The Playbook for the Consumer Comeback

Brent Vartan and Natalie SportelliMarch 24, 2024

For venture capital investors, one of the most contrarian bets right now isn’t on fintech or the metaverse. It’s on a market that represents 70% of the world's largest economy: consumer. 

Investors poured more than $5 billion dollars into brands at the intersection of e-commerce and consumer products in 2021, per Crunchbase. But by the close of 2023, that number fell below $150 million as many early evangelists retreated.

What went wrong

One thing that has become clear over the past few years: digitally native brands couldn’t build the same way forever. Once the acquisition arbitrage ended, they had to scramble to other channels where founders (let alone their investors) had little-to-no experience and examples to follow. 

High valuations and investor optimism that consumer brands could grow like tech companies wasn’t enough to safeguard the future of these disruptors on the public markets or ensure they would yield venture multiples in anticipated returns. That’s why early-stage consumer investing has experienced a pullback, resulting in a heated discourse on the long-term viability of the sector. 

The reality is, many of the same VCs that fueled the rise of consumer also expedited its fall through misplaced guidance and overfunding. Consumer behavior (and how brands should respond to it) has and continues to be a mysterious thing that is too mercurial for most firms to read. 

At the same time, funds raised new investment vehicles at AUM levels that put significant return opportunities out of reach. Investors struggled to figure out what would scale as they imported Silicon Valley software ideals and product-led growth tactics onto consumer brands as a means to usurp categories from incumbents. All the while, where consumer companies came from was changing, moving inwards from the coasts and off the radars of New York and California firms. Consumer wasn’t obvious anymore, and thus, fell out of vogue. 

Since we started investing in 2011, backing some legacy consumer brands like Harry’s, Warby Parker, and Peloton, we’ve sailed through waters both turbulent and tranquil in the consumer sector. (Remember the subscription box boom and bust? Or when COVID changed all of our buying habits?) Throughout it all, we’ve never changed our course. Even though the narrative on consumer has soured, there are plenty of reasons to remain bullish. 

The case for consumer 

Consumer spending drives a strong economy. 2023’s economic environment proved challenging due to rising interest rates, elevated inflation, and a decrease in savings. But among consumers, spending remained strong and unemployment rates stayed low. Defying expectations, Americans kept opening their wallets, and the economy expanded by 2.5% last year. 

In the last quarter of 2023, personal consumption expenditures represented nearly 68% of the nation’s GDP, and this past January, consumer sentiment jumped to its highest level since July 2021. The macroeconomic environment undeniably influences consumer behavior, but consumer spending continues to show resilience, marching up-and-to-the-right over time. 

Intense competition for consumers' dollars, coupled with the reality that people are dissatisfied with current options, is serving as a catalyst for new companies to take market share from incumbents that are trailing in innovation across the board. 

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How early-stage brands can lead the consumer comeback

Jumping onto easy trends, developing quality “things” at a fair price point, and raising large sums at IPO-minded valuations to finance endless acquisition efforts won’t lead to success for early-stage consumer companies in 2024. Brands will need to go to market in ways that sidestep the “Attention Tax” they pay to exist on digital platforms and figure out how to do things that are worth people talking about. 

Consumer brands that secure venture capital funding moving forward will not only need to be airtight on the basics like cost of acquisition, gross margins, and repeat purchase rates, but they will also need to ride cultural momentum. Their products or services will need to over-execute across the human decision journey and over-deliver in ways that are inherently worthy of our attention. 

And that’s why the consumer comeback will be led by brands that: 

1. Get in front of a cultural tailwind

For consumer companies, studying the tectonic shift in culture makes sure the business comes preloaded with real demand. An insatiable curiosity around designing novel systems to solve genuine tensions (which we’ve discussed in areas like mental health, vices, AI and broader Cultural Investing Themes) is where the seeds of valuable businesses can grow more organically. 

That comes from working with genuine empathy for people and building brands that prioritize human desires over category needs. Brands that tap into cultural insights and keep fine-tuning their proposition will be rewarded by consumers.  

When brands can do this for their audiences in areas with cultural tension, like individualism overtaking trust in institutions and a radical reexamination of the definition of wellbeing, they also become societal contributors, transforming everything from mainstream culture to government policy. 

2. Build for an existing community

In successful software companies, network effects fuel growth. For consumer businesses, it’s community. Community is where the win-win network effect takes place in the real world; it’s how new ideas, products, and brands spread more easily and grow more organically. The network effect clicks in when brands overcommit to serving the unmet needs of a group of people. 

And new consumer brands need to find the small groups of people that are having a big impact on culture, be it defined by life stages or identities or passions or pursuits. Brands need to make decisions through the lens of these customers and enroll them into the development and design of the product or business. To be worthy of their customers’ time and attention, brands will have to actually solve for their individual needs and desires. Consumer brands have to make being their advocate worth it – not just financially, but emotionally.

3. Love their current customers

The post-iOS 14 and cookie-less world has made discoverability less obvious and more expensive, which means developing a customer base has become harder (and more important) than ever. But brands can save time and money by recognizing that their next best customer is their current customer.

The smartest consumer brands are getting off the digital media drugs – diversifying how they think about generating revenue – and spending more time thinking about how they can deliver for the customers they already have. For far too long, businesses have been obsessed with adding new users, when revenue is what makes companies grow.

Consumer brands need to dedicate more effort to building a portfolio of products and services that can delight their customers into coming back. They’ll need to spend more time designing engaging email and SMS campaigns to carry the news of these new innovations, and develop thoughtfully curated experiences and activations for their best customers. Brands have to be obsessed with the path to profitability on an individual cohort basis across the lifecycle of a relationship with the brand. That way, businesses can not only drive more organic revenue, they can also turn customers into ambassadors – the best acquisition tool out there for consumer brands.

Whether or not funding immediately follows, promising consumer propositions will continue to emerge. Focusing on riding cultural tailwinds, tapping into existing communities, and loving their customers will help new brands lead the consumer comeback. We’re bullish on that.

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