For nine years, I have invested in a roughly equal mix of B2B SaaS and consumer startups at the seed and pre-seed stages. At Precursor, we define consumer fairly broadly – we include CPG, consumer social apps, consumer digital health, and consumer subscription services under the broad umbrella of what constitutes consumer. One thing that has been on my mind lately is when we will see a return to a healthier, more vibrant investment climate for consumer companies. I went for a walk with a friend of mine a few months back, and he shared something that I keep thinking about – I’ll paraphrase his comments below:
I have been the consumer-focused partner at a large (but not huge) generalist VC firm. I haven’t done a Series A investment in a consumer software company in several years. Other than Bytedance, what did I miss that mattered from a returns standpoint?
I have spent a fair amount of time thinking about my friend’s comment, and I think he’s right – we have had some consumer companies hit rapid growth only to return to earth. We’ve seen it in social audio, video, photo, and live shopping. Listening to this great podcast conversation between Eric Newcomer and Sarah Tavel from Benchmark also gave me more things to consider regarding the challenges facing consumer startups today.
One quick thing to note – there is one category of consumer apps that has continued to do quite well, and that is games. The games business continues producing many large outcomes in private and public markets. Games have largely returned to being an investment area where specialist firms with lots of experience in the category and relationships dominate, so I am excluding them from this conversation.
In the past, we’ve had two catalysts that tend to produce the opportunity to create new consumer startups at scale. One was the emergence of a new platform, like smartphones or social media, that brought new capabilities to market and allowed entrepreneurs to either create net-new experiences or create experiences optimized for those platforms. The second catalyst has been the emergence of newer behaviors, including one-to-many social audio, creating and consuming short-form video on mobile devices, and augmented reality experiences on mobile phones. Sometimes these new platforms come with new distribution channels that can turbocharge growth, which makes the platforms even more attractive. Right now, it doesn’t feel like we have a large-scale new platform or enduring emergent behavior that can provide a tailwind for a new consumer company.
Two other things I think are also likely contributing factors are the relatively small number of VCs primarily focused on consumer investing and the challenge of connecting the dots on how consumer investments can move the needle for larger funds. I remain optimistic that the market for consumer investments will come back at some point, but for now things are challenging.