Where is the Venture Capital for Consumer Products?

The use of tangible consumer products constitutes a large portion of the economy.  Some of the largest companies in the world - from P&G to Wal-Mart - are engaged in the manufacture and sale of physical, consumer-oriented products.  Clearly, there is money to be made in consumer products - even in the information age.  So, why isn't there any venture capital that specifically targets consumer product ventures?

Sure, there are later-stage private equity firms that acquire and consolidate established consumer product and service companies.  I'm talking about institutional capital that will help guide and fuel the growth of young companies.

The standard answer to my question relates to the scalability of consumer product companies.  It's just harder (and possibly more expensive) to grow a consumer products company fast.  That's important to a VC for a number of reasons, including the following:

• VC's are motivated to maximize the internal rate of return on their investments, which places a premium on reducing the time to exit.
  
• The clockspeed of the consumer product industry is becoming faster, which means that the average lifecycle of a product is becoming shorter.
  
• Consumer products are marked by winner-takes-most dynamics and, consequently, wild uncertainty.

So, how fast must a company be able to grow in order to warrant a venture capital investment?  Given the unabated demand for innovative products, what are the alternatives to venture capital?

Answers are of more than academic interest to my colleagues and me at EIP.  To help myself think through some of the possibilities, I engaged in a thought experiment this weekend that resulted in my constructing  a dialog on scalability (Flash) among a fictional VC, the chief marketing officer of "NewCo," and the company's chief operating officer.  I found it worthwhile, and I hope you might, too.

Although outsourcing and other business network techniques can be used to enhance the scalability of consumer product companies, I suspect that we'll see the emergence of an adapted form of venture capital in this sector.  Furthermore, I suspect that the adaptation will look less like the information technology-driven variant found in Silicon Valley and will look more like the symbiotic relationship among biotech firms and big pharma.  In other words, new consumer products will be identified, developed, and market tested by very small firms with the specific intent of licensing or selling the underlying intellectual property (IP) to established players that already have built capacity.  Very small firms are better suited for exploring highly ambiguous territory, and larger companies are well-suited for scaling an individual product by leveraging existing manufacturing and marketing capacities.

Furthermore, I wouldn't be surprised if the relationships among the players in this innovation ecosystem are relatively close-knit.  On average, I suspect that the effective IP protection afforded a consumer product is somewhat less than the IP barriers that can be erected by a biotech company, for instance.  Although we tend to think of technology industries as being fast moving, the real speed champions are found in the consumer sector: the expected life of a novel or movie is measured in weeks.  Although those are extreme examples, the lifecycle of a tangible consumer product is rarely more than a few years.  Consequently, I expect to see more co-development agreements between Bigcos and NewCos in which the former provides money and technical expertise in exchange for some kind of option, and the latter provides domain expertise, focus, and risk mitigation.

Already, the consumer product world tends to be split between the very large and the very small.  Uncertainty makes the landscape dangerous for the very large (e.g. watch GM disappear before your very eyes), and physical realities and accelerating clockspeed conspire to make it very difficult for small companies to grow into big companies without becoming casualties of their own success.  It would seem that the very big and the very small need each other to survive and thrive.