There are different structures for different strategies: Deepak Shahdadpuri

When we first started DSGCP, we agreed to be opportunistic and refine the strategy once we were in the market: Deepak Shahdadpuri

DSG Consumer Partners has backed businesses like Sula wines and OYO Rooms. After raising $50 million in the second fund, the consumer-focused venture capital firm focused is raising a $20-million annex fund to invest in firms that performed well in fund one. Managing partner Deepak Shahdadpuri shares the fund's philosophy and its performance that's helping it raise money. 
 

Can you tell us more about DSGCP Tyeb? You just closed your second fund at $50 million. Why another fund so soon? 
 

Let me share a timeline with you. We launched DSG Consumer Partners (DSGCP-I) in December 2012, raised $12.5 million and invested in 21 companies. In January 2014, we raised DSGCP Souza – a $10 million annex fund to only invest in DSGCP-I portfolio firms. DSGCP at $12.5 million was small; we did not have sufficient capital to continue backing our best companies as they scaled up.
 

In February 2016, we launched DSGCP-II with a $40 million target and $50 million hard caps. We closed the fund at $50 million with demand exceeding our hard cap and had to turn investors away. In June 2017, we launched DSGCP Tyeb, a $20-million annex fund again to only invest in DSGCP-I portfolio firms. DSGCP companies were doing very well and there was an opportunity to continue backing our best companies -- Mswipe, Veeba, Chope, Hostmaker, Eazydiner, Saraf -- that were raising Series C/D/E. 

As for timing, DSGCP Tyeb is not so soon. DSGCP-II was raised 3 years after DSGCP-I. As a fund manager, I interest to raise a new primary fund every 3 years. DSGCP-I was invested 2013-2015. DSGCP-II will invest 2016 to 2018. And I will raise DSGCP-III to invest from 2019-2021.

DSGCP Souza and DSGCP Tyeb are “annex funds”. These are not the main flagship fund. They only (stresses) invest in companies from the current portfolio that are growing, where we are already investors and where my LPs believe there continues to be very attractive opportunity.

I am a huge fan of modern Indian art. DSGCP Souza was a tribute to Francis Newton Souza. DSGCP Tyeb was a tribute to Tyeb Mehta.

Who are the anchor LPs for the second fund and DSGCP Tyeb? 
 

The investors in the $50m DSGCP-II include Verlinvest, Mousse Partners, ACPI and a number of family offices and FoFs (fund of funds). The investors in DSGCP Tyeb have asked not to be disclosed but comprise of existing DSGCP-II investors and new investors.

How has DSGCP-I done in terms of exits & returns? Did you have to write-off any investments?
 

DSGCP-I is performing well. We invested in 21 companies, have had two full exits (Zipdial & Redmart) and two partial exits (Veeba and Oyo). We raised a total of $12.5 million, have realized $11.1 million from the four exits and have distributed $6.3m to investors to date. So, RPI (realization to paid-in capital) is at 0.89 and DPI (distribution to paid-in capital) is at 0.50. We have written off three investments to date.

You have almost recovered the corpus of DSGCP-I & reinvesting. If this option is available, what was the need for DSGCP Tyeb?
 

When we first started DSGCP, we agreed to be opportunistic and refine the strategy once we were in the market, deploying capital and assessing the market. Based on what we have seen over the last 4 years, we believe that the ideal fund size for our strategy is $50 million which is what we raised for DSGCP-II. This will let us invest in about 20 companies over three years and back them from seed to Series-C/D. Since DSGCP-I was only $12.5 million, we have to raise 2 annex funds for that strategy. For DSGCP-II we will not need to do that. Please note that I insisted on no cross fund investing so DSGCP-II cannot invest its $50 million in any of the DSGCP-I companies.

Which companies have you invested in from DSGCP-II? Its early days yet, any exits on the horizon?

We have invested $16 million in 13 companies in DSGCP-II so far. It's very early days. No exits yet, and nothing on the immediate horizon.

You invest early. What do you look for in the investee firms in terms of the product, product-market fit, team, traction? 
 

It is almost always about backing amazing entrepreneurs who want to build a high-quality business. Its more EQ vs IQ, i.e., emotional quotient vs intellectual quotient. DSGCP does not invest. It partners. We work with founders to develop a great product, test the product market fit, improve the product and work with them over the long term to build the foundations of a scalable business. We focus only on consumer businesses and are one of the few funds that will invest in companies purely on a business plan and often before a business plan: we did this at Veeba, Mswipe, Eazydiner, Furtados, IndiaLends and others.

You had a lean structure as a fund, but have now added a team. Does this partly to address concerns on a largely one-man team?
 

As our business and portfolio scales, we required more resources. There is a team of four and we are now fully staffed for our current requirements. Our LPs understand our strategy and understand the structure including the one-man GP (general partner).

They haven’t expressed a concern otherwise they would not have invested. Those that had concerns, and there were many of them, in particular, traditional fund of funds did not invest and was very open about the reason. They did not like a one-man GP. Those that did invest, and remember I had demand for more than $50 million, understand the structure, why it is different and why it is the right structure for our strategy. In my opinion, there are different structures for different strategies and applying a generalized structure for all funds and strategies makes no sense.

In India, PEs lost money when they bought at peak values in 2007-08. Of late, exits have picked up. Are PEs mostly out of the woods with respect to vintage deals?
 

I really don’t know. I look at the macro data, in India and globally, but I don’t track it. I am very focused on my micro market. DSGCP is exclusively focused on backing seed and Series-A rounds in consumer brands in India and SE Asia. We were the first fund in India, and probably the region, to use the word “consumer” in our name and with a stated strategy of building a consumer-focused business. In 2012, when I did this many people and contemporaries were skeptical. Fast forward five years and you are seeing more VCs adopt a consumer strategy to their tech or other strategies.

You are also seeing more consumer-focused funds doing what we do for example Kanwal (Kanwaljit Singh)at Fireside and Nikhil (Nikhil Vora) at Sixth Sense. More and more people now tell me that consumer is the new tech. It isn’t. I do not want to invest in a fad or hot sector. We are building a business focused on consumer and I expect to be doing this when the sector is hot or not as sectors will go through their cycles. There is real value in building expertise, know how networks and relationships in any sector. We have chosen the consumer sector. We want to be seen as the #1 VC to go to in India and SE Asia for entrepreneurs looking to build consumer businesses.

What's the outlook for venture capital next year for India; especially VC for consumer firms? Have VCs made money in this space?

I guess this has been addressed in some part above. Consumer VC is becoming “hot”.  That doesn’t excite me. It means more competition and unnecessary inflation in entry valuations. But there is demand from consumer-focused entrepreneurs. DSGCP has made money but I do not have data from the other consumer-focused VC funds.