The other day I happened to be in London with my daughter, who had succeeded in dragging me off to the Victoria and Albert museum to look at their collection of couture through the ages. Beyond the amazing opulence of the clothes (and the masochism of their wearers), the thing that struck me most was how constant consumer fickleness has been over time. What was the height of consumer style can very rapidly switch to disinterest or even disgust. For example, within a few years after the end of the First World War, it would not have been very comfortable if your company was in the corset business – although a lot more so for women in general.
Why regale you with this story? Like many venture capital firms in the tech sector, we at RPM Ventures are beginning to debate whether the Venture Industry has entered a bubble and if so when it will burst. In the B2C sector, we have seen recent unicorn crashes. For example, TechCrunch highlights how ecommerce company, Fab, grew rapidly, in a violent boom and bust cycle, from a flash sales site, morphing into a more traditional ecommerce business holding physical inventory. However, like the legendary Tantalus, the fruits of profitability always remained out of reach. TechCrunch’s sources have confirmed that Fab is likely to be selling for anywhere between $15M and $50M – quite a fall from it’s previous >$1B valuation.
Meanwhile, an incredible number of B2C startups are being created by San Francisco based entrepreneurs seeking to solve the problems of other San Francisco based entrepreneurs. As would be expected, most of these companies will fail, as they find themselves inundated with competition, attracted by the opportunity and the ever reduced barriers to entry, while searching for a product market fit in the midst of keeping their consumers happy. Yet, at least to me, the even more interesting challenge faced by B2C companies is that even if they gain traction, manage to show user growth and engagement and, God forbid, a business model, they will still suffer from the fickleness of the consumer. This is not great for B2C company founders, as fashion becomes an ever-increasing problem. If their startup is able to navigate the minefield to reach the safe land of a fast growing and profitable B2C company, how long will it be before they are scrambling to adapt to changing consumer sentiment – Zynga anyone?
B2B companies, on the other hand, face different challenges. Most businesses are driven by inertia. Just as non-commissioned officers run the army, middle management runs companies and the last thing any of them want is change. Change is bad – it adds risk to bonuses and, worse, adds more work. B2B startups that have successfully analyzed markets, identified problems and worked out valuable solutions, still have to fight their way through middle management to overcome organizational inertia, until they themselves are sufficiently embedded to become the standard.
This process generally takes years and requires B2B companies and their investors to demonstrate stamina and patience if they want to win the big prize. If teams are able to navigate the rapids to find customers, succeed with pilots, develop the pilots into programs, make and keep the customers happy all while creating heroes within the industry and protecting margins, then they will have developed an enormously valuable franchise that will last a very long time – far longer than most modern ephemeral B2C businesses. The very intransigence of B2B customers becomes the successful B2B franchise’s greatest asset.
At RPM Ventures, we invested in just such a company, focused on providing a SaaS platform to the automotive dealer service industry. There were many whispers that, over the years, the company was not making any progress. We, however, understood the situation far better, knowing that despite the apparent lack of progress, the company was successfully building the infrastructure, relationships and programs necessary to dominate its market. Only once that foundation had been built over years did the dramatic growth in revenues and profits arrive leading to the company, Xtime Inc., being recently acquired by Cox Enterprises for $325 million.
Now that I write this, I think I should have dragged my daughter off to the Science Museum to see machines and technologies still being used by businesses a hundred years after their introduction.