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Ecommerce was the poster child of the record-breaking funding for Indian startups in 2021. Of the $42 Bn invested overall, more than a fourth or $10.7 Bn was poured into ecommerce startups — and diving deeper it’s clear that the surge has come on the back of the greater volume of investments in the D2C segment. And now some of the earliest backers of the D2C stories are beginning to see exits and returns.

Nearly 60% of all deals in ecommerce in 2021 were for consumer retail startups as newer D2C brands emerged and attracted the investor eye. For RPSG Capital, which saw its first exit from health food brand True Elements, this was the ideal time to double down on D2C and consumer brands. But its D2C investment story, which is fast maturing, began back at least five years ago, according to head and chief information officer Abhishek Goenka.

Launched in 2018, RPSG Capital began as a corporate venture arm of RPSG Ventures (formerly CESC Ventures) and it’s in the past six months that the fund has broadened its horizon and looked to bring on LPs. The original thesis has not changed much — backing digital-first consumer brands in the pre-series to Series A stages — but the company is looking to rope in limited partners that are keen on contributing to the D2C boom.

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RPSG’s Maiden Exit And Next Fund

While 2020 and 2021 have undoubtedly been the D2C years in India, Goenka claims that RPSG saw the opportunity in 2017 when Flipkart, Nykaa and other homegrown ecommerce marketplaces had flourished. “We saw an opportunity where at least offline distribution can be disrupted by partnering with younger companies. Partnering with capital and knowledge to scale up,” the RPSG Capital CIO added.

Earlier this year, the fund marked its first exit from a portfolio company. FMCG major Marico picked up a 53.98% stake in a funding round for True Elements that saw RPSG Capital exit the captable. True Elements clocked sales of INR 54.3 Cr in FY22, up from INR 36.3 Cr in FY21 and operates across 13 categories. “The investment was made roughly four years back and we netted ~7x MOIC (multiple on invested capital) & 50%+ IRR (internal rate of return) from this exit,” Goenka said.

Having invested in 12 companies through its inaugural INR 100 Cr fund, RPSG Capital is now looking to raise INR 500 Cr for its second fund. More than 50% of the capital already raised for the second fund is from external LPs rather than relying on the corporate funds. It has backed the likes of ayurvedic beauty brand Vedix, personal care brand mCaffeine, and plant-based nutraceutical brand Plix, fashion marketplace The Souled Store among others.

India’s D2C boom has come due to the tailwinds from the wider ecosystem around ecommerce — logistics, payments, customer experience — but also due to the maturity of how startups are approaching building online retail brands. That’s also why investors are seeing more worthy investment opportunities.

“I am talking about the ability of startups to attract the right talent and resources to build large brands. This was not always available in the past. Plus of course data related to ecommerce is also very handily available across categories. This is helping brands make quality decisions when it comes to scaling up.”

Expanding Investments In The Funding Winter

Amid a funding winter, in 2022 the Indian startup funding picture makes for a bleak viewing, with much of the highs of 2021 all but forgotten. Even though the six-month funding data at the halfway stage of 2022 (H1 2022) indicates a big jump in startup funding in comparison to the previous six months, the quarter on quarter decline is rather evident and worrying.

With $7.3 Bn in Q2 2022 as per data till June 25, the quarterly funding amount is the lowest in the last one year. The numbers from July 2022 make for even bleaker viewing. However, some investors are looking to buck the trend and unearth worthy deals in this environment, and there’s also the feeling that D2C and retail product startups have cracked the the unit economics challenges, whereas consumer tech services such as Zomato and Swiggy are still grappling with it. RPSG certainly feels bullish about D2C brands continuing to grow.

Backed by the knowledge gained from its portfolio, RPSG is looking to expand with a new INR 500 Cr fund. The fund will increase its cheque size to up to $3 Mn per deal in investments through this second fund. RPSG Capital typically acquires 10%-20% stake in the companies it invests in and this will not change even though the cheque size is increasing.

“The quality of our portfolio has been our saving grace and allowed us to take a bigger leap. Even if I completely discount the top two startups from our portfolio, the IRR will only drop by up to 5%, whereas in most other VC funds, this figure might be close to 50%”

The second fund is expected to see a first close by mid-2022, Goenka added, but did not reveal how much corpus has already been raised thus far.

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RPSG Capital’s Next Big Fund

“The idea from day one was to make this a large investment vehicle like some of the larger corporates that have done the same. Our second fund would primarily comprise domestic LPs including family offices, domestic institutions and Ultra HNIs. We see a lot of appetite within domestic LPs for funds like us.”

But it’s not only growth-stage bets that will grow in size for RPSG; it has also ventured into early stage investments too with a BaseCamp accelerator. For Goenka, this is the most logical and natural next step given that the past four years have brought in plenty of learnings for the fund.

The maturity of D2C players has made it easier for investors to make a decision on whether a particular brand or product can scale up, what are its routes to market and what is the kind of push it would require from a marketing perspective. There’s almost a playbook that brands can aspire to implement, added Goenka and as investors, the role is to help these brands learn from the successes of the heroes in the portfolio.

Plus, the entry of global ecommerce roll-ups and house of brands models such as Thrasio, Mensa Brands, GOAT Brand Labs, Upscalio, EvenFlow, GlobalBees and others has also changed the narrative around new brands. The likes of Mensa and GlobalBees have turned into unicorns and have considerable spending power to acquire smaller brands.

Goenka believes that logically and mathematically, it makes sense for companies to leverage their scale and look for synergies. This naturally increases their share of a consumer’s wallet, but it cannot happen with an all-guns-blazing approach like Thrasio in the US.

In India, consumer segments can differ for each category and from region to region, so brands need to first establish their niche before they can hope to become attractive acquisition opportunities. Despite the unprecedented rise of the D2C model in recent years, the sector has been plagued with various issues. A report by HDFC Securities states that a decline in funding, low liquidity, high inflation and high customer acquisition costs are hindering prospects.

As it looks to back brands from an earlier stage, RPSG launched the Base Camp accelerator programme in December 2021 and has selected seven companies, which will be eligible for an investment of INR 1.5 Cr. The first cohort includes ready-to-cook brand CurryIt, personal and home care company Born Good, veg protein startups Eat With Better and Plow.

Goenka believes that at an early stage there will be some slowdown. D2C startups are diluting too much equity and that’s one of the reasons why Base Camp was launched, he told us. Traditional VCs demand a bigger slice of equity and then the brand gets stuck trying to justify its valuation.

“We believe that by the time brands come to Series A scale, the founders would have diluted 30%-40%. This becomes an issue when we come in.” – RPSG Capital Ventures’ Abhishek Goenka

This creates sub-optimal outcomes for growth-stage VCs. The idea behind Base Camp is to identify the novelty in products and positioning to avoid the over-dilution.

Some of these companies could also stand to get further funding from the main fund as and when they scale up. But Goenka denied that this is a funnel for the larger RPSG group of companies and said that acquisition by the group is not a deciding factor for the fund to make investments.

“It (RPSG Capital) is as at arm’s length as the operations at any other VC fund. Obviously, there are a lot of synergies that come along between our portfolio and the main group, but that’s more like distribution synergy or the experience of our resources. But in terms of operations, we work like any VC fund.”

With its new fund, RPSG expects to invest in D2C startups that have finally unlocked the larger Indian market and have ventured beyond Tier 1 and metros. In particular, the fund is bullish on health and wellness and food as being the themes that can crack this market first. That’s where the next growth spurt will come from.