January 2020, Sector 44, Gurugram. Ishaan Mittal was stunned. “It was probably the smallest office I had ever seen,” recounts the venture capitalist. On a Monday morning, the principal at Sequoia India landed in Delhi from Bengaluru, navigated smog and congested roads to reach Honasa Consumer’s office in Gurugram. He wanted to quickly wrap up the last-minute formalities before closing the series B round of funding. Ghazal and Varun Alagh were busy with the R&D team cramped in the basement of a building where the parent company of skincare and beauty brand Mamaearth was chaotically nestled.
Mittal was dazzled. He expected some sort of visual relief. But there was none. “This was the beauty about the co-founders,” underlines Mittal, now managing director with Sequoia India. He explains his ‘pleasant state of surprise’. Started in 2016 by Ghazal and Varun Alagh, Mamaearth had raced to an operating revenue of ₹17 crore in three years—₹22.19 lakh, ₹5 crore and ₹17 crore in FY17, FY18 and FY19, respectively. The brand, which started with toxin-free babycare products, was now striking a run-rate of ₹100 crore for FY20.
Mittal now talks about another pedigree of the startup, which gave it enough room to flex its elbows. The direct-to-consumer brand had raised over $4 million from Fireside Ventures, Titan Captial and a bunch of angels in its seed and series A round till January 2020. So a company of this size was expected to have a slightly spacious and more modest corporate headquarters. Right? “Well, this is what I presumed,” says Mittal, who had seen a bulk of startups graduate to a much bigger space after getting funded. The Mamaearth co-founders, though, were the odd ones out. “They were immensely frugal,” he says.
The constricted size of the office, however, had nothing to do with the financials of the startup. Mamaearth has posted three consecutive years of losses—₹30 lakh, ₹34 lakh and ₹3.5 crore in FY17, FY18 and FY19, respectively—and was expected to bleed more in FY20. Queerly, Mittal sensed an impending tipping point. Sequoia India led the series B round of funding in January 2020 when Mamaearth raised $20 million. “Profitable businesses don’t happen by serendipity,” he maintains. “There has to be a plan.”
Back in 2018, the husband-wife duo was busy executing a close-fisted plan. Mamaearth roped in actor Shilpa Shetty Kundra to endorse the brand. Analysts and critics reacted strongly. “Another D2C startup burning money,” was the noise. There was a fitting context for the caustic reception. The combined losses of five of India’s most funded internet firms—Paytm, Flipkart, MakeMyTrip India, Swiggy and Zomato—stood at ₹7,800 crore in FY18, according to data quoting business intelligence research platform Tofler. The Alaghs, though, stayed unfazed. “We did an equity deal with the celeb. She invested in the company, and we didn’t pay her,” says Varun. “Humne cash bachaya [we saved cash],” chips in Ghazal. “Having clarity on what not to do is more important than aligning what all to do.”
The first-time entrepreneurs, for their part, had crystal clarity on their nays. Early in the journey, when some backers insisted on hiring experienced professionals from bigger rivals such as Unilever, the co-founders put their foot down. Expensive hires, the entrepreneurs argued, would dent the P&L of the startup. The logic was simple. A costly senior executive would bring in a team that would come at a heavy cost. “No doubt we would have got highly skilled staff but the question was at what cost,” says Varun. In a lot of cases, he explains, startups have high burn because they bring in really expensive talent at an early stage. “We needed hustlers who didn’t cost a bomb,” adds Ghazal.
Another instance of keeping costs under control was delaying Mamaearth’s debut on television. Pressure, again, was immense and thrusted quite early. “Itna paisa pada hua hai bank mein, tum TV ad kar lo [there is so much of money lying in the bank. Do a TV ad],” was a strong pitch made by a bunch of VCs in 2018. “This would help in multiplying sales,” they argued, rooting for an aggressive marketing and promotional blitzkrieg. Yet another suggestion was to expand outside the country. After all, new geographies would lead to a spurt in sales and widening of consumer base. The third advice was to foray into the home care segment. Again, the move made sense. HUL and P&G were cited as great examples and the huge total addressable market (TAM) of the segment was dangled as a carrot.
The co-founders balked at all the ideas. Without a comprehensive retail footprint and distribution network, Ghazal led the counter-charge, saying that spending precious moolah on TV would hurt. “You need to learn to walk before running,” she says. She also deflated the home care balloon by citing an aborted experiment in 2018. The co-founders entered the business of dietary supplements for expecting and new mothers. Though there was a healthy demand for products such as organic apple cider vinegar and plant-based Omega 3, the pilot was shuttered after four months. “We realised that such products was not core to the DNA of Mamaearth,” says Varun. “Continuing with it would have made us lose our focus,” Ghazal adds.
