What’s Going On With Consumer Startups In The Age of AI?

Enterprise Over Consumer

The dawn of the Internet era witnessed the emergence of huge consumer companies like Amazon while the advent of mobile technology had Uber and the like on the forefront. However, it appears that the tide has changed in this new age of AI with startup founders and investors appearing to favor enterprise over consumer efforts.

This observation is the school of thought on which the PitchBook article “Where are all the consumer AI startups—and why aren’t VCs funding them?” was based and written.  It came from the author’s takeaway from her two-day experience attending the recent startup conference Slush in Helsinki where venture capitalists expressed high interests in AI startups as expected, but notably for B2B over B2C.

She further adds that PitchBook data has venture funding for B2B AI startups is at $16.4 billion this year while B2C is only at $7.8 billion.  But with the consumer AI market estimated to be doubly larger than its enterprise counterpart by 2032, she posts the question if there is a lack of B2C startups, or if VC are simply just not funding consumer AI companies?

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The Challenges of B2C AI

To start with, it simply seems that investors generally are not keen on consumer startups especially with the VC downturn starting in 2022.  A combination of factors such as rising inflation, higher interest rates and valuation markdowns have created a harsh macroeconomic climate for B2C AI to thrive.  And when stable profitability is the bottom line, investors would understandably be more attractive to the steady and predictable revenues generated by B2B AI companies over the unsustainable and erratic B2C AI business models.

Jordan Steiner, CEO and developer capital/chief strategy officer at Monadical, shared some unfavorable characteristics he noticed from B2C AI companies he noticed on a LinkedIn post.  Most B2C AI ideas these days he found are easily replicable.  When competitors can not only easily clone but also improve on an existing idea, this can hamstring any company’s chances from dominating the space or becoming an incumbent.  And when these factors create a cycle where users chase the newest cool product and churn when the novelty wears off, it illustrates just how unsustainable B2C AI business models are, especially in this period of time when user acquisition costs are higher.

And when a business model banks more on desirability instead of addressing pain points, there is a continuous struggle to iterate and produce new features or content.  This then requires a consistent and ongoing understanding of consumer trends, necessitating access to consumer data and insights that a startup might not have at the beginning and need to build over time, primarily with user acquisition.  Incumbent B2C companies would most likely have heavily invested on acquiring consumer data and insights to maintain and defend their longstanding piece of the market.

So why do B2B AI investments seem the more attractive prospects then at this time?  By prioritizing pain points over desirability, then selling to and maintaining long-term relationships with key industry players, B2B AI companies are able to eventually build desirability to attract more clients.  B2B clients are also more likely to sign up and keep multi-year contracts and subscriptions which not only provide steady and stable revenue but also client data vital for product improvement and customization, helping not only build brand loyalty but also incumbency and low churn.

Copyright: Christina Morillo

Can A B2C AI Company Succeed?

Despite the aforementioned obstacles, there is room for a consumer AI startup to thrive.  The PitchBook article suggests focusing “other spaces where big tech has less credibility, such as mental health solutions.”  In the same article, Point72 Ventures managing partner Sri Chandrasekar highlights differentiation as being a key characteristic for a B2C AI company to help close investments, this uniqueness holding off attempts to be replicated while tapping into that factor of desirability that excites and engages consumers while attracting investors.

If anything else, a consumer AI startup might need to bootstrap it more than just having an idea to attract investments.  Demonstrating and executing on your unique position not only proves your idea as sound and feasible but you are able to get your B2C AI company past the first step towards progressing to the potentially higher rewards offered in this space.

Featured Image Copyright: Pavel Danilyuk

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