The consumer investment landscape in India has undergone a remarkable transformation over the past two decades. Chaitanya Rathi, Advisor at Sharrp Ventures, offers an insider’s perspective on the dynamic shifts in this sector, revealing valuable insights into the current state of consumer investment, venture capital (VC) funding, and the growth trajectory of consumer businesses in India.

From Niche to Necessity: The Rise of Consumer Investments

With 20 years of extensive experience in the consumer space, Rathi has seen it all. “I’ve literally seen it from nobody looking at it at all to today, everyone wanting a little finger in that pie.” He says while reflecting on his time in the sector.

This shift is evident in the diverse investments and the emergence of prominent consumer brands. One notable example is Sula Vineyards, which he mentions as possibly the first real consumer VC investment in India. Sula’s journey from obscure bank debt to a successful IPO exemplifies the sector’s potential.

Rathi observes a significant influx of liquidity, particularly through angel investors, individuals, and family offices, which is why there is a rise in consumer investments. However, he cautions, “A lot of them frankly don’t understand investing very well, hence they don’t really put their fingers into tech too much… but as consumer, because it is something relatable, they will try to invest in it.”

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This accessibility to funding has enabled many startups to get off the ground. Yet, he stresses the importance of translating early funding into sustainable businesses: “Everyone thinks they can start something from their living room. Eventually, it has to translate into a meaningful, purposeful-driven brand and business.”

Evolution of Indian Consumer Market

However, there’s no deny that aatmanirbharta has grown. Discussing recent changes, Rathi highlights India’s entrepreneurial spirit. “India has always been a land of entrepreneurs… everyone feels that they have the acumen to start a business.”

The lower entry barriers in the consumer sector compared to tech have contributed to its vibrancy. Moreover, consumer preferences have evolved significantly. “Unlike 10 years back, where people were skeptical about Indian products, today I buy Indian brands for almost everything. There is genuine trust that has started to build,” he affirms.

The growing trust in domestic products can be attributed to better marketing and genuine innovation that has revolutionized the market.

Having said that, Rathi sees a massive opportunity for Indian brands to compete with international ones. He notes that the increased exposure to Western products via platforms like Netflix and Instagram has influenced consumer preferences. However, many are now turning to Indian alternatives that promise similar quality at a lower cost. “A lot of the Indian brands are also doing very well in terms of copying the story, copying the narrative of these globally successful brands.”

He also talks about latest D2C trend of going online. He believes, for digital-first brands, transitioning to offline presence can be challenging but crucial. Rathi explains, “For f&B brands, it’s far more important to have an offline presence than beauty and personal care.” However, he acknowledges the impact of Q-commerce, which has allowed brands to bypass some traditional offline hurdles. “You can build a 100-150 crore top-line brand just on digital marketplace and quick commerce.”

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Evaluating Investments

When assessing potential investments, Rathi places immense importance on the founder and founding team. “A good founder can pivot from a bad business, but a bad founder will destroy even a good business.” He also emphasizes strong unit economics and the genuine demand for the product. Governance and transparency are crucial, given the long-term nature of VC investments.

In venture capital, the first funding round is comparatively easier to secure. Securing second-round funding remains tough. Rathi notes a shift where early-stage investors are raising larger funds and moving to pre-Series A and Series A stages, leaving a gap in seed funding. However, he sees potential in the same investors doubling down on successful startups.

This trend means successful startups can now secure multiple funding rounds from their initial investors, cutting down the need for new funding sources. This streamlined approach allows them to prioritize growth over constantly seeking new investors.

Total Addressable Market (TAM) and Its Challenges

Understanding the Total Addressable Market (TAM) and its challenges requires a nuanced approach. As India, with a huge market size, can lead to quick, misleading estimates of potential markets. Rathi advises a bottom-up approach to evaluating TAM, warning against overly optimistic top-down estimates. He uses Sula Vineyards as an example: despite being a well-known brand, it serves only a small percentage of the overall market. “You have to actually build it (market) ground up.”

This realistic approach underscores the need for startups to ground their expectations and strategies in tangible, bottom-up research. “You have to talk to consumers, understand their pain points, and refine your product accordingly.”

Future of Consumer Investments

Despite current challenges, Rathi is optimistic about the future. He anticipates more funds and investors entering the consumer sector, spurred by recent success stories like Mamaearth and Sula Vineyards. He believes the ecosystem will naturally evolve, attracting more investment and creating more exits.

Rathi highlights a few key areas he is enthusiastic about: Clean label products, Low and no alcohol beverages and Nicotine alternatives.

Meanwhile, India’s consumer investment landscape is ripe with opportunities. As Rathi aptly puts it, “Tech VC investments started far earlier… consumer investment in India is just about a 10-year-old story.” The next decade promises a flourishing ecosystem, with more investors recognizing the potential of consumer businesses to deliver substantial returns. For aspiring entrepreneurs and investors, now is the time to tap into India’s burgeoning consumer market.

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