The bottom 90% of consumers. I’m incredibly excited by companies…
By: Yacine Ghalim
Tags: Startup, Consumer, Venture Capital

We’re biased towards building & funding companies that address needs we can personally relate to…

Founders typically start a company because they have exceptional consumer insights in a given category. In most cases, they solve a problem that they personally experienced before. They build the solution they wished was there for them at the time. It’s highly rational and, in my opinion, also usually leads to better outcomes. The same goes for investors. As a VC, it’s always much easier to relate to products and services that you, or the people immediately around you, would actually use in real life. Like everyone else, investors also suffer from availability bias, meaning that we tend to overweight information directly available to us. In this case, we overweight the needs we have directly experienced as consumers. Now, let’s face it: the vast majority of founders, and virtually all investors, belong to the “urban top 10%”. And I think that this largely explains why the vast majority of VC-backed consumer startups end up addressing “urban top 10% needs”.

… besides, the “top 10%” is also fundamentally a great segment

Our biases are not the only reason why we build and fund companies aimed at the “top 10%” of consumers. It’s also a great segment of the market. It’s large — in France, the “top 10%’ of consumers account for 32% of national income (37% in Europe). I couldn’t find comparable data on their share of total consumer spending, but I would estimate it around 30% (the “top 10%” usually also save and invest more). It’s also profitable — willingness to pay tends to be higher, price elasticity lower, and margins significantly better. Because they have more disposable income, these consumers also tend to be more able and willing to try new stuff (hence easier to initially acquire organically). This makes it a more forgiving segment to start in as a young company with little resources and without economies of scale. This is particularly relevant in capital intensive industries. Lastly, it’s also an aspirational segment and a great place to start a strong consumer brand. There’s a reason why Tesla started with the Roadster and the Model S before launching the Model 3.

…but the “bottom 90%” is a 2.3x bigger market which has seen significantly less recent innovation

In France & most of Western Europe, the “bottom 90%” account for c. 70% of national income and consumer spending

Here’s what I find most interesting: if the “top 10%” accounts for c. 30% of consumer spending in Western Europe, then it means that the “bottom 90%” account for a staggering 70% of it. It also feels like the lives of those consumers have been much less transformed by Technology than that of their wealthier peers in recent years. There seems to be more room for meaningful improvement. And yet, we don’t seem to be paying enough attention to the opportunity.

History is full of companies who became massively successful by broadening access to entire categories of goods and services. Southwest Airlines, EasyJet, Ryanair or Airbnb allowed tens of millions of consumers to travel much more frequently than previously possible. H&M and Zara allowed just as many of them to buy fashionable, yet affordable clothes (unfortunately sometimes at the expense of workers abroad, but that’s another topic). IKEA did the same thing with furniture. Costco, Walmart or Aldi did it with groceries and basic necessities, freeing up disposable income. With their affordable “all-you-can-eat” models and free tiers, Netflix and Spotify made media entertainment a lot more accessible to the broader population. Affordability was also a key part of the Dollar Shave Club and Warby Parker stories.