Dollar Shave Club, a personal grooming products company, Stance, a luxury socks manufacturing firm, and The Honest Company, a consumer products company, are some of the businesses that have raised millions of dollars from venture capitalists (VCs).
For many years, VCs have been backing tech companies with world-changing ideas. Therefore many questions are being asked as to why Silicon Valley venture capital companies are now injecting millions of dollars into ordinary companies with very little tech prowess. As a matter of fact, these companies only have well-designed websites accompanied by a professional and aggressive social media team.
However, such questions were not asked half a century ago when Wall Street investors recognized innovations from various research universities and California-based commercial labs. At the time, venture capitalists strongly believed in those crazy ideas, and took huge risks by investing and nurturing those small companies. In addition, they were also willing to explore investments with little tech aptitude.
For example, when Draper, Gaither & Anderson, one of the pioneering venture capital companies, was established in 1958, some of its first investments were glaucoma drugs and cushioned playground surfaces. Kleiner Perkins Caufield & Byers (KPCB), a Silicon Valley venture capital firm, also made investments in a sneaker-resoling company. They also made a merger between a snowmobile and motorcycle (commonly referred to as Snow-job).
These companies took time to build their reputations. They had to find out the business models that worked best for them; business models which have become more and more dependent on technological advancements as the years progressed.
Companies like Amazon and Webvan played a significant role in introducing online shopping to the world. These companies motivated entrepreneurs to develop digital options to replace retail.
Most of the new consumer startups do not heavily lean on complex algorithms, like Amazon did, to drive sales or manage inventory. These businesses purchase third-party software which they use for building an e-commerce site. They, then, use brilliant marketing strategies to make their brands unique and outstanding.
Considering the success of such business models, technology no longer defines innovation, but it merely enables it. This means that you can transform an industry without having to invent a technology.
An example is the Dollar Shave Club’s razors, which have nothing innovative to offer their clients. However, the company has significantly disrupted the razor industry forcing Gillette, its major competitor, to launch an analogous online subscription service. The latter has also filed a patent legal action against the startup.
The Honest Company has also benefited from the profuse media coverage of actress Jessica Alba (its co-founder) in addition to proficient marketing strategies.
Online businesses are able to deliver their products nationwide without incurring the costs and risks of opening physical stores. Online subscription models also enable the companies to understand the purchasing behavior of their customers via customized analytic tools, such as software.
It seems venture capital firms are not aiming at taking huge risks in big companies in order for them to make a global change. Instead, they are opting to invest in smaller companies whose market value will continue to rise.