Going against the tide, investor Kanwaljit Singh puts his faith, and money, in consumer startups
At a time when the entire VC ecosystem seems to be focused on tech startups, Kanwaljit Singh took the contrarian approach and launched a fund just for consumer brands. For Kanwaljit, 54, this was an obvious decision.
He started his career at Hindustan Unilever as a marketer, and went on to work with brands like Intel and The Carlyle Group before co-founding venture capital firm Helion Venture Partners in 2005. Helion went on to fund multiple startups in the technology and consumer brands space, with Kanwaljit driving much of the investments in the latter. However, in 2014, when Helion was raising a new fund, the rest of the team wanted to focus only on tech. Kanwaljit wanted to pursue consumer startups, and that’s when he parted ways with the venture capital firm. He knew there was a lot more to the India consumer business story.
So when he left Helion in 2015, he decided to invest in consumer startups on his own full time, and in under two years, he invested in over 20 startups ranging from speciality tea brand Vahdam Teas, to yogurt brand Epigamia. At that time he did not have a fund in mind.
“I was very clear I wanted to invest in consumer brands but I didn’t have a thesis for investment as a fund. I wanted to see if there is a genuine space for a fund. It so happened that the momentum led to the fund,” says Kanwaljit.
In early 2017, Kanwaljit set about raising a fund. Fireside Ventures, Kanwaljit’s consumer brands focused fund, announced fund close of Rs 340 crore in March. By fund close, Fireside had already invested in 10 companies - the fund has since added two more companies to its portfolio. The portfolio is a mix of startups in various sub-segments of the consumer space like baby care brand Mamaearth, food venture Samosa Singh, and men’s grooming brand Bombay Shaving Company.
The premise is simple. India has a large population of young, professional and upwardly mobile individuals. While the ‘Indian middle class’ has become a catch all phrase, an article authored by NITI Aayog’s CEO, Amitabh Kant, and other executives puts the number of the middle-middle and upper middle-class Indians at around 158 million. This number is projected to grow to 350 million – which is a sizeable number. A Goldman Sachs report puts the workforce that falls in the Urban Middle class (with annual income of over $11,000) at 27 million. This is a small part of India’s overall population - a mere two percent - but for an emerging brand that becomes a big enough target group. The same Goldman Sachs report goes on to state that the best categories positioned for profit pool expansion are packaged snacks, baby products, premium personal care, and jewellery among others. These are some of the categories that Fireside is focused on.
Kanwaljit says it is all coming together for new consumer brands in India right now. Modern trade is seeing a revival - it is supposed to double in size in three years from 2017 to 2020. Ecommerce has taken off and young professionals are looking for high quality products that connect with them. YourStory had a detailed discussion with Kanwaljit on why he is so bullish on consumer startups. Edited excerpts:
On why the consumer opportunity now is exciting for first time entrepreneurs
Even over 20 years ago, when I was in Unilever, the opportunity and need for consumer brands was there. India as a country is short of exciting brands. The key players are either multi-nationals, large Indian corporate houses, or large Indian family groups, whose next-gen wants to start dabbling in consumer products. The entire evolution of brands in India has been primarily led by established players. To build a brand in India was a fairly expensive and time consuming exercise because it was dominated by mom and pop stores, and so distribution costs, ability to reach consumer, and marketing costs were high. The focus was mass market and so the brands were mass market. This meant you had to create large platforms, which only the large players could afford.
Also, mom and pop stores were still formatted like a countertop behind which there were shelves with the products. There was no way that a consumer could discover a product in a store. Only with the advent of supermarket formats could you walk into, touch and feel and browse, and actually discover a brand. Then the online world opened up.
The other piece is the emergence of the millennial consumer. They have more secure jobs and are surer of getting other jobs. They are willing to take those big bets, live on credit, and are willing to spend more.
The consumer profile has changed, the consumer access modalities have changed and product discovery and brand discovery has become easier. A virtuous cycle was getting created. This has seen first generation entrepreneurs emerging in this space. This convergence has been going on for a while and is now picking up escape velocity, that is making it look like suddenly consumer is hot. I won’t say this has suddenly become hot, it was always hot.
The market has a large consuming class, who are asking for more interesting, better quality and more aspirational products. There are now more efficient and less capital-intensive ways of reaching the consumer.
On the Fireside thesis
The whole thesis for us is we are not looking at mass market brands. That's still the domain of the big boys. The pyramid now is interesting. There is a bulge in the middle. A lot of the large players are seeing opportunity further down, which is an underserved, tougher, and larger market.
We are targeting the upper end. It is a different direction where we are going. Take Mamaearth (baby care brand in Fireside portfolio) as an example. They are targeting the modern millennial parent, who wants the best for the kid. The focus is on aspects which are all about safety, non-toxicity. They are going towards the top of the pyramid, while the large brands are seeing opportunity far deeper in the market and are looking at tier-III and beyond. These are parallel now.
Now it is not too difficult to build a brand as there are many white spaces. People are not fighting for the same share. The big value when you are building a brand is that you are creating new markets.
