011, specifies that unicorns were founded in or after 2003, following the first tech bubble. That’s the working definition we’ll be using here.

In the chart below, we display the number of known acquisitions made by U.S.-based unicorns that haven’t gone public or gotten acquired (yet). Keep in mind this is based on a snapshot of Crunchbase data, so the numbers and ranking may have changed by the time you read this. To maintain legibility and a reasonable size, we cut off the chart at companies that made seven or more acquisitions.

As one would expect, these rankings are somewhat different from the one we did two years ago. Several companies counted back in early March 2017 have since graduated to public markets or have been acquired.

Who’s gone?

Dropbox, which had acquired 23 companies at the time of our last analysis, went public weeks later and has since acquired two more companies (HelloSign for $230 million in late January 2019 and Verst for an undisclosed sum in November 2017) since doing so. SurveyMonkey, which went public in September 2018, made six known acquisitions before making its exit via IPO.

Who stayed?

Which companies are still in the top ranks? Travel accommodations marketplace giant Airbnb jumped from number four to claim Dropbox’s vacancy as the most acquisitive private U.S. unicorn in the market. Airbnb made six more acquisitions since March 2017, most recently Danish event space and meeting venue marketplace Gaest.com. The still-pending deal was announced in January 2019.

WordPress developer and hosting company Automattic is still ranked number two. Automattic  href=”https://www.crunchbase.com/acquisition/automattic-acquires-atavist–912abccd”>acquired one more company — digital publication platform Atavist — since we last profiled unicorn M&A. Open-source software containerization company Docker, photo-sharing and search site Pinterest, enterprise social media management company Sprinklr and venture-backed media company Vox Media remain, as well.

Who’s new?

There are some notable newcomers in these rankings. We’ll focus on the most notable three: The We CompanyCoinbase and Lyft. (Honorable mention goes to Stripe and Unity Technologies, which are also new to this list.)

The We Company (the holding entity for WeWork) has made 10 acquisitions over the past two years. Earlier this month, The We Company bought Euclid, a company that analyzes physical space utilization and tracks visitors using Wi-Fi fingerprinting. Other buyouts include Meetup (a story broken by Crunchbase News in November 2017) reportedly for $200 million. Also in late 2017, The We Company acquired coding and design training program Flatiron School, giving the company a permanent tenant in some of its commercial spaces.

In its bid to solidify its position as the dominant consumer cryptocurrency player, Coinbase has been on quite the M&A tear lately. The company recently announced its plans to acquire Neutrino, a blockchain analytics and intelligence platform company based in Italy. As we covered, Coinbase likely made the deal to improve its compliance efforts. In January, Coinbase acquired data analysis company Blockspring, also for an undisclosed sum. The crypto company’s other most notable deal to date was its April 2018 buyout of the bitcoin mining hardware turned cryptocurrency micro-transaction platform Earn.com, which Coinbase acquired for $120 million.

And finally, there’s Lyft, the more exclusively U.S.-focused ride-hailing and transportation service company. Lyft has made 10 known acquisitions since it was founded in 2012. Its latest M&A deal was urban bike service Motivate, which Lyft acquired in June 2018. Lyft’s principal rival, Uber, has acquired six companies at the time of writing. Uber bought a bike company of its own, JUMP Bikes, at a price of $200 million, a couple of months prior to Lyft’s Motivate purchase. Here too, the Lyft-Uber rivalry manifests in structural sameness. Fierce competition drove Uber and Lyft to raise money in lock-step with one another, and drove M&A strategy as well.

What to take away

With long-term business success, it’s often a chicken-and-egg question. Is a company successful because of the startups it bought along the way? Or did it buy companies because it was successful and had an opening to expand? Oftentimes, it’s a little of both.

The unicorn companies that dominate the private funding landscape today (if not in the number of deals, then in dollar volume for sure) continue to raise money in the name of growth. Growth can come the old-fashioned way, by establishing a market position and expanding it. Or, in the name of rapid scaling and ostensibly maximizing investor returns, M&A provides a lateral route into new markets or a way to further entrench the status quo. We’ll see how that strategy pays off when these companies eventually find the exit door .

