The latest episode of The Svagat Show features a conversation with Sameer Singh, Venture Partner at SpeedInvest, Founder of the network effects blog Breadcrumb. I was excited to meet Sameer because he’s been an astute thinker in the field of network effects, marketplaces and consumer tech. Least of all because we both also grew up in Hyderabad, India and found ourselves quite randomly in London :)
We kick start the discussion with what’s on everyone’s mind: AI. And he’s been researching a lot on the AI enabled marketplace, so I thought that’s a good place to start.
Sameer explains what is an AI marketplace (see his post for a more detailed view)
Generally speaking, what AI would do in these cases is identifying points of friction in a real -world transaction or a potential transaction and streamlining it and effectively solving a problem in a way that creates a new interaction, a new transaction. Effectively, what you're doing is looking at an overlooked problem, something that hadn't been solved previously.
He peppers it with what it is not
I'll start by defining what an AI enabled marketplace is not, which I think people sometimes get confused by. If your supply is AI, if a user is just interacting with AI like that is not an AI enabled marketplace, a marketplace is meant to enable an interaction or transaction between a buyer and a seller to specific people. And AI is effectively mediating that transaction or making that transaction happen. It would not happen without.
It's a little hazy right now because we haven't seen too many of them in reality. I'm working on getting a couple of them to the real world, but it's still early days.
So all this is quite theoretical, and I had done some research and asked him to talk about one of his recent investments, Haz, which fit that mould.
Yes, Haz is one of those companies. It's essentially a social network and e -commerce marketplace built on the graph of what your friends own. So it makes a feed of everything you own, stuff that's interesting that's not like a hammer and nails, and connects you to your friends and what they own, and allows you to interact with that, make fun of it, like stalk. And also over time, allow you to bid on what your friends own without them having to actually list it for sale and stuff like that.
(Earlier) you could pull email receipts without AI, yes. But would you be able to figure out what's interesting and what's not? …your most frequent purchases tend to be fairly banal things that wouldn't interest anyone. It's the slightly less frequent purchases that would interest more people. Say you've got a jacket, you've got a new pair of jeans, you've got a new phone.
…but you would actually have to have an intelligent system filter out what is interesting and what is not interesting. And that is sort of a non -trivial task. And I think that only became realistic, I'd say, in the last 12 months
I ask him why someone like Vinted can’t do this. And that leads to Sameer sharing another important nugget around new interactions. Which I’d reckon also result in new interfaces - which bring in some form of early barrier - which is weak yes, but just powerful enough to wedge in.
if you look at the way the Vinted interaction works, I know everything in there is for sale. And I know that these people, they have ratings, they have reviews, there's that trust building component. Creating a list of things that people own is fairly adjacent to that. It kind of doesn't really fit on the interface. It's like trying to squeeze in a calendar in Instagram, that's not really going to work.
I'm really big on startups trying to create unique interactions because when you're creating a unique interaction, it's very, hard for someone to actually bolt onto their product because it just becomes very janky and even if it's there, people might not use it. It has to be able to fit seamlessly into the experience for it to draw any sort of engagement.
Roblox has the greatest network effects in recent years
Having spent so much of the last few years focusing on network effects - I asked him what is his favorite company when it comes to network effects?
A less obvious one is Roblox, probably the most impressive network effect company that I can think of. It's actually the final case study in my course because it has so many different types of network effects. And once you figure out how these things work, you're sitting and unpacking these four different types of network effects it has, four different interactions. It has what I would call a platform, a social network, two different marketplaces. It's quite impressive what they've managed to build.
Getting a company like that off the ground is immensely hard. But once you do, it's so incredibly durable, people don't appreciate it enough. I think people don't get it because it's typically the user base is sub 15. And so it's very under the radar in the tech world. But once you actually take a look at that product, that is some impressive
How does one start a company like that? And was Chris Dixon wrong?
The answer is actually accidentally, which is you face some sort of problem in your everyday life and that you've resonated, that resonated strongly with you. And you went about building a product to solve your problem. And then you found that other people like that as well
And then you found that, wait, actually this can be pretty good. And that's when you go, right, I probably need to raise funding. Like that's usually the ideal trajectory of sort of most consumer applications, whether they're based in the Bay Area or Europe or somewhere in Europe. And I don't know how you fund this and get this off the ground.
