Why some startups need to die

There's a lot of excitement when a startup is launched, but there's considerable unhappiness and sorrow when it fails. There's often a lot of soul searching and recrimination as to why it failed. What went wrong? Who was to blame? What could have been done to salvage it?

This is especially true when the startup has burnt through a lot of money , and there's always tons of finger pointing at the time of the post-mortem. Not only does the failure cause personal and emotional pain, it's also considered to be very wasteful, because so much money has gone down the drain.

Mature entrepreneurs will step up and take responsibility for the failure because the startup died when they were the CEO; while others will try to pass the back and find someone else to blame. Either the investors failed to support them; or the external environment was not favorable; or the competition indulged in predatory pricing; or they were too early, and the market conditions weren't right.

"I think we need to understand that startup failure is not a bad thing. The truth is that startups are designed in order to fail! Not all of them, of course, but obviously the ones which aren't able to compete efficiently deserve to fail."

Remember that this is the way the capitalistic system has been designed. The rule is survival of the fittest , and startups need to compete with each other in order to earn the right to win. Especially when an area is "hot", you will get a rash of entrepreneurs who want to enter the field. They will usually have very similar ideas at the same time , as a result of which they will start startups which seem very similar to each other. This is why we see a spurt of "me-too" startups every few months in the industry which happens to be the flavor of the month (right now, it is EduTech or Credit Cards). Since the market is not big enough for all of them, a few will grow; some will stagnate; while the majority will die .

"Let's not forget that if a startup needs to become a market leader, it needs to earn market share by crushing the competition. After all, if one company needs to become big, the others need to fold - this is what Schumpeter's creative destruction is all about!"

The startup space is fiercely competitive, and we need to accept this. This is true, not only for entrepreneurs, but for investors as well, which is why so many of us end up losing our money.

However, there's really no need to mourn the demise of the startup. Yes, the financial loss hurts, but we need to understand that this is part of the natural history of startups

It's a bit like the life and death of a human. We're all excited when a baby is born; and we all mourn when someone dies, but the truth is that death is as much a part of life as birth is, and we need to learn to take both of these in our stride.

Now I'm not trying to get all philosophical here - it's just that the sooner we accept reality, the easier it will be for us to live with this fact of life. In the big picture, this is actually more efficient for the economy. Startups are small experiments, and the financial loss caused when they fold is much less than when a large company goes belly up. By contrast, socialism forces us to keep inefficient dinosaurs like Air India alive by putting them on expensive life support , when it would be much kinder to kill them, and allow more effective alternatives to take their place.

"Yes, startup failure does cause short term pain, but instead of mourning their demise, we need to imbibe the lessons the failure teaches us, and move on, so we can do a better job the next time."

Whom do we want to fund?

Time to introspect

The investment thesis of Malpani Ventures is pretty simple - we want to fund frugal innovation in India. However, we still find this a bit wide -are we willing to fund any company building frugally? If yes, then by now we would have had hundreds of portfolio companies.

We keep asking entrepreneurs for clarity, and with every passing day, we also get more clarity about the businesses we want to support.

Whom do we want to fund?

a) Bharat based tech innovation

These are typically the products and services that are created to cater to the Indian audience. Typically low ARPU, more bang for the buck, understands the Indian distribution ecosystem, can navigate the SME mentality, etc. These are the products and services that may or may not have a global market, but the market in India is large enough.

We may or may not lead rounds, but we want to put our money where we have the conviction that the company can stay afloat for the coming 3-5 years - and this also means raising follow-on rounds. Since we have finite capacity per investment, these companies should be able to raise capital in the coming rounds from other investors.

One thing we want to do better is work with next-round funders to identify how can we find feeders in our portfolio for their larger funds and work actively with our entrepreneurs to grow their businesses.

 

b) Unconventionals - Growth capital that banks and VCs do not want to provide

These are companies that need capital to step their growth, but in the larger scheme of things are left underserved by banks (since they can not provide collateral), or by mainstream VCs (since these companies are not the next Unicorns). We want to reiterate, we are not in the business of finding the next unicorn, we will be far happier watching portfolio companies grow to $1mn - $5mn MRRs consistently and sustainably.

This strategy will only work if the entrepreneurs are looking for this flexibility that we can offer. We are very clear in our approach that being a lean team, we do not have the ability to provide expertise or operational support like larger VCs do - we need to be cognizant of our strengths and weaknesses.

