B2B Startups Lack Glamour, But Win Funding
B2B startups may not be as sexy as their consumer-focused brethren, but they sure know how to make money. And in the world of VC funding, that’s what counts.
“B2B is a tried and tested business model and it works,” says Ajit Deshpande, senior associate with Opus Capital in Menlo Park, Calif. “But look at any B2C that has become big — like Facebook, Groupon and Zynga — and two of the three are doing poorly today.”
Of the top 15 tech exits that generated more than $100 million each between 2008 and September 2013, the majority were enterprise-related companies that exited through IPOs, Deshpande says, citing research that his firm performed.
What Makes B2B So Attractive?
Sometimes it seems that B2B startups have as much sex appeal as a router. However, they carry certain attributes that make them highly attractive to investors. For one thing, VCs find it easier to ferret out the validity of a B2B’s claim than they do a B2C company’s, says Deshpande.
“A B2B says business has a certain problem today and it’s created a solution that it can sell to the business. It’s easier to validate the viability of the solution, product or service than with a B2C startup, so the downside is lower,” he explains. “It’s less glamorous, but it’s real technology with real solutions.”
Over the last couple of years, B2B startups have become more popular than B2Cs not only because they’re able to generate revenue, but because their business models are simpler to understand, adds Adley Bowden, director of analysis for Seattle-based research firm PitchBook Data.
Bowden says that B2B has also become more attractive as an investment as the way people work changes and demand rises for enterprise tools. “There’s more need for collaboration tools and also data storage like Box,” Bowden observes. “All you hear about is Big Data, yet no consumers are buying Big Data analysis. Those are huge markets and will continue to be a big focus area for VCs.”
While B2B has more potential, don’t rule out the idea that VCs will become even more enamored than they are now with B2C startups. During 2014, Deshpande’s gut feeling is that more people will be bullish on consumer startups as an early-stage investment, depending on how two or three large B2C IPOs perform. Some B2C startups expected to pursue IPOs this year include Pinterest, Snapchat and Coupons.com, says StreetAuthority.
However as consumer startups execute their exits and fewer are found in the IPO channel, favor will likely return to B2Bs, he says.