Investing in the millennial revolution

Millennials are changing consumer behaviour. How can investors react, asks Daniel Dunkley for the BVCA Journal.

Unaffordable housing. Student debt. Depressed wages. Less generous pensions. Millennials, people born between 1981 and 1996, face a host of challenges compared to previous generations. While they have benefited from huge leaps in technology and access to information, millennials are yet to enjoy the financial prosperity bestowed on post-war Baby Boomers or the Generation X that followed.

While millennials may be known for smartphone addiction and expensive brunches, they represent a new wave of discerning consumer. Millennials have abandoned big brands and corporations in favour of authenticity and independent founder-owned businesses. Investment firms looking to back consumer-facing companies now have to contend with a new generation of ethically conscious and tech-savvy customers.

The world’s two billion millennials are expected to overtake baby boomers as the biggest demographic in the next few years, representing the largest voting bloc and consumer market in history. They are also approaching their peak spending years. Technological developments are set to transform the way millennials access goods and services, with venture capital and private equity firms financing much of this innovation.

Digital differences

How do millennials behave differently as consumers? Most millennial consumer activity centres around smartphones. According to a recent study from GlobalWebIndex (GWI), a total of 97% of internet users aged between 21 and 34 own a smartphone, and two-thirds of millennials count the smartphone as their main device and primary way of using the internet.

Businesses with a direct, app-led digital channel have prospered to become the big consumer success stories of recent years. While the likes of Uber and Airbnb have changed travel and leisure, hundreds of other companies are set to disrupt industries from financial services to healthcare. In the UK, for example, Open Banking has liberalised financial services, leading to the creation of fintech apps to help young consumers save, invest and manage their money.

According to GWI, millennials also spend more time analysing products, searching for peer-to-peer reviews and social media mentions. The GWI report found millennials are more likely to spread awareness about a product on social media or promote a product to enhance their online reputation. Consumer-facing companies are increasingly aware their brands will be used and reviewed online.

Aside from an emphasis on technology, millennials are also heavily focused on environmental and social ethics. A recent Deloitte study found that less than half of millennials believe businesses behave ethically. Dimple Agarwal, global organisation transformation and talent leader at Deloitte, said millennials tend to distrust big corporations: “Millennials are eager to see brands and consumer-facing businesses take steps to make a positive impact for society. They are aligning themselves to the brands that share their values. Whether that’s fair trade, carbon-neutral or animal-friendly accreditation, millennials value businesses that are transparent about their impact on society.”

Established consumer giants are waking up and shifting their marketing towards millennials. Unilever has acquired several brands targeted at the demographic, including cosmetics company Sundial Brands and ketchup maker Sir Kensington’s. Heineken recently purchased craft beer brand Beavertown to tap into millennials who have abandoned ‘big beer’ corporations.

Even gift cards have been swept up in the millennial revolution. Taymoor Atighetchi is founder of Papier, a popular app for personalised stationery. Papier offers a product that can’t be found in stores and delivers to customers within 24 hours. It is taking market share from established brick and mortar retailers. Atighetchi said millennials are often “time poor” and favour direct channels. He said younger customers “switch off if they think they are being sold to through traditional advertising”.

Atighetchi said millennials are more focused on appearance and design than older generations: “Our business combines product personalisation with leading design and quality. Millennials are a more design-conscious group than any before — they’re immersed every day in visual culture, primarily through apps such as Instagram.”

Atighetchi agreed that millennials were “more wary than ever” of “big nasty corporates”. He said: “They expect more from brands. For brands that get this right there’s a big prize; millennials are more likely to be brand-loyal and form habits. Millennials will often have set ‘go-to’ brands that serve their lifestyle.”

Papier is backed by Felix Capital, a venture capital firm specialising in technology-driven, consumer-facing companies. The firm invests in businesses that disrupt consumer sectors. It targets companies that resonate online and have a strong social media presence. Felix’s investments include Goop, the lifestyle brand created by Hollywood star Gwyneth Paltrow, and Peloton, an on-demand online fitness service. Other portfolio investments include Farfetch, the online fashion boutique touted for a US$6 billion IPO, and allPlants, a vegan food delivery company favoured by ethically conscious millennials.

Frederic Court, founder and managing partner of Felix, believes venture capital will be at the forefront of financing millennial consumer brands: “We see an opportunity for new brands to capture people’s imagination and larger parts of their disposable income, and grow organically into successful businesses. We try to identify and partner with the best founders, building brands that have the potential to change people’s lives and be iconic for that generation. These are people who are reinventing our lives, particularly through mobile phones.

Passion for authenticity

Court believes millennials value “authenticity” above all else: “That is something many established businesses have lost because the founders have moved on and they lose their soul. What is great about many of the companies that we work with is they have founders at the helm, and they have conviction and visions. They start as passion projects.”

Court agrees that socially conscious issues are front of mind for the younger generation: “There’s a need for brands that stand for something; celebrating gender equality or respecting the environment. Consumers don’t want to buy something that doesn’t stand for anything. This generation is fighting for freedom, and they want to consume accordingly. It is very important to that generation and very important for us.”

Venture capital firms will play a key role in helping millennial-focused businesses expand. Court said founder-owned companies often needed capital but did not want to cede control. He said it was important for investors to partner with founders that have a passion for their business: “We love to see an alignment between an opportunity to create a return and having a positive impact on the world. These are the founders we try to build.”

What lessons can large private equity firms learn from millennial consumer behaviour? Court believes they need to ensure portfolio companies are not disrupted by nimbler tech entrants: “A company backed by private equity might be disrupted by a start-up. Suddenly, a company can come from nowhere and have a huge impact on their business. Private equity firms need to make sure their businesses have defensibility against emerging start-ups,” he said.

Court believes the march of the millennial consumer will continue to influence investment decisions in the years to come: “It is an interesting time to be an investor, and we are only at the beginning of this transformation.”

The British Private Equity & Venture Capital Association represents over 750 member firms, including more than 400 investment funds and institutional investors