Our edge

We believe we have an edge - we have patient capital. However, this can not remain an edge for long. The irony is most VC funds have a long life of 8+2 years. So while we can assume our capital is patient capital, the reality is different.

So what is our edge?

We want to help entrepreneurs reach breakeven without compromising on focus & growth. It is foolish to assume venture-funded companies will turn breakeven in a couple of years - we do not believe that.

We believe the roadmap has to be breakeven, the duration depends on external factors and execution capabilities. However, we will refrain from participating in companies where the road to Nirvana is built on just hopes, dreams, and wishes.

We have the ability to participate in follow on rounds, and we have the willingness to tolerate non-hyper-growth businesses. This is our edge! 

If you believe your business aligns with our investment philosophy, please reach out to Siddharth with a one-pager on your business.

How to Track Storytelling Success?

We have now come to the end of our 7-part series on Storytelling Marketing. To give you a quick recap, we discussed:

1. Finding your storytelling voice

2. The top 3 storytelling voices that work

3. The power of storytelling triggers

4. How to leverage stories to maximize growth

5. How to weave stories in marketing campaigns

and

6. Choosing a media channel for your stories

 

You've done the hard work. Your stories are live and running. And today we are sharing with you some metrics to gauge the effectiveness of your stories:

 

a. Brand awareness

Is your target audience familiar with your products or brand?

Are you seeing growth?

Are you discovering new customers?

 

b. Lead generation

How many new sales leads did your campaigns brought to your business?

 

c. Conversation rate

What percentage of new leads did result in actual purchases of your products or services?

You may want to keep in mind that sales aren't the only factor! Building a list, generating leads, and putting you in touch with your audience is equally as important as sales.

 

d. Increase in sales

How have your sales grown over time?

Are you finding your campaigns have become stagnant? If yes, this means you may need to change, edit or revise your storyline or maybe reach a different target audience.

 

e. Return on investment

For every dollar spent on marketing, how many dollars generated in sales?

You want to experiment, but still stay within your budget!

 

f. Customer acquisition cost

How much does it cost your business to acquire one customer? 

 

g. Market share

What percentage of buyers in the market purchase from your business compared to your competition?

 

Keeping track of metrics is vital to effectively market while also staying within budget. This ensures that you are spending money to grow your business, rather than on campaigns that may or may not result in sales.

We have now come to the end of this series on Storytelling Marketing, but please keep an eye on this blog for additional tips and strategies in the coming weeks. We have something similar in other domains coming up! Stay tuned.

Choosing a media channel for your stories

By now you will have your marketing stories weaved in your launch campaign as we discussed in our last post. And you will be ready to release them to your audience. 

How will you know which media outlet enables you to better engage and connect with your target audience? 

Ask yourself the following three questions when you zero in on a media outlet for sharing and distributing your marketing stories-

1: Who is your Target Audience?

You'll want to clearly define who the people you want to reach are and identify which channels of communication they actively use. 

Not everyone who uses Facebook also uses Instagram! As you begin researching you'll understand just how different those audiences are which means you will need to adapt your marketing campaigns accordingly.

 

2: What is your Budget?

How much can you spend to distribute your marketing stories? This is a vital sep because this forms the basis on which you will decide your format, and the duration of the distribution process. 

 

3: What Format will you choose?

You will also need to determine the format in which you will present your story. You can tell your marketing in a variety of formats – in text, video, photo, or audio formats. 

Each of these is different and will have its own advantages and disadvantages. Hence, you’ll need to do evaluate each and determine what works best for you. 

 

Considering the above, there are various marketing channels that are available to you - like blogs, video communities to print media, etc.

It does not mean you have to use every single channel. Instead, it is best advised to pick and choose a few targeted channels where your target spends most of their time and then test the waters. 

However, as you narrow your focus down to just a couple of these channels, you need to evaluate your options by asking yourself these 2 questions:

First

Which marketing channel is your business using currently? It's always easier to integrate new storytelling campaigns into mediums where you already have a presence.

Second

Which of the channels that you'd like to add to your marketing campaigns are accessible to you? Since every platform is different, the outcomes will also be different. Just because it is available does not mean it is good for you.

