Consumer Investors Still Searching for an AI Breakthrough...OpenAI's $100 Billion Valuation...Once Hot Social Apps Fade
Plus, OpenSea's dramatic rise and fall
The Main Item
Consumer Investors Head for the Exits
The consumer startup revival is always just over the horizon.
Large language models and diffusion models were supposed to offer a lifeline over the past two years amid a broader startup downturn. And yes, there are some AI breakouts like Midjourney and Suno. And data shows Character.AI continuing to grow even as its founders seemed to be abandoning ship in its deal with Google.
But the failures of last-generation consumer companies and the dearth of promising new social apps have spelled trouble for consumer venture investors. They’ve been leaving their firms this year and shutting down their funds.
Consumer VCs have stepped back from their posts this year, amidst a lack of exits and a tougher battle for portfolio companies to hold onto customers. Connie Chan announced this year she was no longer making new investments at a16z, and Li Jin announced this week she was transitioning from GP to an advisor at Variant. Anne Lee Skates also left a16z and is out raising her own fund. (Looks like the fund might be called “Parable Partners,” according to an SEC filing we dug up that lists her as its managing member.) Magdalena Kala, who ran her own consumer crypto fund called Double Down, announced in an Instagram post this month that she was calling it quits. She wrote, “In the wise words of Kenny Rogers, ‘You’ve got to know when to hold ‘em, know when to fold ‘em’ and after careful consideration I’ve decided to fold Double Down’s new investment activity.”
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We heard that Kirsten Green’s Forerunner, which raised a $1 billion fund for consumer investments back in February 2022, has seen at least two of its junior investors depart over the last year. It’s been reported that one of Forerunner’s biggest bets, the consumer fintech Chime, is preparing to IPO sometime in 2025. That debut could hopefully help return some capital to its LPs for a firm which hadn’t seen much in the way of distributions yet, according to UTIMCO filings we pulled earlier this year.
New quarterly data on app performance from the market intelligence firm Sensor Tower shows that customer interest for some consumer-focused VCs’ top bets is waning. We took a snapshot of some of the buzziest startup consumer companies of the past few years. Of the 8 apps we polled, including photo sharing app Dispo and live-streaming marketplace Whatnot, only Character.AI had seen a sizable increase in downloads in a quarter since 2023, right after the announcement of its licensing deal and founder departure. And that wasn’t exactly an exit that most VCs dream of.
One Big Chart
Unfortunately for many of the largest consumer startups, many like the makeup brand Glossier haven’t raised since before the downturn. Consumer startups, especially social ones, often launch with a flurry of buzz and new customers, but those early users rarely stick around long term, investors told me. Once-buzzy apps like Clubhouse are now ghost towns, and BeReal, perhaps the biggest breakthrough of the past few years in terms of downloads, was acquired in June for €500 million, a small haircut from its last priced round.
“Funds are getting more and more skeptical of exciting demos or big launches, and increasingly looking for real revenue,” said Outset Capital’s Ali Rohde.
Layoffs have also plagued the sector. Marketplace startup Faire laid off 20% of its staff at the end of 2023, and Glossier has also held layoffs in the face of rising competition of similarly-packaged makeup brands.
AI-powered social apps like Can of Soup, which raised funding from Sequoia last year, get VCs excited but then struggle to break through to the broader world.
“The reason social is challenging is because so often it’s really hard, especially at the early stages, to identify whether the company has really captured magic in a bottle—is it getting the level of network effects and virality that will allow it to grow?” said Anarghya Vardhana, a general partner at the consumer-focused fund Maveron.
There still hasn’t been the killer consumer AI app outside of ChatGPT, and there will be many more failed experiments before the right one lands, said Union Square Ventures’ Rebecca Kaden. She hasn’t given up hope for one, though: “I think we’re at this moment where consumer has a ton of promise but we’re kind of waiting for the magic.”
Prosumer tools and several generative AI video startups are looking for strategic exit paths like acquisitions, an investor told me on background. Canva’s recent acquisition of AI design tool Leonardo.ai could be a model for many in the space, if they’re lucky enough.
But AI doesn’t have to be the savior for the sector alone. There’s still hope for consumer companies in specific verticals like healthcare, said Kaden and Vardhana. Slingshot AI, a mental health counseling startup, reportedly raised $30 million in new Series A funding from a16z.
We heard that Cofertility, the egg-freezing startup where young women can freeze their eggs for free if they donate some to eligible candidates, was in talks to raise its Series A, according to a source with knowledge of the talks. The company recently announced tennis star Maria Sharapova as an angel investor. Cofertility declined to comment.
“The issue is not technology, it's imagination,” said Kaden. “It's the founders coming along that figure out how to use it in new ways.”