Funding loss-making startups at expense of poor unit economics is a recipe for disaster

While startups are tapping on the pool of venture capital, seed funding and angel investors are quickly becoming the backbone of the Direct-to-Consumer (D2C) segment in India. Abhishek Goenka, founder and CEO, RPSG Capital Ventures, in an exclusive interview with Bizz Buzz talks about the potential the newly emerging segment holds, and the do's and don't of funding a risky startup

To mitigate investment risks we do solid background checks on the founders that we are backing. We have a very strong view on the sector and the product, we do a lot of analysis in respect to the companies, the financial, all the legal requirements. Most important in terms of consumer brands, is we try to assess the power of the consumer brand in the eyes of the customer and in general

From a company's perspective, I feel, the overall friction in actually starting a business has gone down substantially. The booming of venture capital in India has brought down the cost of running a business. The time taken for clearance and approvals of business project has also gone down. Entrepreneurs did not have this kind of funding maybe a decade or two ago

What is the revenue generation model of your company?

We are a category-1 Alternate Investment Fund (AIF). So, it is structured like any other fund seed company in the market. The only difference is that there is currently only one limited partner (LP) which is the RPSG group companies. And for us, the business is essentially investing in consumer startups.

And which are these new startups that you are funding?

We are not focusing on a particular segment or industry. The mandate is to invest in consumer brands and largely digital first consumer brands. If you see our portfolio, we have 12 odd companies. Three of them are on the personal care side, one on the apparel, five on food and beverage, one on nutraceuticals, and one more which we are closing up in the next couple of weeks. We pick across consumer brands, but wellness, clean label, plant based sustainability are some of the key themes that we are quite keen about.

You are also focusing on the D2C model. How many such D2C companies are you funding at present?

This fund itself is actually a digital first focused fund. So, if you see 100 per cent of our portfolio revenue is actually from online channels. And this is not only in the last one year, but since we started operating in 2018. This is the only genre that we invested in. So, 100 per cent of our revenue is from online channels and within that a large portion is from D2C.

What is the share percentage in a startup company that you invest in?

It is anywhere between 10 to 20 per cent (of their income).

What has been the investment trend of your company, since 2020 onwards?

Let me divide this answer into two parts. What we have seen over the last two years is a shift in consumer preference. There have been two driving forces. Of course, the pandemic has had an overall bearing on digital adoption. If I can say, 3-4 years down the line, where the market was 98 per cent offline and 2 per cent online. Post the pandemic, for the consumer category, the number of this 2 per cent online has ballooned up, now standing at 5-6 per cent.

The second point is the emergence of online first brands. Typically in any venture capital (VC) or private equity (PE), there are segments which typically go for certain mind-set shifts. This is where the segments or certain categories become quite attractive from an investment perspective. For almost 7 years, financial services, FinTech was the flavour of the season. But in the last 3-4 years, in addition to the pandemic period, I think consumer brands in general have gotten a lot of attention.

How many new companies have you funded since 2020?

Since 2020, we have funded about 6 new companies. In total we would have invested in about 10-12 odd companies, also counting the reinvestment in some of the firms. So, in 2021, we have reinvested in 6 companies.

So, what is the investment capital that you offer a company?

For both first time investment and reinvestment, we give a capital of $1-2 million.

Every business segment comes with its own set of risks. What kind of risk mitigation do you take into account while onboarding the companies?

If you see our backgrounds, we are from the private equity (PE) industry where our mindset has always been that we research and underwrite each and every deal. There are multiple aspects that we look at, we do solid background checks on the founders that we are backing. We have a very strong view on the sector and the product, we do a lot of analysis in respect to the companies, the financial, all the legal requirements. Most important in terms of consumer brands, is we try to assess the power of the consumer brand in the eyes of the customer and in general.

How many companies do you reject for capital investment?

If we look at 100 companies then we invest in one of them.

Any new industry category that you might be interested investing in?

There are a lot of interesting things which are coming up from a daily lifestyle perspective, such as oral care. We are seeing a lot of interesting products from the food side, pet care, and entertainment.

What are your thoughts on venture capital booming in India?

There are two reasons behind this boom. One is that private investments have only started getting traction and interest whether from institutional funds or High Net-worth Individuals (HNI) in general over the last few years. For everyone, this is a great source of diversification. I'm saying this from an investment stand-point. If I take out just the private investment part of it essentially the options available are either public markets that could be real estate, international equity. Logically it makes a lot of sense to have private investments in anyone's portfolio. And with the advent of the entire startup ecosystem, over the last decade or so, people have now become comfortable with the asset class.

From a company's perspective, I feel, the overall friction in actually starting a business of your own has gone down substantially. The tools that are available, a founder to start his own business, the ecosystem which is there, what it has done is brought down the cost of running a business very low, the time taken for clearance and approvals have gone down. Entrepreneurs did not have this kind of funding maybe a decade or two ago. That's why they feel when they get access to seed funding, they also get access to advice as well.

What advice would you give to founders and entrepreneurs, to minimize their risk or losses?

Lot of times people get swayed by growth stories, but I think it is important if you are true to the brand you are investing in, to back the objective of the company. Also do not lose sight of the financial fundamentals. If you keep funding losses in your company, just at the expense of poor unit economics, it's a recipe for disaster. Maybe one out of 10 might make it, because of luck, but the other 9 would fail.

What is the market value of RPSG as of 2021? Have you set aside a target for company value growth for the coming year?

I won't be able to give a market value (of the company). But what I can say is today the cumulative revenue for our entire portfolio is close to $100 million. My sense is that next year this is going to be double of this.