Episode #1: Consumer Tech Napkin | Fundraising & Benchmarks in Consumer Tech

0:00Sameer Singh:If you're trying to draw a common theme across all consumer software, its engagement is more important than retention, is more important than acquisition, is more important than monetization. The things I look for, in particular for any product with network effects, first, is engagement per user going up over time? That's the single most important indicator that something is working. It's a huge technological transformation, but it's a bit different from a new platform. Because as Samir said, the discovery and the way it engaged hasn't really changed. The user interface, if you will, hasn't necessarily changed from what's already here.

0:30So I think of AI as an incredible enabler. And we see that in our existing portfolio companies. I think if you're comparing a publicly listed company on something like Dow-Mow ratio, where they've already got massive scale established network effects, it's always going to be flatteringly high. So I think that can be a little bit misleading.

0:46Andreas Munk Holm:I want to throw you all a curveball. I saw a post a couple of days ago. lots of AI companies starting to experiment with paid marketing. So here's my take. Paid acquisition is a tax on your product's defensibility. The moment you can't outspend the incumbents and competitors, you die. Build channels that get cheaper, ask you grow, or you're just running your growth. I want to ask you, is that true? Is it not? Paid marketing, what's your take? Welcome to the podcast, everyone. So consumer is in a strange position right now. On the one hand, it's seen as a difficult, unpredictable, and in some cases, out of favor with investors space to be investing in.

1:19Andreas Munk Holm:On the other hand, when it works, outcomes are truly outsized. So instead of debating sentiment, let's make this fully concrete in today's episode. We're going to dive into what actually gets a consumer company funded in Europe, why it's not just narrative, but behavior metrics and thresholds that you need to be thinking about and knowing. And we'll try to structure this conversation into something that's truly usable for you. Following up on this, we'll end up doing something that looks a bit like maybe a napkin or something like that to navigate consumer, which is going to be exciting. But for now, let's look at our guests.

1:55Andreas Munk Holm:We've got Samir Singh, partner at Speedinvest, focused on marketplaces and network effects, previously at Abani. Samir, wave to the audience here. Hey, everyone. Susan, you are a partner at Felix Capital, investing across consumer and B2B with a background as a founder in social commerce. What social commerce firm? Well, it was back in 2011. It was a failed SoFillCommerce app, very early days of the App Store. So, yeah, it failed for many reasons, but humbling during. That was a tough time for everyone. And now, Joe, of course, Joe Siga-Dupoy, running Venture at True, focused on early stage consumer and consumer enablement technology.

2:35Andreas Munk Holm:Welcome to the show, Joe. Thanks, Ajax. So I thought we should start with talking a bit about where we stand today. And as I said just before, there's a lot happening in consumer right now. AI apps are really taking off. Social formats seem to be coming back, but not all of it translates into real business. Samir, I'd love to ask you where you see founders confusing what's popular on the one hand with what actually works.

3:00Sameer Singh:This is a long topic, but I'll try to keep it short. I think the biggest misconception people have today is that AI is a platform shift and you should build apps on it. Fundamentally, that is not how it works. AI is not like the browser or mobile. I increasingly think of AI as a microprocessor. Think of it as an input that enables your product, meaning you still have to build a product. And you can't just rely on AI to deliver the experience.

3:25Andreas Munk Holm:Samir, if you describe to the audience, what exactly do you mean? Give a concrete example here. How do people get it wrong and think that AI is a product?

3:34Sameer Singh:Okay, great. I'll start with why it's not a platform shift. That's where I think people really confuse it. The browser and the internet, that was a platform shift because as more people adopted browsers, it became more useful for developers to build new websites. And the more websites there were, the more people flocked to the browser, right? And so you kind of had a two-sided effect. Same thing with smartphones. As more people adopted smartphones, it became more useful for developers to build applications for the smartphones, which made smartphones more useful for end users. None of that is happening with AI.

4:06Sameer Singh:You don't interact with applications through ChatGPT or through Cloud. Well, developers have tried that. That's not really what's happening. What's happening is you're taking these APIs and you're sticking them into an app. And increasingly what's happening is that the end user experience is largely just tokens mediated through a thin app layer. And instead, what you need to do is think about this as another API you add to your application to give you powers that you couldn't have before. You still need to have some sort of multiplayer experience, a network effect, the economy of scale, something else on the product that actually makes the product the product beyond just the API.

4:47I think people sort of confuse that a huge technological transformation, but it's a bit different from a new platform because as Tamir said, the discovery and the way it engaged hasn't really changed. The user interface, if you will, hasn't necessarily changed from what's already here. So I think of AI is an incredible enabler. And we see that in our existing portfolio companies, a lot of companies have woven it into their products to deliver a much better product, more effective, more efficient in different ways. And I can go into details on that. But I think sometimes when you see AI native startups pitching, you see founders sort of confuse the two things.

