Navigating Consumer Startup Investments: Valuations, Founder Equity, and the Rise of Web3 & AI

Consumer startup valuations may be lower than tech companies, but founder equity and potential returns can be significantly higher.

### Consumer Investment Insights: Valuations, Founders, and Future Trends
* 💼 The discussion highlights the contrasting valuations in consumer and tech sectors, emphasizing that **consumer companies may not receive the same attention** as semiconductors or software firms.
* 📈 Caroline Connan, a managing director at a consumer-focused fund, reflects on her experience investing in notable startups like Sweetgreen and Snapchat, stressing that **equity breakdowns often tell a more compelling story** than headline valuations.
* 👥 The importance of aligning with founders is underscored, as the fund prioritizes those who **understand their customers** and can effectively **build their teams around their strengths and weaknesses**.
* 🔍 The fund's internal mantra focuses on **loving the founder** rather than hating the idea, seeking **"silent assassins"** who **deeply understand consumer behavior**.
* 💡 With over 17 years in angel investing, Connan notes that current valuations vary significantly by sector, with **AI and Web3 companies commanding higher valuations** despite being **capital intensive**.
* 🌐 There is an increasing trend of founders presenting **Web3 adjacent companies**, indicating a **resurgence in interest** within this space.
* 🤖 Connan emphasizes that while AI is crucial, it should not be the sole focus for founders; they must demonstrate a **strong business model, effective distribution, and a capable team** to attract investment.
* 📊 Ultimately, the conversation reveals that founders are beginning to recognize the **need for differentiation beyond merely incorporating AI** into their business models.

It's interesting that maybe consumer vets, we all know them because we use them, but perhaps they haven't got the valuations of the semiconductor, the software space of late. But what does consumer resiliency look like? Well, first off, Caroline Connan...

...good morning. And I wanted to thank you for having me here. And for those who may not be familiar with me, as Caroline said, I'm a managing director at the Ventures where we have a pre-seed and seed consumer-focused fund based in Los Angeles and built by the...

...founders of billion-dollar public companies like LegalZoom and Honest Company. And then, as you mentioned, you know, the privilege of investing early in household names like Sweetgreen, Snapchat, Copley, and NerdWallet, etc. And to your question, you know, it's...

...interesting because I think valuations are what catch headlines, but we often underestimate the inputs that it takes to get to those numbers and also the equity breakdown. So, for example, you know, a company that exits for $5 billion is an eye-popping amount.

But when you look at the cap table and you see that a founder, you know, owns 2% of that business, they actually made less than a company where the founder owned 25% of a $500 million exit. So the valuations are often, you know, a...

...particular focus. On the brand side, the valuations may not be there on the tech side. Of course, they do have that potential. But, you know, the equity outcomes for the investors and the founder, you'd be surprised to see, are often much better.

Yeah.
And so you're very much trying to align yourself with the founder and with your own legal background. I'm sure you're ensuring that they maintain a lot of holding and serve themselves well by having ownership of the business as it matures and takes

funding.
What then, about finding these diamonds in the rough?
How are you deciding, okay, this is a startup, a consumer-facing startup that is at a pivot point, is about to go up and to the right?
We have this internal mantra that we

like to... we like.
We say that we have to love the founder and not hate the idea at this stage that we invest. It truly is about the founders.
And we, we, we love what we call the silent assassins, the folks that are focused on building their business, who

know their customers, who know how people actually operate. You know, there are a lot of things that we theoretically would like to exist or like to do.
You know, I'd love to be the fittest woman in the world, but, you know, maybe I won't put the effort and time into an

exercise regime or counting my macronutrients. And the founders that actually understand how people live and behave and what gets them to a purchase decision is really what we're looking for. And do they do that via EQ?
Are they doing that through data?

What do you want to see when a founder that you don't hate the idea of comes and pitches you?
Yeah, I think it... I think it's both. And I think more importantly, it's around understanding not only their consumer but themselves as well: what their strengths and weaknesses are.

So if they are incredibly data driven, maybe they hire a team that is very EQ and brand driven or vice versa. If they're incredibly brand driven, then they hire a team who understands operational efficiencies and knows that, you know, they need to hit their margins.

And so I think the most important thing we look for is a founder who understands their customers, as I mentioned, but also who knows how to hire around them. Look, you've been in angel investing for more than 17 years.

You've been in your seat at BAM Ventures for a number of years. And what are valuations like at this particular moment? How are you looking into 2025 and thinking about whether these are the right sort of checks to be writing at the right valuation?

Yeah, I think that our valuations are very specific to the sectors right now. You know, you hear about the buzzwords of AI or Darwin. They can command a hefty valuation. They also are very capital intensive.

It, I think, to the point I was making at the beginning around the inputs and the outputs. A lot of times funds will back into valuations based on how much they need to deploy, and it may be detached from how much a company itself is actually worth. If you're a large fund and you need to

write $100 million checks and you love a particular category and you give them $10 million, then you need to back into a valuation from there as opposed to investing in a company they may not need as much. It's interesting that you said crypto is sort of the buzzword and, sure, Bitcoin

has been the buzzword, MicroStrategy has been the buzzword. But are we seeing more and more founders coming to you with a Web3 adjacent company now or a consumer focus that is building in Web3? Once again, are we at that stage of the cycle?

We are. We see a lot of founders who have a Web3 component. And I do see it having come back into vogue. And like I mentioned, AI is the mortgagor. And to that point, when you're a

consumer founder, is it just that you want to see AI boosting productivity internally rather than trying to back themselves into a generative AI business? Do you mean what we look for as investors or what founders are pursuing these days? Yeah.

What founders pursue. What are you seeing and what are you wanting? Briefly. Yeah, well, what we're wanting in the way that we think about AI is the way we think about the Internet.

You know, it's like if a founder came to us and told us they're building an Internet company. I think it's ubiquitous. It's necessary. It is the future for us. We're really looking at, you know, the other elements that will make you a successful business: what your

distribution, your team, sales and marketing are. The AI itself for us, particularly at our fund size, is not the sole determinant of whether a company is attractive or not. And I think founders are catching on to that as well.

I think there was a period of time where
just adding AI, yeah, was, they thought it was game changing
in terms of, like, activeness. But I think at this point, founders are
starting to realize we need to show some differentiation beyond that.

Finding Startup Diamonds

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Bloomberg Technology

Discussion on consumer business valuations and the importance of founder equity.

Consumer businesses may not have the same high valuations as tech companies.

Focus should be on the founder's equity percentage rather than just the overall valuation.

A founder with a smaller percentage of a larger exit can make less than one with a larger percentage of a smaller exit.

Identifying promising consumer-focused startups and the importance of founders.

The focus is on finding founders who understand their customers and how people behave.

Founders should understand what drives purchase decisions, using both EQ and data.

Founders should be aware of their strengths and weaknesses, and hire accordingly.

Current valuations and investment strategies, including the role of AI and Web3.

Valuations are sector-specific, with buzzwords like AI and Web3 influencing them.

Large funds sometimes back into valuations based on deployment needs.

Increasing number of founders are incorporating Web3 into their businesses.

AI is becoming ubiquitous, like the internet, and is not the sole determinant of a company's attractiveness.