We will see disruption in CPG sector over next 20 years: DSG Consumer MD

Over the next 20 years, we expect to see more fragmentation in brands, said Shahdadpuri

Last week, DSG Consumer Partners closed its third fund at $65 million. Founder and Managing Director Deepak I Shahdadpuri tells Ranju Sarkar how the success of insurgent brands such as Veeba, Epigamia, Sleepy Owl and Eazydiner is encouraging other entrepreneurs to launch more of these. Edited excerpts:

You have been a pioneer in investing in the consumer space. How has the space evolved in India since you began doing so, both from a market perspective and from an investor’s?

We started in 2012 and raised Fund-I in 2013. We were the first VC (venture capital) fund to have 'consumer’ in our name. It is the core of our DNA. We had a thesis based on the mega trends and themes we were seeing globally and felt we'd see unprecedented opportunities for new brands, insurgent and challenger brands, to create new categories and disrupt existing ones. 

So much has changed but I expected more to change. From an investor’s perspective, we have more VCs dedicated to this space, including Kanwal at Fireside and Nikhil at Sixth Sense. We have also seen the first wave of insurgent brands succeed in the market, including Veeba, Epigamia, The Moms Co, Suzette Kitchen Garden, Sleep Owl and Eazydiner. This is giving confidence to other entrepreneurs to launch insurgent brands. 

Over the next 20 years, we expect to see more fragmentation in brands and large incumbents lose market share to the newer, more relevant, brands. This is only the start of a long-term shift in the consumer packaged goods (CPG) landscape. We saw disruption in the (information) technology sector over the past 20 years and we will see disruption in the CPG sector over the next 20 years.
 

How have the first two funds done in terms of exits and returns? 

We do not disclose detailed performance data. What I can say is that our $12.5-million first fund has released exits totalling more than $60 million and distributed more than $45 million. And, the fund still has large positions in some very successful companies. So, I hope my LPs are happy. The average life of Fund-II is only two years and it is too early to say how they will eventually do. But, we have great brands in that portfolio, too — Raw Pressery, Epigamia, The Moms Co, Sleepy Owl, Arata and Goa Brewing, to name a few. 

Do you take some learnings from these to the third fund?

We continuously look to refine our processes and strategy but, at a macro level, we want to do more of the same.

How have your investee brands grown since you invested? What have they done well? 

Keep in mind that most of these companies are still very young in terms of a CPG brand’s life. It takes 10 years to build a brand and you see the value over an ever longer time. So, how do we measure success when you ask, what have they done well? We look at performance versus budget, market acceptance, strong positioning, market leadership and if they raised new rounds of capital to continue growing. 

Too many great companies. Some examples:

Veeba: fastest growing condiments brand and just entered the HFD segment with V-Nourish. Very strong distribution. Very strong brand recall.

Epigamia: already India’s #1 Greek yogurt brand. Considered by consumers a market innovator. Danone quit the category in 2019, stating it was difficult for them. And, yet, via Danone Ventures, took a stake in Epigamia, validating the company’s playbook and success in NPD. Category creator.

Sleepy Owl: India’s first and #1 RTD cold brew coffee brand. Category creator.

Suzette Kitchen Garden: Market innovator and fastest growing healthy eating QSR brand. Loved by consumers.

The Mom’s Co (TMC): Along with Fireside’s Mama Earth, TMC is regarded as an innovator in baby and child personal care. Category creator.

Raw: India’s #1 fresh cold press juice brand. Very strong distribution. Category creator.

Do you tend to exit early? If an exit meets a return threshold, do you take it or wait to create more value? 

Exit decisions are made case by case. We invest with a view to hold for 10 years. That is how long it takes to build a brand. We are long-term partners. Having said that, we assess exit options and opportunities continuously, to assess the return scenarios. So far, we have had three exits. Redmart — acquired by Alibaba’s Lazada; OYO — sold our stake in a secondary; Zipdial — acquired by Twitter.

India is facing a slowdown. How has it hurt your investee brands? What are they doing to beat it?

India is slowing down. We see this in the most recent Gross Domestic Product figures. I am also seeing that in the numbers of late-stage private and public companies, where they have significant market share. So far, at most of our early-stage companies, and remember these are doing revenues of Rs 8-25 lakh a month, we have not yet seen a material slowdown. Our larger companies are also not seeing a material slowdown. Why? Probably because we are still opening new markets and expanding point of sale distribution. However, we are braced for a slowdown.

I often find DSG & Saama Capital or DSG & Sequoia co-investing. Or, a Sequoia or Verlinvest coming in as a new investor into the companies you invest. Is this by design or a coincidence? 

This is not design or method. Sequoia and Saama have different strategies, different fund sizes and different core DNA. Both are top-tier firms. DSGCP is focused only on consumer brands. Saama has a broader mandate covering technology and consumer but very similar ticket size. Sequoia have an even broader mandate and geography spread. 

What we do have in common is our belief in the future of insurgent brands. And, we were amongst the first to look at this sector. We exchanged notes, ended up often meeting the same company and are working together to build a CPG venture eco-system. 

Verlinvest is a later-stage growth investor and a LP in DSGCP. They are a natural first port of call for companies that have successfully navigated the venture stage and need capital for their growth stage. Verlinvest have come in as investor in Sula, which I did pre-DSGCP, Veeba and Epigamia. With Saama, we have come in together at Goa Brewing and The Moms Co; they have come in after us at Eazydiner and Veeba and we came in after them at Chai Point. Same with Sequoia; they invested after us at OYO, we invested after them at Raw Pressery and we invested together in Vybes.