Long Live Consumer VC

Many following venture capital trends, and just as importantly the mood and psyche of venture investors, will tell you this: “consumer investing is dead”.

In fact, many early-stage investors have spent the last few months (well before the Covid-19 pandemic) questioning venture returns in the consumer space and therefore developing alternative theses and sources of deal-flow outside of it.

In some ways, the trend is perhaps understandable:

• Throughout 2019 and into 2020, a number of high profile consumer IPOs have disappointed (think Casper, Uber, Lyft, and SmileDirectClub). In addition, the industry is now filled with rumors of under-performance by VC-backed consumer startups, most notably amongst DTC brands with extremely lofty valuations. The argument here is that the true cost of scale was business model unsustainability.
• Many investors seem to have given up on the largest consumer categories. For example, the prevailing view (thankfully, prevailing doesn’t mean unanimous) amongst venture investors and technology leaders is that consumer social has become un-investible. The thinking was simple: the network effects acquired by the largest players in social (Facebook and its affiliates, and to some extent Pinterest, Twitter, Linkedin and Snap) are too powerful to break through. A similar reasoning applies to a number of the largest consumer categories, including dating (“Tinder has won”), travel (“Airbnb rules the world”) and others.
• Now, as the world grapples with the first-, second-, and third-order effects of the Covid-19 pandemic, the binary outcomes of consumer investing seem like sub-optimal capital allocation strategies. “Better focus on more stable and high-margin B2B plays”, is what I hear.

I don’t share this pessimism. To the contrary: my conviction is that consumer investing has never been so appealing in the last 5 years. There are many reasons underpinning this conviction; far too many in fact for a single post. In this post, I want to focus on just one of them:

standing in 2020, 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.

Generational Change Means Potential 🦄

The facts are well known. People born between 1995 and 2010, which are typically considered “Gen-Z” (in so doing perhaps hiding significant differences between older/younger members of that “cohort”), will become in the next decade the largest consumer cohort in the US. That isn’t to say that they aren’t already consuming in vast amounts — either directly or through their parents — and presiding over the destiny of exceptional startups. However, that process is accelerating rapidly.

It’s easy to underestimate the spending shifts that this will entail. For one thing, we tend to judge the prevalence of social and cultural phenomena at the yardstick of our own experience (“if I don’t like it, why would anybody else?”). Yet, spend half a day with a 10–15 year old and you’ll notice that there is something radically different about the way that generation lives through life compared to the way “we” did. They expect different things, engage with friends, family, strangers, and brands differently, and therefore won’t readily be natural consumers of products and brands that we take for granted. To put it differently, given the codes, habits, and hierarchies of values of that generation, many of today’s key players are losing cultural relevance much faster than they think– and with that brand equity, users, and profits will be progressively eaten away.

Early 🏆

I’m not the only one to have identified this phenomenon. Far from it. Several consumer application builders have emerged to respond and, in many ways, fuel these trends. Take consumer social, for example. We are seeing a resurgence of new and fascinating apps in the consumer social space that have already acquired scale or cultural significance. A couple of examples come to mind. TikTok’s emergence as a worldwide cultural phenomenon in the last 36 months is clearly one of the most meaningful ones. It’s not the only example though. With a key utility than is intriguing to many (let your friends see where you are at all times — the bridge to meet your friends IRL), Zenly is now one of the most successful consumer social apps in the world, with tens of millions of users and was as of February 2020 the fastest growing social app in several markets. It is now 20–30 times larger than at the time of Snap’s acquisition in mid-2017.

Where are the Next Consumer Ecosystems? 🌍

Interestingly, many of the inroads into consumer apps are happening where you wouldn’t expect them. Ecosystems like Paris and Berlin are proving to be exceptionally fertile grounds where very promising consumer social startups like Yubo, Yolo, and Jodel (amongst others) have emerged. Outside of Europe, pay close attention to “challenger” consumer ecosystems like New York City. At Secocha, we are extremely proud to be backing some of the most exciting consumer applications born in NYC, including Brigit, Bunches, Stacks, Wardrobe, and Jour.

All that to say that if you’re working on a consumer startup (targeting Gen-Zs or not) or a believer in consumer investing, I’d love to chat. Stay tuned for more posts on this topic.

PS — it’s my first blog post so any feedback welcome! 🙏