Well, so here I have a bit of a disagreement with Chris Dixon (referring to his seminal post on the next big thing will end up looking like a toy in the early days)
So it starts out looking like a toy to people who are not using it. If you look at any consumer social product historically, it was generally solving a problem for the earliest users in some way, shape or form. Now you might think that problem was frivolous, but to people using it, the problem was pretty severe. The original Facebook, it started out as a student directory. Basically, it solved the problem of, I want to know who else is on campus. That girl I saw the other day, what's her name? That's a pretty big problem for an 18 -year -old. It's not a problem for a 40 -year -old, but it's big problem for an 18
He further shares a story of his portfolio company: HowBout, that has grown tremendously in the past couple of years.
Howbout is a social calendar. The reason the founder started the company was because once they left college and they got their first jobs, they couldn't find time to meet each other. And every time they tried to do this over group chat, was a pain in the ass. So they were like, screw this, there needs to be a better way. And like the screw this, there needs to be a better way. It tends to be the seed of the vast majority of consumer companies in some way
How should founders think about fundraising at the earliest stages of building a consumer app
Try not to reach out to VCs for your first raise unless you've worked for some big brand name unicorn or the VC has funded some company you worked for. If you're raising for consumer, it's probably not the right place to start.
The average European VC would respond with, no, the market is not big enough. No, you can never make money. No, I don't invest in consumer.
I'll caveat this by saying there's a subset of founders, (that) kind of have a reality distortion field even at that early stage and irrespective of whether the company is viable they can go raise money from VCs. But for the vast majority of founders, start with angels who have backed consumer products before you're probably gonna have more luck there at the earlier stages.
Frankly, that's not even a stage that I would invest in when you might have a concept you might have like a closed beta or something
Sameer shares his list of consumer tech VCs that invest at the earliest stages.
I ask him “You guys (SpeedInvest) look at consumer tech quite a bit, but are there any other firms that you think are interesting? They'd probably get it or at least give it an honest shot.”
On the specialist side, Creator Ventures are someone that comes to market.
There's Hugo Amselman Paris, who's created a fund called Intuition Capital. There's Sarah Drinkwater, who's doing Common Magic. Her theme is community -led products. There's other YouTube outfits that are spinning out their own funds as well, broadly speaking. There's Angel Invest Ventures in Germany. Kima Ventures in Paris. On the more generalist side, Concept Ventures in London. There's Supernode Global. That is a media -focused investment firm as well. True Global which is also consumer focused. Love Ventures has a consumer focus as well.
Usually it's funds on average that tend to have smaller check sizes. I've noticed like 500k and below. I've seen very very few that do a million plus.
But try and identify these angels and this is the long hard slog you're probably going to be doing a lot of crunch base and LinkedIn research to figure out who these people are. Look up previous funding and pick up names here and there and ask them for who else they think invest in this space. So that is the, I would say probably the hardest part of the fundraising journey, figuring out who your earliest angels are going to be
It's almost like the world is telling FU to consumer companies, right?
Yeah, for sure. For sure.
I'll put it this way, building a consumer product requires, I think, far more resilience than any other kind of product. So it's really a first test of resilience. Yes, I empathize with the founders there, but it's sort of the trial by fire you have to go through.
And somehow once you’ve crossed that first chasm and and you start to see a semblance of user activity is when you start preparing for the next stage
And then the next stage is, right, you've been able to scrape together a little bit of money. You've been able to create initial product. You've got what I call an initial sample size of user.
So for a consumer social network, could be like a meaningful sample size would be like a thousand active users. Consumer marketplace, it's 50 monthly transactions. You're at that stage where the underlying metrics start to make sense. And that's where an investor like me is most interested.
And the reason for that is when you're investing in a network of any sort, you're investing in behavior.
The code doesn't matter. Your technical chops don't matter.
