February 21, 2024

Forerunner Ventures sees a future full of ‘digitally native franchises’

Prior joint ventures he first made his name in the venture world by betting on one-off startups like Jet, Bonobos and Glossier when it was much easier to build a digital native brand. But as commerce develops, so does the firm.

As part of its ongoing evolution, Forerunner five years ago brought on board veteran VC Brian O’Malley to tackle startups at the intersection of commerce and enterprise technology; To find out what’s interesting to him right now, we recently visited Forerunner’s office in San Francisco’s Presidio National Park (where a growing number of enterprise firms) to request.

Our conversation was wide-ranging, but unexpectedly, O’Malley seemed to be the most excited about old-fashioned service affairs. Think travel agencies, therapists’ offices, even plumbing companies – all sleepy but huge categories,” said O’Malley. In fact, sitting in a modern glass-lined conference room, he highlighted a start-up he had just discovered within the HVAC space. “A lot of these local businesses are doing $10 million, $20 million, with 20% to 30% profit margins,” he enthused.

The big question, naturally, is whether they are suddenly venture-financed businesses. O’Malley explained why he thinks they are structured the right way and with the help of recent AI advances. Excerpts from that conversation follow, lightly edited for length and clarity.

TechCrunch: The consumer is a tough place to invest these days. Where do you see opportunities to invest Precursor current fund?

Brian O’Malley: I have been spending a lot of time on a concept labeled ‘digitally native franchising’. It stems from looking at many market businesses in the category of trying to empower people to work for themselves. On the one hand, you can work for one of these gig companies and you kind of have everything at your fingertips, but at the end of the day, you don’t really have much control. You are really beholden to the scene and they are getting most of the cut and you are just completely commoditized.

On the other hand, you can buy a small business [software] and running your own company, but then you’re mostly on your own. There is no playbook. You have to find your own customers. You need to teach yourself business. So we started thinking: How can you be prescriptive with a playbook and technology platform that also enables people [foster] what they bring to the table as a business owner.

Like real estate franchises.

But it’s not just Coldwell Banker or Taco Bell or 1-800-GOT-JUNK; there are a million businesses that make a trillion dollars in revenue. I didn’t know much about franchises historically, but one in 20 people in the US is employed by a franchise. Say you are going to open a Taco Bell. You are going to benefit from the corporate brand. They’re going to give you the menu, they’re going to give you all the ingredients – you just need to get the physical real estate and hire the people and grow from there. But now there can be much more of a digital hinterland.

What is a related bet?

So one of the early investments we’ve made is in here During, which helps people build their own travel agency businesses and helps standardize the workflow and takes care of the payment options. With these types of businesses, you can also handle digital marketing because you as a centralized entity can probably do it better than some local businesses. Often, you can build a community around all the people who are doing this and they can help each other.

Why does this concept of a digitally native franchise make more sense now than, say, five years ago?

The two big things that are different today is one, this lack of available capital, so you want to be more efficient. Also, it’s early days but AI is this growing trend and you can leverage AI in a way where it’s still human at first but a lot of the more tedious tasks can be automated.

I keep wondering if in 10 years there will be three companies or if everyone will be running their own company thanks to AI, although either scenario looks problematic for VCs.

You have to help build the platform to enable all these people to do their own thing. It is our belief that the AI ​​components can help more of these service businesses that have historically been perhaps lower gross margin and required a fair amount of individual expertise and can now be handled by a wider set of people for more software-level gross margins because of the AI. they can control some of the more standardized components of it, and people can put their own spin on what’s unique and special about what they bring to the table.

AI is getting better all the time. Is there any concern that these operators may not need a platform partner at some point?

[With every company we fund] there’s some level of platform advantage that keeps the company sticky so people don’t quit and do different things. a company, Almais in the therapist space and fits into this model because they’ve done a lot of work behind the scenes with insurance companies to help people get their therapy covered by insurance, which is really important for therapists because people are ultimately stickier if they have a lower net cost.

There are many of these offline service businesses that still rely on checkbooks and pen and paper and have not taken advantage of many of the tools that have been created but still have successful businesses. We think this model can be a way where you’re helping them continue doing what they’ve always wanted to do, but you’re also helping new people enter the category.

Many of these businesses are owned by boomers, and about a third of them are expected to return in the next 10 years. We see an opportunity to enable the next generation of local entrepreneurs, where people want to work for themselves, have the drive and determination, but don’t necessarily know what to do.

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