 

Now that you have an understanding of what goes behind choosing a marketing channel, identify which channel do you think will help you better maximize your reach and help you connect with your customer base.

A key question to ask again is - Will your marketing budget support a campaign on that channel? 

Think about these two questions as we wrap the discussion on Storytelling Marketing over the weekend with a final post on a very important topic: How to effectively track the success of your marketing stories?

 

How to Weave Stories in Marketing Campaigns?

Just to recap - in our last post, we spent time discussing the different ways to leverage your stories to sell more

If you've not gone through that post, we'd like you to take a moment, read it, and reflect on the styles in order to determine what will work best for your brand.

Now, let's keep going!

 

Once we've figured out a way to leverage stories, the next step is to figure out a way to integrate the same stories into your marketing campaigns - and that can include product launch, relaunch, branding, etc.

The platform you launch on doesn't matter as much as the way you tell your story so that it resonates with your audience. The latter is all that matters.

In order to do this effectively, we need you to first understand the platform you plan to use. Whether it is Facebook or Twitter or Instagram or any of the other social networking sites, it does not matter. What matters is your approach. Marketing via storytelling on Facebook requires a different approach than on a community like Instagram. And that is why it's vital that you spend enough time understanding & evaluating the different areas you plan to use within your campaigns.

 

Think:

How are your peers using stories effectively within their marketing campaigns?

How are people responding to these stories?

What triggers can you identify within these stories?

 

Understanding the platforms you want to engage on will help you establish a solid foundation for your own storyline.

 

How to Weave Stories in Marketing Campaigns?

a. Create success stories or case studies that serve as an integral part of your campaigns

Your people will enjoy reading or listening to success stories because these stories will show them how other people overcame issues that they're facing at this very moment.

So, rather than trying to aggressively sell your products and services, consider doing so through the vein of case studies and testimonials. Why is this a far more effective strategy? It is because this strategy transcends your own reasons for creating your brand and completely shifts the focus on the end-user: how can your offering help them accomplish their goals.

 

b. Feature your stories on digital platforms

Whether you are using landing pages, brochures, blogs and or websites to launch your campaign, you need to integrate stories as part of the content. 

Always remember stories that communicate the authenticity and honesty of your offering will go a long way in establishing and building trust in your prospects.  

 

c. Try to include your stories by creating launch videos

Videos are a powerful medium for launching products and integrating your stories in videos may have a far greater impact because it provides users with a powerful visual component.

Videos are the easiest medium to help you express your emotions and connect with your audience.

 

In our next post, we'll talk to you about choosing the right platform for your storytelling campaigns.

How to Leverage Stories to Maximize Growth

We hope you have had a chance to run your stories through the criteria we discussed in our last post

Do you now have a set of great stories that you are ready to share with your audience? If you do, that’s great! If not, you can still take a crack at it!

It is now time to figure out how to leverage those stories so you can maximize exposure and consequently growth!

Leveraging Customer Stories

Today, we'll focus on customer stories.  These stories will most likely take the form of testimonials and successful case studies from customers who gave your brand a chance and were rewarded for doing so.

Again, as we've mentioned in a previous post, these are some of the most powerful stories you can highlight in your marketing campaigns because they'll speak to your core audience in a very unique and personal way.

When a customer can first-hand witness how your offering worked for someone they can relate to, it will motivate them into taking action. It can act as a validation that enables their decision to follow and invest their time & effort in your company's offering.

As angel investors, we like to speak to as many of your customers during our due diligence stage as we can - customer feedback trumps everything! These conversations often pose as social proof, market validation, and assures potential customers (and sometimes investors) that you have what it takes to follow through on your promises.

 

Here are a few ways to leverage customer stories so you can maximize your growth:

 

a) Actively collect and share feedback from your customers

Follow-up with customers who have bought and used your products and discover how your products have helped them.  

This can be done easily, even if you have not officially launched a product. How? You can offer media copies or access to beta testing.  Not only will this help you improve your products and services before they go to market, but it'll make it easy for you to collect positive testimonials from within your market.

 

b) Highlight Positive Experiences

Can you integrate testimonials and case studies directly into your marketing campaigns? This should go beyond your sales page. Use them within blog posts, newsletters and advertisements. Why not feature them on your social media campaigns or Facebook, LinkedIn groups?