And so what I'm trying to evaluate as an investor is the behavior that's at the stage where you actually have a real meaningful product. And so at that stage what I'm to evaluate is not growth. Growth does not move the needle. Revenue is meaningless, does not move the needle. Things like market sizing I am actively antagonistic against
For any network, the idea is as you get more users, the network gets more useful. And so people should behave in a way that it is more useful. And so what is the metric that would tell you if people are getting more utility for this part? So let's say you're looking at Snapchat in its early days. What are Snapchats used for? Sending people disappearing photos and messages. And so what would you look at? The number of photos or messages sent per user per day, because that was a daily
Is that going up as adoption increases? That's telling you there is a network component here as people are, as adoption is increasing, density is increasing, people think we're using it more. There's something there. If you see the other behavior, growth going up, number of active users, number of sent per user per day is going down. What's the takeaway there? Whatever, you might be quote unquote growing in a literal sense, but
in no meaningful sense of the product working. People aren't interacting with each other, therefore the product is not being used the way it should be used. And so that's really what I'm trying to look for. Like I gave you one example, but depending on each product and each interaction, the specific metric tends to be different.
Sameer is quick to share that at this stage (seed) “the vast majority of VCs in Europe are not looking at those. Most people are looking at growth. It does not matter. Like at series A, once you get to series A, seed plus yes growth starts to matter. Because at that point you've proved out the product works. Now you need to prove out enough people want this.
Challenges of having good consumer VCs in Europe
I ask him what’s the issue with VCs when it comes to evaluating consumer in Europe. Is it that we have more generalists + lack of deals and so don’t know what to be looking for or is it because they know, but just don’t care?
It's the first. There's very, very few VCs who have heard of what a search to fill is. There's a handful, and the ones who've seen it probably don't know exactly how to measure it, how to use it. If you look at the vast majority of what the average VC looks at, it's B2B SaaS product, and they go, OK, ARR is growing. But what indicates product market fit on a single player B2B SaaS product is not what indicates product market fit on a multiplayer consumer network. And I think that first principles thinking is something that is lacking on average in VC in general and Europe in consumer investing in Europe in particular.
It's not like the talent is not there. I wouldn't even say the products are not there. I've seen some solid consumer social products come out of Europe. It's just that the, I think the VC ecosystem has slightly lagged behind founders.
Sameer actually has a hot take on D2C startups. He asks, isn’t it more of a PE play?
I found the dynamic really funny because D2C is a difficult fit with venture. It is hard to fit into venture time scales. I'm not saying you can't build big D2C companies. We have seen big D2C companies but that does seem much more of a fit for private equity. Raising every 18 months for a D2C company is going to be hard.
And likewise if you put in this whole operational complexity that physical goods involve, maybe it gives you some degree of economy of scale in some narrow cases, but in more cases, it just creates operational overhead.
I will harp on with every single founder if you have structural defensibility as a pure software company that is like the most clear -cut venture case you can imagine
Which leads us to discuss a tricky topic: Should we bother starting consumer companies? There’s some good analysis by Forerunner Ventures in a recent report on Consumer vs Enterprise valuations.
I mean there's actually data about this. I forget who ran the study but it was something about a seed stage B2B SaaS company was much more likely to get to Series B but once you got to Series B a consumer company was far more likely to IPO than a B2B SaaS company and this is uniformly true across regions and it's just down to the fact that again the resilience it takes to build a consumer company by the time you've gotten to Series B.
And it’s your consumer tech company is more likely to be a global company from day 1 than your enterprise company which is often local (and hence have founders trying a way to get to SF)
depends on the product so it's a product like Spotify like of course that is a global product from day one it has the potential to go global so a product like how about had the potential to go global from day one but for example if you are a marketplace
…it depends on the product, but yeah, if it's software only, you're right. It's gonna be more likely global from day one.
As we reach the end of the episode, I discuss the rise of Indians in Europe (esp London, Amsterdam and Berlin).
Sameer deeply resonates with what I’ve been screaming at the top of my lungs for the last year. And gives a data point
…if I had to do, give you a rough estimate, probably about 20 to 25 % of the founders that I've spoken to across Europe within sort of my niche tend to be Indian diaspora. And if I look at the UK in particular, it's probably more like 33%. So like the numbers are quite large.
Note: If you’re an Indian operator in Europe thinking of starting up or an Indian founder in Europe - I’d love to chat (rk at svagat dot in) with you and learn of your journey.
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