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A big trade of the last couple of years has been out of consumer startups (like marketplaces, grocery delivery and social media) and into startups selling to other businesses, like B2B software companies. Rising inflation (among other things) has taken a bite out of many startups catering to consumers. While the sector has been a recent hotspot in areas like southern Europe, many VCs have fled the space and investment into consumer companies plummeted last year.
But some investors have kept the faith, and are continuing to bet on the unloved space. Rebecca Hunt, the partner who leads the consumer team at Octopus Ventures and who was on the board of fashion resale marketplace Depop, which was acquired by Etsy in 2021 for $1.6bn, takes issue with the investors shunning consumer full-stop. “I always struggle when people say, 'I don't really think venture makes sense with consumer,’” Hunt tells me, highlighting that consumers contribute a massive chunk of GDP in most countries, and are the cornerstone of a host of Europe's most successful companies, like Klarna and Spotify.
But consumer startups aren’t what they used to be. “The clear trend over the last couple of years has just been around a huge focus on unit economics and a realisation that it [needs to be in] the DNA of the business pretty early on,” Hunt says, adding that she’s seeing founders change their approach. “This is not getting your first 1,000 users as quickly as you can, and then getting to 10k users and beyond; this is about getting 100 power users and truly defining what product-market fit is really early on in the business.”
In: AI + education and AI + gaming
One “underinvested” area Hunt is eyeing is the AI-meets-education space.
She says that in the last year or so, there have been AI education startups using WhatsApp or SMS for short form, personalised learning content for things like exam preparation. She believes those startups have a place in the ecosystem, but that the broader educational “stack,” as she puts it, “is so much more complex”.
“If you think about truly taking educational syllabuses globally and making those… scalable and much more relevant, much more up to date, much more personalised to the individual child in the classroom — that has a much longer term, sticky proposition than the very short form learning platforms,” says Hunt. She believes AI could help update outdated testing processes used by the schooling system to assess children and teenagers.
“There's a lot more to come from that,” she says, which includes addressing areas from “neurodiverse children to overrun state systems of education,” and “also enabling kids to understand more about the softer-skill development”. One problem though: getting people to pay for it. Europeans, in particular, are largely used to not paying for education, Hunt says, and there’s “friction around who pays within edtech, and therefore, how scalable [can] you get it?”
She compares what could happen with education to what happened with fitness and nutrition trends in the 1980s: “People did it because they felt they had to, and now it's like a fundamental part of people's identity — what your fitness regime is, what exercise you do, how you eat... I see that shift happening with education and learning and careers,” she says. “With that, I think there'll be a shift in people's willingness to pay.”
Hunt is also bullish on the way AI is changing gaming. It’s “polarising” among VCs, she says, but “if you go and speak to founders in the gaming space, AI is disrupting everything that they do, from building the game [to] going to market, creating adaptive gaming experiences,” like, “how do you create a non-playable character (NPC) within a game? How does that non-playable character interact with you?”
While historically companies would need to pre-program such responses, she says AI is changing “the whole way that you as a user experience the game, the way that you build a game”. (Octopus Ventures invested in gaming studio Onibi earlier this year.)
Out: AI girlfriends and e-commerce
The AI boom has sparked a tonne of bizarre startups — including AI girlfriends. But Hunt has a strong argument against the space: “I think particularly in the post-Covid era, most people are seeking more real human connection than less. I think these tools can be very powerful in helping improve ourselves, but they will never be — I think increasingly, culturally — a replacement for human interaction,” she argues. Hunt doesn’t believe startups addressing the loneliness epidemic with AI girlfriends have “longevity”, because “it just goes counter to the narrative around human connection”.
Also on the no-go list: e-commerce startups. In categories like fashion, it’s “not accelerating in the way that we thought, so I'm less bullish on those areas,” she says. Hunt points out that the trends around the circular economy and sustainability within such industries haven’t quite been as impactful as investors might have thought. It’s “no longer a differentiator for a business just to have the credibility of being sustainable — I think it's got to bring much more to the table than that,” she believes, like tapping into a new set of supply.
The biggest struggles consumer startups are facing right now
There’s clearly some big headwinds for consumer startups right now — and not just being out of vogue with many VCs.
Hunt says consumer startups are facing an uncertain economic environment, with inflation and tight funding making it hard for them to plan. “The cost of acquiring new customers continues to rise ─ especially with the ever-evolving… algorithms,” which can impact buyer behaviour, she says. “On top of that, supply chain issues are still causing headaches. [Consumer startups] are also under pressure to comply with stricter data privacy laws and sustainability standards, which can be demanding for a young company.”
Talent is still an issue, too, and with “consumer behaviour shifting rapidly, staying relevant is a constant battle”.
More consolidation is on the horizon
The year has already seen some M&A — like BeReal’s €500m acquisition by French mobile game and apps publisher Voodoo — and Hunt sees more consolidation on the horizon; “although only in areas where there are significant synergies between businesses, and where the combined business looks better to investors/acquirers because they have reached scale or profitability.” That’s likely going to be true for startups in “mobility, delivery/logistics and social and gaming,” she adds.
VCs, I’d love to get your take: are you considering dipping your toes back into consumer startups? What areas are looking promising? Do you agree with Hunt that there are promising startups addressing AI in education? What underrated consumer startups are you seeing? Send me a line.
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