Eventually, Mamaearth did appear on TV when it sponsored reality show Bigg Boss in December 2020. But by then, the startup was galloping. It was well on its way to post a four-fold jump in operating revenue, and post its maiden profit after four years of consecutive losses. Subsequently, it entered the Gulf Cooperation Council (GCC) region in December 2020, starting with the UAE, and reportedly expanded to Nepal, Bangladesh and Sri Lanka. It closed FY21 by posting its first profit: ₹24.6 crore. “Inherently the realisation that businesses exist to make profits has always been there,” says Varun.
There was no let-up in growth, funding and valuation. In July 2021, Mamaearth was valued at $730 million when Belgian investment fund Sofina led a new funding round of $50 million. After six months, it raised $52 million in a new round led by Sequoia and entered the unicorn club this January. It claims to be a unicorn that has posted profit for two consecutive years. “We are profitable in FY22 as well,” claims Varun, declining to share the unaudited numbers.
Revenue, meanwhile, doubled: From ₹461 crore in FY21 to around ₹920 crore in FY22. The company is yet to file the audited numbers for FY22, and is preparing to tap the public market next year. “The operating revenue has doubled,” says a high-ranking official sharing data on condition of anonymity. “It will get listed as a profitable unicorn,” the source underlines, adding that the startup has negative working capital now.
From a baby in 2016, which posted a few lakhs in revenue in the first year of operation, Mamaearth has morphed into a beauty and skincare Goliath which is now fine-tuning its ‘house of brands’ strategy. While it bought three companies— Mompresso, BBlunt and Dr Sheth’s—it has built its own army of brands—The Derma Co, Aqualogica and Ayuga—over the last two years. With a valuation of $1.2 billion, a swelling topline and positive bottomline, and a battery of marquee VCs who have pumped in ₹650.1 crore so far, Mamaearth is now gunning for glory in the IPO market.
The backers sum up the blistering six-year journey in one word: Frugality. “They have been running a tight ship,” says Mittal of Sequoia. One of the cultural aspects of a frugal startup striving to build a profitable venture, he reckons, is to stay extremely close to the ground. Even today, senior leaders at Mamaearth go to the market, talk to consumers and are in sync with the taste of the users. While conceding that structural reasons might make some businesses more profitable than others—FMCG and personal care is a high margin business; in some cases as high as 70 percent—Mittal points out what makes Mamaearth special: Not all beauty and personal care players are profitable!
So what is the most critical thing that helps an entrepreneur post profit? Is it the high gross margin inherent in a business? Is it staying thrifty? Or is it lack of competition which leads to negligible cash burn? Mittal reckons all play a part but the fulcrum has to be an attitude. “Turning profitable is 100 percent about having a profitable mindset. You need to be conditioned to post profit,” he maintains. If companies are in losses for years and then they decide to take a U-turn, it’s not easy. “You need to be determined to run a profitable business. And it’s not easy,” he says, adding that the founder needs to make tonnes of hard choices. Take, for instance, the temptation of top guns. There are phenomenal executives but they come at a much higher cost. “To leave them or on-board them is often a tough choice,” he says.
Turning profitable, interestingly, is not just a financial plan. There’s also a lot of cultural decisions that one makes. Take, for example, the cost that one is willing to bring into the company. Though variable margin structure is often discussed, fixed costs are equally important, underlines Mittal. Increasing fixed costs too much early on, with the hope to get to operating leverage with scale, can push out achieving profitability. “Creating a culture of thoughtful expenditure can go a long way in becoming a profitable company,” he underlines.
Meanwhile, Varun and Ghazal talk about the challenges for Honasa Consumer. The biggest is continuing to grow disruptively at a brisk pace. “In a hyper-competitive market, to keep growing ahead of the curve is a challenge,” says Varun. His partner talks about another interesting threat: Offline expansion. Mamaearth was born as a digital-native brand but has furiously expanded its offline footprint—available in over 40,000 stores across 100 cities—over the last few years. “Physical outlets are not natural to us,” says Ghazal, adding that it’s where traditional rivals are strongly entrenched. “So winning the offline battle is going to be another challenge.”
The third tough task is the one that will test the DNA of the company. Varun explains. Mamaearth is no longer a boat. It has evolved into a big ship. How to steer the ship profitably and continuously is a challenge. Varun, though, now talks about the unexplored opportunity. Around 71 percent of the Earth is covered with water. “Our ship has just started the voyage,” he signs off.
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(This story appears in the 23 September, 2022 issue of Forbes India. To visit our Archives, click here.)