VCs aren’t falling in love with dating startups

Some 17 years ago, when internet dating was popular but still kind of embarrassing to talk about, I interviewed an author who was particularly bullish on the practice. Millions of people, he said, have found gratifying relationships online. Were it not for the internet, they would probably never have met.

A lot of years have passed since then. Yet thanks to Joe Schwartz, an author of a 20-year-old dating advice book, “gratifying relationship” is still the term that sticks in my mind when contemplating the end-goal of internet dating tools.

Gratifying is a vague term, yet also uniquely accurate. It encompasses everything from the forever love of a soul mate to the temporary fix of a one-night stand. Romantics can talk about true love. Yet when it comes to the algorithm-and-swipe-driven world of online dating, it’s all about gratification.

It is with this in mind, coincident with the arrival of Valentine’s Day, that Crunchbase News is taking a look at the state of that most awkward of pairings: startups and the pursuit of finding a mate.

Pairing money

Before we go further, be forewarned: This article will do nothing to help you navigate the features of new dating platforms, fine-tune your profile or find your soul mate. It is written by someone whose core expertise is staring at startup funding data and coming up with trends.

So, if you’re OK with that, let’s proceed. We’ll start with the initial observation that while online dating is a vast and often very profitable industry, it isn’t a huge magnet for venture funding.

In 2018, for instance, venture investors put $127 million globally into 27 startups categorized by Crunchbase as dating-focused. While that’s not chump change, it’s certainly tiny compared to the more than $300 billion in global venture investment across all sectors last year.

In the chart below, we look at global venture investment in dating-focused startups over the past five years. The general finding is that round counts fluctuate moderately year-to-year, while investment totals fluctuate heavily. The latter is due to a handful of giant funding rounds for China-based startups.

While the U.S. gets the most commitments, China gets the biggest ones

While the U.S. is home to the majority of funded startups in the Crunchbase dating category, the bulk of investment has gone to China.

In 2018, for instance, nearly 80 percent of dating-related investment went to a single company, China-based Blued, a Grindr-style hookup app for gay men. In 2017, the bulk of capital went to Chinese mobile dating app Tantan, and in 2014, Beijing-based matchmaking site Baihe raised a staggering $250 million.

Meanwhile, in the U.S., we are seeing an assortment of startups raising smaller rounds, but no big disclosed financings in the past three years. In the chart below, we look at a few of the largest funding recipients.

Dating app outcomes

Dating sites and apps have generated some solid exits in the past few years, as well as some less-stellar outcomes.

Mobile-focused matchmaking app Zoosk is one of the most heavily funded players in the space that has yet to generate an exit. The San Francisco company raised more than $60 million between 2008 and 2012, but had to withdraw a planned IPO in 2015 due to flagging market interest.

Startups without known venture funding, meanwhile, have managed to bring in some bigger outcomes. One standout in this category is Grindr, the geolocation-powered dating and hookup app for gay men. China-based tech firm Kunlun Group bought 60 percent of the West Hollywood-based company in 2016 for $93 million and reportedly paid around $150 million for the remaining stake a year ago. Another apparent success story is OkCupid, which sold to Match.com in 2011 for $50 million.

As for venture-backed companies, one of the earlier-funded startups in the online matchmaking space, eHarmony, did score an exit last fall with an acquisition by German media company ProSiebenSat.1 Media SE. But terms weren’t disclosed, making it difficult to gauge returns.

One startup VCs are assuredly happy they passed on is Ashley Madison, a site best known for targeting married people seeking affairs. A venture investor pitched by the company years ago told me its financials were quite impressive, but its focus area would not pass muster with firm investors or the VCs’ spouses.

The dating site eventually found itself engulfed in scandal in 2015 when hackers stole and released virtually all of its customer data. Notably, the site is still around, a unit of Canada-based dating network ruby. It has changed its motto, however, from “Life is short. Have an affair,” to “Find Your Moment.”

