The Next $1B Consumer Startup: Vertical Social Networks and Evaluating Early-Stage Consumer Companies

The Next $1B Consumer Startup: Vertical Social Networks and Evaluating Early-Stage Consumer Companies

In today's digital landscape, where swiping and liking static content has become tiresome, users are seeking more curated and meaningful connections through digital experiences that align with their online and offline interests. This growing fatigue has created the perfect launching ground for the next generation of billion-dollar consumer companies: vertical social networks.

Vertical social networks offer a unique proposition by allowing users to share content that they can't post elsewhere. This exclusivity and niche focus provide an opportunity for these platforms to shine. Even if a platform isn't the first or only place to post a certain type of content, it can still win by providing the best tools and enhancing users' status within their existing network. Platforms like LinkedIn, Clubhouse, and Quora have already capitalized on this concept and seen success.

It's not just Gen Zers who are attracted to these new networks. The chance to build a following, whether personally or professionally, is a strong incentive for users across demographics. By offering a platform that holds all the important data related to users' profiles and interactions within the community, vertical social networks encourage frequent engagement and make it harder for users to churn. This "System of Record" aspect is a key driver of growth and sustainability for these platforms.

New devices and technological advancements also play a vital role in the success of vertical social networks. As new devices emerge or existing ones undergo significant changes in functionality, the amount of time and ways in which users can be "present" on social products expands. This creates an opportunity for new networks to emerge and thrive. Additionally, these new devices often enable new types of content, giving birth to innovative social networks. For example, AR filters were a major catalyst for Snap's success as it expanded beyond its initial user base of high school students.

Furthermore, the unbundling of existing platforms presents a significant opportunity for vertical social networks. YouTube, for instance, serves all types of content, but there is room for specialized platforms with killer features tailored to specific categories. By focusing on a specific niche, these platforms can attract users looking for a more targeted and immersive experience.

When evaluating early-stage consumer companies, one of the key questions investors ask is about defensibility. What sets a company apart and makes it attractive to users? This question can be broken down into several aspects: why do people come, stay, share, and pay for a product or platform? Understanding the answers to these questions is crucial in determining a company's potential for success.

In consumer businesses, frequency and time spent are vital metrics. Investors look for features or actions that receive the most user engagement, as this indicates a strong product-market fit. Switching costs and lock-in mechanisms are also important considerations. A product or platform that creates a strong sense of loyalty and makes it difficult for users to switch to a competitor is more likely to succeed.

Virality is another key concept that investors consider. The ability of a product to spread from one user to another through direct customer-to-customer contact is a powerful growth driver. Products that have a propensity to be shared via social media or word of mouth have a higher chance of achieving viral growth.

Evaluating the long-term economic potential of a consumer company is crucial. Investors need to understand how the economics will change over time and what factors will drive differentiation. Whether it's price, service, or brand, there must be a sustainable and defensible advantage that sets the company apart from competitors.

In conclusion, the rise of vertical social networks presents a significant opportunity for the next wave of billion-dollar consumer startups. These platforms offer curated and meaningful connections, niche-focused content, and enhanced user experiences. Evaluating early-stage consumer companies requires a comprehensive understanding of their defensibility, user engagement metrics, virality potential, and long-term economic sustainability. By considering these factors, investors can identify the next big success story in the consumer market.

Actionable advice:

1. Identify niches within the social media landscape that are underserved and have the potential for vertical social networks. Look for opportunities to provide users with unique and curated experiences that they can't find elsewhere.
2. Prioritize features and actions that receive the most user engagement. Focus on improving these aspects to create a strong product-market fit and increase user retention.
3. Consider the long-term economic potential and differentiation factors of a consumer company. Look for sustainable and defensible advantages that will set the company apart from competitors and drive its success.

By following these three actionable pieces of advice, entrepreneurs and investors can navigate the evolving consumer landscape and capitalize on the potential of vertical social networks.