Let the Data Speak: Consumer Startups Stack Up to Enterprise Startups

Spring 2024

An abbreviated version of this essay appeared in The Information and can be read here.

We live in a consumer-driven economy—consumer spending accounts for two-thirds of the U.S. GDP.   Yet Carta recently reported that just 7% of seed capital raised on the site last year went to consumer companies, the smallest share since 2018. Andreessen Horowitz meaningfully cut its consumer investing team and folded it under its finance investing lead partner. Lerer Hippeau, another venture firm once focused on consumer companies, is investing more in enterprise firms. In our own day- to- day activity and conversations with peers, it is clear that investing in consumer companies has come under greater scrutiny.

At a high level, the bearish sentiment makes sense. Inconsistent consumer sentiment and dwindling savings accounts prompt fears that spending will slow, customer acquisition costs have been rising, inventory and supply chain challenges are material and the shift toward generative artificial intelligence has emphasized infrastructure to date.

But public market data reveals a different story: Compared with enterprise companies, consumer companies are more likely to go public after raising a Series B, more likely to drive efficient growth at the time of an initial public offering and just as likely to trade at 10 times revenue at the time of IPO.

Markets are cyclical and categories go in and out of investing favor. Consumer is out of favor (the only vertical down from 2019 volumes), though coming out of a 153 month bull run (excluding March 2020), venture capital funding across major categories has seen a significant (> 50%) pullback from prior highs, including SaaS, Fintech, Climate, and Digital Health.

We are at the dawn of AI-driven technological changes and are beginning to see the investment opportunity at the intersection of AI and consumer priorities. At Forerunner, we believe the consumer opportunities poised to emerge in the AI era are of the same scale as the opportunities that emerged from the internet and mobile shifts. Think of how quickly ChatGPT+ subscriptions propelled OpenAI to $2 billion in annualized revenue.

Defining Consumer in Venture

First let’s clarify what we mean by a consumer company. Investors lack a shared definition and to some degree this reality has led to conflicting assessments and narratives.  Of the VC-backed consumer IPOs since 2010, only 35% are categorized as consumer cyclical or defensive in PitchBook under GESC categorization (similar to GICS outside of PitchBook). On the flip side, 70% of enterprise IPOs are categorized as technology.

In Forerunner’s eyes, a venture-scalable consumer company is one underpinned by technology where either an individual consumer pays for the service or product or the company’s revenue relies on consumer spend or engagement. Through this lens, consumer companies include much more than retail or inventory-holding companies. They show up in all corners of the market and are fueled by a range of underlying trends. They span marketplace, subscription, software and e-commerce business models and range from digital brands and retailers (Warby Parker, Farfetch, Revolve, Rent the Runway) to service companies (Airbnb, Uber, DoorDdash, Duolingo) to social media (Snap, Pinterest) to software companies that enable commerce (Stripe, Shopify, Toast).

Take Doordash and Zillow, for example. They are categorized as Communication Services (where telecom and social are typically placed). Or Affirm and Uber, which are categorized as Technology. Among six scaled and aspiring public companies in our portfolio, only one, The Farmer’s Dog, would fall under a consumer GESC sector. The others, including Hims, Warby Parker, Chime, Faire, and Oura would fall under non-consumer sectors despite offering impactful solutions for millions of consumers.

Each of the companies mentioned in the table below exist to better serve consumers and each derive their income either directly or indirectly from the 2/3 of annual consumer-directed GDP spend. We include commerce enablement companies, like Shopify and Toast, because 73% and 83% of their top line revenue comes from “merchant solutions” and “technology financial solutions” (directly tied to GMV and consumer payment processing volumes), respectively.

What Makes Early Stage Consumer Attractive to Venture Investors

The consumer investing debate is as much of a qualitative disconnect as a numerical one. To show what allows us to sleep (playing into evolving trends) and dream (setting the next trend) at night, we reviewed over 12,000 venture-backed companies that raised a Series B since 2010 and categorized over 7,800 of those companies as consumer or enterprise.

The numerical case: Consumer IPOs stack up to enterprise.

Consumer companies are more likely to go public if they raise a Series B.

Of the 3,129 venture-backed consumer companies that raised a Series B since 2010, 1.69% went public, excluding special purpose acquisition companies. Of the 4,739 venture-backed enterprise companies that raised a Series B, 1.50% went public, excluding SPACs. Consumer companies go public at a 13% higher rate (63% including the one-time SPAC anomaly).

Consumer companies offer better growth rates and profit margins at IPO.