An algorithm-chosen match

With the spirit of Valentine’s Day in the air, it occurs that I should restate the obvious: Startup funding databases do not contain much about romantic love.

The Crunchbase data set produced no funded U.S. startups with “romantic” in their business descriptions. Just five used the word “romance” (of which one is a cold brew tea company).

We get it. Our cultural conceptions of romance are decidedly low-tech. We think of poetry, flowers, loaves of bread and jugs of wine. We do not think of algorithms and swipe-driven mobile platforms.

Dating sites, too, seem to prefer promoting themselves on practicality and effectiveness, rather than romance. Take how Match Group, the largest publicly traded player in the dating game, describes its business via that most swoon-inducing of epistles, the 10-K report: “Our strategy focuses on a brand portfolio approach, through which we attempt to offer dating products that collectively appeal to the broadest spectrum of consumers.”

That kind of writing might turn off romantics, but shareholders love it. Shares of Match Group, whose portfolio includes Tinder, have more than tripled since Valentine’s Day 2017. Its current market cap is around $16 billion.

So, complain about the company’s dating products all you like. But it’s clear investors are having a gratifying relationship with Match. When it comes to startups, however, it appears they’re still mostly swiping left.

Why your startup may not be as great as everyone says

One of the very first things we ask Israeli entrepreneurs who are hoping to break into the U.S. market is to tell us how their product or service is being received by their target market. What is the feedback? Are potential customers hungry for what the team is selling?

Validation, both of the broader vision and the early product itself, has to be a key focus for any aspiring entrepreneur. Testing your product and getting specific feedback is the only way to know if the company is on the right track or wasting its time chasing down the wrong path. However, even for seasoned founders who understand how vital market validation is to the success of their company, it can be all too easy to get distracted chasing the wrong kind of validation.

Not all validation is created equal. It is crucial that founders differentiate between meaningful validation and vanity “wins” that do little more than make you feel good. Fake validation is everywhere. Here are some common traps founders need to beware of.

Not all customers are born equal

Founders need to be careful about soliciting customers that are either too small or too big for their entry point into the market, or not even in the actual market segment they are targeting. If your early customers are different from those you eventually hope to acquire, then the things they ask for and feedback they provide will skew your short-term goals and put your business on the wrong path.

The best companies and founders are the ones that aren’t afraid to go out and get real, tangible feedback from potential customers.

This is especially common when targeting companies outside the U.S., where startups build long lists of customers in their home market that may or may not have the same set of needs as U.S.-based customers. But by the time these startups are “ready” to expand beyond their home country, they have a hard time selling investors and foreign customers on a product that has only been validated by unfamiliar brands in a small domestic market. Many times, these early customers do not have exposure to competing products in the larger U.S. market, or they have a different set of problems they are aiming to solve altogether, which sends misleading signals to the startup.

Securing customers is obviously crucial to any startup’s success, and can be helpful in shaping how a startup markets itself in the early days. Yet founders must be able to properly contextualize the pedigree of those customers, and always keep the long-term vision front and center. The product isn’t truly validated until you have the right type of customers validating your product.

Corporate guidance?

Large corporations are constantly looking for the next cutting-edge technology that will propel their next phase of growth. This is why countries like Israel, with its deep talent pool in AI, IoT, cybersecurity, etc., have become hotbeds for corporate innovation labs.

At first glance, this is a great thing for Israeli entrepreneurs because it gives them exposure and access to the biggest companies in the world. But proximity and feedback from these groups isn’t everything. Many of these innovation labs accept local startups into their program, which can obviously be exciting for those founders, especially at the early stage. The corporate will then aim to work on a pilot program with the startup to test their product, which could be beneficial for the startup. However, gaining just this one customer doesn’t always guarantee future success, nor does it truly validate the product.

Getting a pilot with a larger corporate can be a great opportunity, but diligent founders must also continue to pursue other pilots. First, pilot programs do not always translate to becoming real customers and founders need to avoid placing all their eggs in one basket. Second, the feedback founders receive from just one large customer may not be representative of the entire customer segment. Simply being in the innovation hub is often not enough by itself to signal long-term success.

