The Great Promise of Consumer-Facing Startups
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At the European Venture Capital Forum in Geneva three weeks ago I had an interesting conversation with a partner of one of the top Scandinavian venture firms. We talked about how they identify high grow companies at an early stage. His firm invests only in startups, which sell their products directly to the end consumer. No dependence on middlemen for product integration, packaging or market access. This is a bit different from a standard definition of consumer internet/e-commerce ventures, which most VCs invest in today, because it also includes hardware products sold directly online, such es Pebble or Nest.
A company selling directly to Mr. Smith has the advantage of being able to quickly test its offering and pivot in case the product is not picked up within a short period of time. If the idea picks up — Airbnb or Uber! — it can scale up to millions of users within months. Another argument is that it requires less capital than its enterprise counterpart to get to a homerun.
Albeit very intuitive, I was intrigued to see how many of the today’s highest valued startups (unicorns) do indeed sell directly to Mr. Smith and skip any product integration steps. At my work at 3M CVC, I rarely look at such companies — 3Ms strength is to integrate its differentiated components and materials into other OEM products. Our market adoption cycles are much different than for e.g. e-commerce startups.
For the purpose of this exercise I call all companies, whose products are not bought directly by Mr. Smith “Enterprise”.
Consumer-facing startups are 50% more common among unicorns than companies selling to the industry or through distribution channels. Not a big surprise. If we look at how the valuation of these different companies has developed over years (in some cases months!) since the company received its first qualified round of financing the results are consistent. 50% higher median CAGR value for consumer (154.7%) relative to enterprise (99.4%), which speaks in favor of the theory advocated by my conversation partner in Geneva. The two top performers are however enterprise!
CAGR distribution
Consumer (Median): 154.7%, Enterprise (Median): 99.4%, Platform (Median) 43.9%
What I found really interesting however is that in terms of capital efficiency enterprise startups outperform their consumer facing counterparts. It does make sense if you think about it: it is certainly cheaper to test a new consumer product on a limited population, but to market it globally requires a lot of capital pushed into sales and marketing. In addition, many of the Uber wanna-be’s are going to be crushed in the Power Law Survival of the fittest play, a higher percentage than enterprise startups. For them the commercialization effort does not follow such an exponential, but likely a more linear path.
This is an important piece of information for investors who want to allocate resources not only to the highest growth, but also to the most capital efficient opportunities — especially if their resources are somehow limited.
Originally published at blog.ewencja.com on April 18, 2015.
