Rough sea for consumer startups — how to cope with it! Part 2
Written by Marcau’s David Hug and Andrea Annese, with the collaboration of Luca Michas and Rudi Skogman
In Part 1 of this article, we tried to analyze the current consumer market and how startups operating in this space need to rethink their strategies in the face of a situation we have not been used to in the last 10 years.
It has become apparent that, while inflation rates have skyrocketed and the cost of basic services like food and transportation have reached record highs, consumers are increasingly looking for cheaper alternatives and changing their brand preferences more frequently than before. On the flipside, consumer-facing startups find themselves in a peculiar situation where they need to explore new acquisition strategies, rethink revenue models, and improve user experience due to increased CAC in traditional channels and new customer habits.
In Part 2, we will explore the experiences navigating the current market conditions of two startups founders from our Ringier Digital Ventures Portfolio. Luca Michas from Yamo and Rudi Skogman from Blok will share their insights on the challenges they have faced, as well as their strategies for adapting to changing consumer habits and to the uncertain economic environment.
How has the current market affected Yamo and Blok’s customers’ behavior?
“Consumers are reconciling their financial caution with their consumption and spending impulse by being much more selective about their brand and product preferences”. This is the opening answer from Luca, which also hints how some segments like baby and kids food are more resilient to uncertain economic situations. On the other hand, this is not the case for the private residential real-estate as confirmed by Rudi: “The rising interest rates drive people to postpone decisions and make them unsure of their own financial future. At the same time the prices of their own homes have come down in the past 12 months leaving less money to buy a new apartment even if the prices are lower in general[…]The change after the start of the war in March was almost instant”. The constant variable in their words is that there is less wallet space for luxuries as people are more cautious in high-ticket purchases in each category.
How has the current market affected your company instead? Based on what KPI did you notice these changes? Did you change your KPI scorecard accordingly?
According to both founders there is a big problem in acquiring new customers, both in terms of acquisition cost and in conversion rates. For Yamo, “big advertising platforms like Google, Facebook [are] increasing their media prices”, which caused an increase in CAC to “almost all e-commerce businesses”. For Blok’s proptech market instead, “we’ve noticed that our own conversion started going down dramatically” reflecting “market statistics that show that the housing market volumes [in Finland] are down 50–60% YoY”. Consequently both founders are focusing on monitoring the conversion value chain, from CPM, CPC and CVR . More generally, Rudi points out the importance of balancing revenues and costs to withstand this peculiar circumstance.
What measures have you taken to meet the challenges?
Very interestingly both companies have acted on their revenue streams, pursuing long term diversification strategies and aiming at increasing retention and LTV.
Rudi : “We’ve done 2 things specifically — Cut costs […] and diversify our revenue streams, making sure we’re not dependent solely on one place for all our revenue. This is still work in progress but has helped us already tremendously as we’ve been able to grow revenues from a new product in a new stream from 0 to 600k ARR in a matter of months.”
Luca: “ […] we focused a lot on retention and LTV. From a product point of view, we are working on improving the quality and our service even more with different measures. But we also adapted the D2C business model itself, offering more attractive pricing for customers who want to commit to a 3 or 5 box plan. We are creating a win-win situation both for the customer and for us. The customer profits from cheaper product prices, and we secure higher customer lifetime revenues with the first purchase.”
Looking ahead to 2023, what environment are you expecting? And how are you preparing for it?
When thinking about the immediate future, uncertainty is often the first thing that comes to mind. With so many macro factors at play, such as the reactions of central banks to rising interest rates and ongoing international conflicts, it is difficult to make reliable predictions. It is thus not surprising that both Luca and Rudi are focusing on their core business, strengthening current revenue streams, and rekindling partnerships, while approaching the immediate future with caution.
Rudi: “ I expect 2023 to be as bad or worse than 2022. Most likely towards the end of 2023 we’ll start seeing some light at the end of the tunnel but until then […] buckle up! We’re preparing for 2023 by strengthening our revenue diversification efforts and making sure we’re using all possible channels for revenue creation. At the same time we want to build new lasting partnerships with larger players in the market to mutually benefit from the synergies created.”
Luca: “In the coming year, we expect continued uncertainty in the market and then either a stronger slump in the markets or a slow recovery, depending on what the Fed decides and how the war in Ukraine develops. For us this means: caution is the mother of wisdom. We will postpone exciting opportunities that have the potential to distract the organization too much until further notice. In concrete terms, this means that focusing on the core issues is absolutely essential for us.”
Has the relationship with your investors changed over time? What are your expectations of investors in the current period?
The purpose of a VC investment is not only the one of re-filling accounts, investors have also the duty to support founders, opening doors in their network, providing strategic advice and, especially, they need to be the right sparring partner for founders. But in challenging times startups leaders need even more, they need empathy and support, even for small decisions. As Luca points out: “especially in stormier times, founders experience countless small to medium-sized challenges and dramas within the startup on a weekly basis. Empathy, i.e. understanding of the business but also the personal situation of the founders is immensely important in such times. Compassion is then the next level of this. Being there for founding teams when things become tough is crucial. Can the founder call you at 10 in the evening, even if just to vent?”. It is important also to remember that VCs are navigating the same waters as their investees and open communication and shared knowledge have never been as important as today on both sides.
Quoting Rudi: “ Our investors have supported us tremendously through this tough year and always had our back.[…] They are in an equally tight spot to companies. The fundraising market from LP’s has gotten a lot worse as well, so it’s understandable that investors are very careful in making new investment decisions and/or supporting all of their portfolio companies. I would however really wish that investors generally would make sure that most of their portfolio would make it through this market because the companies that do make it out alive will be stronger than ever as competition will have died and markets will again be booming.”
While there is already much food for thought from these conversations up to this point, we could not leave our founders without asking them a very important final question.
What advice would you give to early-stage founders trying to build a consumer-oriented startup while navigating this rough sea?
TLDR: Focus on product market fit and try to extend your runway as much as possible!
Rudi: “ I would say that most consumers will be trying to cut down on spending next year so anything that offers a lot of value at a low cost is likely to succeed. Concentrate on customer experience and customer satisfaction. Luxuries are off the list for now, so I would advice to steer clear of that space for the near future.”
Luca: “ Focus 100% on your product market fit. This means building a product that your target audience loves and will tell their friends about. Don’t scale too early. Understand what the flywheel of your product is. Think about how you would build the business without external capital. What would you do if you received venture funding? How would you invest it? What could you do differently/better with the money? Think about “product-led growth”, find your niche where you can build the best product and grow out of it.”
With Christmas just around the corner, we were very grateful for the gift Luca and Rudi gave us by sharing with us their valuable experience gained on their boat in the rough seas of the consumer environment. For the uncertain year of 2023, it’ll be crucial to understand the changes in consumer behavior while focusing on core activities. Also, support from the right investor will continue to be essential for startups, and we at Marcau Partners, who’ve been involved with consumer-facing companies for decades, can’t wait to hear from you. If you’re building a consumer-focused startup, don’t hesitate to contact us!
Have a happy holidays season and we’ll see you in 2023!
