Analysis | How Covid-19 Sparked an Unlikely Startup Boom for Brands - Washington Post

These familiar names were hardly alone in getting a vote of confidence this year from venture capitalists. It turns out, 2020 is shaping up to be one of the best times ever for consumer startups. Deals and financing for such companies totaled more than $6.6 billion in the third quarter, according to CB Insights. Funding for the full year is projected to reach nearly $18 billion, an all-time high. 

Some of that reflects splashy deals by unicorns, such as when plant-based milk maker Oatly AB of Sweden raised $200 million this summer from investors including celebrities Oprah Winfrey and Jay-Z. But CB Insights tallied 414 deals in the sector for the quarter, not far off the average number of quarterly deals in recent years, showing the spoils aren’t going to an unusually small coterie of stars.  

I was initially surprised this activity hadn’t been frozen up by the pandemic. Sure, insurgents like DoorDash and Instacart have benefited, by nature of their focus on catering to those at home. But I assumed other factors would give investors pause about a wider basket of consumer businesses. Wouldn’t they be put off by the pile-up of store closures and bankruptcies the retail world has seen in recent months? Or deterred by comments from Procter & Gamble Co. executives and others in the industry about consumers returning to big, trusted brands? Didn’t they see a warning in the IPO flop of Casper Sleep Inc.? 

That’s only part of the reality, though. While the pandemic has sped up the decline of some already-struggling retail chains, it has also acted as an accelerant for many of the trends startup founders and venture-capital investors have been betting on. People were already embracing casual dressing and athleisure styles before stay-at-home living made sweatpants a daily uniform. That was surely a helpful backdrop for Allbirds, the sneaker unicorn that announced a $100 million fundraising round in September and has recently added clothing to its line-up.

Health and wellness is another area that was a growing focus for consumers even before the public-health crisis offered a reason to rethink self-care routines and develop coping strategies. Now, the growing attention to this area could be a boon for fitness startups such as Tonal or a meditation app such as Calm, which Bloomberg News reported in October was exploring a fundraising round at double its 2019 valuation. In these cases, it’s not like venture capitalists need to revamp their investment theses, they simply need to reassess a timeline for them to play out. And many of them have ample capital to deploy. 

In some instances, the pandemic has cast existing consumer trends in a different light. Meat substitutes, for instance, were already making their way onto chain-restaurant menus and grocery store shelves as plant-centric diets become more popular. Then, in the early days of the pandemic, meat shortages demonstrated the vulnerabilities of that sector’s supply chain, giving investors more reason to back alternative protein makers such as Impossible Foods, which announced a $200 million fundraising round in August. 

It’s a cliche that startups must look for “white space,” and the pandemic has certainly created some, with incumbent retailers closing thousands of stores and packaged-goods brands dumping unproductive items. The disappearance of familiar stores and products leaves consumers no choice but to reconsider their previously autopilot shopping routines. That could work out well for newcomers, especially those that are tailored to e-commerce and offer some sort of feel-good component, like being made from sustainable materials. Kirsten Green, managing partner at Forerunner Ventures, said some consumers appear to be “buying less, but they’re buying better,” as stay-at-home living nudges them to be more thoughtful about purchasing, right down to how much packaging is needed for their online orders. 

The key challenge for consumer startups is navigating the more subtle ways that the world of dealmaking has shifted since the pandemic began. Caitlin Strandberg, a principal investor at Lerer Hippeau, said deals are happening especially fast right now – in part because it’s a highly competitive environment, but also because the rise of virtual meetings means everyone can simply cram that many more confabs into a day without getting on a plane. And she said the transformed shopping environment shapes what she listens for in a pitch. Amid the surge in online shopping, “the Amazon question has become even more important,” she said, referring to the decision of whether to sell on its website or not. 

The pandemic has rattled consumer demand and shopping patterns in a way that has flattened many incumbents. But it also has opened the door even wider for startups. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

©2020 Bloomberg L.P.



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