Why Everyone Is Down On Consumer (And How You Can Beat It To Build A Great Business)
Over the past few years, there’s been an increasing frustration with VCs about consumer investing. “The only things people care about in consumer today is cannabis and crypto”, a frustrated friend in venture told me a few weeks ago. “All the real money is in enterprise”, said another. At the same time, entrepreneurs feel increasingly unable to get great consumer products to market and compete.
But why exactly is everyone down on the consumer tech space, and what can you do about it? Here, I’ll break down three main factors contributing to concerns about consumer startup investing, and how to navigate them to build billion dollar consumer companies despite it:
1. No new platforms
When Apple launched the app store in 2008, it started a new wave of consumer focused innovation built on top of mobile. Driven by smartphone use adoption, arguably the fastest spreading technology in history, we saw Uber, Instagram, WhatsApp, Pinterest etc. started every year for over 4 years straight, where incredible products were built and distributed off the back of this new platform. Since then, consumer exits success stories have declined and become more sporadic, partly due to large tech behemoths actively stifling competition and partly due to increased access to capital allowing companies to stay private longer. But other than this, and potentially more importantly, for the last 10 years, we’ve seen no new platform reach mass consumer adoption . Once upon a time launching in the app store was a distribution channel until itself, with over 2.1M apps in the Google Play store alone, it’s just too crowded today.
The VC hype around blockchain, AR/VR, wearables, virtual assistants etc. aren’t just for the excitement about the innovations unto themselves, but for potential ecosystems to develop around these new platforms.
Virtual assistants are surely the next platform bet Google, Amazon and Apple are making, with the race to get a Siri, Alexa or Apple home into homes as hot as ever. But it could still take a couple years for these companies to shift their focus from hardware adoption to developing ecosystems, and until then startups betting on this new platform will struggle to get off the ground. According to the Gartner hype cycle, we’re still 2–5+ years away from even getting close to rates of smartphone adoption.
2. Skyrocketing digital advertising costs
The oligopoly of the top tech companies also leads to a second huge hurdle for consumer tech companies: advertising costs. Google and Facebook control over 56% of digital advertising spend. While Amazon and even SnapChat have seen some increase, no other player accounts for more than 5% in the digital space. Compound that with more advertising shifting from offline to online, and overall ad spend rising in general, and this acquisition channel got very expensive very fast.
The general trend is obvious to both VCs and entrepreneurs alike, but the numbers paint a striking story. In 2017, Facebook Newsfeed CPMs increased 91% YoY to $12.80. For comparison, in Q4 2013 Facebook ad CPM was just $1.09, more than a 12x increase in just four years.
Now digital ad spend, which could’ve been a reasonable chunk of your marketing mix a few years ago, is going to put significant pressure on your CPA, especially for mass market offerings. Investors know this, and will be skeptical of any startup acquiring customers through just traditional distribution channels.
3. Consumer startups are increasingly capital intensive
Because of these factors above, among others, most of the consumer startups that have seen the most growth over the past 4 years haven’t been technical in innovation, rather products competing on brand experience and cost reduction, DNVBs like Casper, Everlane, Warby Parker, etc. While these companies have clearly innovated on business model to build billion dollar businesses, investors who traditionally bet on technical innovations or network effects struggle to see brand as just as defensible of a moat.
Companies like this have proven how brand can be an incredibly powerful tool to building successful consumer companies. But copycats inevitably pop up and do so incredibly quickly, spurring on a race to raise more and more capital.
Beating the Odds
After all of this, you might be discouraged and wondering if there are any opportunities for new consumer startups? Of course! I’m interested in those that are approaching the consumer market by doing the following:
- Develop for new platforms: We will see $B+ businesses built on top of new hardware platforms and data sets. While it might take a little while, there will be some advantages to being early players in new ecosystems.
- Find new distribution channels: Isn’t it everyone’s dream to spend less money on advertising? If the main way you get new customers isn’t through digital advertising, you might be a great position. Maybe you distribution strategy is to use a new platform above, 14 year-old marketing influencers on YouTube, or IRL tactics, like leaving scooters on street corners like Bird.
- Stay focused on your true customer: Since reaching consumers is so costly, so many startups seem to be hedging their bets by simultaneously offering an enterprise option. Not only is this executionally distracting, the early indicators for success in B2B (signing clients, launching pilots) are rarely the same for consumer success (DAU, churn), and increase your risks for failing at both, albeit more slowly. If you have a consumer product and can tap into any of the above, go for it 100%. Hedging with an enterprise offering early in your lifecycle will get you nowhere quickly.
- Have amazing retention: It’s trite but holds true, so is always worth reiterating. If people use your product forever and your LTV is outstanding, you won’t have to worry about distribution platforms or costs. Truly great products with the right market fit will always cut through the noise.