The Myth of Consumer Startups

Spend enough time in SF and you start to hear the same thing repeated over and over again, that the greatest companies are consumer companies. Think Instagram, Snapchat. TikTok, etc. The story of making it in Silicon Valley is a story of capturing attention (worth reading: The Attention Merchants by Tim Wu). The goal of these companies is to get you scrolling and staying on the app.

As someone who probably has an instagram addiction, it makes sense. You can feel the dopamine loop as you make a habit of scrolling, posting, and returning to check your like count. It reshapes your relationship with your device.

There is a particular appeal to building something that regular people use, something that lives on phones and shows up in the lives of strangers who have never heard of your Series A.

The data, however, looks less appealing. Across 5,690 companies and 21 years of YC batches, B2B accounts for 50.5% of everything funded. That’s more than Consumer, Healthcare, and Fintech put together. Consumer sits at 15%. That gap hasn’t closed over time and it’s been pretty consistent across the years. Whatever story you tell about why Consumer is the real prize, the people actually writing the checks have been telling a different one. The consumer app era has ended and most people building startups haven’t noticed.

A B2B company can grow with a relatively small number of paying customers. A consumer app usually needs millions of users before it becomes a real business at all. Most of the generational YC breakouts are B2B: Stripe, Gusto, Amplitude, Segment, Brex. These companies didn’t capture attention, but they generated revenue.

The consumer success stories, like Airbnb and DoorDash, though real, are the exception. For every Airbnb, there are dozens of consumer companies in the dataset with “Inactive” next to their name. The companies founders admire are often consumer companies, but the companies that last usually aren’t.

Credit: Allyson Lim