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The Consumer is Hot
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
June 18th, 2004


By Brent Holliday
Greenstone Venture Partners

“What you don't have,
You don't need it now,
What you don't know,
You can feel it somehow” – U2, Beautiful Day

Consumer markets are huge.  According to the latest estimates, there is an installed base of over 1.7 billion cell phones today. How big is that?  There are just under 2 billion televisions, the mother of all consumer electronic devices.  And not even the telephone is as ubiquitous as televisions.  Consider that televisions started selling en masse in the early 1950’s and that annual sales are around 90 million.  Compare this to cell phones, which really didn’t start selling en masse until the early 90’s, which have projected sales for 2004 at 560 million units worldwide.  Read that again… 560 MILLION units in a year.  And growing. (Factoid tangent:  Digital still cameras (DSCs) have officially killed film.  Everyone you know has one.  Annual volume worldwide?  35 million units.  What a great new consumer electronic market!  Well, uh, in 2004, more DSC equipped cell phones will sell than stand alone DSCs!  The cell phone just ate the DSC market’s lunch, at least at the low end “snapshot” type of camera).

Houses in developed countries typically have more than 2 televisions.  Now they have more than 2 cell phones as well.  But here’s the kicker… A household buys a new TV once every four to five years.  A household is buying a new cell phone at least once a year.  Like the television market, most of the revenue from the cell phone business comes from the consumer, not the enterprise.

Another consumer focused gargantuan market is video games.  The video game industry was US$7B last year in the United States alone.  The worldwide video game business is larger than the box office movie business.  This is another huge consumer oriented market.

Why, then, is the early stage private equity industry (mostly venture capital) so afraid of consumer related companies?  There is clearly a large market. But less than 20% of the early stage private equity investment goes to consumer oriented companies or even to companies who sell into the consumer oriented markets.  The preference over the past decade, with the notable exception of the internet commerce web sites (think pets.com etc.), has been to invest in enterprise related companies where the buyer is ultimately a business.

As I have stated here before, the enterprise spends a lot of money and is less fickle about their purchasing than the consumer.  There are also less of them, making it easier to reach through direct and channel sales.  The biggest concern among VC investors is the amount of spend needed on advertising and marketing in a consumer play versus an enterprise company.  A VC gets hives thinking about funding a failed marketing campaign aimed at the 18-24 urban female demographic.  Another important reason for the stodginess on consumer related investment is that, by and large, VCs come from enterprise and not from consumer land.  It’s what they know.  It wouldn’t take you very long at a venture capital conference to figure out that VCs are not hip to the latest trends among consumers.  Unless you mean “hot” trends like wrinkle-free pants and $12 hair cuts.

Do you think VCs have woken up to the fact that there are consumer markets to be attacked?  Yes, most have.  And they are staying in “comfortable” territory by focusing a lot of money on consumer electronics, like the cell phone market.  But three years ago, the only VCs investing heavily in consumer electronics were the Asian, European and Israeli VCs.  I was in Japan in 2001 and the venture groups from Singapore , Taiwan and Japan were somewhat disappointed with the fact that Canada lacked good consumer electronics start-ups.  Where were the chip companies?  Where were the software companies aimed at this market?  There interest in Canada was mostly in life sciences and alternative energy at the time.

We invested in a chip company selling into the cell phone market with a focus on video.  I see a few promising opportunities in wireless in Vancouver that have consumer orientations.  We have the most fertile new media/video game critical mass of any location in the world.  Since I invested in Radical Entertainment in 1998 while at BDC, I haven’t seen many digital entertainment deal done by the local VCs.  But the success is clearly there (Relic, Barking Dog, Black Box and the resurgence of Radical).  Perhaps the tide is turning a bit.  But it will probably take a new kind of VC to attack consumer investments in earnest.  Enter Bono the venture capitalist.

Bono?

Yes, Elevation Partners is a new San Francisco fund that is currently raising close to $1B US for investment in digital entertainment.  And they just announced that Bono would be joining them as a venture partner.  So, between U2 concerts and African debt awareness, Bono will be doing due diligence and going to board meetings.  Perhaps Alanis Morissette would like to join Greenstone on its next fund? “I got one hand in my pocket, and the other one holding pref. shares.”

I don’t think there will be a major rush to do consumer focused deals by VCs although the shift in attitude towards them is palpable.  I think they will stay in the comfort zone of software and hardware and not venture out into retail, film/TV production or other non-tech consumer companies.  As the telecom equipment sector limps back to health and the enterprise buying cycles take time to become more robust and predictable, VCs will pay more attention to things like ½ billion cell phones a year and billions of dollars in video game production.  It is a cycle and my hope is that it doesn’t get overcooked like so many other sectors in technology have when VCs started piling on.

I wrote this column to point out that there is an easing in the anti-consumer oriented perspective from VCs.  I didn’t write it to get a flood of business plans in this sector sent to Greenstone.  I am like most of the existing VCs.  I have dabbled in consumer oriented investments but my “happy place” is still in the enterprise focus.  Besides, Bono has way cooler clothes and bling-bling.  Give him a call.

What Do You Think? Talk Back To Brent Holliday

 



Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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