Mass Premiumisation Is The New Play In Consumption Category

Mumbai-headquartered Rockstud Capital is probably one of the few early-stage VC firms in India that has been able to return the entire capital to its investors from its first fund, that too within a relatively short period of five years. 

While the first fund has a portfolio of 10 companies across sectors, with one partial exit, Rockstud’s INR 300-crore second fund will back about 25 companies in areas like sustainability, health tech, fintech, and consumption space. 

The VC firm recently made its first bet on Palette Brands from the latest fund. Just like its first fund, it will continue to invest at pre-series A stage, writing checks ranging between INR 3 to 6 crore. 

But this time, Rockstud plans to lead the rounds, rather than being just a co-investor. It will also participate in follow-on rounds of well-performing portfolio companies. 

Hedwig by The Content House caught up with Gaurav Thakkar, Principal at Rockstud Capital, to understand their modus operandi for picking up startups and what early-stage founders can do to create a sustainable company. He also spoke about the emerging trends that he finds exciting. 

In a candid interview, Gaurav said they prefer to look at startups that have built some level of product market fit and are revenue generating. Still, as an investor, he keeps an open mind and is willing to come in a bit early if the founding team meets his requirements.

He believes nothing is better than building a profitable business that positively impacts the world such as improving climate change. Here is his full interview, edited for brevity and clarity. 

The Content House: When you assess founders, what are the deciding factors for you?

Gaurav: For us to consider a startup for investment, it has to have some level of product market fit. Assessing a company at that stage means we’d eventually see if we align with the founder and his idea. 

We make a bet on the founding team, so we try to understand the background of the founders and their motivation behind starting up. Very often founders come up with solutions because they themselves have faced the problem and know what it would take to fix the issue.

If a founder has no experience in the sector he is in, we do a little more digging to understand the level of research the founder did before launching the product. What kind of conversations has he had with potential customers? What's the feedback he got? Is there a customer stickiness to what he is building? Why does he feel he is the right person to crack that market?

These are some of the questions we try to understand by having a conversation with the founder as well as customers. We always prefer talking to the paying clients to understand why they are buying this product and would they continue to buy if the price is increased.

We try to figure out interesting business trends of the startup we are in discussion with.

For example, from the first fund, we invested in NOTO - Healthy Ice Cream, a company in the ice cream category. During the time we were considering investing, we were amazed to see the kind of numbers Noto was doing from just one city. Some of its competitors were doing the same numbers but from two or three cities. These things show how the founder is building the business.

The Content House: What are the recent trends that excite you? 

Gaurav: With consumer technology becoming more accessible, a trend towards premiumisation has emerged, which is driving innovation and helping startups come up with high-end features. 

Today’s consumers are value-conscious and are willing to spend extra if they feel that the product is either contributing to the greater good of the planet, or it's making them healthy. So this premiumisation play, in terms of better products and services is a big theme within the consumption that we would look at.

The Content House: Can you tell us more about this premiumisation trend and what it means for startups?

Gaurav: Actually, it’s a mass premium category. Instead of restricting their growth by getting into a niche market, brands have gotten into this mass premium category. Since it’s neither very expensive nor very cheap, there is a large target segment to go after.

For example, we are seeing premiumisation play happening in food segments, such as in the oil category, which is actually a very commoditised business. 

Premiumisation also means higher revenue. Earlier, we used to be impressed when a consumer brand would do a business of INR 25-50 lakh a month. But now, brands earn a revenue of INR 1 to 2 crore a month at a relatively early stage, and it still means nothing.

Of course, the bigger question here is how to build a strong customer stickiness and eventually scale. Because once you build a certain traction other players would automatically come. Even legacy players will compete with you by coming up with a slightly different offering.

How you differentiate and continue to build that customer stickiness is where most of the consumer brands struggle. The ones who are able to do that at scale are able to raise larger funding but most of them struggle to even reach Series A stage.

The bar for Series A rounds has also gone up. If the revenue of INR 1 or 2 crore was enough for Series A before, investors look at nothing less than INR 5 or 6 crore.

The Content House: How do you see new-age consumer brands competing with well-established legacy brands that have a large loyal customer base?

Gaurav: Even if there are legacy players present in a category, I feel there are more than enough opportunities for startups to build unique solutions and co-exist with established companies. Today's consumers are willing to experiment and ready to try new brands, even if it means paying a little extra for quality products. 

Our first investment was in Palette Brands, which used the funding to get into the cookware category, which has a lot of established brands with a loyal customer base.