Consumer companies are often characterized and criticized as having lower profit margins and higher marketing expenses. In the calendar year of their IPO, though, consumer companies had a median combined growth rate and profit margin of 52% compared with 32% for enterprise companies. Investors often evaluate companies on this measure, known as the Rule of 40, because they want the sum of a company’s revenue growth rate and profit margin to be at least 40%. In our study, 62% of consumer companies went public above the Rule of 40 threshold compared with 44% of enterprise companies.

Consumer company IPOs are larger.

Of the consumer companies that went public, 18.8% did an IPO at a valuation of more than $10 billion, nearly double the 9.6% rate for enterprise companies. Notably, consumer companies went public slightly faster—a median 76 months from founding versus 78 months for enterprise companies—and at a median 51% higher valuation.

These metrics reflect that consumer companies often have larger market share at IPO than enterprise companies. For example, Uber, Doordash, and Instacart each have over 60% of their respective markets, DraftKings plus Fanduel have 61% of the online betting market, and Amazon and Chewy have 70% of the ecommerce pet market. This scale of outcomes demonstrates the ability for consumer companies to reach meaningful scale and similar to enterprise companies this type of scale creates opportunities for consumer companies to leverage large user bases into other lanes of business.

Consumer companies fetch comparable revenue multiples at IPO.

Consumer companies are just as likely as enterprise companies to be valued at more than 10 times their annual revenue at IPO (42% consumer versus 40% enterprise). They are also just as likely to be valued at 5 to 10 times their annual revenue (29% consumer versus 30% enterprise).

There is opportunity for investors in high-quality small-cap consumer IPOs.

Compared with enterprise companies, relatively fewer consumer companies go public at market caps less than $2 billion. Yet those that do perform comparably to their enterprise counterparts in terms of growth rate and stock performance. This demonstrates how the two company types have comparable upside but with a greater investor appetite for small cap enterprise SaaS companies.

The qualitative case: Scale and Impact + AI’s consumer moment has arrived.

Some of the world’s largest companies started by serving consumers.

Just as enterprise software companies aim to expand revenue with clients by adding new products or increasing usage, consumer companies have parallel ambitions and success. Think about Amazon (books), Google (search), and Meta Platforms (Facebook)—three of the most influential companies, all of which began with a consumer-first value proposition and then expanded into adjacent businesses and multidimensional business models.

For example, Oura in the Forerunner portfolio, started as a hardware company and has expanded into a subscription-app company focused on an individual’s complete picture of health, most recently expanding beyond sleep and activity tracking to reproductive health. Faire started in the US selling artisanal and handcrafted items to boutique retailers and now sells internationally across home, food, apparel, beauty, jewelry, pets, and kids categories to a growing profile of retailers. And Speechify, which started selling a text-to-audio product, has expanded to include an offering comprising the largest assortment of audio books available.

Consumers stand to benefit as much from AI’s potential and consumer AI to date is less developed.

In the rapidly evolving AI landscape, the majority of investment and focus to date has been around developing the essential infrastructure and models necessary for AI’s growth. As these foundational elements have become more robust, accessible and cost-effective (and eventually commoditized), opportunity has shifted toward innovative applications that offer distinctive consumer experiences or solve specific consumer problems using AI. Fifteen years ago, the emergence of smartphones created the opening for companies such as Uber, DoorDash, Instagram and Spotify. We will likely see a similar renaissance with  AI.

A sneak peek from our upcoming Consumer Report highlighting key value shifts and their adoption phase over the past two decades.

Incumbent AI distribution advantage has weaknesses.

Google, Microsoft, Amazon and Meta have hundreds of millions of potential users for their AI agents and tools. But they will face challenges from antitrust regulators and mistrustful consumers. The venture-backed teams that can build products and solutions that make users feel seen, feel smarter and feel safer have an opportunity to build real trust and win hearts and minds.

AI personalization can reduce customer churn.

Consumer companies must continually reengage users and earn their loyalty (that is, their business). True personalization—which AI stands to enable—can challenge this norm. AI applications will improve as users share more information, making them stickier and making switching costs higher.

A key aspect of our thesis when investing in Duckbill, for example, is that each and every engagement represents an investment by the consumer.  If that time invested yields an ever better experience, the switching costs will be higher not only because Duckbill has more information, but also because of the trust built along the way.  While the incumbents might currently have more data on each consumer, it will be more difficult for them to reframe their relationship and foster a different level of trust and feeling.

Consumer companies have innovative and category redefining business models

While consumer-first companies typically excel in reach, speed, and market adaptability, enterprise-focused companies traditionally benefit from greater stability and predictability.  Today, both have taken a page out of each other’s playbook: consumer companies often offer memberships and subscriptions, while enterprise companies have benefited from exponential and efficient self-serve growth strategies.

