Today's topic: is consumer tech uninvestable?

Believe it or not, once upon a time consumer startups were the darlings of the VC world. In fact, 10 years ago they made up 60% of unicorns and 80% of unicorn value.

But now, a startup that pitches a consumer product to a VC is likely to get a no. Fast.

A big reason for this? Churn. Let's take Netflix:

Netflix is worth $374B, but they churn 2-3% of their customers each month, meaning they have to replace their entire customer base each year.

Newsflash – churn rate isn't just a Netflix problem. It's symptomatic of a larger issue: the constant battle for customer retention and acquisition.

And let me tell you, acquiring customers ain't cheap. And the more money a company has to raise for customer acquisition, the more dilution founders and investors face.

No wonder investors are hesitant to invest in consumer companies.

But does this mean that consumer is dead? Not so fast.

A consumer lifeline

Enter the B2B2C model.

The most exciting consumer companies are the ones that can build an extremely user-friendly product – one that solves a big problem – and support consumers without adding to their bill.

(Sidebar: Did you know the average American spends over $200 a month on subscriptions?)

One of the companies in Hustle Fund's portfolio is doing this already: Debbie is a startup that rewards users for saving and paying off debt.

Founder Frida built a waitlist of over 20k users and saw super strong consumer adoption. Then she pivoted into partnering with credit unions as a way of fast-tracking her customer acquisition.

Lemonade is another one. They started as a direct-to-consumer insurance company but pivoted to become an AI-powered SaaS platform for other insurers. Talk about a (pause for effect) twist 🍋.

Robinhood, once the poster child of direct-to-consumer fintech, now offers its trading platform to banks and brokerages.

Heck, even Airbnb started working with rental properties to expand their customer acquisition efforts.

So... B2B2C. It just might be the lifeline to help consumer tech companies go from floating a river to speeding through the rapids.

Spotting the potential pivots early

If you're curious about investing in consumer, you may want to think about how you can help early-stage startups spot these pivot opportunities before they spend their entire seed round on customer acquisition experiments. Or Coke Zero.

To start, you'll want to find founders with experience in scaled customer acquisition.

They should also be curious, with a healthy obsession with data-driven experiments.

And if you find this founder but she/he is in a competitive market without clear differentiation, that may not mean the end of the road.

Remember, early-stage startups don't typically have scaled distribution figured out yet. But they might be open to advice from a potential investor.

Instead of a quick no, help them think about what businesses might support the same end customer without those distribution and unit economic challenges.

If it works out, it could turn a "meh" investment into a mega investment.

Flexibility is key

So, is there room for consumer startups in a VC portfolio? Absolutely – but with a footnote.

The key is flexibility. Look for consumer tech companies that have the potential to pivot to B2B2C models. These are the companies that can weather the storm of high customer acquisition costs and churn rates.

What could happen if things go right?

Pivot… pivot!

Kera from Small Bets

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