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What NGP looks for when investing in mobile consumer services

| Insights

Walter Masalin, Partner, NGP Capital

18.05.2015

The connected device in your pocket is packed with every possible sensor you can think of, and more of them are getting connected either directly or indirectly, unleashing a new wave of innovation.


We have been investing in mobile technologies for the past 10 years, and we believe things will only get more interesting going forward.

Consumer services is one of our particular investment focus areas, and these services are extending beyond the smartphone. We are seeing new form factors, including wearable devices and other connected sensors, capturing the creativity of entrepreneurs who are building new solutions and solving more problems for us. For example, there are a number of exciting areas related to healthcare that new sensor technologies are enabling; in fact, these will soon change how we think about prevention and care all together.

In this blog post, I will tell you a bit more about the key things we’re looking for in consumer-focused businesses, whatever segment they may be in.

Size, Growth, and Engagement

As a growth-stage investor providing expansion capital, we look for companies with (1) a sizeable user base, showing that the service is solving a real consumer need beyond the few early enthusiasts; and, in addition, where (2) the growth of the user base is consistently increasing; also, (3) engagement is the obvious thing everyone looks at. Therefore, reviewing the consecutive cohorts and how they develop over time is a great, objective way to understand just how good a service really is, since it is the most straightforward way to look at how often specific users come back to use a product over time. Looking at these three things and liking what we saw was one of the key factors that led us to invest in MAG Interactive, a Swedish casual game developer.

Obviously, 50 million downloads—the amount of reach MAG had at the time we first met them—was a sizeable user base. But any user base above the 1 million mark is something meaningful that picks up our interest and shows there is genuine market interest. The smaller the absolute user base is, the higher the growth has to be in order to give the required confidence that the service is going to become big. More importantly, there needs to be a viral, organic component to the growth that is not only visible week-on-week and month-on-month but that is understood at the product level—why this is. MAG’s game Ruzzle was one of the first games that implemented Twitter with its product in a really nice way and subsequently saw tremendous growth in the U.S. as players were trash-talking and challenging each other via social media. Still today, more than 95% of new Ruzzle users are organic.

Then we come to number 3, engagement, which is the remaining obvious thing, as mentioned. Engagement really depends on the type of service—for example, casual games that tend to have lower monetization potential per user on average should have higher retention numbers than more intensive, hardcore games that can have very high average revenue per user that compensates for a lack of wide market appeal. On the other hand, the more utility type of services can have somewhat different looking retention curves, because, of course, the use case and the behavior is very different: users might not come back at all for a week or for a whole month, compared to some games where they come back every day. The key thing then, of course, is that the long-term retention is there—in other words, how many users stick with the service for the long run. Ruzzle just had its three-year anniversary and continues to be entertaining to the core user group for years.

When you’re launching your product or a new version, you don’t know where the retention curve is really going to end up. You can’t afford to wait for years to beta-test, and it becomes very slow to update and make significant improvements and changes to the services that would massively increase the retention numbers. So you have to combine experience and analysis of early data with the discipline to restart early, which is something that is difficult for many of us. The problem of losing face and admitting that you should restart is always more difficult than falling into the trap of convincing everyone around you that with a couple more incremental modifications and couple more months of data, things will look completely different—when, in fact, they won’t.

Monetization Model and Unit Economics

Looking at unit economics is straightforward, in the sense that the lifetime value (LTV) has to be larger than the customer acquisition cost (CAC) and the variable costs associated with serving the customers during the product’s lifetime. In practice, estimating LTV and CAC in a dynamically moving environment and analyzing trend lines is not a simple task and proves to be an area where there is risk. Usually, we want to see LTV as a multiple of CAC, depending on the segment. There needs to be a margin of error and the promise of a business that can command attractive operating metrics down the line. We invest in businesses that that have proven their unit economics, at least on a smaller scale or in a specific geography. Having strong unit economics is obviously a great position for any company to be in, and this was one of the key reasons for our investment in Babbel, a market-leading language learning app that has high LTV and, therefore, is in a position of strength due to driving its customer acquisition campaigns—although the company has been disciplined and wants to earn back its marketing expenses well ahead of 12 months, even though its cohorts keep monetizing for years. Be careful with capital-intensive models, as the more a company has a handle on the dynamically moving LTV and CAC, the more it is in control of its own destiny.

Industry Structure and Company-Specific Advantages

Finally, we look for businesses that have differentiation and potential for long-term sustainability, beyond looking at the current activity and growth metrics, but relying more on how the service is built and what the key components are that it relies on. The underlying assumption that made us invest in Moovit, for example, was our firm belief that the way the company is engaged with its active user base and its community gives it an advantage. The community provides real-time data to the platform, which is a massive force that others have difficulty replicating and which offers scale of an order of magnitude higher compared to traditional ways of sourcing information. This advantage gives Moovit an opportunity to offer its users better data, which in turn improves the user experience and drives further growth—a recipe for sustained value. At the time of writing this blog, Moovit is launching a new city per day and improving data quality with the support of its community members around the world.