The more you spread a message of positivity that demonstrates your ability to create products and services that truly help your audience, the easier it will be to maximize sticky growth while building a loyal audience. 

 

c) Consider Influencer Reviews

This is a tricky one. You do not want to be seen as a sell-out, but you do not want to fool your customers either. But, your customers and beta testers aren't the only source for testimonials that will boost growth. Have you considered sponsored reviews or feedback from influencers in your market? This is different from brand ambassadors or paid ads - this is utilizing an industry influencer and piggybacking on their reach.

This will cost you money but can easily double or even triple your income, not to mention exposure because you'll be able to tap into an existing audience that you may otherwise not have access to. It so happens that customers trust micro-influencers to be impartial and true to their followers - often resulting in honest feedback that these followers love!

 

In our next post, we'll look at the different ways you can weave these stories into a successful product launch.

The Power of Story-Telling Triggers

After looking at the three types of marketing stories in our last post, we asked you to run through the stories you want to use and establish what kind of stories they are. 

How did that exercise go? 

We hope it went well and that you were able to determine what you want to achieve with each story and how best to integrate it into your brand and marketing message. 

Once you have clarity on the goals that you want to achieve with your storytelling, it's time to take a closer look at how you can use triggers to take advantage of story-telling.

What are triggers and how will they help?

Triggers evoke a response from your audience. Triggers will engage with your core market and make them feel something, whether it's excitement, hope, inspiration, or simply confidence in your offering.

It's important that your marketing messages always come across as being genuine and honest.  Avoid hyperbole or leading potential customers astray with promises you can't keep.

The best way is to identify where they are in their own journey and weave a story that aligns with their level. For this, you'll need to conduct market research to ensure that you're able to understand the type of customers you're aiming for and how best to serve them.

By integrating triggers that touch down on what's most important to your audience, you'll be able to ignite a firestorm of excitement and activity surrounding your brand.

This is exactly how thought-leaders build a loyal tribe that follows them wherever they go, buys all their products, participates in beta testing, submits testimonials, and helps them supercharge their exposure. FYI, a YouTuber with 8 billion views just launched their burger brand at 300 locations!

So obviously they're very important and equally effective!

It all starts by building an emotional connection with your customers. You do this by truly understanding what they're struggling with, fearful of doubt in their own journey.

Then, you can provide comfort through your story-telling by showing them that you understand what they're going through and that you have a way to help them through it.

 

Here are a few things to consider:

a) Is your story believable? Will people believe in your story-telling and feel connected to it?

b) Does your story align with where your average customer is on their journey?  Does it make sense to them?

c) Will your story evoke a positive response, touch down on the greatest hopes and dreams that your audience is thinking about every single day?

 

Today, we’d like you to create a general outline for a story you can weave throughout your marketing campaign, or within your brand itself.  

It doesn't have to be complicated. You can also begin with a summary of your own story and then connect it with what your customers will relate with.   

You know your audience better than anyone.  Create a story that invites them to share a journey that will lead them to success and you'll build a forever-tribe of loyal customers. 

In our next post, we'll talk about how you can leverage the power of a great story to maximize sales.

The top 3 storytelling voices that work!

So, in our last post, we discussed how storytelling can help unite your brand with your audience and bring a new perspective to an audience that has likely seen it all.

We asked you to take a step back and analyze your business so that you could begin to identify a storytelling voice that will resonate with your market. If you managed to do that homework, the next step will be to identify the exact type of story that will aid your overall goals.

Whenever we think about storytelling in marketing, we can think about the 3 main types of stories that can be integrated into your campaigns

 

The top 3 storytelling voices that work:

BRAND STORIES

The most important stories that you can share with your audience are brand stories. 

Most of the top brands in any market most likely started their marketing journey by integrating storytelling in their communication from the first day - i.e. the actual brand creation process.

A brand story explains the purpose of your business and why it was created.  It tells potential customers that your company understands the problems in the market and is creating solutions that will benefit them in some way.

These kinds of stories will most likely overshadow any other narrative your company may have. These present a window into how your brand will connect your audience with the information they need or the topics they are most interested in. 

It can also solidify your presence in your market and will help establish your brand as an authority and thought-leader, even in a highly crowded niche.

The best time to use a brand story is when you are looking to build brand loyalty.  This type of storytelling can help validate a prospect's decision to follow your brand when they are in the decision-making stage.

