There are two main business model structures for startups: business to business (B2B) and business to consumer (B2C). Each structure can have distinct growth trajectories, risk profiles, and key performance indicators. In this blog, learn more about B2B and B2C companies, the differences in each model, operational differences, and the opportunities available to private market investors.

B2B vs B2C

The main difference between B2B vs B2C companies is the nature of the customer.

What is B2B?

B2B is a classic enterprise model where a startup sells its product or service directly to another business. The customer is typically a decision-making unit within a business, often involving multiple people which could include finance, engineering, or other teams. In a B2B model, product pricing can be adjusted based on the size of the business, the volume of the product/service the purchasing business needs, and other factors.

The following are some examples of what B2B products and services could look like:

Products: Office desks, chairs, or monitors, merchandise racks, medical equipment
Services: Customer relationship management (CRM) software, task management software, office cleaning services, point of sale (POS) systems

What is B2C?

B2C is another common business model where a company sells its products or services directly to individual end-users for their personal use. A customer is typically a single person, and the sales process is tailored to individual consumer behavior. Startups that use a B2C model often have more customers than a B2B company because they are selling directly to end users, not necessarily to one business that may have hundreds of end users.

The following are some examples of what B2C products and services could look like:

Products: Consumer packaged goods, clothing, electronics, home furnishings and decor
Services: Home cleaning services, petsitting, babysitting, tax preparation

Differences Between B2B and B2C

While the core difference between B2B and B2C companies is the customer purchasing the product or service, there are some additional differences in terms of sales process, revenue model, and investment thesis.

Decision-Making Process

For B2B companies, the decision-making process of choosing to purchase one product/service over another can be long, complex, and require discussions with multiple people in order for a decision to be made. For example, a B2B startup may need to talk to the HR team, executive team, and finance team in order to get the final decision to purchase an HR software. Alternatively, the decision-making process for B2C companies can be simpler, only having one decision-maker, the individual purchasing the item.

Sales Cycle

Like the decision-making process, the sales cycle on the company side for B2B companies is also typically longer, taking months or even years. B2B companies usually focus on lead nurturing and pipeline growth. However, the revenue from each sale is typically larger than revenue from B2C transactions, which can make the longer sales cycle an option.

Revenue Model

For B2B companies, the revenue model is typically based on longer-term contracts, whether recurring annual subscriptions, multi-year contracts, and some even have tiered pricing based on the number of end users and features. There is also usually a higher average revenue per user than for B2C companies. On the other hand, B2C companies are often one-time purchases, lower-priced subscriptions like streaming services, and rely on high volume.

Investing in B2B

There can be certain aspects of investing in B2B companies that appeal to private market investors. For example, recurring revenue models can create visibility into future cash flows. Metrics like annual recurring revenue (ARR) or monthly recurring revenue (MRR) can help investors track growth of B2B companies over time. Additionally, there are typically high switching costs of businesses switching tools. Once a workforce is trained on a specific tool into its workflows, such as switching to a different software, can be difficult and expensive. This may create a higher customer lifetime value for B2B companies.

Investing in B2C

On the other hand, investing in B2C companies could offer a different type of opportunity for private market investors. Some B2C companies might become household names, holding viral growth and attaining recognition. A clever marketing campaign can build a notable brand that earns customers loyalty for years if not decades. Product-market fit may also be validated quicker in B2C companies through larger quantities of sales data, app store ranking, social media engagement, or other sources.

Final Thoughts

Investors don’t have to make a decision between exclusively investing in B2B vs B2C companies, they can utilize a strategy that has both types of business models in their portfolios. B2B and B2C companies can play unique roles in an investor’s portfolio, each providing different benefits and investment opportunities.

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Want to learn more about investing in startups? Check out the following MicroVentures blogs to learn more:

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.

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