Why are consumer experience innovations underrated by VCs?

Consumer experience VCs
Image by marigis | Bigstockphoto

When looking at hot technology and venture capital markets, we can see that quite a significant number of companies offer B2B solutions. In particular, B2B SaaS solutions have been very popular among investors. We also see that consumer services that have received big investments from VCs are often linked to totally new technology visions like Web3, cryptos, and metaverses. Does this mean that there are no significant investment opportunities to improve traditional consumer services, e.g., offer better customer experiences?

I was recently looking at lists of the richest people in different countries in Europe and the US. Surprisingly, many of them have actually built their fortunes in the consumer business, particularly the retail product business. It is mainly in the states of California and Washington where the richest come from tech companies. Also there many are consumer products, including traditional consumer products like cars (Tesla), computers (Apple), taxi services (Uber), or bookstores (Amazon).

So, one may wonder: why do so many investors say they are ‘deep tech’ investors, which, in practice, often means they’d rather invest in enterprise IT and SaaS products rather than making consumer experiences better?

Disruption is an important keyword for many investors. But sometimes, they see the disruption in a quite narrow way. They get really excited when someone makes open-source tools for enterprise IT or creates a new tool to pipe data from system X to system Y. However, if someone creates a service that, say, improves consumer retail experiences, delivers better health services or enables more personalized experiences – investors seem to hesitate (unless there’s a metaverse angle, that is).

Why is consumer experience low-priority for VCs?

Of course, I’m simplifying it a bit – there are exceptions in both directions. But thinking how huge the consumer business is, how it’s still in need of digital disruption and how consumers look for better and easier ways to use services and buy products, it is somehow surprising that disrupting and improving traditional consumer services is not really a priority for many investors or even startup founders.

One reason might be that B2C businesses are usually perceived as difficult and expensive regarding go-to-market strategies. Some people also say it’s hard to predict consumer behavior nowadays and that you should invest in direct-to-consumer businesses only when you see enough traction. A number of commentators highlight that many consumer businesses are dominated by big players, so it’s hard to challenge their dominant positions. 

Then there are investors who say that products in the B2B market are easier to scale up compared to consumer products. In the B2B scenario, the idea is that once you sell an IT solution to one enterprise, all other companies in the world can buy the same product. However, in the direct-to-consumer business, you must tailor products more to local needs and tastes.

One could also argue that many tech investment companies are full of tech nerds that get excited about new tools, but actually have no idea what happens in high-street stores, banks, or health-related industries.

Many concrete opportunities

All of these are relevant concerns. On the other hand, consumer retail, fashion, and health are much bigger markets than B2B IT or pure technology products and services for consumers. We have also seen how companies like Inditex (e.g., Zara brand), H&M, Lidl, Walmart, Southwest Airlines, Uber, Amazon and Wise have disrupted different markets. Some have been mainly technological disruptions, while for others it’s more about innovations in business models or processes. But they also demonstrate that even though technology is important, it is only one part of their success.

Before the latest troubles, Web3, blockchain, and cryptos have been the focus of many investors. And they can offer interesting new solutions to own digital assets, manage ownership rights and remove middlemen. At the same time, there are also many other opportunities to make consumer experiences better and more digital, as well as make many traditional businesses more scalable.

Let’s take some concrete examples. I wrote earlier that digital identities are a nice target, but there is plenty to do to make very practical steps from paper-oriented banking. There are a lot of opportunities to build better health and wellness services on wearables and user-held data, or to make physical and online retail work better together. And then, there are technology opportunities to use more data and sensors to develop brand experience and engagement. We also know that physical products are still important and help engage customers.

Make things easier for consumers

Those are some examples of areas where there is a need for innovation. Technology could enable better services and customer experiences provided that someone is capable of building solutions right. It is always challenging to create new success concepts. But in these areas, it is quite often also possible to test the market with smaller investments and see if it is possible to bring happy customers to a nice service and then expand it.

We can see in many daily situations how services could work better, buying could be easier, services and products could be more personalized, and our own data could be used better to make services more useful and satisfying. We also know that user experience is a key success factor in digital services, especially customer experiences. But surprisingly, these areas don’t attract more investment money or start-ups that want to build new big success stories.

The past shows us that you can make big success and money in creating a consumer business. For all the excitement over B2B, there are still plenty of new opportunities in the consumer area now and in the future.

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