Why investing in early-stage consumer is tough despite WhatsApp’s $19B acquisition

$19B. More realistically it was $16B, but nonetheless this massive number represents the largest venture-backed M&A exit of all time. For those who follow me, you undoubtedly know that I am all about B2B. There are plenty of reasons why I love B2B, but admittedly, it’s tough to stomach seeing a $16B acquisition and know that you would have passed on it.

My primary concern with consumer has always been that users are so fickle that predicting what will and will not be successful seems virtually impossible. Even WhatsApp, a company with some 456 MAU, would have defied all my rules on what makes a strong consumer investment, those being (1) high network effects that provide opportunity for a winner take all market and/or (2) a concrete monetization strategy that demonstrates great willingness to pay for consumers (such as gaming companies like Kabam). WhatsApp seems to defy both these principles with multiple players winning in a market that has virtually no multi-homing or switching costs and has also deferred monetization at an extremely low ARPU. As an early-stage investor, my inclination would have been to make a bet on Kik or some of the more emerging-market focused platforms that have demonstrated ways to lock-in consumers and create in-app purchases.

While those companies still have massive potential to be big winners (and that might be heightened given the rumored bidding war over WhatsApp with Google), I can imagine that consumer investors are a little jealous of the massive return Sequoia pulled for betting on WhatsApp. The question therefore becomes, ‘Why was WhatsApp the winner in this market and will its success continue?’

The answer, however, is unclear. We can point to early litigation between Blackberry and Kik or hypothesize whether WhatsApp would have eventually flopped as a private company, but there are so many unknowns to account for that the exercise is relatively pointless. More simply, lightning struck. Consumers fell in love with a product that provided a compelling user experience and downloaded the app at a faster clip than any service in history. Much like Snapchat, it’s hard to point to any concrete element of the team or business model that led us to justify their growth over the other players in the market. In the later-stage, it becomes much easier to rationalize investments with user growth and data points on engagement, but at the earliest stages this is an incredibly difficult, especially for someone like me who lacks the clairvoyance or coolness of the folks who have made killer bets on consumer time and time again.

Tom Tunguz posted this morning on how transactions like this will likely lead to a surge in consumer valuations and he’s probably right. I suspect, however, trying to bottle lightning like WhatsApp will prove more difficult than these valuations justify, leading to a lot of pain for investors along the way. At the end of the day, the best investors are the ones that invest based on the future they envision, rather than the past exits of their peers. Maybe WhatsApp changes the future of what VCs envision, but I remain a believer that standing by your vision is a better strategy than following the herd.