 

CUSTOMER STORIES

Customer stories comprise testimonials from people who have successfully used your products or services. 

These kinds of stories are extremely powerful because they share the journey of success with new or prospective customers who may still be on the fence, unsure whether your product or services are a good fit for them. 

What is the best time to include customer stories? When you are in the middle of a product launch and you can share a case study that is designed to validate a product or service.

 

PERSONAL STORIES

Personal stories are also vital in the realm of story-telling. 

These can be powerful in establishing the authenticity of a business because they're designed to depict your personal journey.  This is a step deeper into why your business was created and instead, and it forces you to be open and even vulnerable with your audience.

You may need to share personal struggles and accomplishments with your audience while also matching their level so they feel even they can walk in your footsteps! Even they belong!

These inspirational stories will help to motivate your audience and give them a sneak peek into the outcome should they decide to follow your brand.

When you tell a vulnerable story in a relatable and sincere way, it will become instrumental in getting your audience to have faith in your brand and believe the promise of your message. They'll begin to see themselves in a different way, the dream of their own success, and be excited about what's in store should they go on the journey with you.

Consider using personal stories when you want to increase your sales and brand recognition or improve engagement with your customers and get them excited about your upcoming offer. 

 

Closing thoughts

So, what story will you tell?  Today, take some time and try to ruminate about what storytelling style, tone, and voice will likely resonate with your audience. If you can manage to find that voice, your story may begin to take shape.

In the next post, we’ll show you how to ensure that you integrate important story-telling triggers into your campaigns so that you're able to instantly connect with your audience.

Please don't miss it.

Finding your storytelling voice

As a founder, have you ever used story-telling to launch a product, sell a service or simply connect with your core audience?

If not, you're overlooking one of the easiest ways to position yourself as an authority in your market, and also improve your organic reach and conversion rates.

Why? 

Because carefully crafted story-telling is at the heart of every effective marketing campaign and forms the foundation of every successful brand. 

A story that resonates with your market will unite your brand with its audience and demonstrate your commitment to providing value.  It will also show your market that you understand their concerns, fears, and desires.

With a story entwined throughout your product launch, and within your branding itself, you'll be able to better connect with your audience because you're showing them why your brand even exists and how it was created to help them.

And that's really powerful stuff!

Over the next few posts, we'll take a close look at the different storytelling techniques so that you can determine what will work best for your brand, or your next product launch. We'll tear open the lid on some of the most effective storytelling strategies that will help you connect with your audience while furthering brand awareness.

There's another important reason to turn to storytelling when building your business: 

"Storytelling can also help you find your voice, and stand out in the market because it gives your audience a new perspective, a closer look into the workings of your business, and how your products or services are designed to help them."

It lays out the origin of your business and explains how you're able to help them move to the next level in life or in their own business.

 

Because let's make one thing clear:

"Storytelling in marketing isn't about you. It's about your customer!"  

Even when you weave personal stories into your marketing campaigns, the purpose is to highlight the benefits that your audience will gain access to when choosing your brand above all others. Storytelling can also be an effective way of identifying a problem in your niche and then offering a simple solution throughout your story.

There are so many ways you can effectively use storytelling to penetrate a new niche, connect with an audience, stand out from the crowd and subsequently, blow the competition out of the water.

 

Are you excited? You should be!

Today, we'd like you to kick-start the information-gathering phase. This is where you take some time to analyze your brand so you can determine a relevant storyline for your launch.

You'll need to take a step back so you can gain insight into how your audience will likely see your brand, not how you know it to be. This isn't always easy because of your connection with your products and services.

 

Begin by writing down a short one-pager relating to:

a) Your brand's purpose: Why it exists. How it began

b) Your brand's influence: What you bring to the table 

c) Your brand's problem-solving: How you bring solutions to your market

 

These questions will help shape your storytelling strategy and make it easier for you to create the foundation for your marketing & launch campaigns.

In the coming post, we'll take a look at the 3 types of storytelling that will help you skyrocket sales, maximize exposure and stand out even in the most crowded markets.

 

How can you find the compelling narrative your startup needs

Steve Jobs once said, "Start with Customer Experience and work backwards towards Technology". He understood that you cant start from the answer - you have to understand the problem first!

