Q&A: Octopus Ventures on consumer investing in times of recession

Ero Partsakoulaki: Do you believe that businesses in the consumer sector will struggle the most amid the current state of the economy?

Rebecca Hunt: I believe there's potentially a bit of an over-correction in the market. In these kinds of macro environments, where you have inflation, interest rates pressure, cost of living crisis, people's automatic assumption is that the consumer [sector] will be hit the hardest because people stop spending money. But the reality in the data that we're seeing, not only from private companies, but from big public companies as well, is that's just not the case.

Our theory here is that consumer debt or household debt is the lowest it's been in 15 years, consumer and household saving levels are very high and so we don’t actually expect to see an enormous drop in demand for consumer businesses. We're more likely to see people pricing down essentially, rather than buying the most expensive products, but they won't stop buying.

That is what we're starting to see in our own portfolio as well. We have invested in a business that's focused on really high quality delivery-only fast food and they're seeing a huge surge in demand. And I think that's people pricing down from eating out. We believe there's actually a really, really big opportunity for companies in the consumer space and in consumer tech more specifically.

EP: Does that mean that you find investments in traditional consumer startups less attractive?

RH: We've seen and we're still continuing to see a good number of very high quality consumer businesses. We as a fund are shifting away from what we call consumer product businesses, where there's a physical product component, to what we call consumer tech businesses, such as marketplaces, social businesses, businesses that are software-led. We believe these businesses are more scalable because they’re not as affected from fluctuating inflation and interest rates, as well as supply chain issues that continue to be apparent.

EP: Would you compare investing trends amid the current economic challenges to those that emerged in the 2008 global financial crisis?

RH: Some of the very best consumer businesses, with Airbnb and Uber being the top two examples, were built at that time. It's been proven by analytical studies that buying decisions we make during times of economic crisis are longer term and stickier decisions. So we tend to switch less between products and we tend to focus our buying on products that have real inherent value to us. And that in itself forces these consumer businesses to create products, services, brands that are truly valuable and are truly creating value for that end user. That focus is really important.

I think the other discipline that's been really instilled in consumer tech businesses is whether they have a business model that scales. Does it have a business model that works? There were billions and billions of dollars of VC money that went into the ten-minute online grocery delivery industry over the last two years and we've seen a huge contraction of that market just in the last few months with businesses consolidating and being shut down. I think that's because fundamentally, a lot of them started on an ethos where they just didn't have a business model that worked.

EP: Where do you see opportunities to deploy capital now?

RH: The creator economy is a really big theme for us. Businesses are emerging out of the idea of democratizing access to global platforms for the average creator in a wide range of segments from photography through to physical products and service marketplaces. We see them as platform businesses that help other people create an inherent value and then both the creator and the platform build value.

There's a lot that's being built in terms of enabling those creators to be more successful in their own verticals. The interesting shift that we're seeing is that it's not just about the handful of YouTubers that have tens of millions of followers, but it’s actually helping the long tail of YouTubers to monetize their content and their audiences. The first iteration of those types of businesses, like Onlyfans, have been pretty successful in their own categories but there's actually a much broader audience for an opportunity for those kinds of businesses.

There’s also a shift in retail that we’re looking at a lot. Re-commerce is a key trend around the restoration of clothing and other goods. Back Market, a marketplace for refurbished electronics, is now a very big business in Europe that raised USD 335m in January. We also invested in a business that restores electrical products, and we're starting to see a few businesses doing similar things in the fashion space.

EP: What features you find most attractive in the consumer businesses you decide to invest in?

RH: We focus on pretty early stage businesses, so pre-seed, series A, and we get really excited by those that have very strong community or network effect. That's really important as it drives very strong referrals and retention. This is a kind of the key metrics that we really care about when we look at consumer businesses. We look at whether a business has to buy customers back every single time they transact or they inherently reengage and re transact with the business because they love the product. That's often driven by community and network, by how referable the product is.

We also look at businesses with what we call product-led growth. So businesses that are not just buying their way to success by acquiring customers but they make customers that engage with the products and as the product grows, they engage more deeply with the product and spend more in that journey. We also really care a lot about brand, where we just think there's a huge amount of inherent value.

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