5:24whilst I think that's all that's definitely all true I also think it's true alongside that to the optimistic side that it is fundamentally enabling new types of consumer experiences so even though the sort of rails if you like on it's not a platform shift from that perspective I think the capabilities to build really differentiated product is still there but you still have to do that right to Samir's point just and Susan's point just because it's AI is not enough right it's just it's a super powerful enabler but it has to come as part of a broader wrapper okay samir can you give an example of what is it that you see startups doing when they're doing it

6:05Andreas Munk Holm:wrong so to say when they're thinking that or founders of person what are they doing wrong when they're coming to you saying we're doing this because ai is a platform shift what is it

6:15Sameer Singh:worst the understanding i'll give you a very basic example like i don't want to name specific companies, but think about a company that generates audio or audio content or video content or image-based content that you then sort of end up sharing on social, right? So the underlying models can do that fairly effectively. And there's a couple of companies that have cropped up saying, you know, we'll allow you to create slightly better versions of this. But the thing is, because the underlying models are available to so many companies, there's a whole bunch of companies that can effectively create a very very similar experience there's not a whole lot your product is actually doing in terms of heavy lifting there's a couple of companies that i tried to build essentially a game where part of the input is ai generated so some of the elements that you interact with you can combine a couple of elements together to create a new ai generated element and then you continue onwards in your game the game experience is like a whole cohesive thing.

7:15Sameer Singh:And another couple of companies that have been trying to create some sorts of comic networks, but the panels are generated with AI. And that's where you have sort of both creators and consumers, or you have IP and consumers. So it's a cohesive product. You've created a product experience and AI is just sort of one enabler that's allowing the entire thing to exist as opposed to being the entire experience.

7:36Andreas Munk Holm:Instead of staying super negative here and saying the things that don't work, let's go to you, Joe. You mentioned just before, Or there are situations where you're like, this is a completely new thing that's now enabled or it's possible to do today because of AI. So say some of the hype-y stuff that is actually also real. Yeah, I mean, we've talked in the past around the opportunity to take markets where, for example, the supply side has been historically constrained by high cost of human labor. so you think about things like therapy or things like legal services or things like even private wealth management i think the opportunity to reduce effectively the marginal cost to serve the customer by doing that through software relative to a human means that that service can be delivered at a much lower price point and in theory open up the long tail of market that was not previously accessible to the sort of old operating model so that still requires a holistic product experience to be executed against.

8:37But it's the sort of thing where when we think about when you talk about the why now and is AI a why now and in what circumstances, that's an example where we get really interested.

8:48Andreas Munk Holm:Susan, I obviously got to give you the opportunity to also say, what are you excited about in this AI boom? No, I agree. I mean, I think, well, I think there's a lot of B2B use cases, but focusing on consumer, I completely agree with Joe that I think a lot of it is about democratizing what previously was incredibly expensive manual tasks. And if you think about what the underlying LLMs are best at, right, which is taking like different formats of data, you know, which can be very raw, can be handwritten, can be, you know, PDFs, completely unstructured and ingesting that, turning it into something that's very understandable.

9:19That is what, you know, that sort of that's the foundation. On top of that, you know, whether it's financial service advice, whether it's healthcare, I think health is an incredible area, both on the consumer side and the clinician and hospital side in terms of AI applicability and other areas, personalized fitness, therapy, et cetera. I think those are all incredible use cases.

9:40Andreas Munk Holm:I would love to ask the three of you, because one of my aims with this episode is that we're able to say a little bit about the fundraising market and what's important to be thinking about across the consumer spectrum. But the fact is that consumers, of course, everything from subscription marketplaces to social. So for that reason, I'd love to ask you a bit about how do you separate signal from noise within these segments? Are there in any way similar characteristics that make something look exciting across? But are there also, to a similar extent, are there specific things around, as an example, subscription where you're saying this is exciting, this is what really makes me tick when we're looking at subscription, whereas for marketplace, it's something else?

10:25Andreas Munk Holm:Susan, feel free to start. Yeah, sure. No, I think you're right. I think there are commonalities. Obviously, we actually have a – at Felix, we have sort of our own set of benchmarks that we've developed over the last 10 years of being in business across these different sort of business models. But I think when we think about sort of what's transversal and, you know, it can even extend to physical products or services, AI-enabled services, et cetera, I think one of the things we look for from very early on is signals of what we call customer love. In another way, you could say it's have you found product market fit.

