From Assets to Brands
Do you see your investment as an asset or as a brand?
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VC’s investing knowledge and operating experience is considered as valuable as their capital. In addition to their operating savvy, VCs now need to develop a strong brand-building experience.
Here is why.
In the past decade, there has been an economic reorientation towards social, cultural, and environmental value of goods. A product like cookware or a plant is never just a cookware or a plant: it’s a conduit for creativity, community, aesthetic pleasure, or a way to minimize environmental impact. When they buy a plate or a dress, consumers signal a lifestyle. When they sell a plate or a dress, sellers signal their worldview. Both sides are looking to impart value signaling into the exchange of goods. A two-track consumption pattern emerged: a) mass consumption of standardized products, and b) considered consumption of signaling products.
A lot of VC funds invest in the latter. Their portfolios are increasingly dominated by innovative consumer goods, travel and hospitality, beauty and care, banking services, and apparel. Despite being differentiated versus mass produced goods, these new products and services are often mutually replaceable. Almost 60 percent of consumers in 90 percent of categories switch when considering a new purchase. To survive and grow, a company needs to make sure that they are part of consumers’ initial consideration set (the set of brands that first come to mind when they are looking to buy something). If it makes it into initial consideration, a company is two times more likely to be purchased than a company that is considered later in the decision journey. This trend only gets amplified with the market share growth.
To become part of the initial consideration set, a company needs to be able to command awareness, but also convey what it stands for: its purpose and promise and values. For example, Nike and Apple offer product innovation and differentiated consumer experience. To evoke a specific meaning through its products, services, and experiences, a company needs to become a brand.
By default, a startup has no brand at launch. VC money comes at the moment when a company commercializes its innovation. When they invest in a company, VCs treat it and manage it as an asset. They seek to maximize growth in the shortest period of time and reduce cost. They rely on customer acquisition versus organic growth. Marketing spend is an operating expense instead of an investment (percentage of sales). Venture money also flows to companies in high-growth industries. This kind of rapid-growth operating model makes any company look good in the short-term, and reflects compressed time horizons that venture capital operates on (8-10 years). During the period of accelerated growth, capital is invested in a company’s balance sheet and infrastructure required to grow the business until it reaches a certain size so it can be sold or filed for IPO.
Beyond tech, this model doesn’t work.
Non-tech assets are easily commodified. The US Department of Labor estimates that only half of small businesses survive after five years. With each additional year, it further decreases to 20 percent. The situation is even more dire when it comes to startup investment by venture capital funds. The high failure rate and mediocre median returns of the VC industry ask for a new approach. At the moment, the majority of a fund’s return is generated by a few superstar companies in their portfolio. At the same time, fund managers spend most of their time on average performers.