How to Evaluate Consumer Startups in 2024 and beyond
This is everything I would evaluate when investing in consumer startups & products in 2024 and beyond. There is a lot of content on B2B investing — but let’s talk about the consumer investing landscape. There are 11 factors I would consider.
To preface, I both support *and* critique many consumer startups. Many of the startups I often look at are a mix of B2B and Consumer. I would typically invest in B2B. However, I believe Consumer will also have new opportunities. There are pockets of opportunity in consumer, but it requires critical and honest analysis. This prompts you to be selective — as with any other investment. Consumer startups are naturally relatable, but they can be highly risky despite the upside they can present. These are the 11 factors I would look into when evaluating consumer startups.
1) Vet whether the product appeals deeply to one of the “7 key motivators” — coined by Chris Paik.
Consumer products that are successful appeal deeply to human emotions. The reason they grow is because they resonate with the people who use them. What are those emotions? Chris Paik, ex-Thrive Capital and currently a partner at Pace Capital, provided a framework for this.
When you evaluate a consumer product, you need to see if it appeals to one or more of these emotions below.
“All successful consumer-facing companies appeal to one or more of the seven deadly sins. They are time-tested core motivators that incentivize people to do things (the fact that they have survived for all of time without any edits is proof of their power). There are no successful consumer companies that do not appeal to any of the seven deadly sins.
Different motivators can apply to different constituents within each company, even different behaviors from the same constituent.
Examples: 1) Sloth: Uber, Amazon. 2) Pride: Instagram, TikTok. 3) Gluttony: DoorDash, Netflix. 4) Lust: Tinder. 5) Envy: Pinterest. 6) Wrath: Twitter. 7) Greed: Bitcoin, Robinhood. “ — Chris Paik
2) Look for companies with strong word of mouth growth and potential. Understand the word of mouth growth for these products: the potential of it (if non-existent), the current state, and the future state.
Word of mouth growth and referrals are typically a sign that a consumer startup is doing something right. If you can get one consumer to tell another consumer to check a product out and engage with a product deeply, that’s a great sign. And if it happens over and over, sustainably, I would take a deep look into that product. However, there are exceptions. ‘
If word of mouth growth exists, you should always question the word of mouth growth.
- Does it really solve a need? You need to understand the problem it solves, how frequent that problem is, and how big of a problem it is for consumers.
- Does it provide some emotional bond? You need to understand how consumers feel about the product, how they talk about the product, how they interact with the product, if their lives have been improved or become dependent on it, and more.
- Is it a nice to have? There are many successful products that started out as a nice to have, but increasingly over time, it becomes a consumer staple and household name.
- Is it irreplaceable currently or on track to be irreplaceable? A product must truly become irreplaceable or on track to becoming it in order to reach its peak and be successful. For instance, Google has not truly had a great competitor for search and discovery. There’s been Instagram, TikTok, and ChatGPT. Even then, Google still stands as number one.
“As of May 2023, a whopping 93.12% of all search queries conducted across all search engine providers are done through Google” (Source).
3) Choose consumer products that either exhibit characteristics of 1) platform-ownership or platform-independence or 2) if they have signs of long-term stability in platform-dependence.
Most consumer startups rely on platform dependence in order to succeed.
- They can use existing platforms to grow their platform. Early on, there is some level of partnership or influence gained from another platform in order to grow. These platforms, at large, can be the main social platforms. These platforms, on a smaller scale, can be other influencers’ and partners’ platforms that co-sign a consumer startup’s platform.
- Rarely do any consumer startups succeed through pure platform independence. Many consumer startups succeed through growth from another platform and then have eventual growth as a result of multiple platforms. When a consumer startup becomes popular enough to succeed on any platform, they get closer to platform independence.
- Those that eventually get close to and achieve some form of platform independence do gain a moat. They achieve long-term stability in platform-dependence. Truly own *your* platform as much as you can, and you will create lasting and successful consumer products.
The key is the following: I would understand how sustainable platform dependence is for most startups and if platform independence is achievable.
- Can the platform “rug” be “pulled” at any time as well?
- Have they developed enough of a flywheel to work on any platform?
- Can they become a platform themselves?
- Can they succeed independent of a specific or particular platform?
These are examples of various startups and their relations to platforms, which fueled their growth.
- Facebook started on Harvard’s platform (ie their student network). Then, they expanded from college to college over time. They captured different student networks and platforms to fuel their growth. Once you can get on a platform and gain traction, you can be successful.
- The Jordan brand relied on Nike and partnerships with athletes & other in order to distribute and become as successful as it is today. Arguably today, Jordan is popular enough to in theory to become its own brand separate from Nike — but it will continue to be platform dependent due to the logo association for many of its popular shoe and clothing lines. In this sense, platform dependence is okay but can be a hindrance to true platform independence.
- MrBeast burger has become popular not because they re-invented the wheel with the burgers, and the burgers aren’t necessarily different — they are popular due to MrBeast’s platform of influence and following. Also, his constant UGC around his products and embedded advertising allow constant top of funnel growth.
