Why B2C and SMB Startups will Rule in Coming Years
At On Ventures, we have centered our thesis around B2C (business-to-consumer) and SMB (small and medium-sized business) startups. Why, you may ask? It’s simple: there is a huge market opportunity, short feedback loops make the capital invested in the company more efficient, and there is an abundance of local talent in this space.
In the Western world, there is $30 trillion of consumer spending, and over the last decade, we have seen a fundamental transformation in that spending. Every category, from healthcare to education to financial services, is now shifting almost to digital-first businesses. We believe that this is just the beginning, and the adoption curve for these digital-first businesses will continue for decades to come. Furthermore, we saw that no one else in Israel was focused exclusively on B2C and SMB startups at this early stage of a company's lifecycle.
While enterprise software has been the focus of major funds and innovation for many years, we believe that there are characteristics of resilience that can be found in B2C and SMB tech. When you take the needs of consumers at the most fundamental level, such as where they get their food, education, and healthcare, we believe that we can find those same resilient characteristics of enterprise software in this 30 trillion opportunity with an entirely new generation of companies.
Another reason why we think B2C and SMB tech will be the focal point of the next few years of venture capital is the short feedback loops and capital efficiency. Enterprise sales startups typically raise $5-8 million at the seed round, at a $20-25 million valuation, and that buys them two years of development with a team of 10 people. At the end of those two years, they may gain only two enterprise clients, which typically either don’t pay or pay very little. This “graduates” the startup to raise an A round of about $10-20 million at about $50-80 million valuation to go on for another 18 months and hopefully finish with about ten to a dozen paying clients.
The B2C and SMB math is entirely different and more efficient at the early stage. The consumer tech startup needs about $3 million at the seed stage to assemble a team of 5 to 7 people for two years and spend about $500,000 on online acquisition channels. At the end of those two years, after about a dozen small pivots in targeted segments and value propositions, the B2C or SMB startup should have acquired between 500 and 5,000 paying customers, making it a very clear decision on whether it makes sense to follow on the investment in Round A or sit one out.
The third reason why we are so keen on seeing the B2C and SMB boom happening here in Israel is that there is so much B2C and SMB talent here that “grew up” in wonderful companies such as Wix, Monday, Lemonade, or coming from the AdTech space. It’s truly inevitable that a new generation will rise from these excellent companies to form the 2.0 era of B2C and SMB companies.
Lastly, what is scary for investors as it pertains to B2C and SMB is the resiliency of the usage patterns and, in some cases, the margins. What we have seen over the last decade is that when you're providing services that customers are going to need for 5-10 years, such as banking, health, insurance, etc., and you can build relationships with customers for that time period as well, and then you're able to build similar levels of resilient relationships and long-term relationships in lock-in that give you some of that dependability of software in a market that is 15-20 times larger from an overall spend.
