Embracing Chaos in Consumer VC
In my last post, I shared one of the reasons why I strongly believe in consumer investing at a time when others are looking in the other direction. In short: we are at the cusp of a very rapid acceleration of shifts in spending patterns as a new generation of consumers with wildly different expectations enters the mainstream.
In the feedback that I’ve received, some of you have noted that outcomes in the consumer space are “random”; that, in other words, there is no way to reliably pick winners vs. losers, especially at the earliest stages (i.e., pre-revenue and, sometimes, even pre-product).
It’s of course true that outcomes in consumer investing are very binary. And it’s equally true that identifying why a particular outcome unfolded is challenging. At first glance, it’s basically chaos.
I’ve thought about these (very valid) points a lot and while I don’t have a fully formed answer yet, I thought I’d share the way that I currently try to make sense of the chaos.
The first thing to say about “binary” outcomes is that it really isn’t a very good argument for deciding whether to invest in consumer startups. All early-stage investments are extremely binary, and even if consumer deals have a distribution of outcomes that skews more heavily to the right, it’s something that calls for changes in the way we invest — i.e., portfolio construction strategies. Rather than shying away from consumer altogether, it’s a feature of the asset class that justifies adjustments in check sizes, number of deals to make, verticals in which these deals are made, and potentially in reserve policies.
Admittedly, that’s not an argument that takes you very far. Even if you’ve figured out a portfolio construction strategy that matches the risk profile of consumer investing specifically, how do you maximize chances of finding “winners”? The answer is probably just as much about deal-flow strategies as it is about deal evaluation criteria. I set out below a few thoughts on the latter, in the beautiful world of “barely any metrics” startups.
The World Behind My Blinders 🙈
To start, I should say that we all find it much easier to understand opportunities when we have experienced the pain points first-hand or when we could see ourselves as consumers of the product. It is a problem because our own experiences are typically extremely confined. We all wear very restrictive blinders and what we can see is a function of our education, socio-economic backgrounds, relationships, interests, and our perceptions generally.
While it is impossible not to wear these blinders because they are part and parcel of who we are, we can conceive that a whole world exists beyond them (one that may look very different to the one that we live in) and we can make every effort to study, understand and embrace it. It’s an exercise of discovery as much as it is an exercise of empathy.
Products & Teams Expressing New Cultural Phenomena 👌
With that mind, and borrowing a lot from brilliant consumer investors, I find it helpful to focus on emerging cultural phenomena as the key foundational layer of new ventures.
- Emerging Cultural Phenomena As Core “Narrative”. As D’Arcy Coolican’s explains, on the way to product-market-fit a product must first find “product-zeitgeist-fit”; that is, extremely strong cultural relevance. It must be built to allow, facilitate, and improve the expression of an emerging behavior that was in some way previously impeded by the state of technology or other aspects of society. Last week, James Currier and Josh Elman raised a similar point when they explained that breakout social startups must “own a new habit”. It’s worth noting that new cultural phenomena don’t suddenly pervade society at large. They often start in smaller groups, in parts of society that an investor isn’t necessarily part of (because of age, gender, socio-economic background or interests). Then, some of these groups turn their own behaviors into widespread cultural norms — either because the group itself becomes larger and dominant (typically the case if it’s a generationally-driven change), because the group is influential and persuades larger and larger parts of society to participate in that behavior (on this, check out LA Originals) or because that behavior is just “better”.
- “Narrative”-driven Teams and Products. If emerging cultural behaviors are a key foundational layer to great products, the next step for me is to find teams who understand these behaviors quickly and build products to fuel or unleash them. Great teams are able to decipher nascent behavior with nuance, clarity and crispness (it’s in fact often them who educate me about these behaviors). They also have a unique ability to articulate a product around it, which is just as much about having the right product vision as it is about having the right process and state of mind. Getting product right rarely happens on the first try and the process often involves endless iterations. Not every team is willing to live in this constant state of flux. It’s uncomfortable to speak with users who don’t like your product and don’t understand it. It’s hard to instrument your product and relentlessly test assumptions. It’s tedious to incrementally fix your retention. It’s scary to radically change your UI.
“Enabler” Traps 🎣
One word of caution, though. In consumer apps, the easiest thing to do is to focus on features, especially those that “enhance, strengthen, and amplify” (Jean 2lr calls them “enablers”). For that very reason, “enablers” too often become synonymous with the product even though they are not the core architecture of the product. Think of lenses on Snapchat, filters on Instagram, or the public feed on Venmo. And here is the trap: by focusing too much on enablers, it’s easy to see them as “gimmicks” that aren’t likely to be conducive to long term engagement and growth (“it’s just a filter/lens company”). Conversely, by focusing too much on the appeal of these features (they can drive growth, and a lot of it!), it’s equally easy to lose track of the fact that “enablers” aren’t sufficient to power long-term success — to put it simply, you can’t have an enabler in a vacuum.
To be clear, features are obviously very important to successful products, but they need to “enable” much deeper foundational layers, which is why I try to spend more time on the narrative behind a product as discussed above.
Wrap-Up
All that to say that the “randomness” of consumer investing is something that I embrace. My recipe at this point is to focus on emerging cultural phenomena with potential to enter the mainstream and to partner with teams who have a unique ability to express that phenomenon into a product. It’s hard, but it’s a fascinating journey that allows me to partner with some of the brightest and most thoughtful founders.
Keep the feedback coming! 🙏🏻
