The venture capital surge and crash of the early 2020s devastated consumer-focused startups. Scarred by losses, many investors pivoted toward enterprise-focused companies offering dependable contract revenue—and over the past two years, those better positioned to capitalize on artificial intelligence’s windfall.
Yet a contingent of VCs believes AI will revolutionize consumer startups as well.
“It’s always darkest before the light and the pendulum for consumers is now swinging back, due to AI,” Nicole Quinn, a consumer-oriented investor at Lightspeed Venture Partners, declared in a January post on X.
Contrarian Bets on Consumer’s Comeback
The most optimistic investors are aggressively backing consumer companies to “buy the dip” while others retreat. Mercedes Bent left her position at Lightspeed Venture Partners this year to launch Premise Venture Partners alongside former New Enterprise Associates partner Vanessa Larco, focusing exclusively on consumer investments.
“Everyone’s abandoning consumer investing at precisely the wrong moment. It’s textbook loss aversion,” Bent told Business Insider. She views their exodus as her opportunity.
Beyond Premise, several consumer-dedicated funds have emerged recently: Hobart Ventures (created by former Raya and Dispo executive TJ Taylor) and Parable (founded by ex-A16z partner Anne Lee Skates) both launched within the past year. Established firms like Menlo Ventures, Maveron Ventures, and Bessemer Venture Partners continue supporting the category despite headwinds.
Those headwinds remain formidable.
Silicon Valley Bank data shows VC funds targeting consumer as a primary focus closed approximately $9 billion in 2024—a seven-year nadir, down from $65 billion in 2021. Consumer startups on Carta’s platform raised 47% less capital in 2025’s first quarter. Carta’s June analysis suggests the sector is stabilizing at a “new normal” funding level significantly below the 2019-2022 period.
Consumer startups also face spectacular flame-out risks after brief moments of hype. Consider Clubhouse, the 2021 social networking sensation that secured over $100 million in funding and a $4 billion valuation before fading when platforms like Twitter (now X) launched competing features. Other consumer ventures, such as TikTok competitor Flip, have shut down entirely.
Despite these challenges, investors at major firms like Andreessen Horowitz increasingly believe AI could unlock novel consumer business models enabling extraordinary growth trajectories.
“This shift allows consumer companies to scale in ways that were once impossible — and to become big businesses (on a revenue basis) in months, not decades,” wrote Olivia Moore, an A16z partner specializing in AI investments, in a September blog post.
The Monetization Puzzle
Skepticism persists about how consumer tech startups can generate profits while Big Tech giants dominate.
Brian Sugar, PopSugar media brand co-founder and Sugar Capital founding partner, doubts the industry has solved the monetization and distribution challenges created by the previous consumer tech wave.
“If you create a genuine consumer phenomenon like ChatGPT, which represents something truly novel, you can achieve that level of adoption,” Sugar told Business Insider. “But I don’t believe AI suddenly resolves what’s transpired in the consumer technology landscape.”
Blockbuster AI applications have captured public imagination—from OpenAI’s ChatGPT to Anthropic’s Claude—yet many of these companies apparently derive more revenue from business clients than individual subscriber fees. According to Menlo Ventures, only about 3% of consumers pay for premium AI services.
However, investors backing consumer tech are wagering that large language models will trigger the same behavioral and monetization shifts that the iPhone sparked in the late 2000s.
If search activity migrates from Google to ChatGPT, consumer tech companies may need to optimize for OpenAI’s algorithms rather than Google’s.
“Currently, I’m advising all my portfolio companies to establish distribution through ChatGPT, Claude, and Perplexity. These platforms haven’t optimized for monetization yet—they haven’t started extracting profit from the distribution they’re generating. But they will, probably within five years,” Bent explained. “If you can’t control distribution yourself, minimize customer acquisition costs by identifying and optimizing for emerging platforms.”
