Hey, I'm Dan! I invest in startups at Madrona and write the DL, a weekly newsletter about tech in the Pacific Northwest

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Consumer brands and marketplaces that VCs love

A few weeks ago, I wrote an article on why VCs love SaaS businesses, and some readers thought the takeaway was marketplace and consumer businesses are bad. Not what I meant! The takeaway was that SaaS startups should be evaluated differently than marketplace and consumer startups because they have different business models and capital requirements.

Consumer brands and marketplaces can be great VC investments, too, and last week Maveron published an article on what the best consumer companies look like, and a16z published an article on what the best marketplace businesses look like, so here are the key takeaways from both:

Consumer Brands

  • Most of today’s best brands start with niche, early adopter communities (e.g., Yeti and fishermen, Supreme and skateboarders)
  • VC funding should be the exception rather than the rule for consumer brands because niche brands take longer to scale and can’t authentically accelerate growth with Facebook and Google spend
  • VCs want to invest in brands that can grow 50%+ per year for 5-10 years after reaching $50M in revenue
  • Digitally-native brands have more in common with their legacy competitors than one another; Allbirds’ best comps are Nike and Vans, and Glossier’s best comps are beauty brands
  • SaaS companies are valued on revenue, but consumer brands are valued on EBITDA (20-30x)

Consumer Marketplaces

  • Four marketplaces account for 76% of consumer spend (Airbnb, Doordash, Instacart, and Postmates), and they are all in travel or food
  • The fastest growing marketplaces are growing 3-5x annually by connecting suppliers with pent up sources of demand (e.g., wholesale goods, celebrity engagement, streetwear)
  • Marketplaces that have city-by-city network effects tend to be highly fragmented (e.g., Doordash and Postmates) while marketplaces with global/national network effects are highly concentrated (e.g., Airbnb)
  • The “holy grail” of marketplaces are ones where customers spend $100+ per transaction and transact multiple times per month, but none of the 100 largest marketplaces today fit this criteria
  • (Here is a16z’s full list of the 100 largest private marketplaces based on credit card spend data)

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