All your startup friends say your product is cool

This one may seem obvious, but it remains just as pervasive as ever. It’s easy for first-time founders to drink their own Kool-Aid and get overly hung up on any positive feedback that’s heaped upon them or their product. An overwhelming number of new startups are created in heavily concentrated markets like Silicon Valley, which can make it difficult to find unbiased feedback outside the echo chamber.

It’s not only nice to be told your product is awesome, but it can become downright addicting.

This is especially true for startups that are just beginning to validate their product offering, or a specific piece of their technology. Afraid of approaching someone who “won’t get it,” we see founders chasing the feedback they want to hear, often from peer entrepreneurs, who will be excited by a piece of technology but obviously won’t be the ones who end up buying and using it as real customers.

By self-soliciting feedback from the wrong people, founders make the mistake of focusing on the wrong aspects of the product instead of taking it directly to potential customers in the market who will specifically tell you what they do and don’t like.

You just raised $10 million. That has to mean something, right?

Even raising a sizable round from VCs can be a form of fake momentum. Much has been written on the topic, but it’s easier than ever for some entrepreneurs in specific domains to raise significant capital these days. There are more seed funds out there than ever before. Valuations and deal sizes at the seed and Series A stages continue to climb. What this truly means is that bets on the success or failure of a startup are being made earlier in the life cycle of the company.

Just because a VC chooses to invest in a company does not mean that startup has reached the promised land. VCs are not your customers, and while capital they provide is a critical means to further the development of the business, it does not replace getting real validation from and selling to the target market.

Winning!

Founders often misunderstand or overestimate the tangible impact that awards and PR recognition will have on their businesses. We see this all the time when entrepreneurs come bragging about some competition they won, or a top 10 list they were included in. Don’t get me wrong, awards are nice to have and they can help with attracting talent and hiring into your startup. However, founders need to realize that the value is capped, does not serve as real validation and is typically meaningless to investors and potential customers alike in their evaluation of the startup.

There are several potential traps on the journey to validation, and it can be easy to fall victim if entrepreneurs take their eyes off the prize. It’s not only nice to be told your product is awesome, but it can become downright addicting. The best companies and founders are the ones that aren’t afraid to go out to market and get real, tangible feedback from potential customers. If you’re not doing that, you’re simply making yourself more susceptible to fake validation that can derail your vision.

Startup names may have passed peak weirdness

For years, decades even, startup names have been getting weirder. This isn’t a scientific verdict, but it is how things have seemed to someone who spends a lot of hours perusing this stuff.

Startups have had a long run of branding themselves with creative misspellings, animal names. human first names, made-up words, adverbs and other odd collections of letters. It’s gone on so long it now seems normal. Names like Google, Airbnb and Hulu, which sounded strange at first, are now part of our everyday vocabulary.

Over the past few quarters, however, a peculiar thing has been happening: Startup founders are choosing more conventional-sounding names.

“As we reach the edge of strangeness… they’re saying: ‘It’s too weird. I’m uncomfortable,’” said Athol Foden, president of Brighter Naming, a naming consultancy. While quirky startup monikers haven’t gone away, founders are increasingly comfortable with less-unusual-sounding choices.

Foden’s observations are reflected in our annual Crunchbase News survey of startup naming trends. We’re seeing a proliferation of startups choosing simple words that describe their businesses, including companies like Hitch, an app for long-distance car rides; Duffel, a trip-booking startup named after the popular travel bag; and Coder, a software development platform.

But fortunately for fans of offbeat names, the trend is only toward less weirdness, not no weirdness. Those who wish to patronage seed-stage startups can still buy tampons from Aunt Flow, get parenting tips from an app called Mush or get insurance from a startup called Marshmallow.

Below, we look in more detail at some of the more popular startup naming practices and how they are trending.

Creativv misPelling5

For a long time, it seemed like a vast number of startups selected names largely by disabling the spell checker.

