Last week, beauty e-commerce platform Nykaa was looking to raise $30MM, after raising $20MM last year. 

Nykaa has been a revelation. The company's robust growth flies in the face of the general belief that vertical marketplaces (e.g. Nykaa) would never be able to compete at scale with a horizontal marketplace (e.g. Amazon). The large customer base, infrastructure and supplier network of a horizontal player would outdo a vertical player. 

Nykaa's 100% year on year growth says otherwise, with good reason.

The internet now provides easier access to the long tail of customers, and suppliers. Discerning readers would recall from last week's edition that the internet has substantially reduced customer acquisition and fulfilment costs. Aggregating the long tail can result in a passionate customer base, that keeps coming back because the vertical platform solves a focused problem like nobody else. 

Even with the internet's assistance, Nykaa was still staring at an uphill task.

Started in 2012, by ex-Kotak Mahindra MD Falguni Nayar, the company was an interesting blend of a startup setup by an influential industry veteran. Ms. Nayar's wealth of experience would show in the company's journey, as Nykaa attempted to create an entire market from scratch.

That market, of course, was selling beauty products online.

A lot of products that begin to sell quickly online have a fairly large demand offline. The internet becomes a facilitator for the sale, and thus customer acquisition is efficient. Despite India having 1.2 Billion people, or 1/6th of the world's population, the Indian beauty market stood at $6Bn in 2018, almost 1/5oth of the world's beauty market. Driven largely by women, the nascent market is still playing catch up globally.  

Beauty is also complex category because it involves personal care. Electronics, for example, can take a "one size fits all" approach and still sell. Beauty, on the other hand, has to be tailored to personal specifications (e.g. skin type, sensitivities, climate). Given India's diverse demographic and climate only adds to the complexity.

As they say, beauty lies in the eye of the beholder, and the beholders are many. 

To serve the needs of a multitude of customers, there would thus be a myriad of products and SKUs (imagine lipstick shades for one type of lipstick). Not only are the customers long tail, but so are the products. The result of this is a disorganized, fragmented, market with a variety of channels to sell products. 

Driving online adoption for a nascent, complex market would thus be significantly difficult.

The online market was a tiny sliver of the overall market, and when Nykaa raised its Series A in 2014, the company was barely scratching the surface. As I touched upon earlier, beauty is intensely personal and therefore requires you to become a trusted brand. 

Nascent market (few), small online channels (new), trust to be built (unconvinced) are the characteristics of the market. Few, new, unconvinced customers - it was an uphill task indeed.

The lack of trust was apparent in the first few years. Nykaa rightly identified the need for handholding and advice to help customers make informed purchasing decisions. The company took an inventory-heavy marketplace approach to manage quality. It simplified UI/UX to ensure that the purchasing experience was seamless. It expanded into offline stores to have physical touchpoints. 

The outcome would be fantastic, and no commentator would have reckoned that Nykaa would scale so rapidly. 

Net revenue progressed from $4MM in FY15, $14MM  in FY16, $30MM in FY17,$80MM in FY18 and is expected to close April'19 this year at $160MM. In just 4 years, the company has grown 40x, tracking more than 100% growth every year. As Nykaa is an inventory-led marketplace, its margins on products are higher than horizontal marketplaces. With 30-50% margins on seller's products, the company also launched its own label with 40-60% margins, to improve margins. 

With healthier margins than other marketplaces, one could now explain the curiously "small" amounts Nykaa has raised.

Ranging between $10-20MM, the company has raised similar amounts since its Series B, and not progressively increasing amounts (e.g. OYO). This indicates a healthily growing business, on track to profitability, which is not extremely capital hungry.

To demonstrate capital efficiency, tt took OYO $1.7Bn to reach a $5Bn valuation (2.9x ratio of valuation to raise), while it took Nykaa $120MM to reach a $640MM valuation (5.3x ratio). For more comparisons, Ola is 1.6x, Swiggy is 2.1x for the same multiple - and this is a fairly robust indicator of capital efficiency. 

While the market was difficult while starting out, it became a fantastic business if the engines starting working.

Due to Nykaa's premium focus, it has an average ticket size of 1,200 INR ($18), with gross margins of ~50%. Subtracting a 20% fulfilment cost, given the inventory-heavy business, would leave the company with 30% of revenue (360 INR/$5) as contribution margin (CM). Nykaa's customer acquisition cost (CAC) is 200 INR($3). [thanks to inputs by readers on the difficulty of following the math in a story, I will be creating an Excel going forward]

The healthy ratio of first-order contribution margin to CAC ($5/$3 = 1.6x), shows that the company generates a profit (CM - CAC) for every customer acquired. Given the company is now a trusted brand, repeat makes the business even more attractive (high lifetime value). It is little wonder that Ms. Nayar believes the business will be profitable very soon. 

Beyond a healthy business, the power of Nykaa is truly seen in its platform.

Amazon changed the way sellers sold products, and I believe Nykaa will do the same for beauty brands. With a readymade infrastructure to sell products and a large customer base provided by Nykaa, beauty entrepreneurs will find it far easier to launch brands. Due to Nykaa, I expect a large number of beauty brands to mushroom and become incredibly popular (think Youtube influencers).

Nykaa has created a new market, and the juggernaut is just getting started.