‘Enduring brands take time to build’
This line comes up in our meetings with every consumer founder and it evokes a range of responses from ‘That’s the first time I heard a VC talk about patient business building’ to ‘Are you out of your mind? How do you make your returns work!’
For our debut blog post, we chose a topic we care about deeply: Building Brands and Businesses Sustainably. It is particularly relevant as India is minting a record number of unicorns, and businesses are blitz scaling and raising incredible amounts of capital. DSGCP was founded in 2012 because of our belief that founders don’t have to be constrained by pursuing the blitz scaling trajectory. Building businesses in a capital-efficient manner is a viable alternative.
We believe consumer brands need a different approach. Our philosophy in a nutshell:
‘A consumer brand will take longer than a tech business to achieve similar scale. However, if the consumer brand consumes a fraction of the capital as compared to the tech business, the returns are similar. And most importantly, the consumer brand avoids the high-risk approach of pursuing a ‘billion or bust’ trajectory.’
There are two pillars on which our investment strategy rests.
Pillar one: Patience.
A calibrated approach to growth will go a long way in building a brand sustainably. There is no point in chasing growth for growth’s sake and overcapitalizing brands in pursuit of exponential growth. We do not obsess about achieving unicorn outcomes in defined time frames. Many consumer brands will see founders exiting businesses in the sub US$300 million enterprise value at the time of exit. As a fund, we are extremely comfortable underwriting such outcomes and working with the founders to build the business sustainably in a more predictable manner.
A key learning highlighted in this post has been that founders should pay attention to the typical distribution of exit outcomes. Building the business brick by brick in a measured manner will help improve the predictability of outcomes dramatically. It is also important to note that building a business sustainably and achieving a unicorn outcome are not mutually exclusive. One can achieve both. It could just mean that it might take longer to get there.
Pillar two: Focus on brand and business fundamentals.
Focus on fundamentals helps improve predictability of the outcome dramatically. We pay close attention to fundamental business and brand metrics. In the context of business fundamentals, ‘Quality of Revenues’ always trumps ‘Absolute Revenues’. Parameters such as ‘Gross Margins’, ‘Return on Ad spend’, ‘Retention Cohorts’, ‘Store Throughput’, and ‘Capital Efficiency’ are extremely important in determining the quality of revenues. When it comes to brand fundamentals, we are focused on building businesses with a sharp brand proposition and high NPS scores. In most of our portfolio companies, the brand is the most valuable asset that is being created in the business.
The WHY behind our approach to building brands sustainably, and what gives us the confidence in it is best summarized by these 3 characteristics of consumer brands:
1. Consumer brands do not have a winner take all outcomes
There is always an opportunity to differentiate and dominate a sub-segment of the market. There are limitless possibilities on how a brand could carve out a niche for itself. For example, in personal care, there’s a chance to dominate a niche for senior citizens or new mothers (like Moms Co). In hair care, there’s a need gap for an offering for curly hair (like Arata). Similarly in diapers, SuperBottoms serves the market of eco-conscious parents who prefer cloth.
2. Consumer brands have a product/service with positive gross margin on Day 1
Sustainable businesses are built through prudent planning and management of cost structures and working capital. One metric we pay close attention to is ‘Capital Efficiency’. There’s a lot to be said about capital efficiency and it warrants a post of its own! In this context, however, capital efficiency is our interpretation of the RoCE (Return on Capital Employed) metric that late-stage and public market investors use.
We compute it as:
Current Revenues/Cumulative Capital Consumed
A good benchmark for capital efficiency is above 2x. To illustrate: if a business has consumed US$2 million so far, the revenues should be US$4 million. A simple & powerful metric that we use for planning and monitoring in our portfolio. It is a great early indicator of the feasibility of sustainable business building.
3. Consumer brands are more insulated from the tech obsolescence cycles.
Hence it’s not necessary to pursue exponential growth to scale rapidly. This is an area of focus and necessity in tech businesses with shorter disruption cycles since founders usually like to scale up rapidly before the next disruption.
Our philosophy of fundamentals-first brand building makes the work we do with our founders extremely fulfilling. To preserve this, we have a few ‘North Star’ principles that guide us:
1. We do our best to make every investment count.
Our belief is that we can drive every brand to a meaningful outcome for our founders. We do not have any compulsions to blitz scale or encourage founders to pursue a risky growth trajectory. In fact, being best aligned with our founders is a priority given that they are our primary customers. Our big outcomes may not be as outsized as that of a tech fund. However, we would have a longer distribution of great outcomes for the founders and the fund. This is how we make the returns work — having as many number of great outcomes as we can.
2. A win-win mindset and not falling into the trap of the zero-sum mindset.
As consumer brands are not winner-take-all outcomes, our founders do not have the compulsions of having a zero-sum mindset and obsessing about competition. We do not have to win by killing a competitor. This helps our founders develop an internal locus of control and build a differentiated brand. We have this mindset in our partnerships with founders, co-investors, and LPs.
3. Partnering with fantastic people and build amazing relationships.
‘Relationships are as important as returns’ is a core tenet at DSGCP. We back people. We work with people we like and trust. And this is important because these relationships compound. Looking back, the wonderful community of our founders, fellow investors, limited partners, and portfolio teams is what has made it all worth it.
4. Building brands that make a positive difference to the customers and the planet.
The best part about how we invest at DSGCP, is that most often we are, or will become, customers of the brands we partner with. We experience firsthand the benefits of the hard work put in by our founders and the portfolio teams! And this deepens our appreciation for the difference it makes to customers as well as the environment.
Our approach was extremely contrarian when we began in 2012. We were the first, and only, seed-stage consumer-focused fund. LPs and other stakeholders asked us if we would be able to find brands for our pipeline. From that first fund, we backed some brands that have become leaders in their category including Veeba, OYO, mSwipe, Eazydiner, GOQii, Chaipoint, Redmart, and Chope. Fast forward 9 years, the ecosystem is thriving and there has never been a better time to be a consumer founder/consumer investor! In the last 9 years, we have seen the journeys of offline-first brands and the DTC brands. We are channel-agnostic and invest in both offline-first and DTC insurgent brands. In the upcoming posts, we will delve deeper into how we put our philosophy and passion into practice as well as our learnings from our journey!