Consumer Startups, AI & Capital Flows

Consumer startups have faced a tough road over the last couple years. Not only have their business models – whether retail, eCommerce, or marketplaces – been under threat, but B2C (Business to Consumer) VC funding has also dramatically dried up in that same time period.

The graphic below shows us how the Venture Capital (VC) market peaked in Q4 of 2021 and went into a rapid decline.

At a more granular level, investment into B2B (specifically Saas, as we will see below) has continue to increase while investment into B2C has dramatically decreased.

With AI on everyone’s minds these days, can it alter the landscape for consumer startups in the years ahead?

Consumer Startups, AI & Capital Flows

A New Wave of Consumer Startups?

If we start to pull together the threads on AI, a new picture begins to emerge about what is possible for the new wave of startups.

An exploration of various themes – from AI Content Writing to AI Software Development, to AI Visual Media tools & AI Generated Search – reveals that there will be changes to the way companies are developed now and into the future.

Within the context of various ethical concerns and uncertain “trust signals” emerging around AI, the obvious reality at this point is that:

  • a) new ‘cross-functional’ capabilities will emerge – ie. coders can pickup design, non-coders can pickup code – much faster
  • b) the marginal cost of producing prototypes and product designs will go down
  • c) the Saas business model will shift

That doesn’t mean that human talent, across various categories, will not still be required to scale this new crop of companies. On the contrary.

Since ‘consumer startups’ have been on the downslope over the last few years, and most VCs have now pivoted towards Saas, B2B, etc., a major gap exists in the market.

Between new possible applications for AI and the continued decline in investment flows from VCs into consumer startups, a new layer of opportunity is set to emerge in the future.

Venture Capital in B2C Startups Declines

After a red-hot decade of investing in consumer startups – powered by ZIRP (Zero Interest Rate Policy) – VC allocation into B2C peaked in 2021.

VC peaked in 2021
LinkedIn

As the pandemic years started to unwind (2020 – 2021), inflation started to increase and negatively affect the stock market. Technology companies, specifically, went into freefall and the Nasdaq dropped dramatically in 2022.

VCs (Venture Capitalists) are downstream to their LPs (Limited Partners), typically major funds or fund-of-funds who invest into the VCs themselves.

As the stock market cooled in 2022, so did the potential for exponential returns (via acquisition) and liquidity (via IPO/SPAC). The MAG(nifcent) 7 (Google, Meta, Apple, etc.) themselves were cutting costs and refocusing on profitability, thus the consumer investment cycle began its decline from 2022 into 2023 and now 2024.

Venture Capital in B2B Startups Increases

Simultaneously, investment into the B2B side of the market by VCs has remained strong in that same time period.

As we can see in the Dealroom graphic below, allocation into Saas has continued to increase YoY in the last six years, while everything related to B2C investment has rapidly declined in that same period of time.

Dealroom - VC investment in cateogry type
Dealroom

The top 3 segments for B2B Saas investment in 2022 were Fintech, Security, & Marketing. The split between B2C Saas and B2B Saas heavily skews towards those products targeted at Enterprise.

Dealroom B2C Saas vs B2B Saas investment
Dealroom – 2022 data

That doesn’t mean B2C Saas can’t produce big winners, however, as was the case with Canva going parabolic (in private valuation), reaching a peak of $40 Billion during the 2021 peak.

Nevertheless, the trend is typically your friend when it comes to markets; thus, we don’t expect to see these heavy B2B investment trends reverse overnight.

We see investment into B2B outpace B2C by about 4 to 1, particularly at the later stages. In the recent post-pandemic market correction, we’ve witnessed B2B activity contract at a lower rate than other verticals, so it’s been more resilient.

Tribe Global

What Does AI Have to Do With Capital Flows?

It seems apparent that a lot of the Generative AI tools will lower capital costs to creating software going forward, and as a result the Saas business model will be under stress.

Not immediately, but over the same time horizon (3-5 years) that most VCs would hope to generate significant returns on their portfolio companies.

In that same time period, a whole host of experiments will be run by potential entrepreneurs across a range of possible business models. What concept or combination of concepts will work will need to be seen, but something will inevitably click.

For a variety of reasons, those experiments are more likely to be on the consumer side. Principally because funding those endeavors via traditional VC Channels will likely be difficult for the foreseeable future, for the reasons mentioned above.

What are the solutions?

Community Business Models + Equity Crowdfunding

For a host of reasons, many new business models built on top of a ‘community’ have started to emerge in the last few years.

There are various ways to look at how a community can become core to a new business:

The dovetail between community business models and equity crowdfunding is a fairly obvious one. Principally, it is correlated to the following relationship that we observed during the boom of donation-based crowdfunding from 2010 onwards.

Consumers are more likely to fund projects that they are passionate about

The social psychology between a product that one loves and wanting to be an ‘early-stage investor’ helps explain why there continues to be growth in capital flows into equity crowdfunding platforms.

Equity Crowdfunding is a drop in the bucket compared to Angel and VC capital, but as we can see above, the market continues to grow at a healthy rate.

It is a “niche” in the funding markets, one that has use cases for a variety of different entrepreneurs depending on the their jurisdictions.

Valuations, regulations, and returns are all applicable to this “asset class,” just like VC and Angel, but on the balance, retail investors will invest less money and be more socially connected to the cause compared to the other asset classes.

Canva Example – What Would They Do Now?

Melanie Perkins - Fusion Books
Forbes

The Canva example cited in the Software, AI & Saas Business Model post was a conceptual example of how the business’s path may have differed in the modern era:

  • Started as Fusion Books, sold software to schools to develop yearbooks, monetized off # of yearbooks printed
  • Raised $50,000 AUD as a loan from friends and family to create software
  • Waited ~5 years between launch of Fusion Books and seed-stage funding into Canva
  • Eventually became a $40B company

Imagine in the mid-term future, being able to create that same software for cheaper, scale growth faster, and ultimately raise money outside of VC Funds if necessary.

The potential to become part of ‘The Next X’ is enough of a psychological motivator for many to invest in projects they believe in on equity crowdfunding platforms.

Community >> Raising Capital

Many companies nowadays – across all verticals – spin up Discords and run their entire companies off a fairly basic software stack.

It certainly seems plausible that these future entrepreneurs will go a step further into developing their own products, and ultimately seek funding opportunities in the future.

It also seems plausible that customers would be interested in becoming investors in real, cashflow-producing businesses that can disrupt categories.

Thus between the new opportunities that AI will inevitably create for future entrepreneurs and the dearth in B2C VC Capital, many new consumer companies will likely be launched in new and creative ways across platforms where they can access capital efficiently.

Certainly, Angels and VCs will be instrumental in shaping consumer companies beyond the seed stage, from both a capital and advisory perspective.

Yet, the aggregate method of startup formation will likely change dramatically as these new technologies reach greater depth in the market.

More AI + Community Content

Livestreams, Community & Commerce

Software, AI & Saas Business Model

Equity Crowdfunding Business Model