Storyboard18 | VC Vox: The power of building brands sustainably

(Representational image) Businesses are blitz scaling and raising incredible amounts of capital in India. But a more calibrated approach to growth can go a long way in building a brand sustainably. (Image by Steven Lelham via Unsplash)

‘Enduring brands take time to build’

This line comes up in our meetings with every consumer founder and it evokes a range of responses from ‘That’s the first time I heard a VC talk about patient business building’ to ‘Are you out of your mind? How do you make your returns work!’

Building brands and businesses sustainably is particularly relevant as India is minting a record number of unicorns, businesses are blitz scaling and raising incredible amounts of capital. DSG Consumer Partners (DSGCP) was founded in 2012 because of our belief that consumer founders don’t have to be constrained by pursuing the blitz scaling trajectory. Building businesses in a capital-efficient manner is a viable alternative.

Consumer brands need a different approach. ‘A consumer brand will take longer than a tech business to achieve similar scale. However, if the consumer brand consumes a fraction of the capital as compared to the business, the returns are similar. And most importantly, the consumer brand avoids the high-risk approach of pursuing a ‘billion or bust’ trajectory’. There are two pillars on which our investment strategy rests:

Pillar one: Patience.

A calibrated approach to growth will go a long way in building a brand sustainably. There is no point in chasing growth for growth’s sake and overcapitalizing brands in pursuit of exponential growth. Do not obsess about achieving unicorn outcomes in defined time frames.

Building the business brick by brick in a measured manner will help improve the predictability of outcomes dramatically. It is also important to note that building a business sustainably and achieving a unicorn outcome are not mutually exclusive. One can achieve both. It could just mean that it might take longer to get there.

Pillar two: Focus on brand and business fundamentals.

Pay close attention to fundamental business and brand metrics. In the context of business fundamentals, ‘Quality of Revenues’ always trumps ‘Absolute Revenues’. Parameters such as ‘Gross Margins’, ‘Return on Ad spend’, ‘Retention Cohorts’, ‘Store Throughput’, and ‘Capital Efficiency’ are extremely important in determining the quality of revenues. When it comes to brand fundamentals, focus on building businesses with a sharp brand proposition and high NPS scores. In most of DSGCP’s portfolio companies, the brand is the most valuable asset that is being created in the business.

(NPS or net promoter score helps to gauge customer loyalty to the brand.)

There are three major characteristics of consumer brands that contextualize the ‘WHY’ behind our approach.

1. Consumer brands do not have winner takes all outcomes

There is always an opportunity to differentiate, and dominate a sub-segment of the market. There are limitless possibilities on how a brand could carve out a niche for itself.  For example, in personal care, there’s a chance to dominate a niche for senior citizens or new mothers (like The Moms Co). In hair care, there’s a need gap for an offering for curly hair (like Arata). Similarly in diapers, SuperBottoms serves the market of eco-conscious parents who prefer cloth.

2. Consumer brands have a product/service with positive gross margin on Day 1

Sustainable businesses are built through prudent planning and management of cost structures and working capital. One metric to pay close attention to is the ‘Capital Efficiency’ metric. This metric is our interpretation of the RoCE (Return on Capital Employed) metric that late stage and public market investors use. It’s computed as:

Current Revenues / Cumulative Capital Consumed

A good benchmark for capital efficiency is above 2x. To illustrate: if a business has consumed US$2 million so far, the revenues should be US$4 million. A simple and powerful metric. It is a great early indicator of the feasibility of sustainable business building.

3. Consumer brands are more insulated from the tech obsolescence cycles.

Hence it’s not necessary to pursue exponential growth to scale rapidly. This is an area of focus and necessity in tech businesses with shorter disruption cycles since founders usually like to scale up rapidly before the next disruption.

To preserve the philosophy of fundamentals-first brand building we have a few ‘North Star’ principles that guide us:

Do your best to make every investment count.

Do not have any compulsion to blitz scale or encourage founders to pursue a risky growth trajectory. In fact, being best aligned with founders is a priority given that they are the primary customers.

A win-win mindset and not falling into the trap of the zero-sum mindset.

As consumer brands are not winner-take-all outcomes, founders do not have the compulsions of having a zero-sum mindset and obsessing about competition. You do not have to win by killing a competitor. This helps founders develop an internal locus of control and build a differentiated brand.

Partnering with fantastic people and building amazing relationships.

‘Relationships are as important as returns’. Working with people you like and trust is important because these relationships compound.

Building brands that make a positive difference to the customers and the planet.

The best part about how we invest is that most often we are, or will become, customers of the brands we partner with. We experience firsthand the benefits of the hard work put in by our founders and the portfolio teams! And this deepens our appreciation for the difference it makes to customers as well as the environment.

This approach to building brands and businesses was extremely contrarian when we began in 2012. We were the first, and only, seed stage consumer focused fund in India and South East Asia. LPs and other stakeholders asked us if we would be able to find brands for our pipeline. From that first fund, we backed some brands that have become leaders in their category including Veeba, OYO, mSwipe, Eazydiner, GOQii, Chaipoint, Redmart and Chope. Fast forward nine years, the ecosystem is thriving and there has never been a better time to be a consumer founder/consumer investor!