What Bubble? The Consumer Internet Innovation Boom Has Barely Begun

On Aug. 9, 1995, a 16-month old “Web browser” company named Netscape, founded by a 23-year old Illinois programmer, went public. In much the same way that Netscape’s IPO became regarded as the starter pistol for the tech boom years that followed, some now reference Facebook’s 2005 institutional round as the unofficial start of the current consumer internet revival.

Five years into this investment cycle, there is some concern about another bubble. While it’s true that some valuations of consumer Internet startups have gotten frothy, we are not headed for some spring 2000-like meltdown. Indeed, what is driving the accelerated investment pace is an intense innovation boom spurred by a variety of factors that will be with us for some time.

Much of the early promise of the consumer Internet is only now coming to fruition. If we learned anything from “The Jetsons,” the future eventually arrives—although never quite in the way we envisioned. Most VCs of a certain age will remember the bold promise of consumer Internet pitches of the 1990s about the disintermediation of industry juggernauts, price compression and the elimination of nagging inefficiencies across industries.

However, in order for many of those Sharpie’d diagrams of a decade ago to ever leap off the whiteboard and become companies of significance many things that were not then in evidence had to fall into place with almost military precision. Fortunately, these elements are in evidence today and largely responsible for the current consumer internet innovation boom:

1. A collapse in application development costs, creating “lean,” capital-efficient businesses.

2. Continued advances in search engine optimization, security and payment processing.

3. The explosion of cheap, ubiquitous broadband, enabling rich applications that offer compelling user experiences.

4. A massive shift in online advertising spending and the ability to accurately measure/monetize traffic.

5. Viral marketing and network-effect dynamics.

6. Media portability and customizability, as in user-generated content.

7. The arrival of iconic, game-changing devices (such as the iPhone and iPad), which have enabled companies to extend their brands.

8. And, most importantly, engaged, demanding consumers, who are emboldening startups and their investors to take more risks to deliver exciting innovation.

Of course, none of this would amount to much were it not for the dramatic evolution of how users were interacting with and embracing technology as part of their daily lives. For example, car navigation systems and applications like voice-recognition software are redefining how we interact with our computers, what we expect of them and how increasingly integrated they’ve become in our lives.

The Netscape IPO was seminal partly because the browser was very humanizing. It took something that was arcane at the time—the World Wide Web—and made it accessible to millions. This evolution of human/computer interaction is still in its infancy. Teams continue to innovate around what we demand of our devices and—at the risk of sounding a bit melodramatic—how we interact with each other and the businesses we patronize, and about the people we wish to become and the society we wish to inhabit.

What we see today is but a skeletal representation of the applications that will be forthcoming. Location-based services (LBS) are one obvious example, but we can say much the same thing about next-generation search, vertical social networks, even ecommerce. Inarguably, LBS is a hot sector. However, for anyone who’s been following LBS closely, today’s “check in” and gaming mechanic technologies—as intriguing as they may be—are decidedly version 1.0.

The LBS innovations coming shortly will make such functionality seem so 2009. That’s not intended as a dig at Foursquare. Indeed, Foursquare is just as likely to provide the next wave of innovation as anyone. My point is that we are perhaps in the second or third inning.

Being able to discern from my device where my friends are now or what store coupons I can redeem today is all well and good, but the coming wave of LBS 2.0 applications—some of which are already here—will be able to discern where we will be tomorrow and push content and services to help us plan travel, connect with friends, inform us of upcoming events (and purchase tickets seamlessly, naturally). In short, LBS 2.0 apps will be richer, more relevant and more useful.

Looking ahead, LBS 3.0 will consist of applications extending that thread of innovation further. For example, they will likely allow you to create wholly customized experiences around your interests with geo-tagged content and advertisements that are so well-targeted as to be fully embedded into your experience.

Consider the following scenario: You’re in Rome and have a few hours to kill. You click an app on your GPS-enabled device and it brings up a fully customized walking tour of Vatican City. As you take the tour, you hear all the usual tour book content but—since your interests are, say, fashion and Renaissance architecture—the content will emphasize those interests. If your spouse is with you, he or she will be able to walk beside you and get experience an entirely different tour because, naturally, he or she has different interests. And so it goes…

Yes, Bunky, this is a very exciting time to be investing in the consumer Internet space. The notion that a slowdown is imminent would require a belief that innovation is fizzling and consumers are not demanding these kinds of rich applications. This is folly. The blogosphere may spend its time on marginalia like “AngelGate” and so on, but such harmless distractions have little bearing on the prospects of teams quietly building the next wave of game-changing consumer Internet companies. So, freshen your drinks, get a ringside seat and get comfortable. We’re going to be here a while.

Jonathan Tower is a venture capitalist at Citron Capital where he focuses on consumer internet, digital media and mobile applications investments. He writes the blog Adventure Capitalist and can be followed on Twitter @jonathan_tower. Reach him at jtower@citroncapital.com