 "Vinay Singh, Partner at Fireside Ventures")
Amid the so-called funding winter, marked by investors tightening their purse strings, Fireside Ventures, an early-stage venture capital fund focused on consumer brands, has remained largely immune to the funding pangs. Moreover, Vinay Singh, the firm’s co-founder and Partner, emphasises that this is a great time to invest. In an interview with Aryaman Gupta, he talks about Fireside’s investment thesis, portfolio performance, exit strategy and more. Edited excerpts:
Has the so-called funding winter put a dampener on your investments?
The funding winter has been pretty mild in the Indian context. Inflation, especially after the oil price correction, has been in check. The Gross Domestic Product (GDP) is still growing well. Hence, from a demand perspective, we do not see any stress. Globally, funding has slowed down, especially series D and above rounds in the consumer internet and tech sectors. That is where most of the funding stress is.
In our world of consumer brands, where businesses are built fairly profitably and are not dependent upon external funding to keep the runway going, we have not seen much of a funding winter. At best, it’s a mild chill.
What has changed for us is how the ecosystem has evolved, rather than the funding impact. Valuations have turned attractive and we continue to be aggressive. Our deal flow is thick and we think it’s a good time to invest.
How has Fireside’s investment strategy evolved over the last few years?
In 2017, when we started, we had about 300 million internet users in India, out of which 50 million were shopping. Incumbent brands were not really taking e-commerce seriously. A lot of brands built their business by being marketplace first. And while direct-to-consumer (D2C) was burning money, it wasn’t really haemorrhaging money. So, from an overall blended perspective, we were able to get fairly profitable businesses that could get to a scale of $6-7 million a month in revenue, before they even thought of going online.
When the pandemic hit, offline channels shut down. This led incumbent brands to realise that online was the only channel where they could sell products. Brands, therefore, over-indexed on online marketplaces and digital media investments. Hence, return on investment (ROI) on marketing spends became tricky for most of them. Between 2017-2021 was the first wave of digital-first brands.
Since then, wave two of digital-first consumer brands has seen more focus on product innovation, rather than channel execution. We are seeing brands, born online, go offline earlier in their life cycles. While we continue to be focused on consumer brands, within that, the kind of opportunities we are looking at have evolved over the years. The way we evaluate a start-up has changed. We focus a lot more on their channel strategy, consumer retention strategy, differentiation, etc.
Please give an update on how your Fund I and Fund II have performed. How many investments have you made from your third fund?
We made 18 investments from our first fund, which was worth $50 million, and got two unicorns, Mamaearth and boAt. That fund has returned a significant amount of capital. We have almost returned the full principle back to our investors, in cash. And the fund is marked up healthily.
We closed our second fund in early 2021, which was worth $120 million. There we did 14 investments. Around 80 per cent of the fund is deployed. The remaining capital will be used for follow-on investments. The underlying portfolio from this fund has grown seven-fold in revenue and four-fold in valuation, and we continue to double down on some of our winners.
We have announced four investments from our third fund this year and have a bunch more in the pipeline. We have allocated 18-20 per cent of the capital from our Fund III and have a target of 20-25 investments. There are no plans for any new funds in the near future. Across our three funds, we have an Assets Under Management (AUM) of about $400 million.
You raised your third fund worth $225 million in October last year when the funding winter was in full swing. How did you manage to do that?
In the last few years, there has been a heightened availability of domestic capital for venture funds. Around 80 per cent investments are from domestic Limited Partners (LPs). This has come from a couple of sources. One is the government, which introduced initiatives like Startup India, under which it launched the Small Industries Development Bank of India (SIDBI) Fund of Funds. They have invested in our fund in the past. It also set up the Self Reliant India (SRI) Fund for Micro, Small and Medium Enterprises (MSMEs).
Bank treasuries have started to invest in funds. State Bank of India (SBI) is an investor in one of our funds, so is Housing Development Finance Corporation (HDFC). These are new avenues of domestic capital opening up. Family offices have also become much more aggressive in their investments. Global capital allocators are re-looking at their capital allocation after the pandemic.
There is a geopolitical angle between China and the United States. Meanwhile, India is the largest fast-growing economy in the world today. Our economic fundamentals and demographics are also looking good. We are working with global family offices, sovereign wealth funds.
Aside from this, the common themes we see across all our LP relationships is that they appreciate verticalised venture capitalists who go deep in a sector. This results in more predictable outcomes. For instance, while our Fund I did well, our Fund II was a more broad-based success. We were able to replicate our success in a lot more investments. That predictability is what investors like. That is one of the reasons for us being able to put together our third fund.
What is your exit strategy amid the current funding slowdown?
Between strategic exits and private equity (PE) secondary exits, we have a fairly robust exit plan. There are one or two companies in our portfolio that are looking at a public listing in the next two or three years. Our Fund I is just six years old. We have some time to plan all the exits, since the tenure is ten years.
What are some of the major concerns among your Limited Partners (LPs) at the moment?
Our world is very different from what is happening in the tech sector. It is taking longer to get deals done. Due diligence is a lot deeper. Late-stage deals have slowed down. The total volume of deals is similar to 2021, but the value has dropped, due to the slowdown in late-stage deals.
However, it is not happening with us. We have not been sitting on dry powder. We have been fairly active. What we are hearing from our LPs is that it is a great time to invest. The year 2021 was a terrible period because there was just so much money sloshing around in the ecosystem that valuations were becoming tricky. We had also slowed down our investments at the time.
However, this is the right time to accelerate our pace of investments. Our LPs are also being more aggressive with their co-investment strategies. They are very actively engaging with us to figure out how they can be part of more early-stage funding rounds, aside from their investments in the fund.
More and more start-ups are now turning profitable. Does this indicate an end to the current downturn in the ecosystem?
Now, a lot of start-ups are taking the call on when to turn profitable. It is not a new phenomenon. Over the last two to three years, brands like Dunzo, Vahdam Teas, Mamaearth have turned profitable or have started to generate significant cash. It’s not driven by the external environment but by internal calls from these brands.
For us, if we see a start-up is profitable, it does not mean it is doing well. Sometimes, profitability can be a limitation for scale. We focus on sustainability. The brand has to be able to go on without requiring continuous external funding. In the pandemic, this became clearer than ever before.
What other sectors are you looking at investing in, apart from consumer brands?
Consumer brands are our DNA. But within consumer brands, there are various emerging themes we are focusing on. We are getting into more and more consumer electronics. We are interested in verticalised beauty and personal care. Then there are emerging themes like pet care, eco-friendly brands, etc.
We are also looking at the enablers of consumer brands, like supply chain tech companies, Software as a Service (SaaS) for consumer brands, data analytics companies that help consumer brands in decision-making. That is where the next set of opportunities lie. We are pretty broad-based within consumer brands, but do not plan to step out of this sphere.
