My good friend and the founder of Capital Factory, Josh Baer, wrote a post last year saying that he will invest in your B2C startup. Well, so will we. We wrote the first check for ROIKOI, which went on to raise well over $1 million, and also made investments in Bigwig Games, Blue Avocado, Deep Eddy Vodka, Dropoff, and Threadover the past two years. We were also one of the first checks for Wisecrack, but that is based in Los Angeles, and invested in the Series A for talklocal, based in DC. And we are investors in several venture capital funds, including Lead Edge Capital, which holds early positions in Alibaba Group, BlaBlaCar, and other large-outcome B2C companies but these are not in Austin so I guess I'm diverging from my point of this post. In any case, that is a total of eight B2C company investments (if you include Wisecrack and talklocal) out of a total of 33 startups we are involved with, representing 24% of our portfolio (and 18% if you exclude Wisecrack and talklocal).Real Massive also has a kind of B2C dynamic, even though it is B2B, so maybe I should count them too as they are Austin-based. But our primary focus is SaaS, for which we have holdings in 19 startups (57% of our portfolio). Both Bazaarvoice and Coremetrics were/are SaaS businesses and we have the most experience to bring to that category. SaaS is also far less risky than B2C, and that brings me to the real point of this post.
Whenever we invest in a B2C company, we typically write a check that is 50% smaller than our typical B2B investment. I think this is a good rule of thumb for investors as B2C is a hits-based business, like producing a hit movie. It is very hard to do. There isa lot of competition. The allure of selling to the world's 7 billion is very strong. And when B2C hits, it really hits. As my 2013 Lucky7 post on Snapchat's staggering $3 billion valuation points out, the riches one can make starting or investing in B2C businesses are extreme as compared to B2B (SnapChat is now valued in excess of $10 billion). Sequoia Capital was reported to make $3 billion on it's $60 million investment in WhatsApp. Look at Apple's $657 billion valuation (as of yesterday) versus Salesforce.com's $36.7 billion valuation as the world's best examples of B2C and SaaS (B2B), respectively. The bottom line - selling to the world versus the limited set of B2B companies produces far greater wealth.
So why is this so hard in Austin? Why don't we have a Facebook, a Google, a WhatsApp, a SnapChat, etc. in Austin? I hear this sometimes, especially from Silicon Valley VCs when they look at Austin and wonder "what's wrong with us". The answer is: we need a much, much greater volume of startup experiments to have a massiveB2C outcome and the startup capital will follow (and quickly). With the failure rate of B2C startups being so much greater than B2B startups, Silicon Valley has a huge advantage in that there are far more VCs, angel investors, incubators, and B2C startups being propped up to go for the diamond ring. We simply have fewer experiments and therefore smaller outcomes in this area. The only way we solve this problem is with entrepreneurs stepping up and successful B2C entrepreneurs and investors stepping up to serve them (I'm always very glad when people like Justin Siegel move to Austin and step up as he did when he became a Mentor at Capital Factory). The bottom line is that being a new B2C entrepreneur in Austin is very hard because there are less VCs and angel investors to support them.
Having said that, there are some great B2C success stories here. Austin Ventures supported both HomeAway and RetailMeNot since their inception and they are now worth $2.56 billion and $760.7 million respectively. I hear some people say, "but those were rollups - not organically grown like Facebook, Google, WhatsApp, or SnapChat". That is a fair point but they both have incredible CEO operators at the helm. Yes, it is true that it is "easier" to buy traffic from entrepreneurs that organically figured out how to create the golden-traffic-driving goose like HomeAway and RetailMeNot did. But that doesn't at all mean they were easy to start and grow - if it was then we would have a lot more HomeAway and RetailMeNot-style rollups with huge outcomes in Austin, and so would Silicon Valley for that matter. The key point is that it was less risky and therefore, I would argue, more "appropriate" for our largest VC, Austin Ventures, to support in a town that has less B2C volume, by far, than Silicon Valley.
We did have an IPO-like exit with privately-acquired Indeed (press release) back in 2012.
Of course, we also have Whole Foods, which is an amazing B2C success story, and Dell, which started out as a B2C company and is now more of a B2B business (the world's largest startup, as Michael Dell proudly likes to say, and it seems like Dell is doing better than ever as a newly private company).
We have great entrepreneurs in Austin like Jonathan Coon, founder of 1-800 Contacts (which was acquired for $900 million) propping up startups like Impossible Ventures, which could create that "Thunder Lizard" that folks like Mike Maples, Jr. would cheer (he helped Twitter through their pivot in the beginning days and if you haven't watched his speech on that, you really should). Recently, Mike challenged Austin to create a $100 billion outcome and Jason Seats in my interview with him challenged us to create a $20 billion IPO for the ripple effects it would foster (no doubt it would have a huge impact on our startup scene and even better if it is a B2C outcome - hopefully one day it is a company like Impossible Ventures).
Josh is right, though, we can't just bitch about it. He's part of the solution. We're part of the solution. Our VCs are part of the solution. Incubators like Techstars Austin, The Incubation Station, UnLtd USA are part of the solution. But the biggest solution of all is more brave entrepreneurs, like Jonathan Coon, who are willing to step into the arena and create the largest B2C outcome that Austin has ever seen. Selfishly, hopefully it will be someone like Dropoff, led by Sean Spector (previously the founder of GameFly when he lived in Los Angeles). We are doing our best, like Josh, to both help support the B2C ecosystem and also to find that very rare thunder lizard.
I would love to respond to your comments below and get a dialogue going about this.
Update 1/11/15: Michael Dell read the post and wrote "right on" and referenced this article (Tech Bubble? No, It's a Startup Wealth Gap), which he read recently. The study cited highlights the rare probability of a huge outcome, which is much discussed in the comments below. But that won't scare away the "unreasonable" B2C entrepreneurs that are determined to be successful at it, no matter how many pivots it takes. From the study, it taking 1/3rd of time to reach a $1 billion valuation as compared to a decade ago jives with my Lucky7 post on the new Golden Age of Tech.