You can now follow different approaches to target the right audience. Yoga Bar (another fireside portfolio company) offers protein bars, so the target here is people who go to the gym, are into outdoors sports, pregnant women etc. Through digital and community-based activations, you can reach the target instead of it being a one-shoe fits all. You can use a community-based approach, use Instagram celebs - all of these are helping brands follow a different approach to get the initial loyal customer base. Once you get to a certain size and a core consumer base, the momentum allows you to start expanding.
On what a new-age brand should do today
This is unique to each brand, but the broad construct remains the same. Be very focused on who your target consumer is. First target the right consumer and then identify who that consumer is as deeply as you can. Once you have validated that there is a product market fit with that consumer then start looking for what's the best way to reach that consumer. Our channel, marketing, and engagement is defined by that.
For instance, we are starting to see a lot of acceptance for our Goodness smoothies in corporate campuses. We zeroed in on the consumer - the young working professional. The large tech campuses are one channel, but we also know that these professionals stay around these campuses. So we can target the retail environment around the campus instead of going to every modern trade outlet. You don't have to follow the conventional method. You need to follow what works for you.
Metro stations, gyms, hospitals, online mom communities are all becoming target groups. Now you can build relationships with the consumer through good content and engagement. This is possible due to the new (online) formats that have come up. You can’t do this with television and print. Now brand building is more about story telling. For instance, the Mamaearth website talks more about the founders than anything else. Every Vahdam Teas pack goes with a little letter from the CEO (Bala Sarda), where he talks about why he started the company and his tea heritage. It is almost like he is personalising each order.
On whether consumer startups take longer to give return on investment
These are highly exitable businesses. If I come in as a very early-stage investor, I can exit in three years with a 5x return. Some of the angel investments I did, I am sitting on stakes that I will get 5-10x returns today if I exit. However, the compounding of value as they call it happens once you cross that point. These companies after a while don’t need money to pay for cash burn, but for growth. As they grow bigger, their need for money gets lesser.
If I have a winning company in my portfolio, it is in my interest to stay invested longer because they are not going to raise hundreds of millions of dollars. What is my incentive to stay invested if my ownership keeps declining to the extent that it becomes meaningless. These companies have other options including debt and private equity (PE). PEs also look at secondaries, and so an early investor gets an exit option.
The timing of the exit is what’s important. I am an investor in Paper Boat. I have no interest in exiting the company at all. That is one extreme point of view. On the other hand, if I get a 5x return from one company in four to five years. I can also churn some of my portfolio. It takes long to build the brand but not that long to find exit opportunities. In our space, we believe and hopefully we will demonstrate it, there are very few absolute failures. Some might say you don’t have those 50x either, but to that I say we'll see. We are not dependent on that one company for a blockbuster exit.
On why other VCs don’t look at consumer startups
It will happen. It is an evolution. Some like DSG, Sama, Sequoia, and SAIF are investing in this space. Now, family offices like the Mariwala family, Munjal family, and Sanjeev Goenka Group are aggressively investing in this space. In this space, HNIs (high net-worth individuals), and angels are already active. There are few investors in the $1 million to $3 million slot. That’s where the family offices are starting to engage. In the over $ 5million to $10 million stage there are Pes, and beyond that many investors. It is in Series A and Series B stages that there is a dearth.
We look at up to Series A. Even in Series A, we prefer to start with a small cheque. The intuition here is you don't need big cheques to build a brand.
Ecosystem is the first challenge. Every company should not have to rediscover everything. How do you get best in-class product discovery, and best in-class packaging? How to use online channels, digital marketing etc. It all comes down to ecosystem. In terms of funding, investors, as I said, are few in the Series A and B stages. I spend a lot of time meeting and convincing people on working together on investments.
On online as a channel
Online and offline are not an either-or strategy for consumer brands anymore. You need both. It is also not a matter of where do you start and where do you end. There are companies that started completely offline and then leveraged online. There are companies which have been totally online and then went offline. Even internationally, percentage of people buying consumer goods online is still in single digits, and India is much lower.
You need physical distribution but it is also about timing, what role you see each of these channels playing, it is about your ability to strategise channel. Offline is still very large. Are you a general trade player or a modern trade player or a speciality store player; do you look at clusters of markets, will you go for the wholesaler-distributor model? This is where we can add significant value as we have been in this space and this is where the learning is deeply embedded. Online is new for everyone.
On whether ecommerce is solving the distribution challenge
Partly it has and partly it hasn’t. There are case studies emerging of people who have leveraged online successfully. Vahdam was born and built only on Amazon.com. They have few more channels now. But they have reached critical mass and reached certain escape velocity just on that one channel. So I will take that as a great example. There is a cosmetics brand Wow too built on online. People who have understood it have been better at it. What we are trying to do is can we understand it on behalf of existing and future portfolio companies. So that we can create some blueprints that can allow easier navigation. As an overall consumer brand industry, there is a lot more that can be leveraged on these online channels. The BigBaskets and Amazons certainly have a role to play (to increase adoption) in better educating and creating better learning environments for new brands to find it easier. The brand needs to have that mindset, and want to leverage this channel.