The Dirty Secret of Apps: Many Go Bust; “There are so many startups that die with a whimper. That’s the worst type of death….You walk into the office one day, you look at each other, and kind of realize it has to come to an end.”

Updated March 7, 2013, 7:45 p.m. ET

The Dirty Secret of Apps: Many Go Bust

While many independent developers have made money creating mobile apps, many more have struggled or failed along the way, Ben Fox Rubin explains.

By BEN FOX RUBIN

Pocket Gems Inc. is the classic Silicon Valley success story, a startup whose mobile games have been downloaded more than 100 million times since it was founded in 2009 in a Stanford University dorm room.

More commonplace is the tale of Spork, a little-used food-rating app that lived for just a year before giving up the ghost in a small San Francisco office.

Plenty of independent developers have made fortunes off the boom in mobile apps. But many more have failed after learning the hard way that computer skills, a little money and a good idea often aren’t enough in the competitive market.

With hundreds of thousands of games, productivity tools and other apps already on the market, and thousands more launched every week, many startups are finding that their ideas aren’t so unique after all. In this environment, well-heeled companies with big marketing budgets hold sway.

“There are so many startups that die with a whimper,” said Dan Cheung, the 37-year-old software engineer who quit his job to build Spork. “That’s the worst type of death….You walk into the office one day, you look at each other, and kind of realize it has to come to an end.”

Mr. Cheung founded Spork with his sister Sam and fellow software developer Nick Hughes. The free mobile app let users rate specific dishes at restaurants. But they were beaten to the punch by a rival app called Foodspotting, which offered similar functions but was backed by more funding for advertising and marketing. Foodspotting had been downloaded about 4 million times when restaurant-reservation site OpenTable Inc. OPEN -1.20% agreed to acquire it for $10 million in January.

“By the time we got to market,” Mr. Cheung said, “kind of all the oxygen was sucked out of the room.”

Spork registered about 100,000 downloads. But Mr. Cheung said his team couldn’t find a way to make money from the concept. A year after they launched the project, they gathered in their San Francisco office and agreed to shut it down.

The odds of striking gold in the apps business are quite long. While there are more than 800,000 mobile apps available in Apple Inc.’s AAPL +1.16% App Store, only 80 of them generated more than $1 million in revenue during the fourth quarter, according to research firm Distimo.

Reaching a few hundred downloads a day used to get an app on a Top 10 or 20 list a few years ago. It now requires several thousand, so larger apps companies—such as Electronic ArtsInc., EA +0.48% Walt Disney Co.,DIS -0.07% Zynga Inc. ZNGA +0.28% and Rovio Entertainment Ltd.—tend to dominate the top-seller lists. Only 2% of the Top 250 publishers for iPhone apps in the U.S. App Store are newcomers, according to Distimo.

Yet the field continues to draw small developers hoping to get lucky. David Pritzker left his job as a lawyer involved in private real-estate investment to become a mobile app entrepreneur. He and a longtime friend started Mouthee, a free app that provides users with movie, restaurant and music recommendations from their friends. They initially worked out of his Chicago apartment and funded the project themselves with the help of some outside investors. They used a tech firm to help build their app, since neither was a software developer.

While the app enjoyed a bump in initial downloads, Mr. Pritzker conceded that his team may have spent too much time in development. By the time the app launched last April, their field was already filled with competing apps, some with very similar features.

“For people getting into that space, you almost have to assume that somebody else is out there trying to build exactly what you are,” said Mr. Pritzker, 32 years old.

Mouthee is still struggling to build an audience. With a tight marketing budget, Mr. Pritzker spread the word via friends and family and by using Facebook FB +4.10%and Twitter brand pages. He also brought on “brand ambassadors” at college campuses. Working mostly for free, they helped him throw sponsored parties, distribute Mouthee stickers and T-shirts, and show the app to their friends.

Mouthee ran promotions—giving out free iTunes gift cards or other gifts to users who signed up their friends—which would bring a spike in downloads, but the boost would taper off after a week or so, Mr. Pritzker said. According to Distimo, Mouthee has yet to break into Apple’s Top 400 apps ranking in the lifestyle category.

“We still have a ways to go,” said Mr. Pritzker, who declined to disclose how many people use the app or how it has done financially.

Ben Liu, chief executive of Pocket Gems, said the apps world was much smaller and less competitive four years ago when the successful mobile games company was founded. While the market is much larger today and the cost of creating an app has fallen, fierce competition and much higher expectations from users makes it harder for smaller developers to break through.

Larger app companies such as Pocket Gems have more marketing firepower, he said. They can sell new apps to their large user bases and garner new users through ad networks like Google Inc.’s GOOG +0.15% AdMob or Facebook. They also pay or barter for advertising with other app developers.

Small players are reduced to low-cost ways of getting the word out. After creating his puzzle-game app Clock Blocks, Matt Capucilli would go to Union Square in New York City to ask people to consider playing his app. Clock Blocks never made it big, though Mr. Capucilli found some success with another app called Video Time Machine that he and his team later sold.

Sometimes small developers still get lucky. Anton Lopyrev, 26 years old, left his associate product manager job at Google in August to start an app with two former classmates from the University of Waterloo, in Ontario. Their free app, Umano, provides users with a selection of news articles that are read aloud by voice actors.

After Umano launched in October, the partners got the word out by going to commuter stations in the Bay Area, wearing T-shirts and handing out fliers. The app has since gained hundreds of thousands of downloads and was featured in Google and Apple’s app stores.

Even Spork co-founder Mr. Cheung is trying again. About a year after Spork failed, he is now developing a new online-shopping startup, called WishPlz, which tracks the prices of items users plan to buy and notifies them when they drop. A mobile app is expected to launch this month.

“Engineers are very passionate about the product and they are the ‘build-first’ mentality,” Mr. Cheung said. “But there’s also the business end, where you have to learn that before you build anything at all.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: