Venture Capital is driver by power laws, meaning that a small percentage of companies drive the majority of the returns. In other words, VCs are looking for the needle in the haystack vs. the average company to drive economic returns. But what drives better outcomes: is it enterprise tech or consumer? or a mix of both? A recent report by Sapphire Ventures took a data-driven approach to answer that question.
What’s driving the power law returns in venture
The Sapphire Ventures team compared the mega exits in consumer including Rivian, Coinbase, Roblox, Robinhood, Airbnb, Doordash, Uber, Lyft, and Pinterest with the enterprise exits including UiPath, Toast, Snowflake, Palantir, Unity, Slack, Zoom, Crowdstrike, and Datadog.
In terms of number of exits, there’s a higher number of Enterprise companies getting acquired or going public. When it comes to the total value of exits, consumer startups cumulatively exceeded enterprise exit value in the period of 2018-2022. It remains to be seen what the outcomes will be in 2022 as the exit markets are less active and the IPO window is closed, but assuming the merger gets approved, we’ve already seen Activision’s $70 billion acquisition by Microsoft and Twitter’s potential $40 billion takeover by Elon Musk.
A look at the overall exits for both enterprise (B2B) and consumer (B2C) companies from 1995-2022 shows that both categories can produce power law returns, but they vary substantially:
- The top five enterprise companies with the largest exits account for $188B in value creation, or 12% of the $1,609B generated in the enterprise category since 1995.
- The top five consumer companies with largest exits account for $426B in value creation, or 30% of the $1,436B generated in the consumer category since 1995.
- In total, there were 7,600+ venture-backed exits in enterprise tech and almost 4,200 exits in consumer tech.
In a nutshell, when consumer startups succeed, they can have major outcomes. The value generated by the top 5 consumer companies is 2.3x greater than that of enterprise companies. However, consumer startups exit less frequently than enterprise startups, so can be more binary in terms of returns – either huge wins, or losses, where building an enterprise portfolio can be seen as ‘safer’ in terms of number of exits, but at lower value overall.
I highly encourage you to read the full report (short sign up required), but for simplicity, here are the major takeaways:
1. If you are a consumer investor, the clear goal is not to miss that “one deal” that has a huge spike in exit valuation creation. (picking and access are important)
2. Further, as a consumer investor interested in making money (DPI, not just TVPI), two other things must also be true along with picking the right investment: Having your consumer company go out into a strong IPO market, and then selling shares before the stock drops. (a major pain point for Israeli startups in 2021)
3. On the other side of the house, if you’re an enterprise investor, you want to create a “basket of exits” in your portfolio. And while it is never easy to exit a company, the persistence of M&A options for enterprise companies in up and down markets helps to continue to support enterprise power law exits.
Thoughts on the consumer startup space in Israel
Israel is primarily known for it’s cybersecurity, semiconductors and perhaps devops, all in the enterprise space. But there’s a large and growing number of Israeli ‘startups’ and successful publicly traded companies in the consumer space in Israel from gaming companies like Moonactive, Papaya Games, Playtika, Overwolf, etc to content related companies including Minute Media (disclosure: Remagine Ventures is an investor), mobile apps like Simply (previously known as JoyTunes), marketplaces like Fiverr, health companies like K Health, TalkSpace, etc and the list goes on. Out of the 32 Israeli ‘centaurs’ (startups that generate over $100M in revenue a year), about a third are B2C or B2B2C,
I wrote about Israeli consumer startups on VC Cafe back in 2018, which is way overdue for an update. For my latest thoughts on this subject, I invite you to check out the podcast episode I recorded with Mike Gelb at the Consumer VC.
I’ll mention that at Remagine Ventures, the fund I co-founded with my partner Kevin Baxpehler, our portfolio splits into two: 1) consumer startups when the markets are large enough to support VC returns (mainly gaming studios, but also consumer digital health and content creation) and 2) enterprise/B2B technologies that power the biggest consumer trends (synthetic media, predictive analytics, visual search, ect).
Whatever the category, what is certain is that in order to generate venture returns, exits are necessary, and ideally IPOs. Here’s to hoping for a less rocky 2022 and a return of the exit markets 🙂