As Indian startups continue to battle with a decline in funding this year, the direct-to-consumer (D2C) segment, which includes brands such as Mamaearth, Sugar Cosmetics, Paper Boat and Zouk, is witnessing a much bigger plunge in external funding.
The segment, which had seen booming investments during the pandemic years, has recorded an 82% decline in funding so far this year, data from Tracxn showed. D2C startups raised $162 million between January and September this year, compared to the $913.6 million it had raised in the corresponding period last year.
Moreover, this year saw only 76 rounds of investment, while the previous year had seen about a 100 more during the same period, the data showed. The average ticket size this year is also considerably smaller than last year.
For example, the highest funding this year, among D2C startups, was seen by Giva. The omnichannel jewellery company raised $35 million in July from Premji Invest and existing investors. Last year, the largest round was of $108 million by online dairy platform Country Delight.
During the pandemic years, these startups rode the wave of increasing online shopping amid lockdowns, with shoppers often preferring to buy directly from the manufacturer’s site than through retailers. A report by Avendus Capital in 2020 had projected that the D2C segment could have a $100 billion addressable market by 2025.
Several D2C startups had raised funding at significantly high valuations in 2020 and 2021. For example, both Mamaearth and the Good Glam group raised funds at unicorn valuation in 2021. As per a report by Bain and Company, VC funding in D2C startups jumped 30 times in 2021 to nearly $1.2 billion.
But as the pandemic-driven consumption habits waned in 2022, investors started becoming cautious about these valuations, especially in the middle of a funding winter that startups were witnessing globally. In 2023, the funding scenario is worse.
“Investors are now coming at safe valuations. Founders are extra cautious since they have not seen this kind of a funding winter for many many years,” said Umesh Uttamchandani, co-founder and chief growth officer at DevX, a startup accelerator.
“DevX Venture Fund usually looks for a revenue multiple of not more than 5-6 times… larger D2C brands are trading at 12-15 times their revenue, so that is why it doesn’t seem to be a compelling opportunity for us to invest into,” he added.
To maintain their growth post-Covid, D2C startups began setting up physical stores and focusing on omnichannel distribution. The aim was to increase visibility of their products, resulting in higher volumes and increased market share.
Better brand visibility would also help decrease the cost of customer acquisition as the company could then cut spending on digital ads to bring in customers. Companies like Sugar Cosmetics and Pilgrim doubled down on expanding their physical presence.
“The existing D2C players are largely finding it tough to show the growth expected of them. The existing D2C brands are making the expensive choice of going phygital to continue showing growth,” said Amarjeet Singh Makhija, partner and leader – startups, PwC India. “Phygital” refers to the marketing strategy of having both digital and physical store presence.
Despite smaller deal sizes, investor sentiment in the D2C segment remains upbeat this year. “The D2C continues to shine in terms of new investment, newer brands and fresh categories,” Makhija added.