- SKIMS, while it relies on partnerships with other influencers, is still driven a lot by Kim Kardashian’s platform and her relationships. It is driven by Kim’s platform right now and resultantly has gotten a following from it.
- NFL arguably has reached new heights and become more popular due to Taylor Swift’s platform. https://www.forbes.com/sites/mollybohannon/2023/10/02/chiefs-jets-game-taylors-version-was-most-watched-sunday-show-since-super-bowl/amp/
4) Consumer startups must have a clear moat that gives them a competitive advantage. You need to know within seconds *why* a product is specifically important to its niche/cult of consumers and *how* the product is different from what exists in the market.
A moat is important. What is it? At its fundamental level, it is a differentiated advantage. Is it a dedicated community, does it solve a problem it hasn’t solved before? How emotionally invested is the consumer to the product and the experience?
The product is incredibly important, but just as important is how the dedicated consumers feel about the product. The goal is to find a small starting community that is incredibly passionate about it and feeling the genuine potential of the product expanding to other consumers over time.
If you can feel the visceral and genuine emotion that a new community and audience harbors towards a product, you will know that the consumer product has reached an early level of product-market fit.
Let’s talk about competition. If someone else is offering a similar consumer product and can eat your lunch, you need to rethink whether it’s a bet you want to make. However, there are exceptions to this if you have a truly obsessive audience and community (ie MrBeast penetrated the incredibly competitive food space). Competition is not necessarily a bad thing, and it can mean there’s high demand for that type of product in a given market.
5) Evaluate startups and their executional ability. You need to feel confident in their execution when evaluated against Porter’s 5 forces, as a foundational framework.
- Threat of New Entrants: how easy or difficult is it for new competitors to enter the market your product is in?
- Degree of Rivalry: what level of competition is in your market for your specifc product?
- Threat of Substitutes: can this product be replaced by others, at a higher quality and/or lower price?
- Bargaining Power of Buyers: how much authority do customers have when buying products, in order to lower costs, increase quality, etc?
- Bargaining Power of Suppliers: how much authority do suppliers have for changing product quality or prices?
6) Consumer startups require high costs to acquire customers. The ones that do succeed have these unique acquisition characteristics.
Choose companies with potential for a customer acquisition strategy with low CAC. Low CAC, in general for any type of startup, can be in the form of 1) diversified multi-channel customer acquisition or 2) strong & sustainable single-channel customer acquisition.
Many of the opportunities we will see in consumer in the next decade and beyond will be driven by those who own platforms. Most notably, these are creators and influencers. They can be promoting their own Consumer physical products or Consumer SaaS products (Consumer Software / Consumer Tech).
The more organic the acquisition strategy, the better. These are ideal scenarios:
- Own the marketing and embed it within your channels. An example of this is MrBeast’s products.
- Partner with others in a synergistic way that doesn’t skyrocket your CAC. An example of this is a music artist that offers a feature to another popular artist to create a hit single on their album, in exchange for the same in the future.
- Develop an obsessive community to spread word. Examples of this are video games such as Fortnite, Call of Duty, etc. These are also great examples: 10 Big Brands That Don’t Advertise.
Diversified advertising channels are important. If you are dominated primarily by advertising and not a mix of channels, most investors will not want to subsidize your growth until you have hit high financial benchmarks. Investors do not want to artificially pump up growth numbers, so you can pay for advertising. They want to see a sustainable business that is compounding slowly over time and tracks to profitability.
Most companies will have a dominant advertising channel. For consumer startups, it’s either 1) organic, 2) organic and paid, 3) paid. It’s almost a must-have for most DTC brands, but the more you use it, the more it costs for you in the long run. Build a great community or build a great product for an existing community first.
- Additional reads: Smile Direct Club, Nike DTC, Lunya, VCs No Longer Do DTC, The direct-to-consumer craze is slamming into reality
You can go all out on paid advertising and dominate a category. The requirement here is capital. TikTok spent $1 billion on paid ads in order to become a successful social network, as mentioned by Sarah Tavel from Benchmark on Lenny Rachitsky’s podcast. Even then, this spend is not stopping anytime soon. But it will likely be sustainable due to the monetization they’ve been able to bring to the platform. For most consumer companies, the alternative is the case.
7) Companies who can compete effectively in *their* market are important. Choose a large *enough* market, but note that a large market does not necessarily indicate success. What matters if they can succeed in their own market first and expand from there.
Market size is important, but it’s not an end all be all. Yes, having a large market is key. But when you’re comparing a large competitive market versus another equally large market with less competition, even then, it’s hard to tell. There’s still many factors at play. I would understand deeply the core product value they provide, how differentiated it is versus competitors’ products, how obsessed consumers are with it (level of obsession *and* number of those obsessed), if it’s repeatable, how it grows, and why it’s important to society now.
We’ve seen time and time again, as mentioned above, products can disrupt already existing large markets that are very competitive. (ie Figma, Tesla, TikTok, etc). Even if it’s a large market with low competition now, that may not be the case forever. You will have to repeatedly sell the same product over and over to different consumers, and the return for each dollar spent on paid acquisition typically declines over time.