However, we are confident that the team will create its own niche in the cookware segment despite having strong competition.

We have seen some really interesting innovations in the luggage category. Mokobara, for example, has made a place for itself even when there are legacy players like VIP and Safari. Who would have thought a new-age brand would come and eat their market share?

Very often investors get worried about the presence of a legacy player in the industry their portfolio companies are in. But, I think, a lot of legacy brands don't make quick decisions. And that is one thing new-age brands can do very quickly and comfortably. They have the pulse of the customer and hence they can pivot and iterate very quickly compared to a legacy brand. 

Moreover, there is so much data available for a founder to understand their customer segment better and offer products exactly the way they want.

So if you can bring in a differentiating factor and build a value product by listening to the customer closely and iterating, you can always scale.

Gaurav Thakkar, Principal at Rockstud Capital

The Content House: In the B2C segment, what can founders do to create a sustainable company? 

Gaurav: For me, there is only one definition of sustainable business: A business that is profitable or at least has a clearly defined path to profitability.

Founders have realised that if their business is going to continue to rely on external capital for growth, they are in trouble. Because there'll always be some competitor building something better than them or more funded than them. That realisation is sinking in for the founders.

The first thing you look at for achieving profitability is unit economics. Are you, on every sale, unit economics positive? That's the bare minimum. Without that, we don’t even look at that business.

You can't expect an EBITDA level profitability at the early stages, but is the company already a contribution margin 1 (CM1) positive [when your sales cover the direct cost like packaging, logistics, etc.]? Is it showing signs of getting towards CM 2 [when sales further cover the cost of branding and marketing]? If you see that, then the company is at least on the right track in terms of building a sustainable business.

You break down different levels of profitability and look at the stage at which the company is. It will show if the company is on the path to profitability after the fund-raise.

A lot of times, founders don’t even consider profitability since they are at an early stage, and that is a red flag for us. A founder has to be clearly thinking about building a business that becomes profitable.

The Content House: How can a brand, say in a mass premium segment, ensure that they are profitable at a unit level? What are the strategies to actually achieve that?

Gaurav: The first thing I always tell founders is don't give anything for free because the moment you do that, it becomes difficult to charge customers. You don't know once you start charging customers if they are going to stick around. So always put a price on what you are selling.

From there on, you have to track some of the metrics to understand how your economics is playing out. For example, your repeat ratio and return ratio. And your discounts. Are you doing more or less of it? Are you making sales because of discounts? This will show if what you’re selling is a push product or a pull product. A lot of consumption gets driven by discounts so you have to be very careful in terms of what discounting you do and how your customers perceive it. 

These are some of the elements as a founder you can track to really know if you are really building a good unit economic business.

The Content House: After tracking these metrics, what are the things that a founder should focus on? 

Gaurav: I would say content. Once you build your product and position it in the right way, you have to figure out how to put out the right content in the most creative way to connect with your customer base. You have to have the ability to build strong content that resonates well with your story, product, and with something consumers can relate to. 

In a highly competitive industry, like the consumer brand category, a lot of startups have used content creatively to create a unique space for themselves and build a brand.

Today, you see a lot of brands putting founders’ faces on the product instead of celebrities. They do this because they want consumers to relate to their story better. 

In our portfolio, Noto has done a decent job in putting out content, telling consumers what they are building in the healthy ice cream category. Similarly, there is an oil company whose founder is trying to differentiate through content by posting videos of manufacturing of their product, which gives a lot of conviction to me as a consumer. 

If founders can back their claims with the right content, it builds authenticity and customers begin to trust the brand. So content is what the founders should focus on apart from tracking the metrics I mentioned. 

The Content House: Is there an apparent shift towards prioritising sustainable businesses from the investor perspective?

Gaurav: In the last one and a half years, a lot of companies have not been able to raise funding predominantly because their focus was only on growth.

Investors are very clear now that there is a more sustainable way to build a business. Today we are talking about profitability at the earlier stages, which is a great thing. I consider it as the maturing of the ecosystem. 

It’s okay not to be profitable today, but you have to have a clear roadmap. If you're not able to do that authentically, you are going to struggle to raise funding. 

Even the valuation expectations of founders have become a lot more realistic. While it has led to a lot of pain, it is a good thing that's happened for our ecosystem. The bar has gone up because, in the last three years, a lot of funding went into companies that were not able to justify the valuation. 

That is why investors want to be absolutely sure that they back companies that can scale. They are going a lot deeper in terms of making sure each and every number is questioned. Investors want further validation and extra comfort before writing a large cheque.

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