Consumer technology companies: Creating the World’s most valuable companies

The most valuable technology companies in the World are built on consumer technology[1]

The most valuable emerging companies in Europe are also consumer technology companies They have created 73% of the value of all the European $1b+ companies[2]

This is not just about high profile valuations, e-commerce consistently outperforms software generating a 29% IRR vs. a 21% IRR[3]

Why does consumer create returns?

The Power Law

Venture capital is about ‘hitting it out of the park’ rather than ‘not losing’ with the European Investment Fund reporting that from their portfolio 79% of companies return less capital than they have raised. This leaves the remaining 21% to return the fund and return all of the upside, requiring these companies to generate 10x+ for a Fund to be a success. Consumer companies as we have seen above consistently achieve $1b+ status. [See here — TechCrunch returns for a good explanation]

Scale potential and business model attributes

1. Scaling potential: There is a consumer at the end of every supply chain. Consumer technology is about disrupting whole industries whereas enterprise companies are typically focused on selling to incumbent players. This enables consumer companies, if they get it right to get to an unparalleled scale

2. Network effects: Consumer companies are able to reach scale and therefore create large companies at a great speed because:

a. Reach: Consumer companies can reach a global audience simultaneously through effective advertising, super charged by virality

b. Cumulative value: In consumer companies as users use the network (Facebook), or platform (Google) or shop (Amazon), their value typically increases over time as they receive more value from the platform, being that content/information or available products

3. Platform effects: Great consumer companies are technology companies at their core, they invest[4] heavily in infrastructure

This infrastructure can be translated across verticals and channels enabling them to move from their original offering into:

a. Category transformation: Digitalising a category, for example Amazon’s move into E-books

b. New categories: Using infrastructure to sell a different product, for example The Hut Group’s move from a DVD re-seller into a Health and Wellness conglomerate

c. Seller services: Using infrastructure to help 3rd parties run their business, for example Etsy’s seller services

In summary:

1. Venture capital returns are driven by outliers

2. Consumer companies create the majority of these outliers

3. There is a consumer at the end of every supply chain enabling consumer companies to transform industries vs. serve industries

4. Consumer companies build defensibility through network and platform effects

Read Part II: Where we are going next — Why consumer companies will continue to create the majority of outliers

[1] Forbes 2018 Top Technology Companies (US only); Market cap 10th December 2018

[2] Dealroom and Tech Nation Unicorn Report — 2018

[3] Cambridge Associates

[4] 2017 Annual Reports — P&L R&D including content