The CQ: Let the Data Speak -- Consumer Startups Are a Better Bet Than Enterprise Startups

Forerunner's response to the market's intense scrutiny toward consumer investing.

The CQ is Forerunner’s weekly newsletter rounding up the most pressing consumer news and analysis, plus some bonus musings from our investment team. Subscribe now to get the latest edition in your inbox every Saturday.

By Kirsten Green, Jason Bornstein, and Luke Erickson

@ForerunnerVC

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. 

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 Plus 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. 

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.

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.

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.

For the full article, including data tables, see the post on Forerunner’s site. For condensed version, see the op-ed we published in The Information this week.