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Consumer Startups Everywhere Else – Why Silicon Valley Whiffed on the Daily Deals Space

I ran into Michael Tavani last week – after co-founding Scoutmob, he is in the process of ramping up Switchyards, an incubator with the express goal of launching design-led consumer startups in Atlanta. This led to a bigger question – how should non NYC/SF startups approach B2C differently?

Atlanta, like most startup hubs outside the Bay Area and New York, has a better hit rate in B2B startups, with only a few B2C successes and some current companies with good upside potential.

Scoutmob is still in process, powering through a pivot from their roots in the Daily Deal space into Ecommerce, focused on sourcing unique local goods through their Shoppe. This is fascinating because they are actually touching on 2 startup categories that have been least centralized. Groupon started in Chicago. Outside of the fashion category, most big deal sites were elsewhere – Living Social (Washington D.C.), Woot! (Dallas), even late-entrant nCrowd (Knoxville). Except for a fashion deal cluster in NYC, eCommerce is even more decentralized. My startup, PerfectPost, often works well for eCommerce companies, and the number of ecommerce startups doing $20 million or even over $100 million in revenue in some suburban warehouse of any major city is just staggering.

Contrast this with the waves of consumer startup that have thrived in the Bay Area and New York. Social networks (Facebook, LinkedIn, Twitter), Mobile apps (Foursquare, WhatsApp, Instagram), and now emerging, Convenience (AirBNB, Uber, SpoonRocket, HomeJoy, Blue Apron). Young startups thrive on early adopters and effective distribution, and when it comes to consumer startups, it’s about meeting a need for an individual, and often, word of mouth.

The Bay Area in particular is flush with intelligent and curious people who feel the need to be “in the know” and innovative. If there is something new, many people will try it. If it doesn’t suck, they’ll probably tell a friend about it as proof they were inquisitive enough to be there first. You can argue about whether that is a real need, but it is effective and it gives young companies the early adoption and feedback they need to become a meaningful company, even if the initial experience isn’t perfect. Social sites grew this way. Mobile apps combined this dynamic with the world’s highest concentration of iPhones to get a head start, before the App Stores were overcrowded.

I would argue that the “Convenience” category of startup is arising from early adopters and technology with constraints unique to their home cities, and consumers with more money than time. When I first heard of Uber, I couldn’t understand the need to have an expensive black car roll me around town. For early adopters in expensive cities, it wasn’t that expensive for people who were looking to not own a car, or who were already highly paid. Their early adoption got Uber through the initial stage and to a scale where prices on normal cars dispatched through UberX are often worth a look for a less-techie Atlantan. But you can’t start a B2C company at scale.

Blue Apron, Plated, and HelloFresh are all high-end food delivery startups, all started in New York. New York is expensive and crowded, and apparently, grocery shopping in New York is an unpleasant experience. Paying $50 for a box holding the ingredients for 2 organic meals for 2 people seems outrageous when I have a family of 5, a car, and a Publix with a huge parking lot every 3 miles. But they can find enough New Yorkers for whom this sounds like a deal that they can reach new scales, offer new products, and probably get to the point where they can make sense in less expensive, organic-focused cities. Blue Apron offers 6 menus each week. A new startup in the space is only going to be able to offer 2 menus, for logistical reasons. In a price-sensitive market that likes to grocery shop, you can’t catch these guys, not head on.

So why did Silicon Valley whiff on the daily deal space? Because it was entirely about price sensitivity and trying new restaurants/stores based on a deal. These deals weren’t initially in apps – they were on web sites with printable coupons or delivered via email and text message. Chattered about on mature social networks. Distribution channels loved by the suburban set, but probably not sophisticated enough for the technorati, and certainly not worth trying some new restaurant without any FourSquare tips or Yelp reviews. In hindsight, missing this space was only a small mistake in view of its’ implosion, but the theme of finding Bay Area blind spots and exploiting them seems right.

Similarly, ecommerce doesn’t really depend on early adopters – not since most people got comfortable with ordering things on the internet. Country Outfitter sells over $100 million per year in cowboy boots, based out of Northwest Arkansas. The distribution approach is commodity stuff that most normal people use – Google Search/SEO, Adwords, Social Media, Email. They built a brand based on the shift of country style into mainstream culture. They ship product, so there’s no “one place” for early adopters. Also the exit multiples are often not as VC friendly.

So I think building a B2C startup based on early adoption of technology and “cool” apps or price insensitivity outside of New York and San Francisco borders on suicide. I think you have 2 choices – contend in a space that is mostly geography agnostic (eCommerce), or come with a strategy where your geography gives you early adopters that give you an unfair advantage over other people. An example of this could be Switchyards hackathon company Vacayway, started by one of our advisors, Lance Weatherby. 7 of the top 10 vacation rental markets are in Florida, our southern neighbor, and traffic in this space is probably driven by word-of-mouth, search (Key West Rentals), and AdWords.

Consumer startups elsewhere need to claim local advantages or play on even playing fields instead of trying to beat the Valley at its’ own game.

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