Venture investment in consumer internet: Q4 update

An (almost) end-of-year review of investment trends among US consumer internet companies

Among all tech sectors, consumer internet companies face perhaps the toughest startup journey. Shifting tastes, fleeting attention spans and saturated markets make winning and retaining customers a daunting proposition, even in the best of times. And these are not the best of times. Sky-high customer acquisition costs and a growing sense of digital fatigue are now straining companies that were thriving just three years ago, pushing some investors out of the space entirely.

Yet, for investors with the conviction to remain, a massive amount of value could be up for grabs. Consumer internet has created the most lasting and recognizable brands in tech and still offers lucrative opportunities. US consumer spending accounts for two-thirds of GDP, yet consumer internet companies draw less than seven percent of VC investment, down from 30% a decade ago. In this article, we'll examine this widening vacuum of investment and other trends that are shaping the future of consumer internet just as AI begins to transform it.

1Consumer investment bounces off the bottom

Consumer startups are still feeling the hangover from the VC boom of 2021, but signs of a recovery are growing. VC investment in the sector is up 25% from 2023's nine-year low, with the rebound most pronounced at the later stage. After grinding to a near-standstill last year, Series B to D investment is up 83% year-over-year, driven by a handful of mega deals. Investments over $100M account for 55% of late-stage investment in 2024, up from 37% last year. With deal flow now trickling toward an 8-year low, investors are consolidating their late-stage capital in the most promising companies in each sector.

Fortnite creator Epic Games leads all consumer internet companies with $425M raised in July and a $1.5B investment from Disney that was announced in February and is awaiting approval. The deal would put gaming among three consumer internet subsectors that have doubled their late-stage investment total this year, including media/social networking and commerce enablement. E-Cigarette maker Juul added to its mountain of raised capital with a $1.2B late-stage round in May, the largest single deal in a consumer sector.

The social media startups generating special interest from investors are those seeking to add value beyond the screen, either by offering tools for creators to capture more of the value they generate, such as the platform Social Display, or by bringing users into the real world, such as the AI-powered social platform Infinite Reality—both companies closed $350M deals in July. In the near-term, eCommerce and digital-native brands remain oversaturated, though we expect continued strength in media, social and commerce enablement.

2Commerce enablement sees valuations spike

While eCommerce companies struggle with higher customer acquisition costs and higher price-sensitivity among consumers, companies with products that help streamline operations are faring well. Commerce enablement saw median valuations spike 89% in 2024, the most among any consumer segment. Among notable enablement deals:

• End-to-end eCommerce platform Cart.com raised at a $1.1B pre-money valuation, a 2x step-up from its valuation in 2021;
• Butter, an enablement company that reduces unintended customer churn, saw a 1.3x step-up to $125M pre-money value from 2022;

• Akia, an engagement platform that optimizes hotel check-ins, was valued at $40M at a 2x step-up from its seed round just last year.

These companies highlight a trend of continued growth we expect for enablement companies, as eCommerce continues to be a competitive space.

3Crypto and gaming unite

Blockchain is becoming an integral part of gaming, both as an enhancement to traditional games and as a foundation for standalone projects. This year's resurgence in crypto prices has rippled into gaming, with 27% of gaming VC deals going to companies using blockchain, up from 19% last year. Notable players like Sky Mavis and Animoca Brands are pioneering this space, integrating blockchain to create more immersive gaming experiences. Crypto's concentration in gaming is nearly 4x its share of VC overall and likely to grow as play-to-earn gaming, the tokenization of in-game assets and the promise of inter-game interoperability continue to rise in popularity.

4An AI advantage for later-stage companies

For consumer companies, we've observed that the presence of AI does not make a huge impact on early-stage valuations. However, its significance may be a differentiator as companies advance through the funding pipeline. At later stages, consumer AI companies have a significant valuation premium over companies without an AI offering. For Series B+ companies, those integrating AI into their core products have a 265% valuation premium compared to companies without AI as a core component. Notably, this is a reversal from what we've seen in other sectors, where AI is helping to boost earlier-stage valuations more than later-stage ones. We don't know for sure why the trend is different for consumer, but it may simply come down to revenue. Since consumer valuations are more grounded to sales than other sectors, it's possible that early-stage AI companies have less revenue, while at later stages, the best companies have implemented AI.

