To B2C or not to B2C

I read yet another article advising people against attempting B2C startups. "It’s worse than a lottery ticket so avoid them at all costs", the post warned. The popular incubator, YCombinator, whose participants can be seen as a representative sample of promising startups, also seems to be accepting mostly B2B startups in recent years. 

This should be counter-intuitive. When you look around your home, you’ll see a bunch of products, and most of them are B2C. You, a consumer, went to a business and bought them. When you see your credit card bill, you first gasp at how much you spend and then also notice that’s all B2C - home, food, kids, shopping, travel, and entertainment. So what explains this low confidence in B2C startups? 

First off, I think the advice mainly applies to software startups, and not for physical goods and services. I’d also exclude software that are essentially wrappers for physical product and service, like Uber, Airbnb, DoorDash, Amazon, and Ticketmaster. Both physical goods and services, and software wrappers around them have done pretty well with B2C, albeit with lower margins. 

Within software, there are 2 broad categories - entertainment and utility; software that helps you have fun and those that help get a chore done. 

Entertainment comprises of 3 sub-categories: communication, content, and games. Communication is hard to break into because of network effects and stickiness. Content and games are a crap shoot - there are a few lucky winners and a long tail of losers. That requires a studio model with many bets, and the capital and stomach to play the long game. So bigger players and platforms, like YouTube, Netflix or Disney, are better positioned than smaller startups. 

Utility software offer tools to complete tasks and improve productivity. Most of human productivity and complexity exists at work or in school, and therefore it makes sense that B2B dominates this category. That mainly leaves utility for your personal life. 

The broadest tools are to-do lists and notes - there are many mousetraps and slightly better mousetraps for that, so I would hesitate to build one more. Then there are tools for specific life areas - finance, health, self-development, and home care. I’d guess that only a minority of the population use these tools as most don’t care for optimization or have their own entrenched ways. Sustained retention is also a challenge because the needs and motivation aren’t consistent. But there’s opportunity to develop nuanced and better products and reasonably large businesses in each of these categories. Wealthfront, Copilot Finance, Robinhood, ClassPass, Noom, Calm, Duolingo are some good examples. 

Then there are tools for specific types of consumers - students, professionals, parents, women, seniors, single, artists, creators/prosumers, and the list goes on. Quizlet, LinkedIn, Reforge, Coursera, Flow, Tinder, Descript, Canva, etc. are good examples of successful startups with this approach. I think there’s more opportunity for startups to serve niche and underserved segments within these broader segments, like medical students, patients suffering from psoriasis, culinary Youtubers, etc. While the TAM may not be huge, they can earn multiple million $ ARR, which is great for solo operators and small teams but not for VCs and venture-backed startups. So avoid raising funding for these businesses. 

B2C startups, because of their low barrier to create and market, are also prone to the classic entrepreneur failure mode of building without defining and validating the problems. Founders can be too quick to “solve for themselves” without good customer discovery or market research. This is rarer for B2B where the questions around who needs your product and why are harder to ignore. 

Consumers, relative to businesses, are also more finicky, less loyal, and less willing to pay. So retention and monetization are harder. You may have to support an ad-based business model (or a freemium hybrid) that requires high engagement and retention to sustain, which may not work for all ideas. 

On the positive side for B2C, you deal with millions of independent decision makers, and many who are enthusiastic early adopters and risk takers. The barrier to entry in terms of discovery, customer acquisition, billing, and compliance is also lower. Buyers and end consumers being one and the same keeps the business and product development simple and aligned. 

All said, B2C software startups are definitely tricky. But it’s also naive to broadly rule out such a large category as unviable. If you do that, you can generalize further and rule out startups overall. B2C is just a different game with different strategy and rules - and there are ways to play well and win.