Forerunner Ventures first made its name in the venture world by betting on once-nascent startups like Jet, Bonobos and Glossier when it was far easier to build a digitally native brand. Yet, as commerce evolves, so does the firm.
As part of its ongoing evolution, Forerunner brought aboard veteran VC Brian O’Malley five years ago to dig into startups at the intersection of commerce and enterprise tech; to find out what’s interesting to him right now, we recently swung by Forerunner’s office in San Francisco’s Presidio National Park (now home to a growing number of venture firms) to ask.
Our conversation was wide-ranging, but unexpectedly, O’Malley seemed the most excited about old-fashioned service businesses. Think travel agencies, therapists’ offices, even plumbing companies — all of them “sleepy but very large categories,” said O’ Malley. Indeed, seated in a modern, glass-lined conference room, he highlighted a startup he’d just met within the HVAC space. “A lot of these local businesses are doing $10 million, $20 million, with 20% to 30% profit margins,” he enthused.
The big question, naturally, is whether they are suddenly venture fundable businesses. O’Malley explained why he thinks that, structured the right way and aided by recent advancements AI, they are. Excerpts from that chat follow, edited lightly for length and clarity.
TC: Consumer is a tough place to invest these days. Where do you see opportunities to invest Forerunner’s current fund?
BO: I’ve been spending a fair amount of time on a concept we’ve sort of labeled the “digitally native franchise.” It stems from looking at a lot of marketplace businesses in the category of trying to empower people to be able to work for themselves. On the one hand, you can work for one of these gig companies and you have everything kind of handled for you, but at the end of the day, you don’t really have much control. You’re really beholden to the platform and they’re getting most of the cut and you’re just completely commoditized.
At the other extreme, you can buy small business [software] and run your own company, but then you’re largely on your own. There’s no playbook. You have to find your own customers. You need to teach yourself a business. So we started wondering: How can you be prescriptive with a playbook and technology platform that also enables people to [foster] what they bring to the table as a business owner?
Like a real estate franchise.
But it’s not just Coldwell Banker or Taco Bell or 1-800-GOT-JUNK; there are a million businesses that do a trillion dollars of revenue. I didn’t know much about franchises historically, but one out of 20 people in the U.S. is employed by a franchise. Say you’re going to open Taco Bell. You’re going to take advantage of the corporate brand. They’re going to give you the menu, they’re going to give you all the ingredients — you just need to get the physical real estate and hire the people and grow from there. But now there can be much more of a digital back end.
What’s a related bet?
So one of the early investments we’ve made here is in Fora, which helps people build their own travel agency businesses and helps standardize the workflow and takes care of the payment options. With these types of businesses, you can also handle digital marketing because you as a centralized entity can probably do it better than some local business. A lot of the time, you can also build community around all the people who are doing this and they can help each other out.
Why does this concept of a digitally native franchise make more sense now than, say, five years ago?
The two big things that are different today is one, this lack of capital available, so you want to be more efficient. Also, it’s early days but AI is this growing trend and you can leverage AI in a way where it’s still human first but a lot of the more tedious tasks can be automated.
I keep wondering if there will be three companies in 10 years or every person will run their own company thanks to AI, though either scenario would seem problematic for VCs.
You’ve got to be helping build the platform to enable all these folks to go do their own thing. Our belief is that the AI components can help more of these service businesses that historically were maybe lower gross margin and required a fair amount of individual expertise and can now be handled by a wider set of people for more software-level gross margins because the AI can take control of some of the more standardized components of it, while people can put their own flair on what’s unique and special about what they bring to the table.
AI is getting better all the time. Is there any concern that at some point, these operators may not need a platform partner?
[With every company we fund] there’s some level of platform advantage that keeps the company sticky so people don’t roll off and do different things. There’s a company [outside our portfolio], Alma, which is in the therapist space and fits into this model because they’ve done a lot of work behind the scenes with insurance companies to help people get their therapy covered by insurance, which for therapists is really important because people are ultimately stickier if the net cost to them is lower.
There are many of these offline service businesses that still rely on checkbooks and pen and paper and haven’t taken advantage of a lot of the tools that have been created yet still have thriving businesses. We think that this model can be a way where you’re helping them continue to do what they’ve always wanted to do, but you’re also helping new people get into the category.
A lot of these businesses are owned by boomers, and there’s an expectation that about a third of them will turn over in the next 10 years. We see an opportunity to enable the next generation of local entrepreneurs, where people want to work for themselves, and they have the grit and determination, but they don’t necessarily know what to do.
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