Why Unglamorous Consumer Startups Merit Some Investor Love Tech startups have a hypnotic hold on investors, except for those who pay attention to the numbers.
By Mat Franken Edited by Dan Bova
Opinions expressed by Entrepreneur contributors are their own.
Let's face it, tech startups are today's media and investor darlings. Companies like Uber, Lyft, Airbnb, and Coin are continuing to scale and dominate headlines. Overlooked by many, though, is a crop of consumer product startups, innovating under the radar well outside the tech ecosystem, that is equally deserving of both capital and media attention.
Only 4 percent of total venture capital in 2013 went to investments in consumer according to Pricewaterhouse Coopers' and the National Venture Capital Association's MoneyTree Report, flat from the year prior. There may be change in the wind as investors start to feel tech fatigue and follow the lead of some of tech's royalty.
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"The natural foods market feels similar to the tech market around the rise of the commercial Internet in the mid-1990s," said Brad Feld, managing director at the Foundry Group.
AOL co-founder and former chairman Steve Case has invested in consumer companies Sweetgreen and most recently, Revolution Foods.
At CircleUp, an equity-based crowdfunding platform focused purely on consumer products, CEO Ryan Caldbeck suggests many investors, enticed by tech, ignore hard data. He asserts returns on consumer products have actually been higher than their tech counterparts, and returns are a data point well worth following!
"Less sophisticated investors, who often don't understand how to evaluate a tech business, get enchanted at the possibility of investing into the next Facebook," Caldbeck said.
At Aunt Fannie, as a new natural products brand that recently closed a successful round of funding, we found there are four must-have's for a burgeoning consumer business to overcome tech startup bias, compete and succeed in the tech-saturated marketplace.
1. Your team. Most tech companies, before they land large investments, build strong teams whereas many consumer companies begin as mom-and-pop shops. Bringing on advisors, officers and staff with experience in your channel make a consumer brand much more attractive to investors.
Just as important, suggests Feld of Foundry Group, "Are the entrepreneurs obsessed about the product?"
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2. More than just better. Your product and brand need to stand out for reasons beyond functionality.
"What is your brand's reason for being?,'' asks Caldbeck, of CircleUp. "Why does the world need that product and how big is that market? Saying "it's the best tasting' is never the answer. Very few companies in the past 30 years have been built solely because they were the best tasting."
3. Adaptability. Tech companies generally accept that they will need to adjust to the marketplace in real-time with pivots and product iterations. Consumer startups, too often married to their products, would be best served listening to consumer feedback. Be prepared to make changes, as necessary, and adapt quickly to meet the needs of your market.
4. Performance. Scalability is critical when it comes to showcasing growth potential, so be plausible with your projections. Caldbeck suggests focusing on retail level sales performance. Demonstrating same-store sales growth is a key scalability indicator investors will want to see.
In the past, institutional investors would generally invest only in consumer companies with a minimum of $10 million in revenue. Platforms like CircleUp are leveling the playing field by giving smaller companies access much-needed capital. Experienced investors like Feld are leading consumer syndicate "Circles" that bring tech leaders to the forefront of consumer products, which allows the broader public to follow tenured leads. In turn, those leaders help pull the consumer startup space forward.
With prospects brightening, it will all come down to demonstrating why a product deserves attention. Investors are beginning to listen and the prospective returns in consumer are attracting tech royalty's eyes. It is time to give this overlooked startup space some attention.
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