Are Enterprise or Consumer Startups Best VC Bets? One VC’s View

When Shawn Carolan joined Menlo Ventures just after earning his MBA at Stanford in 2002, he found the venture capital firm “fairly enterprise focused.”

But Carolan, a trained engineer who says he loves gadgets and gizmos, was most interested in tech products aimed at consumers. Over the next decade, the Stanford recruit managed to give the firm some compelling reasons for expanding its interest in consumer startups, based on results from his investment bets. In late 2011, Carolan played a leading role in Menlo Ventures’ investment in Uber’s Series B financing round—-early-stage support that earned his best return on investment to date, he says. San Francisco-based ride-hailing company Uber, still a private company, has a current valuation estimated at more than $60 billion. Carolan had also backed Siri, which was later acquired by Apple, and the online video streaming company Roku.

Carolan (pictured) is now a managing director at Menlo Ventures and head of an expanding consumer practice—-the firm plans to hire another general partner and two associates for the group, which is expected move to a new office in San Francisco within about a year. The firm already makes almost as many consumer-oriented deals as business-focused investments, but aims to make that split even closer to 50-50 once its expanded consumer team is in place, a company spokeswoman says.

I was eager to talk to a VC like Carolan who has such enthusiasm for consumer startups, having just interviewed Nino Marakovic, a committed investor in enterprise-oriented companies. Marakovic is CEO and managing director of Sapphire Ventures, which is closely affiliated with the big German enterprise software company SAP, its sole investor.

Marakovic says consumer startups such as Facebook can yield outsized returns, but it happens rarely. In general, he says, business-focused companies deliver more modest returns, but more consistently.

While Carolan’s driving passion rests with consumer-oriented companies, he can’t say they’ll deliver better returns than startups designed to serve businesses. Both face substantial challenges, he says.

“They’re both hard in their own unique ways,” Carolan says. But current technologies, such as cheap Web-based data storage and the plug-in functions made possible by APIs, allow entrepreneurs to start consumer-facing companies and scale them up at very low cost, he says.

Carolan calls these empowering services “ingredient technologies,” because they allow innovators to combine them to cook up finished products, like Siri and Uber, that make life easier for people.

“You don’t necessarily need to invent the rocket science,” Carolan says. Rather than investing in the breakthrough ingredient technologies themselves, Menlo Ventures aims to invest in companies that mix these elements creatively to “transform the most frequent interactions in your life,” he says.

The emergence of a whole array of those ingredient technologies allowed Uber to disrupt century-old businesses such as taxi and limousine services, Carolan says. First, smartphone users now hold “incredibly powerful iOS and Android operating systems in their hands,” he says. Those phones contain GPS chips so that riders and drivers can find each other in real time. Consumers can download the Uber app in about 30 seconds, reducing the “friction” of adopting it, Carolan says. Uber also contains a telephony app that allows the rider to call the driver without a cumbersome exchange of personal phone numbers.

Carolan sees further ingredient technologies on the horizon that will continue to expand the potential for new consumer products.

One of them is computer vision. Computers that could interpret what they “see” in digital images or in the three-dimensional real world would accelerate the development of self-driving cars, Carolan says. Companies including Uber and Google have pilot programs using autonomous vehicles, but Carolan won’t hazard a guess on how long it will take for those to become widely used.

“That’s a question I would love to answer,” Carolan says. But he predicts that they’ll be a catalyst for new kinds of businesses.

More transformations could come from the use of natural language processing, artificial intelligence, and machine learning, Carolan says.

These technologies could some day make it possible for a trained bot to handle in minutes all the arduous separate arrangements that now come with moving to a new house. “You could say, ‘turn on all my utilities—here’s my credit card number,’“ Carolan foresees. That kind of service is a near-term possibility, he says.

Carolan acknowledges that the consumer startup arena is crowded with hopeful entrepreneurs trying to take advantage of low startup costs and enabling technologies. But even though founders don’t all need to invent breakthrough technologies, they still need to execute their ideas with good engineering, good design, and a close understanding of customer needs. “I don’t care what you’re building, it’s hard,” he says.

Consumer startups routinely have to forego initial revenues and offer some access to their products under a freemium model, while competing with a host of other new apps for the time and attention of customers. But Carolan says the freemium method is still working for … Next Page »

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Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy

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