Sixth Sense Ventures, which is in the process of raising Rs 350 crore for its second fund, SSIO-II, believes consumer-centric companies will increasingly be the disruptors. SSV founder and CEO Nikhil Vora tells FE’s Bhavik Nair that newer players continue to capture a disproportionate share of the growth. Excerpts:
Many young entrepreneurs are taking on established players…
The potential to disrupt is huge because the consumer business in India has been very static for the last 50-70 years. That is why the bigger companies grew larger; not because of their brands but on the back of the distribution strength. This is now being dismantled with distribution channels opening up and you will see many new brands which now have shelf space. We see a lot of hyper competition in the consumer branded space over the next 5-10 years. It’s happening in various categories such as liquor, dips and sauces, foods, personal care. All consumer companies work on a minimum 35-40% return on net worth, a very high return. Everyone works on an operating margin of 20%-plus.
We have seen many disruptions in IT. How do you see that in the consumer-centric space?
What you see in tech businesses are not so much of a disruption, but innovations. However, consumer businesses are potentially disruptive and not innovative. A Fogg was not an innovation but they disrupted the deodrant category. A Go Cheese was not a disruption in the value-added dairy category; they got shelf space against an Amul on one side and a Nestle on the other side, which I think was a disruptive element. So, I think you will see a lot more brand disruptions happen and the challenge for leaders is that they hate to create disruptions on their own. While the leaders will continue to grow, thanks to the entire size of the market, there is also a disproportionately larger growth that is getting captured by the newer players.
You are saying: “You only require capital twice!” Does that stand true even now?
Completely true! In all my years in the consumer space, I haven’t generally seen a business in the consumer domain which requires perpetual funding. If the businesses grow, they won’t require capital again. The moment a business gets funded on its own, there are enough cashflows to support its existing businesses. There are very few consumer businesses which in their life-cycle journey will require capital. You look at any listed consumer company in this country, not a single company would have raised capital. That is true even for private companies which have scaled up.
How are you so convinced about SaffronStays in the micro-hospitality segment when there is an Airbnb out there?
There are two things when we looked at investing in SaffronStays. One is this premise that property seduces. Everyone who has excess capital possibly has a second home somewhere. While they buy the second home, it is not a yield-generating asset and it is not even being properly maintained and used. What SaffronStays does is it to take all these properties and give them a premium look and feel. We have been able to manage close to 50 bungalows and we think it will become 500 in three years. We believe that people want to travel in groups. The ability to standardise the locations and create a premium feel and at some stage soon, create a membership model is something that we are excited about.
Are valuations as high in the private space as they are in the listed consumer space?
First, we have to understand why the consumer businesses are expensive. Fundamentally, consumer businesses get funded only twice — at seed stage and at growth stage. If it requires funding a third time, it is not a consumer business. When a business’s requirement of capital is only twice in its life cycle, it becomes a seller’s market because it is not in any desperation to raise capital. Consumer companies don’t require capital after a certain level of growth. If they don’t require capital, then the only way for a potential investor to buy into a consumer company is to buy out an existing investor or put in the value at a much higher level. Therefore, the value of these businesses becomes expensive. As far as the private space is concerned, the valuation is almost similar compared to the listed space. Sometimes, a sheer scarcity premium makes the private space a bit more expensive.