10:58But what we like to see beyond sort of like product market features in terms of like usage or engagement or attention is really signs of customer enthusiasm, whether that shows up as the percentage of organic acquisitions or the rate of referral, word of mouth. with companies early on, we'd rather they go deep than broad. So even if you find the first 1 ,000 or 5 ,000 users or customers who are incredibly excited about your product, and it can in the early days seem a bit more like a niche, but I think broadening off from that, a very dedicated, excited base is much easier than spreading it across with everyone, but not really getting that much engagement or excitement back.

11:41Sameer Singh:If you're trying to draw a common theme across all consumer software, its engagement is more important than retention, is more important than acquisition, is more important than monetization. So you're broadly trying to follow that ladder of proof. The things I look for, in particular for any multiplayer product, any product with network effects, first, is engagement per user going up over time? That's the single most important indicator that something is working. So as an example, if you're looking at a Snapchat, is the number of snaps shared open per user per day going up? That's your first indicator.

12:18Sameer Singh:Second, is the retention improving over time and is the retention flattening at a high enough level? The first one is more important than the second, but broadly that's what you're looking for. Because again, as there's more users on the product, the experience should be getting better and therefore newer cohorts should be retaining at a higher clip than older cohorts. third again customer love so organic acquisition should be uh the biggest chunk and not a simply paid acquisition which can be noisy especially early on and sort of the last signal is monetization which i wouldn't even look at unless all the other signals are there i think that the most important thing is to to see improvement in those engagement metrics i use the trend rather than the absolute level that i think is the the most high information signal for an investor i think if you're comparing to publicly list a company on something like Dow-mile ratio, where they've already got massive scale established network effects, it's always going to be flatteringly high.

13:14So I think that can be a little bit misleading. I think the key thing is understanding how things are evolving over time, both temporarily when you look at how the next cohort is coming in, how they're performing on those key metrics, but also if you can segment the user base to understand what are the characteristics of the customers that are disproportionately engaged or disproportionately retaining, that then is a much stronger signal for us that we really like to see.

13:42Andreas Munk Holm:You're all saying the earlier the stage, the less data. If we're looking at a pre-seed startup and it's something that hasn't yet gone to market, how do you think about this? Are there any metrics that do you then try and say, then at least do some analysis and test customers? Or would you say, no, no, sometimes you just go with the idea and the team and you're comfortable with that? I mean, I think the brutal reality is it probably depends quite a lot on the founder's background prior to starting the company. Like clearly pre-seed, pre-launched consumer deals are getting done and will continue to get done.

14:19One of the trends and the shifts that we've seen in the last 12 months is that the theoretical barrier to getting started and testing something, whether that's vibe coding to mock up a prototype to get some level of feedback, some level of initial proof points around your fundamental hypothesis and your insight on what business you're going to build is. I think the bar is higher. And I think rightly so as well. I think, you know, as an institutional investor, we're investing other people's money, which we take very seriously. And so I think there's right to have a relatively high burden of proof and a threshold around that.

14:53And I think almost the first step is, you know, does the founder show the resilience and the resourcefulness to get some early feedback, some early signal from customers? Clearly in some segments, you know, we've invested in companies that, for example, are going through regulatory processes and things like that. Clearly you can't ship something quickly in spaces like that. But I think as a broad comment, I do think the expectation is there to try to have some initial science more than you know just a pitch deck and a narrative at any stage you need either narrative or numbers and if you can have both then it's always going to be better than just having

15:31Sameer Singh:one in today's day and age there's generally not much of a reason for you to not put a a basic mvp out there and get some validation often when that happens it's because it is easier to raise on the narrative than it is to raise on the reader. And it does happen for some categories. One of the challenges with consumer is that consumers tend to surprise you. They don't always do what you expect them to do. And so surveys, interviews can be deeply misleading. And the only real ground truth is behavior. And so especially if you're a founder who doesn't have a background, who doesn't have as many VCs chasing them, it's a great idea for you to go get some quick validation as soon as you can.

16:11Andreas Munk Holm:I'd love to ask the three of you, now you're sitting here throwing around acronyms and numbers and stuff, and I imagine there's a lot of pre-seed founders that haven't yet raised that this nomenclature isn't just normal for them necessarily. Is it so ingrained in to being successful as a consumer founder that the second you start thinking about product, you also got to start thinking about metrics and growth and how you track engagement and all of these things? Because otherwise you don't like you're not cut out for it. You don't have the right focus if you don't also have that in you by already at the start.

