A16z’s Andrew Chen on the opportunities today for consumer tech startups

What’s happening in consumer tech?

At TechCrunch Disrupt San Francisco last week, Extra Crunch managing editor Eric Eldon sat down with Andrew Chen, a general partner at Andreessen Horowitz. Andrew focuses on consumer tech, with investments in companies like Barkbox, Boba Guys, Tinder, Substack and more. They talked about everything from design trends, to marketing, to revenue models — including the revenue model that Andrew is least interested in right now.

You can find my notes analyzing the conversation below, including Chen’s view of consumer SaaS, how he thinks about marketing channels now, key verticals like AR/VR, esports and housing. And ads.

Consumer design is taking over the workplace

As work apps like Slack and Zoom grow more and more popular, it’s no longer the norm for the apps we use at work to be ugly, confusing messes. A big part of this is driven, Chen says, by designers from the popular consumer developers moving into enterprise.

“What we’re finding is that the things that were really interesting and exciting ten years ago have completely morphed” says Chen. “It used to be that, you know, you had hundreds of teams that were working on a new photo sharing app or a new messaging app or whatever. All of those ideas have now been very much tried.”

“Consumer teams that maybe ten years ago would’ve been working on Facebook apps, or mobile apps, are now working on a much broader segment of products than what they would’ve worked on before.”

“Like, I’m loving the products I’m using at work today,” he notes “which is kind of a shocking thing if you [think back] to when everyone was using purely enterprise software.”

“There’s a lot going on with bringing consumer design, as well as consumer growth strategy and tactics, to every corner of the software sphere. These days I’m having conversations with people that are working on everything from hardware, to enterprise software, to healthcare, that are all thinking about ‘How do we actually get people to adopt this?’ and [building] products in a way where they actually care about engagement, retention, and acquisition…”

Marketing channels don’t last forever

The running thread throughout Andrew’s panel was that companies need to find the growth channel that works for them and is defensible, while knowing that the same marketing channels might not last forever.

Using banner ads as an example:

“The first time there were internet banner ads, the click through rate was like 70% — seven zero. It was incredible. People were like ‘What the heck is this? This is amazing! I’m going to click on this thing!'” said Chen.

“If you look at the global Internet clickthrough rates now, it’s like .05% or something like that.” “It’s literally fallen several orders of magnitude down to what it is. What we see is that every single new growth channel, starting from any of these advertising models, to email marketing, etc.. they all go through this curve where things perform worse, and worse, and worse.”

So where should a company focus their efforts today?

“For any entrepreneur that’s in the ecosystem, you always have to [figure out] ‘What is the untapped thing that a lot of companies haven’t all jumped on yet?” says Chen. “In the work place, that might be Slack, or Google Suite, something like that. Within games, everybody’s thinking about Reddit, they’re thinking about Twitch. If you’re building a D2C product, you’re thinking about Instagram influencers; all these cutting edge things where the performance of the channel has not been degraded because of competition and the natural decay of these things.”

“If you’re going to do something in ecommerce, and this direct-to-consumer side, you have to have, from the very, very beginning, a clear point of view on what is going to be your defensible growth channel as you scale out. I think one of the most interesting ones —like Ipsy did with Michelle Phan — [is where] you partner with a set of influencers starting from day one. They’re actually maybe one of your co-founders. Honest Co. is obviously another one. That’s obviously something thats defensible.”

Housing is a popular space, but it’s tough to win

As Andrew points out, the way most people find housing hasn’t changed much in the past decade. Dozens of apps have come and gone, but simple services like Craigslist are still the go-to for most.

“I came to the Bay Area twelve years ago and went on Craigslist, and applied to be roommates with a couple of other folks.” he says. “That same experience is still being repeated today. Imagine all the things that have changed over the last 12 years. That was 2007 — like when the iPhone just came out. And it’s still something that really hasn’t changed. “

“This is a really exciting market, I think, because it’s something that has just not really changed, in many ways.”

But it’s tough — mostly because even if you find a new concept that gets people interested, it’s a hard space to defend.

“The downsides of that market, and something that you have to be very critical about, is it’s the kind of market where the network effects are fairly weak. It’s hard to build a winner-take-all kind of company there, so you really have to think hard about what [it is] you’re going to do that’s going to scale and grow in a way thats going to be defensible versus everyone else thats doing it.”

One place where Andrew sees potential is in more flexible living options — particular in cities, like SF, where people might find themselves changing jobs, and thus neighborhoods, somewhat often.

“The average tenure within San Francisco, for a software engineer, is under like two years right now… which means, as you probably already also get, that people are moving around quite a bit. If you could stay with one company, one rental company, and say ‘This year I’m going to live in Noe Valley, and the next year I’ll live in Potrero, and the next year I’ll live in Cow Hollow’ and they just help you move around and you don’t even have to set up your cable or whatever… that could be something that, at a very large scale, you could actually get to real network effects”

New platforms like Voice and AR have potential, but also have discoverability issues

 

It feels like we’ve been hearing about smart assistants and virtual reality as the “next bit things” for years, but there’ve been very, very breakout few successes in either space.

Andrew is still keeping his ear to the ground, though, because if either of them start to take off, there’s plenty of room to grow. And if they start to take off, it’s good to be in there early.

“If you’re one of the first apps on a platform… like, if you remember in 2009, when the App Store came out.. all the top apps were like, fart apps and flashlights or whatever. That’s what it took to be a top app in the store, and that was an awesome time to be a developer.”

But for now, particularly with voice platforms, just getting users to find your app is a big part of the challenge.

“I think that the fact that there’s so much voice in devices, and that they’re building it into everything is very very exciting. All the platforms that are building these into app platforms need to work a lot more on discoverability, so that developers can actually create the traction they want. Assuming some of that stuff can get unlocked, it’s a super exciting space.”

The business model he doesn’t care about

When asked about what revenue model’s he’s most interested in, Chen flipped the question around to focus on the one he doesn’t care about.

“I’ll tell you which one I’m not interested in,” he says. “I’m not interested in ad-supported companies.”

Why? Because even after you’ve spent years building a user base big enough to advertise to, Chen says, figuring out the right way to do ads (and build all the self-serve ad tools, etc) can take “several more years”.

“That’s its own network effect that you have to figure out how to bootstrap and scale,” he adds. “It becomes, as Elad Gill has written about, a ‘two-miracle’ startup.”

(He’s also not super interested in eSports teams, noting it as one of the spaces he thinks his colleagues are overestimating. “There’s probably a little it too much hype on that end,” he says. “I’m much more excited in investing in whatever will be the next Fortnite, as opposed to the teams around it.”)