Mamaearth’s listing a milestone moment for startup ecosystem, will shape D2C's future, say VC investors

While the big boys of the D2C ecosystem have had to cut spending amid a tough funding winter, the drying up of new investments has meant that the early stage buzz in the segment has cratered.

Over the past few weeks, there has been increasing buzz about Honasa Consumer, the parent company of Mamaearth. As the first IPO from India's startup ecosystem in the last 18 months, its performance could determine the fortunes of at least half a dozen growth stage startups, which are preparing to list in the next couple of years.

“This IPO is a milestone moment for the startup ecosystem as well as the FMCG industry. Honasa (parent company of Mamaearth) is pioneering the digital future of FMCG in India. It has shown that it is possible to build a Rs 1,500 crore-plus revenue company, profitably, in a short span of 7 years…”,  said Ishaan Mittal, managing director at Peak XV Partners.

“We hope that this IPO, which is a first from India's startup ecosystem in the last 18 months, will encourage more founders to take their companies public.”

Peak XV (formerly Sequoia), its biggest VC shareholder, has not sold any stake in the IPO despite sitting on 10X returns. It is likely because it sees more upside in the company's value. 

"The startup ecosystem is watching the Mamaearth IPO closely. If it does well, it will spell good news for more unicorns lining up IPOs," a founder, who subscribed to the Mamaearth issue, said.

Other growth stage firms who are weighing a public listing in the next year include the likes of Lenskart, Firstcry, OfBusiness, among others. Retail investors have been particularly cautious about new age internet companies' IPOs, after their experiences with firms such as Zomato, Paytm, Nykaa, Delhivery, and PB Fintech in the last couple of years. While most of these stocks are still trading about 30-40 percent below their listing price, they have have seen a rebound in the last year as they sharpened focus on profitability and significantly reduced losses.

Zomato for instance, has been delivering profits for two quarters in a row now, which has sent its share price to a 22-month high and seen its market capitalisation topping $12 billion last week. 

 The D2C bet

Over the last few years, investors have bet billions of dollars on the D2C (direct to consumer) market. And, judgment has finally arrived for the first of the lot.

As Mamaearth lists on the bourses on November 7 after a slow retail uptake in its initial public offer (IPO), all D2C investors are hoping for it to fare well in the public market — irrespective of whether it is a portfolio company, a competitor to a portfolio company, or in the anti-portfolio.

“Mamaearth is indeed a signal for opportunity in D2C space. Public markets have loved brands like Gillette, Colgate, Jockey, etc. And have given very high valuations. It will remain to be seen if Mamaearth reaches those numbers similar to listed brands like 10x revenue multiple in a few years,” said Anand Lunia, general partner at early stage venture capital firm IndiaQuotient that has invested in D2C startups like Sugar and FabAlley.

Valuation is always in a conundrum in the startup world. But, it became more so in the D2C segment when the pandemic-era boom in online purchases and cheaper money led to some big-bang, tech-like funding rounds in the space. As the boom petered out gradually over the last 18-20 months, one question got asked over and over again: how should D2C companies be valued?

When Mamaearth filed its IPO prospectus earlier this year, a controversy erupted after a report claimed that the company was seeking a valuation north of $3 billion — a number that would be 1,700 times its FY22 earnings. The unicorn’s founders- Varun and Ghazal Alagh- were quick to reject that any number had been decided at all, and doused the flames.

Ultimately, the company valued itself at $1.25 billion in its IPO. However, concerns remain on the pricing front as the valuation being sought is over 105 times the company’s annualised FY24 earnings (based on a net profit of Rs 24.7 crore in the June quarter).

“Valuation of each category depends on premium, frequency, control of distribution, and category leadership besides growth. Mamaearth has proven sales growth and category leadership. However, one can argue that some categories of D2C brands may get even higher valuation multiples if they solve for some other variables too. Shoes will be one example,” said Lunia.

Shoes have a high emotional connection. People want to wear premium shoes, but they don't like changing shoe brands often and India does not have many brands besides global sports brands.

“If a brand like Clarks can be built it will get high valuation. Campus shoes has a revenue multiple of 6x and PE multiple of 70x. Bata is similar,” Lunia added.

Boost for the D2C ecosystem

There are quite a few big D2C companies waiting in the wings to go the IPO route. While consumer electronics brand Boat has postponed its IPO amid a choppy market, there have been reports of baby product retailer FirstCry exploring an offering. And, eyewear retailer Lenskart is ripe for an IPO with it hitting $4.5 billion in valuation in its last funding round.

While the big boys of the D2C ecosystem have had to cut spending amid a tough funding winter, the drying up of new investments has meant that the early stage buzz in the segment has cratered. D2C startups have seen an 82 percent decline in funding – from $913.6 million raised in the first 8 months of 2022 to $162 million in the same period this year, according to data from Tracxn.

If Mamaearth is received well by the public markets, VCs believe that it would benefit the growth stage and late stage companies in the sector first, and then percolate down to the early stage.

“The Mamaearth IPO is a great boost for the Indian startup ecosystem. There’s a ton of inspiration that founders –- D2C and otherwise — are going to gain from the IPO. Building any business is difficult, but building a business with a deep supply chain, a strong consumer brand and with a Rs 1,000 crore kind of a revenue scale is a phenomenal achievement,” said Rajiv Srivatsa, partner at early stage VC firm Antler.

“It’s certainly going to be a positive influence for the ecosystem as a whole. This will have a boost to the late stage ecosystem as well - at least sound businesses with profitability – to go for an IPO too. Revenue multiplier levels for these businesses will be set by this latest IPO,” he added.

Blueprint for D2C startups?
The biggest beneficiaries of Mamaearth’s public market debut are definitely excited. Rishabh Mariwala, who has booked a return of over 50X in the IPO, thinks that Mamaearth has shown the way to D2C startups on how to go about balancing cashburn with sustainability of the business.

“There is a negative narrative around D2C companies burning cash where people question sustainability, but Mamaearth has shown the way and its IPO is a watershed moment for the startup ecosystem. It shows that D2C, along with marketplaces and offline, can help companies crack the code,” said Mariwala, managing partner of Sharrp Ventures from the Marico family.

“For any company looking to IPO, they just have to ensure that they are consistent with profitability and EBITDA and the rest will follow. Companies, hoping for an IPO, should ensure that they are burning less... A lower growth rate is fine, but a higher burn is not and Mamaearth is the torchbearer here," he added.

To be sure, between financial years 2022 and 2023, the company's gross profit margins increased by 0.11 percent from 69.96 percent to 70.07 percent, respectively. Mamaearth saw a net loss of Rs 151 crore in FY23, turned profitable with earnings of Rs 14 crore in FY22 and slid back into the red at a loss of Rs 1,332 crore in FY21.

One concern with Mamaearth’s public market debut has been a large secondary component — while there was a fresh issue of Rs 365 crore, existing shareholders offloaded around Rs 1,336 crore in an offer for sale.

However, it is worth noting that its biggest VC shareholder — Peak XV (formerly Sequoia Capital India) — didn’t sell any stake in the IPO despite sitting on 10X returns.