16:55I think exactly as Samir said, I think the only ground truth is consumer behavior. And we've seen that with both very early stage companies where they've done surveys with 500 or 1 ,000 people when they think it's in their ICPE, but the actual behavior turns out to be wildly different than what they expected. But also it happens for a lot of established companies too, where they launch a new product or launch a new feature and it doesn't go as planned. In the current development environment, and especially when you're looking at the whole suite of DevOps tools available where it's so easy to test things and to put versions out there, I think it would surprise us if founders didn't want to do that.

17:37And I think the other thing is consumers can be tricky to monetize. And I think if you're thinking about long-term, how do I build a sustainable business, you need to think early on. I don't think you need to monetize early on, but you need to start thinking about what are the North Star metrics for you, whether that's engagement or retention or something else, key factor, et cetera, and really focus on those. And that needs to be a data-driven exercise.

18:00Andreas Munk Holm:You're all nodding. So I know that you agree with Susan. Are there any adjustments, nuances we should add to it? To the previous point, one of the good things about consumers is data early. And so I think it is important that founders are using that data as a mechanism to learn very, very quickly on the extent to which they're actually solving the problem that they're setting out to solve. so I think it's not it should be something that they are actively leaning into absent any fundraise just to know whether the business is working and whether the product is resonating there's obviously a use case for metrics running up to a fundraising process where you want to have you know the your metrics clearly articulated and ideally be in the top quartile and everyone always ends up in the top quartile somehow but I think the broader step back point is those metrics should also be a useful way to almost have a health check on the business.

18:53They don't have a shelf life that runs out once the fundraising process is over. And I think that having that familiarity with what your Northstar metrics are, what is driving them, shows as part of the fundraise, the depth of understanding you have about the problem you're trying to solve and the customer base you're serving, which is valuable beyond just getting an investment or not.

19:17Andreas Munk Holm:Joe, I want to ask you, because as you said in the beginning, there's always a bit of a bias against consumers. I was about to say, at least it's been like that for many years, especially in Europe. How do you see that actually showing up when companies are trying to raise? Yeah, I think, like you say, I think consumer has become a bit of a dirty word over the last sort of five to 10 years, which is ironic because, I mean, there's not great data on the funding side because consumer is not really kind of mutually exclusive. but their estimates is sort of 15-20 % of venture funding but it's 60 % of the economy.

19:49So it feels like it's underserved and underweight when it comes to venture capital. And just to jump in, I mean, again, the sort of the largest outcomes in Europe, whether it's, you know, Spotify, Klarna, Revolut, et cetera, all very consumer. The largest companies in the world include over a trillion. I mean, you know, Apple, Meta, I mean, Google to some extent as well. All of these have a very large consumer business.

20:14Andreas Munk Holm:So why is this? If we spend 30 seconds here, why is it that consumer has a hard time in the venture scene? I personally think it's because it's the power law, but it's even more accentuated as a power law. I think the loss ratio or the rise-off rate is probably higher. And there's some data that for us, but I've shown that. But don't you just portfolio your way out of that? Like you just do a 50 portfolio? I think you can in theory, but I think that comes on to my next point, which is at the early stage, you know, unless you're funding these companies to profitability, you have to believe that the market is there at Series A as well.

20:50Continue the show, keep the show on the road, right? And we're now doing an exercise of mapping basically all of the preceded Series A funds that we know of in Europe. And so far we're at like 40, which is not a lot given that there's like a thousand, well over a thousand venture funds across Europe. So I think it trickles down because people know that the challenge is going to be there on the subsequent funding rounds. It increases the risk and increases the risk of like an early write-off, right? If a company runs out of runway after its pre-seed or its seed. The US market is a little bit more risk on in general.

21:22And so we often actually hear founders just getting on a plane and going to San Francisco to do their fundraise, which is like, it's obviously heartbreaking for us as a European consumer investor. investor and just as European, we shouldn't be having to outsource our capital markets to the US. So I think there is a, you know, one of the things. Hopefully we can collectively change that. Well, that's the thing. I think there needs to be a little bit of a, like, a kind of like rallying cry around consumer. It will be helped by some great outcomes, right? I think Susan's point, like Revolute is a consumer facing business and it's an awful hundred billion, even on coming out of Switzerland's consumer business probably listed in the US, right?

21:58So there's a fuel that got bought this week by Danone for a billion. These are great case studies that I think prove that consumer can deliver outlier outcomes in Europe. And hopefully that means that there's capital with its attractors into the market here in Europe to support these founders, because I do think it's underserved at the moment. Yeah. I'll just add one more nuance to that, which is I think that in the 20 mid-teens, or early teens, I think consumer became more synonymous with e-commerce and direct-to-consumer, which there's certainly been some great outcomes from that on being one example, as you mentioned, from Inure.