Most desirable dictionary words were already in use as domains or too pricey to acquire. So founders took to dropping vowels, subbing a “y” for an “i” or adding an extra consonant to make it work. The strategy worked well for a lot of well-known companies, including Lyft, Tumblr, Digg, Flickr, Grindr and Scribd.

These days, creative misspellings are still pretty common among early-stage founders. Our name survey unearthed a big number (see partial list) that recently raised funding, including Houwser, an upstart real estate brokerage; Swytch, developer of a kit for converting bikes to e-bikes; and Wurk, a provider of human resources and compliance software for the cannabis industry.

However, creative misspellings are getting less popular, Foden said. Early-stage founders are turned off by the prospect of having to spell out their names to people unfamiliar with the brand (which for seed-stage companies includes pretty much everyone).

Puns

One of the more fun naming styles is the pun. In our perusal of companies that raised seed funding in the past year, we came across a number of startups employing some sort of play-on words.

We put together a list of seven of the punniest names here. In addition to Aunt Flow, the list includes WeeCare, a network of daycare providers, and Serial Box, a digital content producer. Crunchbase News also created its own fictional startup — drone chicken delivery startup Internet of Wings — in an explainer series on startup funding.

Perhaps some day business naming will harken back to the industrial age, when corporate titans had exceedingly boring and obvious names.

Real companies with pun names that have matured to exit were harder to pinpoint. A couple that have gone public are Groupon and MedMen, a cannabis company that went public in Canada and is valued around CA$2 billion.

For some reason, it appears pun names are more popular in the brick-and-mortar world than the tech startup sphere. Restaurants specializing in the Vietnamese noodle soup Pho have dozens of play-on-word names memorialized in lists like this. Ditto for pet stores.

Personally, I’d like to see more internet startups rolling out pun-based names. Foden would, too, and he has even volunteered one suggestion for someone who wants to start a business applying artificial intelligence to artificial insemination: Ai.ai.

Made-up words that sound real

There are more than 170,000 non-obsolete words in the English language, per the Oxford English Dictionary. Startups, however, are convinced we need more.

Hence, one of the more enduringly popular business-naming practices is to come up with something that sounds like an actual word, even if it isn’t.

We put together a list of examples of this naming style among recently seed-funded startups.

It includes Trustology, which is building a platform to safeguard crypto assets; Invocable, a developer of voice design tools for Alexa apps; and Locomation, which focuses on autonomous trucking technology.

Naming advisors like to see the made-up word name trend on the rise, Foden said, because it’s the kind of thing companies pay a consultant to figure out. Another advantage is it’s easier to top search results for a made-up word.

Normal-sounding names

Lastly, let’s look at those rebel startups choosing familiar dictionary words for their names.

We put together a list of some here. Besides the aforementioned Duffel, Hitch and Coder, there’s Decent, a healthcare startup; Chief, a women’s networking group; Journal, a note organizing tool; and many more.

Startups are less concerned than they used to be with snagging a dot-com domain that contains just their name. Commonly, they’ll add a prefix to their domain (joinchief.com, usejournal.com), choose an alternate domain (Hitch.net) or both.

Overall, Foden said, startups today are putting less emphasis on securing a dot-com suffix or an exact domain name match. Google parent Alphabet, in particular, made the alternate domain idea more palatable. It helped to see one of the world’s richest corporations forego Alphabet.com in favor of abc.xyz.

Where is it all going?

They say history repeats itself. If so, perhaps some day business naming will harken back to the industrial age, when corporate titans had exceedingly boring and obvious names like Standard Oil, U.S. Steel and General Electric.

For now, however, we live in era in which the most valuable companies have names like Google and Facebook. And to us, they sound perfectly normal.

Methodology: For the naming data set, we looked primarily at companies in English-speaking countries that raised seed funding after 2018. To broaden the potential list of names, we also included some companies funded in 2017. We also tried to limit the lists, where possible to companies founded in the past three years, although there were occasional exceptions.