Why It Makes Sense To Invest In Consumer Businesses

Luke Smith

Partner + Investor

June 13, 2021

Variety is the spice of life. Or that’s what an 18th Century British poet would have you believe. I’d agree. At FP, we have a broad remit of investing in Applied AI, Marketplace and eCommerce businesses. Those pillars may change over time but I doubt that we’ll step back from having a wide scope.

Having said that, I’ve felt quite a bit of groupthink unfurling in the VC community that goes: “If you’re not a B2B SaaS investor, are you really a venture capitalist?”

(B2B SaaS is business-to-business software-as-a-service, for those who don’t do tech jargon.)

Now, perhaps I’ve just revealed some deep insecurity but I’d like to think not. I’ve talked to a number of investors, some from funds that were once proud B2C investors, who comfortably ignore huge swathes of the venture ecosystem in favour of the hallowed turf of B2B SaaS.

I should say at this point, majoring on B2B SaaS is a perfectly sensible approach to venture. Successful SaaS companies tend to have great economics and throw off cash...one of the reasons why they attract such lofty multiples in the public markets. Enterprise value to forward revenue multiples for Tom Tunguz’s tracked basket currently have a median of ~10x, a performance largely sustained over a couple of years. The software markets are truly large and growing too. Those are all ingredients in a great recipe of venture investment strategy. Indeed that’s why a great deal of our Applied AI investing goes into companies like Apexx, Gravity Sketch and Spot QA.

We don’t, however, invest in B2B SaaS companies to the exclusion of opportunities in the consumer space. In no particular order, I’ll talk you through why I think that’s the case.

They’re fascinating

First of all, it’s interesting. Call me crazy but I like walking down streets seeing what people are doing, which shops have changed, what transport people are using, and what people are wearing. I’m always interested in what apps people have on their phone, what they use, what they love, and how they set up their homescreens. I think we’re all somewhat interested in people’s holiday snaps too, and not everyone on The Gram has to be Murad Osmann.

They have $bn potential

Second, and obviously, there are big successes out there and on offer. The majority of the value of European tech companies valued at over $1bn are consumer businesses. Some of Venture’s greatest hits are consumer businesses too: Facebook et al, Uber-Lyft, AirBnB, Pinterest, Houzz, Supercell, King, etc., etc. even Apple, once upon a time.

They can achieve sky-high growth rates

Third, growth. Consumer businesses can grow scary-fast. That can be fuelled by a cocktail of drugs (performance marketing) and other vices, sure, though that can yield an opportunity to grow at faster rates than their B2B counterparts. The consumer sales cycle looks nothing like the byzantine, lengthy funnels that you see in the business world. There is a trade-off given the relative stickiness of those revenues, of course, but if there’s something that Venture investors love enduringly it’s growth. The consumer markets can deliver that to breathtaking levels. One of the reasons why you see so many VC dollars going into freemium models and self-serve B2B software is because equivalent levels of growth can be achieved. Someone putting a purchase on their credit card at work is a lot like...someone putting a purchase on their credit card while not at work.

The good ones are easy to spot

Fourth, and possibly most important, it has never been easier to spot great consumer businesses. Performance marketing costs have risen over the years. It turns out that rent on Facebook and Google’s high streets can be just as tough to meet as it is in the offline world. That means that those consumer businesses which are weakly differentiated, not particularly defensible and reliant on performance marketing (Casper, anyone?) stick out like a sore thumb. That’s bad for existing businesses in the space but provides the investor with ample assistance to see the wood from the trees.

How consumer startups can navigate investor skepticism

So, what does all this mean if you’re a consumer startup or thinking about starting up? First of all, know that your universe of potential investors is (currently) relatively limited compared with your B2B peers. Know too that investors may all have been stung once or more by being involved in a consumer startups that perished at the hands of high-and-rising acquisition costs and generally weak economics.

Knowing these things gives you a clear recommendation if you want to take your business down the venture route. Those consumer businesses who are succeeding (in the funding markets, at least) are those with good answers to the fundamental economics question without compromising on growth.

We’ve seen AllPlants do well at the early stage here in the UK as they take advantage of changing consumer tastes and preferences (veg/vegan = growth) while operating a high quality income model (subscription = economics). Lemonade in the US has popularised a tech-enabled-mutual insurance model. They’ve taken advantage of a general dissatisfaction with incumbent financials, have in-built virality with the mutual model all the while operating in an arena with huge LTVs.

One final thing to note...margins and large transaction sizes are your friends. Without them, getting to contribution-margin positive or actual profitability is a long, hard road.

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Luke Smith

Partner + Investor

June 13, 2021

Luke joined Forward Partners from REV Venture Partners, a corporate VC, where he was responsible for deal origination, investment due diligence and portfolio reporting. He was previously a consultant with the strategy consultancy Oliver Wyman, where he worked across the retail, aviation, healthcare and FMCG sectors. Luke originally planned a career in science and he holds a PhD in biochemistry. His focus at Forward Partners is on sourcing and executing new investments.