Subscription models have gained consumer acceptance. According to Forrester, half of online Americans maintain at least four paid monthly subscriptions. Consumer AI startups are adopting monthly charges for more predictable revenue streams. Some implement usage-based pricing, with elevated costs or options to purchase additional “credits” for power users.
For example, Rosebud, an AI journaling application backed by Bessemer Venture Partners, offers free basic features but charges $13 monthly for advanced AI capabilities like long-term memory or voice transcription. Krea, an image and video generator supported by A16z, offers plans ranging from $10 to $60 monthly based on task volume, with additional credit purchases available.
Natalie Dillon, a partner at consumer-exclusive firm Maveron, anticipates more consumer tech companies will diversify revenue streams to capitalize on new advertising opportunities that may emerge when OpenAI and competing LLM providers begin serving ads to free users.
“Currently, many businesses rely heavily on subscriptions because that model resonates with today’s consumers. Over time, I expect we’ll see more ad-supported startups, but that market infrastructure hasn’t been established yet,” she said.
Emerging Opportunities in Consumer AI
While capturing consumer attention grows increasingly difficult, startups may still attract interest—and investment—in specific niches. Consumer startups building AI assistants raised $1.3 billion from US-based VCs in 2024, according to Silicon Valley Bank.
Granola, an AI meeting note-taker, secured $43 million in May. Alta, an AI fashion assistant, announced an $11 million seed round in June.
Amy Wu Martin, a Menlo Ventures partner who led Alta’s seed investment, anticipates a “rich ecosystem of specialized consumer AI products” will emerge across healthcare, shopping, and entertainment “over the next couple of years.”
In gaming, startups like Northzone-backed Hidden Door, which launched in August, are creating interactive AI-powered fiction experiences. Whoop and Oura, both valued in the billions during recent fundraises, deploy AI to analyze health and wellness data from their wearable devices. Social networks and dating platforms are also integrating AI, securing early funding or acceptance into prestigious accelerators like A16z Speedrun—including dating startup Sitch.
“Every major enabling technology has spawned new social network dynamics,” observed Kent Bennett, a Bessemer Venture Partners partner.
Not every consumer startup requires AI, however. Sugar noted his portfolio’s top performer is Locket, a photo-sharing app that lets users exchange images with friends and family through phone home screen widgets. The non-AI app went viral on TikTok in early 2022 and has gained particular traction with preteen users.
Each generation typically remains loyal to the consumer platforms they adopted during formative years—Facebook for Gen X, Instagram for millennials, TikTok for Gen Z, Sugar explained. He believes Gen Alpha, the emerging consumer generation, represents an open opportunity for startups that can capture and retain their attention.
That proposition, while logical, carries substantial risk. Character AI illustrates these challenges. Despite securing a $2.7 billion licensing-and-acquihire arrangement with Google last year and attracting millions of young users to its AI-generated companions, the company faces criticism for insufficient safeguards, including a lawsuit alleging one of its chatbots contributed to a teenager’s suicide.
This month, the FTC initiated an investigation into companies like Character AI and their AI companions’ impact on children.
“The user-created characters on our site are intended for entertainment and we have prominent disclaimers in every chat to remind users that a character is not a real person and that everything a character says should be treated as fiction,” a Character AI spokesperson told BI. They added that the startup has invested “tremendous resources” in trust and safety measures.
Consumer’s Cyclical Nature
Dillon characterized consumer investing as cyclically fashionable: “We’re in a pattern that we’ve seen before.”
Consumer interest typically recedes during macroeconomic downturns, she explained. When new technological shifts arrive—currently, AI—enthusiasm resurges.
Meanwhile, Bennett believes some investors have overcompensated by completely abandoning consumer tech.
“Enough people suffered losses over the past decade investing in direct-to-consumer ventures that they may have concluded consumer is permanently broken,” he said. “There’s some hangover from that top-down lesson.”
Yet when startups succeed, the potential returns are massive.
“It’s extraordinarily difficult, but when you succeed, you instantly access trillion-dollar markets,” he said. “To win consumers over with your product, you simply need to deliver something that feels miraculous.”
