6 VCs explain why seed investors now favor enterprise startups

Published January 7, 2020

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

Today we’re digging into seed-stage companies, the vanguard of the venture market. In particular, we’re trying to understand why the ratio of seed deals now favor enterprise startups over their consumer-focused brethren. The fact that seed investors recently inverted their preferences, cutting more checks to enterprise (B2B) startups in 2019 than consumer-oriented companies (B2C) was news.

We wrote about the trend here, as regular readers will recall.

To better understand what’s going on, I spoke with a number of early-stage venture investors who recently dropped by Equity, came highly recommended by peers, and several I know personally. The goal was to get a handful of inputs from different firms to get under the skin of the trend.

What in the hell is going on in seed? Let’s find out.

Why are enterprise seed deals on top?

This morning we’ll hear from Jenny Lefcourt at Freestyle Capital, Jomayra Herrera of Cowboy Ventures, Hunter Walk from Homebrew, Iris Choi of Floodgate, Sarah Guo from Greylock and Ajay Agarwal of Bain Capital Ventures. As you can see, we picked a list of investors form firms of different sizes, theses and focus. However, each investing group either focuses on early-stage investments that include seed deals or dabbles in them.

Here’s what we want to know: why did the the majority of seed deals swap from consumer-focused startups to enterprise-focused deals?

Our investing group detailed a number of explanations, a handful of which echoed each other. To best convey their thinking, we’ll quote each investor at moderate length. If you are in a hurry, the most common point made against consumer-focused seed deals is go-to-market difficulty in the current market.

Other reasons include price, secular changes to the technology landscape, and the changing experience profile of the investing class themselves. (Minor edits made to select responses for clarity.)

Freestyle’s Jenny Lefcourt said via email that consumers are an increasingly difficult cohort to sell to, because they “became fickle with the proliferation of VC-backed, consumer-focused startups over the past few years.” As a result, consumers became “harder and more expensive to acquire and even harder to retain,” meaning higher customer acquisition costs (CAC) and lower lifetime value (LTV).

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Startups Weekly: Peloton’s 29 secret weapons

Published August 31, 2019

Hello and welcome back to Startups Weekly, a weekend newsletter that dives into the week’s noteworthy startups and venture capital news. Before I jump into today’s topic, let’s catch up a bit. Last week, I wrote about a new e-commerce startup, Pietra. Before that, I wrote about the flurry of IPO filings.

Remember, you can send me tips, suggestions and feedback to kate.clark@techcrunch.com or on Twitter @KateClarkTweets. If you don’t subscribe to Startups Weekly yet, you can do that here.

What’s new?

Peloton revealed its S-1 this week, taking a big step toward an IPO expected later this year. The filing was packed with interesting tidbits, including that the company, which manufacturers internet-connected stationary bikes and sells an affiliated subscription to its growing library of on-demand fitness content, is raking in more than $900 million in annual revenue. Sure, it’s not profitable, and it’s losing an increasing amount of money to sales and marketing efforts, but for a company that many people wrote off from the very beginning, it’s an impressive feat.

Despite being a hardware, media, interactive software, product design, social connection, apparel and logistics company, according to its S-1, the future of Peloton relies on its talent. Not the employees developing the bikes and software but the 29 instructors teaching its digital fitness courses. Ally Love, Alex Toussaint and the 27 other teachers have developed cult followings, fans who will happily pay Peloton’s steep $39 per month content subscription to get their daily dose of Ben or Christine.

“To create Peloton, we needed to build what we believed to be the best indoor bike on the market, recruit the best instructors in the world, and engineer a state-of-the-art software platform to tie it all together,” founder and CEO John Foley writes in the IPO prospectus. “Against prevailing conventional wisdom, and despite countless investor conference rooms full of very smart skeptics, we were determined for Peloton to build a vertically integrated platform to deliver a seamless end-to-end experience as physically rewarding and addictive as attending a live, in-studio class.”

Peloton succeeded in poaching the best of the best. The question is, can they keep them? Will competition in the fast-growing fitness technology sector swoop in and scoop Peloton’s stars?

In other news

Last week I published a long feature on the state of seed investing in the Bay Area. The TL;DR? Mega-funds are increasingly battling seed-stage investors for access to the hottest companies. As a result, seed investors are getting a little more creative about how they source deals. It’s a dog-eat-dog world out there, and everyone wants a stake in The Next Big Thing. Read the story here.

Rounds of the week

Time to Disrupt

Don’t miss out on our flagship Disrupt, which takes place October 2-4. It’s the quintessential tech conference for anyone focused on early-stage startups. Join more than 10,000 attendees — including over 1,200 exhibiting startups — for three jam-packed days of programming. We’re talking four different stages with interactive workshops, Q&A sessions and interviews with some of the industry’s top tech titans, founders, investors, movers and shakers. Check out our list of speakers and the Disrupt agenda. I will be there interviewing a bunch of tech leaders, including Bastian Lehmann and Charles Hudson. Buy tickets here.

Listen

This week on Equity, TechCrunch’s venture capital-focused podcast, we had Floodgate’s Iris Choi on to discuss Peloton’s upcoming IPO. You can listen to it here. Equity drops every Friday at 6:00 am PT, so subscribe to us on Apple Podcasts, Overcast and Spotify.

Learn

We published a number of new deep dives on Extra Crunch, our paid subscription product, this week. Here’s a quick look at the top stories:

How Pivotal got bailed out by fellow Dell family member, VMware by Ron Miller
How to use Amazon and advertising to build a D2C startup by Matt Altman and Tyler Elliston
Customer success isn’t an add-on — Start early to win later. By Dale Chang and Jay Nathan.

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Could Peloton be the next Apple?

Published August 30, 2019

Hello and welcome back to Equity, TechCrunch’s venture capital-focused podcast, where we unpack the numbers behind the headlines.

This week we were back in the SF studio, with Kate and Alex on hand to chat venture, business, startups, and IPOs with Iris Choi. Choi is a partner at Floodgate, and one of the very few folks who have ever been invited back on the show.

Despite Floodgate being an early-stage firm, Choi was more than willing to dig into the week’s later-stage topics, starting with the Peloton IPO filing. Kate was stoked about the offering (her piece here, Alex’s notes here). Peloton, a fitness, media, hardware (and more) company, is a lot different than your run-of-the-mill enterprise SaaS exits.

Next Alex ran the team through a list of impending IPOs that we care about. There are a number of venture-backed companies looking to go public before the stock market falls apart. More on each when they price.

After the S-1 march, we turned to personnel news, namely that Instacart’s CFO is leaving the firm after about four years with the company. Ravi Gupta is joining Sequoia Capital. We’ll tell you why.

Next, we touched on two rounds. First, a Kleiner deal into Consider, an app that brings power-tooling to email. And then we chatted about Inkitt, another Kleiner deal. Why the pair of early-stage rounds? Because Alex recently went to Kleiner to chat with its new partner team about where they’ll deploy capital in the future.

And that took us comfortably over our time. A big thanks to Choi for joining us, again, and you for sticking with the show. More next week!

Equity drops every Friday at 6:00 am PT, so subscribe to us on Apple Podcasts, Overcast, Spotify, Pocket Casts, Downcast and all the casts.

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