Fundamentally, AI is already boosting margins for consumer companies. Automation tools, such as improved conversational AI, help lower customer acquisition costs. While chatbots were once cutting edge, they are now evolving into more human-like conversations, with smarter computer-generated responses and AI-driven engagement. 

Implementing AI into existing products is a challenge that founders are approaching thoughtfully. Abhi Ramesh, founder and CEO of Misfits Market said his company has applied large language models (LLMs) to their existing data, helping to drive down costs by as much as 70% over the past two years. "For inventory and pricing, AI algorithms help streamline our warehouse back-end and back-office processes. On the front end, our model uses machine learning to pre-populate carts by analyzing user behavior, allowing customers to focus on the 'fun stuff.'"  

5Investors shift focus

While consumer tech was once a central focus of the largest VC firms, sector-agnostic funds are increasingly pulling back from the space, instead choosing to allocate more investment into the more predictable revenue stream of enterprise software, which includes many AI companies. Notable recent departures of consumer-focused GPs at firms such as Andreessen Horowitz underscores the shift away from traditional consumer tech companies toward AI investments. Among the top 100 most active VC firms, consumer companies accounted for just 6% of investment in 2024, half the share from two years ago. The shift continues a long-term trend of consumer tech losing market share to enterprise tech.  

Previously, consumer seed deals outnumbered enterprise 2:1, but that ratio has now reversed. Does this spell doom for the consumer tech segment as we know it? We don't think so. For contrarians, the growing vacuum in funding creates opportunity to find value across the distribution of companies, below the top quartile of valuations. 

One thing is for sure: The lines are blurring in how we think about the consumer space. Digital-native consumer brands aren't going away, but the pressure is on for many of them to either become profitable or to differentiate themselves with something truly unique. Firms that might have invested into an e-commerce company are shifting investment into enterprise companies that are adjacent to consumer brands—AI startups creating customer service applications, for example. This shift is squeezing the available capital for existing consumer startups, which may face a tougher path to exit if they can't become profitable.  

6Early-stage dynamics

With later-stage dynamics especially challenged, early-stage funding in the consumer space has taken a larger share of deals, though actual deal numbers are now falling off. Investors are closing nearly five times more seed deals than Series A, creating a bottleneck in the startup pipeline. The trend is even more pronounced in consumer than in the larger VC ecosystem, where three seed deals are being closed for every Series A. As the number of consumer VC deals tracks toward an 8-year low, many of these seed companies face uncertain futures, pressured to show traction as only the most scalable will secure follow-on funding. On a positive note, investment is beginning to rebalance. In 2023, seed and Series A investments made up 58% of consumer deals, nearly double its historic share. This is now correcting itself, with 45% of deals in early-stage investments this year.

7Exit-ready unicorns

The IPO window has remained largely closed for nearly three years, leaving many late-stage consumer companies stranded and waiting for an exit. Consumer IPOs raised over $14B in capital in 2021, dwarfing the $4.7B raised since. There are at least 100 active consumer unicorns in the US, accounting for upwards of $280B in locked liquidity waiting on the sidelines. Liquidity events for these companies would return capital to investors and help restart the flywheel of innovation in the space. Many of these companies could make strong candidates for an IPO, following in the footsteps of several VC-backed consumer companies that bucked the trend to go public during the IPO drought. Reddit, CAVA and Instacart are all trading up from their IPO price, which could instill confidence in other tech unicorns. However, the success of their IPOs and their stock performance since exiting have been mixed.

Consumer unicorns that are growing ripe (or over-ripe) on the vine will have to weigh their options carefully. For companies that don't have the metrics to IPO, an M&A transaction may provide an outlet. According to our recent State of the Markets report, nearly 30% of US VC-backed tech unicorns are now unprofitable and shrinking. These companies will be hard pressed to raise additional capital from growth investors but may find opportunities in M&A transactions. 

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