Let’s use gaming as an example to describe consumer obsessiveness. I would argue that a browser MMORPG game like RuneScape is almost impossible to recreate today, in terms of the level of engagement and retention over years and years. First, the onboarding needed to get a consumer to their “aha” moment for any computer game requires immense effort. And the level of obsession for the community and every individual player, together cohesively, is so hard to recreate for decades. This is why CAC is a major problem in gaming unless you have a truly obsessive community and an existing community or platform to recreate more games/features off of. As another example, Call of Duty continues to be popular due to the following they’ve built, the platform strength from Xbox and PlayStation, the partnerships they’ve had with creators, the platform strength they’ve built from YouTube and other services, etc.
8) Consumer startups that are repeat purchases and repeat products that consumers will use over can be potential gold mines.
This is your CAC:LTV ratio. How much LTV can this product generate? If a customer prompts themselves to instinctually come back over and over, your CAC:LTV will be better over time.
If it’s a one time sale, you will need to sell the same product to a new consumer every time over time. This is incredibly challenging to do, but there are companies that do it sucessfully.
As an example of a sticky company, let’s talk about Nike. You usually buy one or two pairs of shoes at a time. But typically you come back because the quality and experience is so good that you end up buying more shoes for yourself or others in the future. Also, you end up checking out other products if you’re into athletics or some activity that involves their other product lines because you trust the brand. You also end up telling your friends and family by talking to them directly about it or showing it off on Instagram/other social platforms. You might leave a review, and some customers might even create a short video or long video on a social platform about it. This creates a flywheel effect where consumers start to see the products everywhere, and UGC driven by the purchasers can start to dominate education and create more top of funnel acquisition.
9) Time is an asset. Understand if this product in any way addresses the value of time. Is it a repeatable product that people will buy over and over, that saves time over and over?
Time is one of the most important assets. If a product can save time or give you time back, you have found gold. As Gary Vaynerchuk mentioned, Uber, Airbnb, and Instacart are all examples of products that save consumers time and provide a quality experience. They also are repeatable products that you can use — over and over again. Consumer tech that can achieve this will be successful.
“Being able to buy and sell back time is what some of the most successful startups over the last 3 years have done. They capitalize on our craving to get back the time we have to spend on the things we don’t want to do. If you’re thinking in start-up mode, and looking for an inspirational seed as a starting point, I highly recommend thinking about time. People will massively overpay for it. And if you can figure out that trade off, you’re putting your business in a good position” — Gary Vaynerchuk
10) To identify whether products and trends will resonate with people, go *where* they are most to see how they behave and also *study* their behavior.
I believe there three keys to understanding the products that will resonate with consumers, 1) going on social platforms and studying trends: Reels, TikTok, YouTube, Instagram, etc; 2) spending time outside to study how people behave, 3) reading about consumer behavior. In further detail, these are the three things I would do to build your anticipation for consumer trends.
- On TikTok, you need to be able to separate the fluff from the substance. Certain influencers may talk about a certain product because they are incentivized to do so. Understand the products that are organic from the ground up, from individual consumers that eventually reach more influencers over time. This applies to both physical and software. A product can also start top down from an influencer and slowly build up social proof / co-signs over time. You can watch TikTok and identify lasting/emerging trends. These will define the next generation of consumer products. Many creators will plug their products, but at the same time, you can identify opportunity areas or trends that may not surface yet into a tangible product.
- Go outside, in-person, and study where consumers are. Go into stores, go into big cities, go into small cities, and especially pay attention to what people do on their phones. Study how consumers are behaving and what they believe in is next without them necessarily saying it. Study their actions more than their words.
- Read about consumer spending trends and how they’re changing over time. Apply this to what you see everywhere else. There’s a lot of hypotheses about how consumer spending will change. It’s important to stay as true as you can to the data and the underlying assumptions — understanding statistics and any emerging long term tailwinds/headwinds.
11) As with any business, the metrics can tell the story.
Traction is important. If you have a community, audience, etc — even if they aren’t monetized yet — are signs of traction. Especially in a market with interests rates, capital to fuel growth is incredibly hard to come by. Make sure you create a great business first and try to develop distribution channels with low CAC.
If the business is generating revenue for a sustainable cost of acquisition with a potential for profitability in the future, it can be a good business. The key word here is sustainable. Consumer technology startups can have fast growth, but it needs to be financially sustainable growth.
- Note: I want to caveat that sustainable business growth is not a substitute for avoiding risk-taking. Yes, you should double down on your core revenue-generating business. But you cannot be averse to taking risk. You should be open to failing a lot. Keep the main thing the main thing, but you should experiment and get small wins over time. The entrepreneurs that continue to innovate and fail time and time again are the ones that will create timeless products.
Evaluate all the channels and methods for customer acquisition. B2B is different because you can make an outbound call that can lead to $10k+, $100k+, $1M ACV or more over a year depending on the product/service. Consumer it’s highly unlikely that one customer will generate even $10k from the get go for 99% of products. It is important to understand where a consumer product is acquiring customers, how much it costs, and how much revenue it is delivering.
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