Many startups we evaluate have something exciting in the works at all times - and founders love raving about their babies! And understandably so, they've toiled, put in the hard work, and are proud of their accomplishments.

At times, founders are so engrossed with their offering, that for an outsider to understand what exactly are they doing becomes a bit confusing. Now, it is important to understand those founders live and breathe what they do, and outsiders need to first understand from a 30,000 feet view.

Starting with why your solution is so exciting is probably not the best way to begin!

When you start giving out answers without asking the questions first, that is akin to a weird game of Koun Banega Crorepati! Nobody knows whats going on!

There are some founders that go provide context - but again those are 1-or-2 sentences about describing the problem. This is kind of the opposite of what Jobs suggested. And invariably, the founder ends the conversation with 'Hey, trust me, I know what I'm doing!'

Customers need More

Having a brief understanding of the problem, and diving deep into the solution is the wrong way to do things. For startups, really understanding and nailing the problem is all that matters. After all, if you don't own that space, why are you even in business?

The problem is the foundation of your existence. That is how you empathize with your customers. That is how you develop your product. That is where you start positioning yourself.

I read somewhere that every need is contextual. It's not the same for everyone. Heck! It's even different for the same person at different points in time! It varies from function 'This needs beautification!' to emotion 'I need support!'. And the nature of a need is that it finds a way to get itself met - with or without you!

Startups need compelling narratives

Here is how you can find the compelling narrative your startup needs:

a) Target market - Who are you selling to? B2B or B2C? Is the buyer and the user the same?

b) 30,000 feet problem - What is that one general problem that affects every target customer? Is it price? Convenience?

c) Activity - What are customers or users doing when they will use your product?

d) Goal - What is the primary end goal when users are performing the activity?

e) Functional problem - What is the most difficult part about the activity today?

f) Outcomes - What defines a good outcome if the activity goes right? What defines a bad outcome if the activity goes wrong? What is the impact in both cases?

g) Substitute - Needs are met with or without you. What do users do without you to solve the problem?

h) Complaints - What do users complain about the substitute? They can do with a solution, why do they need YOUR solution?

i) Trend - How can this problem worsen in the future?

j) Impact - What is the positive impact of solving this problem? Is it time-saving? Does it lead to cost-saving?

k) Potential users - How many people can be potential users, even if it is for a single usage?

Closing comments

When potential customers hear about the way you are approaching solving the problem, they should self-identify with every step. They will self-validate themselves. This is a good starting point to ask more questions about how you can do better.

At this point, you will not have to do a hard sell!

What most VCs get wrong about D2C investing

D2C investing from the point of view of our Associate - Siddharth Shah

 

Is venture capital suitable for D2C brands?

As a predominantly angel investor operating in the tech & tech-enabled spaces in India, I rarely focus on D2C or Consumer-focused themes. The way I look at things - venture capital is more suitable for tech-enabled or digital-first companies that can scale rapidly, earn exceptionally high return on capital, and has a very high terminal value. As an angel investor, I like to focus on companies that can reach 50 cr in revenue in 5 years without burning (and effectively raising) a ton of money.

My experience in the public equity markets shows me that companies that have been able to create value for their investors are mostly companies that are:

  1. Asset light

  2. Have a strong moat

  3. Have a long runway for growth

The key issue when I look at consumer brands or D2C companies as a tech investor with a public equity background is that I feel D2C does not fit the bill in venture capital.

Why is that?

  • There are large players in the market that own distribution

  • There is zero to low brand loyalty which means constant value add + rediscovering

  • Lack of scale in D2C translates to poor ROI on these investments

The biggest issue being the last point

  • Early-stage D2C investments that come in with large fundings at a high valuation distorts the chances of the entrepreneurs chance at a successful exit

And this is where most VCs get it wrong about D2C investing

Out of the handful of D2C deals I’ve pitched to our investment team, I’ve received feedback like:

a) How many energy bars can you sell?

b) What if Kellogs gets into that segment once it becomes big enough?

c) We haven’t seen a single consumer company going big!

But my pushback is - India is a country with 1.3 billion (and counting), consumer wallets are becoming fatter, and they are becoming more conscious about what they are consuming.

Most investment thesis revolves around tech investing, digital trends, enterprise software, but in reality, consumer is probably bigger than all of them combined. So when someone asks me ‘Is the market large enough?’ I don’t doubt their question, but I know the real question is ‘Is the market large enough for Coca-Cola or Pepsico to enter?’.