For consumer, business model variation and innovation, whether replacing or combining models, stands as a consistent hallmark of breakout venture-backed companies. Uber and Airbnb replaced vertical and franchise models with global marketplace models. Amazon, One Medical, and Doordash introduced subscriptions to complement selling products and services, respectively. And Robinhood replaced a usage-based fee model with selling a product (order flow). Even in prosumer software (like Notion and Canva), which tows the line between consumer and enterprise, the product-led-growth movement has changed the game and spurred exponential, bottoms-up growth through individual consumer adoption and without an outbound sales team.

In the Forerunner portfolio, Chime replaces charging bank fees with taking a cut of interchange, while Atticus replaces a typically fee-for-service legal model with a contingency-based model rooted in high quality referrals and client success. On the other hand, Dutch replaces a fee-for-service veterinary care model with a subscription,  while Fora combines a take rate model with a supplementary subscription in the travel agent space. Models tend to be more fluid combining multiple flavors to create the right customer incentives.

Your Put is our Call

It can take a decade to build a company that’s ready for an IPO.  Consumer companies are vital to a diverse and dynamic venture ecosystem, and they have been crucial components of almost all of the top venture funds over the past two decades. The data—and the qualitative conversation—show compelling investment opportunities in consumer companies. While the public narrative has detached from the data and potential, Forerunner remains steadfast in our commitment to supporting visionary founders building the next generation of consumer-first offerings.

Data FAQs

What is the source of the data?

All data for Series B and public companies is from PitchBook.

What data is included in the analysis?

Series B data includes over 12,000 venture-backed companies headquartered or with offices in the US that raised a Series B after 2010. We categorized the companies individually and used the consumer and enterprise companies for this analysis (deep tech and biotech are the main categories of companies not included). Series B data is used to create the universe of companies (denominator) for the calculation of Series B to going public conversation rate. Public company data includes all consumer and enterprise venture-backed companies that went public after 2010, either by IPO or SPAC. This includes companies founded before 2010 and / or that raised a Series B before 2010 (for the conversion rate, we excluded companies that raised a Series B after 2010). For example, with this definition Oddity is not included because the company did not raise venture dollars (raised private equity dollars from L Catterton). On the flip side, PitchBook does not categorized some companies as venture-backed that we would consider venture-backed, like Coupa Software. For consistency, we deferred to PitchBook's definitions.

How did you categorize companies as consumer or enterprise?

Using our definition for what we believe should be in the consumer venture conversation, which includes companies where "individual consumer pays for the service or product or the company’s revenue relies on consumer spend or engagement." Over 90% of companies are straightforward to categorize with this definition in mind. With social, commerce enablement, marketing software and B2BC companies, we went a layer deeper to ensure that the business makes a signficiant portion of revenue based on the volume of payments or the engagement of users. With this in mind, companies like Shopify (70% payments revenue) are considered consumer while companies like Klaviyo are not (SaaS).

Why use median for the metrics?

Using median, instead of mean or average, minimizes the potential for skewing data reported in the tables with outliers (upside or downside). We believe this is a fairer comparison of what investors should expect when they think of the outcome potential.

Why exclude SPACs for the metrics?

We see SPACs as a one-time market phenomenon that we do not expect to repeat. Including them would skew the data as they are not reflective of the companies we believe will go public in the future.

Why use calendar year (CY) for calculating Rule of 40 metric?

We pulled revenue growth and EBITDA margin for fiscal year (FY), calendar year (CY) and trailing twelve months (TTM) for companies that went public. Calendar year created the largest sample size of companies with revenue growth and EBTIDA margin data. PitchBook has data for fewer companies for FY and TTM.

Why only include companies that went public >$500M valuation?

Venture capital returns are driven by outlier outcomes. While venture-backed companies were able to go public below <$500M valuation in decades past, this is unlikely to be true going forward.

Why focus on US companies?

We are a US-focsed investment firm. There are rare occasions that we will partner with international teams. When we do, the companies are primarily serving US consumers -- think of Oura or Balance. With this in mind, a company like Spotify is included in the analysis.

Does the trend hold if you exclude some of the most notable consumer companies?

Yes, Doordash, Uber, and Airbnb -- the three most significant consumer IPOs in recent years -- do not skew the data. In part because we use the median (rather than mean) in the analysis. And in part because the company performance metrics are not always on the upper quartile. For example, Doordash's Rule of 40 benefitted from a Covid bump (215%), while Airbnb's was pulled down by Covid (-160%), and Uber's was near the median (53%).

Does the trend hold if you exclude some of the most notable consumer companies and remove commerce enablement?

Yes, all metrics hold, except for conversion from Series B to IPO moves in favor of enterprise.