Siddhi Capital, a growth equity firm specializing in food and beverage brands, recently closed its $135 million Fund II, which represents a significant increase from its previous fund. In response to challenging market conditions characterized by inflation and high interest rates, the firm has decided to “move upstream” with its second fund. This new approach involves investing in fewer and larger consumer packaged goods (CPG) deals that offer high margins and are focused on generating positive cash flow.
The venture capital (VC) landscape has experienced a downturn following the boom of 2021, leading to disruptions across startups. Many companies were forced to raise down rounds in 2023, reflecting the difficulty of securing funding in the current environment. VC fundraising also saw a sharp decline last year, with PitchBook and the National Venture Capital Association reporting a 67% drop in funds raised compared to 2022.
Analysts have observed a trend where limited partners (LPs) are more inclined to support funds with a proven track record of success. This preference for historical performance resonates with Siddhi Capital, as nearly all LPs from the firm’s first fund chose to invest in the second fund. The trust gained from past achievements and access to prominent industry deals has encouraged new backers to join Siddhi Capital’s latest fundraising efforts.
Melissa Facchina, co-founder of Siddhi Capital, highlighted the changing metrics for CPG exits, emphasizing the increasing importance of factors such as margin and cash flow positivity. Acquirers are now more interested in deals with higher revenue numbers, shifting away from the previous focus on companies with annual revenues of $25-50 million. In Fund II, Siddhi Capital plans to allocate two-thirds of its portfolio to growth-stage businesses in traditional food and beverage categories, with the remainder dedicated to food technology.
Focus on Problem-Solving and Mass Market Appeal
Siddhi Capital’s investment strategy prioritizes companies with mass market viability that address specific consumer needs. Portfolio companies like Super Coffee, Cirkul, and Magic Spoon offer products that resonate with a broad audience while solving common consumer pain points. Facchina emphasized the importance of investing in products that seamlessly integrate into consumers’ lives, avoiding the need for extensive marketing or explanation. The firm’s shift towards a more traditional private equity model in Fund II involves reducing the number of investments and increasing check sizes to support high-potential companies.
Overall, Siddhi Capital’s decision to close its Fund II signals a strategic shift towards larger CPG deals with a focus on profitability and market scalability. By adapting to the evolving investment landscape and aligning with LP preferences for strong performance, the firm aims to continue its successful track record of supporting innovative food and beverage brands.