By far, consumer has been underserved due to the hype surrounding tech-led investments that return the entire fund!

 

Here is how I think about D2C investing:

It is futile to assume that only one brand will rule the market

Tech & consumer investments arent alike and the investment thesis shouldn’t be alike either. We love quoting BCGs Rule of 3 & 4, and that is true to a certain extent, however, consumer mindsets are changing. How you may ask?

Consumers today prefer, and favour unique and targeted products that cater to their personal preferences. Today, if a mother is looking for baby products, J&J is no longer the only option in the market. Today we have companies like MamaEarth & Chicco that have gained more targetted usage. Does a mother trust a large conglomerate like J&J to be able to provide soothing relief to her child more or someone who gives it their all to be the best product their child can use?

By default, these companies have products that are inherently smaller in scale - are never intended to be mass market as a J&J - yet these are the same companies that can be quickly absorbed by larger conglomerates.

 

But it is even more futile for D2C companies to raise a lot of money at very high valuations

Giving too high valuations, and shoving cash down the throat of a D2C company with the hope that it will rule the market is not only unrealistic but also counterproductive. Large fundraises at obscene valuations only force entrepreneurs to pick that path of least resistance i.e. GROW AT ANY COST!

Growing at any cost in software is much different than growing at any cost in consumer. Weren’t you operating in a niche? So you’re telling me your space is now mainstream where you can potentially grow 10x a year for 10 years? Hmm…

The more capital a D2C company raises, the more it is forced to grow at any cost, which leads to expansion into unrelated adjacencies, which leads to higher cash burn, which leads to more funding. In a slim chance, someone wants to acquire the company, the high liquidation preference, last round valuation come into the picture and they’d rather the company shut shop.

The beauty of consumer companies is that it does not need to raise a large amount of capital to grow. These companies can typically raise 3-10 cr, and get to 10+ cr in revenue quickly, at which point they can be profitable. Now to go from 10 cr to 50 cr is a matter of:

a) Growing patiently

b) Growing profitably

 

D2C companies should only raise capital 2 times in their lifetime

Seed

When it’s proven that customers want its product, the company has up to 1,000 loyal customers, and now wants to invest some resources to grow from 1,000 to 10,000. This is typically the stage where the company has under 2-3 cr in revenue, maybe operating a breakeven to a minimal EBITDA loss, and now needs capital to get to more customers, and more channels. This typically means capital is invested equally into inventory, distribution, marketing. With some investment, these companies can get to that 10 cr in revenue, run profitably and grow patiently & profitably.

Growth

The company’s been growing profitably for a while in a niche, customers like its product, products are present in a few channels, and customers want the company to be accessible more widely, with more offerings. By now, if the company has not been acquired for a handsome figure already, this is a good signal that it’s time to grow! Internally generated free cash won’t get you too far, and this is where you go out and raise a large round. This round can be as small as 50 cr or as big as 500 cr depending on the product suite, industry, current run rate, growth opportunities. This is round that takes the company from a niche, class offering to a mainstream, mass offering - something that has the potential to be scaled up rapidly. And more often than not, this is the round that is a while before an IPO in an ideal world.

 

Closing thoughts

There are investors who are primarily tech investors who feel D2C is tech-enabled and has similar characteristics as any other tech business. These are the ones who should stay farthest away from D2C as possible.

D2C is not a tech business. D2C is just another channel that brands use. Just as modern trade or general trade. D2C has its pros and cons. Some VCs feel D2C is cheaper than traditional channels but with the growing customer acquisition costs over the years, this is far from the truth. Consumer companies also do not have better margins just because they are marketed as D2C, because if they did, companies like Rawpressery or Soulful would be profitable, and not have raised a lot of money.

Fundamentally, a consumer company needs to focus on product differentiation, branding, margins, and distribution. Not very different from a traditional company eh?

I do not know about consumer investing as much as others in my field. However, I disagree with those who say consumer investing is a cash burn business that never gets to scale - if you are sensible in the way you raise less, less often, and aim to grow profitably in a niche - you only need venture capital twice in the first 10 years of a consumer business. And that translates to spectacular returns as an early-stage investor!

This post originally appeared here.

Post

Recent Posts