Venture capital and private equity investors have pumped in tens of millions of dollars in young firms, given their unique product strategy, innovation and marketing initiatives
After the funding boom in the e-commerce and fintech space in 2014 and 2015, investor interest in niche consumer brands, once a no-go zone for global funds, has revived. In the past couple of years, many consumer product startups, including yogurt maker Epigamia, organic juice brand Raw Pressery, and condiments and sauce maker Veeba, have attracted investors by the hordes with their niche product offerings aimed at the millennials.
Venture capital (VC) and private equity (PE) investors have, in fact, pumped in tens of millions of dollars in these young firms, given their unique product strategy, innovation and marketing initiatives, which have even challenged FMCG giants such as Marico and Unilever.
Since 2015, PE and VC investors have put in $613 million in food and beverage consumer brands, show data from Venture Intelligence, which tracks deals activity. Investors say rising demand for differentiated brands and improved access have created the opportunity for new brands to flourish.
“The consumer space is opening up with new brands and new entrepreneurs given the growing population and increasing demand for different brands. Fundamentals are all in favour of this becoming a separate class of investment thesis. There are special funds focused on the consumer space only," said Kanwaljit Singh, managing partner, Fireside Ventures.
According to Singh, access to consumers has become more democratized and is cutting through the mass market. “This is a fundamental shift in how consumers are consuming the brands." Fireside Ventures is an early-stage venture capital fund with a corpus of ₹ 340 crore, focused on consumer brands. The fund has invested in Yoga Bar, Samosa Singh, Goodness Beverages, Design Café, Bombay Shaving Co., Mama Earth, Vahdam Teas, Kwik 24, Magic Crate and Frog Bikes. “Strategic investors are ready to explore opportunities in this space. The PEs have always been active. Such companies are highly valued in public market. Exit for an investor is a real possibility," said Singh.
However, while the macros might indicate an opportunity in the consumer space, the sector presents its unique challenges to investors, as well as entrepreneurs. Achieving scale, cracking the distribution model and tackling changing consumer preferences and tastes, are only a few headwinds they have to deal with.
“A brand cannot grow very fast; it takes a lot of time to build it. Besides, once the niche brand is created, one has to go to retail shops to execute the distribution process, which is yet another task. Sometimes, VCs are worried about the lesser frequency of exponential growth because preferences for brands keep changing and innovation happens only till a certain level. Ultimately, growth becomes a challenge," said Ankit Agarwal, director, InnoVen Capital India Pvt. Ltd.
Nevertheless, start-ups have been enjoying the rapidly growing faith of investors. Drums Food International Pvt. Ltd, the maker of Epigamia Greek yogurt and Hokey Pokey ice cream, raised $13.8 million in its Series B round led by existing investors Belgium’s Verlinvest and early-stage investment firm DSG Consumer Partners last year. In March, organic juice brand Raw Pressery raised $9.5 million from Sequoia Capital, Saama Capital and DSG Consumer Partners.
However, consumer entrepreneurs say that venture capital investors, who are used to backing rapidly growing technology companies, need to adopt a cautious approach in the consumer space. Excessive investor exuberance could lead to not-so-great outcomes, they warn.
“Unlike technology, consumer companies take time to scale. There is no magic wand to create a consumer brand within a short span. Factories have to be built and the distribution network has to be in place, which ultimately takes time and is quite challenging. Making a consumer brand is a 10-step journey, which unfortunately, some of these tech investors do not realise. I fear some investors will keep pumping in money in consumer companies and will not see returns. This will bring down sentiments in the investor and consumer companies relationship," said Viraj Bahl, founder and managing director, Veeba Food Services Pvt. Ltd, which is backed by Verlinvest, DSG Consumer Partners, Saama Capital and Sixth Sense Ventures.
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