The pursuit of better unit economics causes consumer technology investors to shift focus

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A number of consumer technology companies and companies focused on consumer packaged goods (CPG) have gobbled up venture capital over the past year. Keychain, Harmonya, Highlight, Ramani, SupplyPike, Vividly, and Turing Labs, to name just a few, have captured the attention of investors with their technology.

Companies aren’t the only ones receiving funding. The same was true for investment firms focused on consumer and household items. This includes VMG Catalyst, Alethia, and Humble Growth.

The time has come for traditional daily necessities. However, these companies themselves are not necessarily worthy of VC. That’s because consumer tastes are constantly changing, grocery shelf space is limited, and e-commerce requires clever techniques to cut through the noise. Many of the companies with capital value mentioned above fall into the enablement category of helping CPGs become better businesses.

But why are investors looking for so many opportunities in consumer technology and consumer goods right now?

Part of that is likely excitement about artificial intelligence, which Dana Kim, co-founder and CEO of Highlight, noticed while considering Series A funding for her product testing startup. .

“A surprising question we received throughout the funding process was, ‘What role does AI play in your organization?'” Kim told TechCrunch+. “What gave people a lot of relief was that Highlight wasn’t interrupted overnight by some kind of generative AI application at the end of the day. We need to know, and that’s not something generative AI can spit out. In the face of disruptive technology, it was important to have really hard data.”

Kim has spoken to many traditional FMCG investors (those who typically invest only in consumer products) who are now looking to diversify their portfolio and expand into adjacent areas. He said he was there. Think about enablement, e-commerce software, data, and analytics. The latter is what he Highlight does.

Some investors revealed to Kim that many of their portfolio companies struggle with consumer testing and gathering real consumer feedback.

He pointed out that much of this was due to the difficult commercial environment exacerbated by the pandemic, which highlighted supply chain scalability issues. Kim said lower gross margins and increased interest in higher, more attractive unit economics are causing some investors whose portfolios consist solely of consumer staples companies to look elsewhere for their capital. It is said that it has started.

“The best way to create value may be to invest directly in brands or in tools and technologies that make existing brands more effective,” said Jason, general partner at consumer venture capital firm Maveron. Stoffer says. “That’s what’s driving that change. Investing in direct-to-consumer brands can earn you a lot of money, but back in the days when venture capital was plentiful, multiples were very high, and advertising was cheap. This is a much more difficult proposition.”

Stoffer also pointed out that the customer strategy no longer really works because “customer acquisition is too expensive and it’s very difficult to stand out from the noise.” That’s why more and more retailers are relying on social media fame. The strategy of positioning itself well for Instagram and launching an influencer network continues to work, he said.

He also points to some of the companies that will exit in 2023, such as sandal maker Birkenstock and beauty and wellness company Oddity, both of which went public but do not necessarily rely on VC funding. Not that there was.

“I would argue that in a world where venture capital seems to be running away from consumers, it feels like on the consumer goods side, private equity is making a lot of money,” Stoffer said. . “There’s a real question about whether the consumer goods business is suitable for venture capital. There’s an element of playing roulette when you bet on these kinds of brands, because this particular Gen Z-focused cosmetics business… But how do you know if it will be successful compared to 10 other cosmetics businesses that look similar?”