March 15, 2021
When Investing in Alternatives, There are Lots of Alternatives: Here’s Why Investing in a Consumer Venture Capital Firm Could Make Sense for Your Portfolio
By H Venture Partners
All venture capital is not the same. There are consumer venture capital firms, as well as firms that focus on B2B software, high-tech innovations, sustainability, and underrepresented founders. There are also “agnostic” venture capitals that don’t have an investment theme, and rather focus on the most compelling companies that come across their desks.
As a savvy investor, you know you need to diversify your portfolio -- and the potential high returns in venture capital are a great alternative to explore. But in the sea of venture capitals with whom you might choose to invest your money, why might you choose a consumer venture capital firm?
Consumer products and services are a huge white space in innovation. Even though consumer spending accounts for about 20% of global GDP, and the Federal Reserve claims 69% of the economy is directed toward the consumer, just 3% of venture capitals focus on consumer investing. There are several reasons for this, but the bottom line is this: For consumer venture capital firms, there is a huge opportunity. That said, not everyone can excel at consumer investing, which is a misunderstood segment of venture capital.
Potential Returns: Tech venture capital vs. Consumer venture capital
Consumer is a specialized field, typically centering more around building steady-growth, omnichannel success stories and less around groundbreaking new technology that will either sink or swim. It’s often considered “less sexy” by investors, because the potential returns are not as eye-popping as the biggest success stories in tech -- think Facebook, Google, Apple. However, there are generally more winners overall.
Believe it or not, the consumer category has historically generated more consistent returns for LPs than tech. From 2007 to 2017, consumer venture capital outperformed the rest of venture capital by 7%. Why? A good consumer startup is likely to find a strategic acquirer; some 80% of the exits in consumer are the result of acquisition by a big-name buyer, like P&G, Johnson & Johnson, Estee Lauder, L’Oreal, or Unilever, for example.
Tech companies usually have fewer acquisition opportunities, or need to swing for that IPO home run, whereas consumer companies have more potential paths to liquidity.
Specialization: The Midwest Consumer vs. The Coastal Techie
If you’ve settled on a consumer venture capital firm for your first foray into this alternative, it might seem natural to place your money in a Silicon Valley fund. However, you might not want to do that -- or you may not be able to find the right home. Many venture capital firms require a minimum investment in the low millions as the price of admission.
On top of that, many venture capitals in the Valley typically don’t have consumer packaged goods expertise. While the West Coast is home to many of the big tech investors along Sand Hill road, and major tech companies like Microsoft, Apple and Google, the Midwest is actually more appropriate for consumer-focused brands. Some of the biggest retailers in the world have headquarters along the Ohio and Mississippi Rivers, and enjoy the distribution and logistics advantages of being located in the middle of the country. Representative of the “average” consumer, many startups test their concepts and products in the Midwest before rolling out nationally. Cincinnati, Ohio, happens to be the number-one test market for consumer brands in America.
Put yourself in the shoes of a founder. If you’re building a consumer company, it’s important to have experts who can help you build out your omnichannel retail presence. From diapers to soap to mascara, so much brand discovery happens in the aisles of your favorite stores. Smack dab in the middle of the Midwest, we have an abundance of consumer experts at H Venture Partners, helping our brands expand into the best retail stores, like Kroger, Target, Walmart, or Ulta and beyond.
We love helping consumer startups stand out among the bevy of brands born each day across North America. We could not be happier to provide new founders with support from a stable of consumer experts and executives that have launched brands like Pampers, COVERGIRL, La Croix and Peloton into the stratosphere. And finally, we are pleased to make the venture capital asset class more accessible to a broader range of investors because our funds typically feature a lower minimum investment than most other firms.
From IPOs to acquisitions, there are many paths to liquidity for our portfolio -- which ranges from the most nutritious baby food on the market, to one of the only “clean” skincare offerings for Gen Z -- and we’re excited to help this next wave of hit products potentially become household names. When you invest in consumer venture capital, you’re part of this process, too.