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Are B2B startups a better bet for angel investors and venture capitalists compared to B2C opportunities? It’s an interesting question, and on the surface the answer might be: “Of course not – it depends entirely on the startup in question!” Yet does this position hold merit? In this article, our investment team at Bure Valley Group offers some thoughts on this question for angel investors in 2020-21.
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B2C – a deeper look
A startup operating on a B2C model (business-to-consumer), of course, sells its products and services directly to the individual consumer – rather than another business. This might involve selling bicycles, toys, makeup or clothing. The advantages to starting a B2C company for an entrepreneur can be profound. After all, a lot of money can be made for the business (and its investors) if the startup founder “gets it right” from the beginning.
There are at least two attractions for someone to start a B2C company. The first is that many B2C companies have shorter sales cycles compared to the B2B sphere. It usually takes less time to sell lipstick to someone compared to a complex SaaS product offered to hospitals. As such, this can also make B2C startups more alluring to angel investors since the money might be expected to start coming in sooner. The second attraction is that pricing mark-ups on these B2C products can be justified when a strong brand is establishing – bringing in even more cash.
Yet B2C startups can come with downsides which both founders and investors should weigh carefully. In particular, it is often difficult to start a viable B2C product-based business without a physical shop location – even in 2020, when so much consumer activity is based online. Part of the fun of shopping is the customer experience of stepping into a shop to feel, see and smell the different products. Finding a viable location can be difficult, however, and come with large costs such as warehousing and shipping. One way around the problem is to get another business to sell the startup’s products on its behalf. Yet this cedes a lot of control over the startup’s sales cycle, which can lead to higher costs and delays.
B2B – a deeper look
A business to business-to-business (B2B) startup operating primarily by selling a product or service to other businesses. Examples may include selling CRM software (customer relationship management) to other startups which want to manage their leads more effectively, or selling a security solution to SMEs within a specific sector/industry (e.g. building management firms).
Here, it can be useful to distinguish between product-based B2B startups and those which are service-based. The former will need to purchase and store the products (unless they are acting as a broker) – adding to start-up costs and creating an immediate liability. The investor should, therefore, be confident in the founder’s negotiating skills, market analysis and passion for the product to see it through. The latter is especially important since B2B products cannot be shifted in response to clients’ needs as quickly as a “B2B” service-based company.
Startups offering a service to other businesses can be more agile than “B2B” product-based companies (e.g. marketing automation software). This can make them a promising business model for the first-time entrepreneur, since their services can be refined and expanded as their knowledge and experience with the target customer grows. After all, it is unlikely that they will offer exactly the right solution straight away – so having some agility can maximise their chances of success (certainly something investors will be keen on!).
B2B service-based startups also come with other advantages. One is that companies tend to have more money than consumers. People are usually happier to spend thousands of pounds from their company compared to buying out of their own pocket! Another is that the startup’s competition is often not as fierce when it comes to running marketing campaigns. Niche markets can be identified with fewer direct rivals, and it may even be possible to find uncontested market spaces (i.e. “blue oceans” – as defined by W. Chan Kim & Renée Mauborgne) where new demand can be created and captured.
All of this plays a part in why our team at Bure Valley Group is so excited about our work with GBMS Tech; a growing company offering SMEs and other customers innovative protection solutions against hackers, viruses and ransomware. One of their unique value propositions is offering a unique malware blocking technology – one which has not yet not suffered from an intrusion or successful cyber-attack. You can find out more about GBMS Tech and similar, exciting investment projects on our portfolio page here.
Conclusion & invitation
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827