For a startup founder, owning over 50 percent of the company is a feat when the company was founded nine years ago; more than a year after becoming a unicorn; and most importantly on the day before ringing the ceremonial listing bell after a successful initial public offering (IPO).
And Falguni Nayar, Founder and Chairperson of FSN E-Commerce Ventures, which runs Nykaa, has managed to achieve that. Owning 52.56 percent of a company whose market value ranges between Rs 94,306 crore and over Rs 1.21 lakh crore based on the lowest and the highest price point since being listed on November 10, the feat is anything but ordinary.
Compare this with other tech startup unicorns which have gone public, through initial public offerings (IPOs) in recent months. And a clear ‘skin in the game’ differentiator emerges.
Take the case of Deepinder Goyal, the Co-founder of foodtech unicorn Zomato which went public in July, currently holds 4.71 percent stake. At the lowest and highest share price points since listing, Deepinder’s stake in Zomato values in the range of Rs 4,211 crore to over Rs 6,247 crore.
Deepinder Goyal, Founder & CEO, Zomato
Similarly, Yashish Dahiya, Co-founder of PB Fintech which operates PolicyBazaar, has 3.84 percent stake in the recently listed online insurance aggregator. Using the same method of the lowest and highest share price since listing, Yashish’s shareholding is valued in the range of Rs 1,973 crore to Rs 2,534 crore.
An ex-investment banker, who has been dabbling in the startup ecosystem for some time, opines that skin in game is a major catchment for investors, both at private as well as the public stages. “An investor, irrespective of cheque-size, takes comfort when a promoter has too much to lose if the business hits rocky water,” they said.
That the promoter will not falter, owing to the vested interest of having high(est) shareholding works wonders with the investor psyche.
“The moat of the business could become a secondary factor for investors who take comfort in higher promoter holding,” the capital market maven added.
In the case of Nykaa, the listed startup tech unicorn’s shareholding pattern gives strong nostalgia of traditional family-owned businesses. And in reality, Nykaa operates as a strong family-run business which has involvement of family members in the business operations.
Yashish Dahiya, Co-founder of PB Fintech which operates PolicyBazaar, has 3.84 percent stake in the recently listed online insurance aggregator.
At an individual level, the 22.06 percent that Falguni holds — through Falguni Nayar Family Trust — is valued at in the range of Rs 20,800 crore and over Rs 26,848 crore based on the lowest-highest share price points since Nykaa’s listing.
And considering the fact that Falguni’s average cost of acquisition of Nykaa’s shares worked out to Rs 8.30 apiece, at the issue price of Rs 1,125 Falguni’s acumen as an investment banker turned entrepreneur has already provided her a cost to issue price return of 13,454 percent, or over 134 times. At the high price of Rs 2,574 a piece the returns work out to a whopping 309 times.
These mind-boggling numbers are bound to raise eyebrows, because in the startup ecosystem it is only natural to expect that the founders will be diluting a lot of their high-stakes very early stages, and then keep diluting at every next round of funding.
Startups with single founders have to witness heavy dilution, the case in point is Vijay Shekar Sharma who held 9.1 percent of Paytm-operator One 97 Communications on November 11, when it filed its prospectus for the IPO. Though his average cost of acquisition per share was 50 paisa, his shareholding exactly a year before filing the prospectus was relatively higher at 14.7 percent.
In case of startups with multiple co-founders, the proportion of dilution is uneven and the depletion is relatively faster. Take the case of logistics startup Delhivery where the four co-founders Suraj Saharan, Mohit Tandon, Kapil Bharati, Sahil Barua respectively held 6.82, 6.98, 3.23, 7.21 percent at the end of June 2021.
Delhivery’s draft red herring prospectus dated November 1, filed with market regulator — Securities and Exchange Board of India (SEBI) – on November 3 reveals that the respective holding of the four co-founders at the end of March 2019 stood at 13.38, 13.43, 5.4, and 13.70 percent respectively.
Interestingly, Falguni and her husband Sanjay Nayar — non-executive director of FSN E-Commerce Ventures with over 35 years of experience in banking, and private equity — have co-invested in the business, which helped them hold their stakes at higher levels.
A case in point are two rights issue in Nykaa’s capital history which saw the husband-wife duo subscribing to 0.79 million and 3 million shares each in October 2013 and March 2014 respectively.
Also, Nykaa has been operated as a single founder-run startup initially and then the family members, daughter Adwaita and son Anchit joined the (family) business in 2017 and 2018 respectively.
Before being appointed as the executive directors on July 1 this year, Adwaita, who had co-founded Nykaa with her mother, played a key role in establishing Nykaa’s fashion business. Anchit, who first worked on the expansion of Nykaa stores, was the company’s chief marketing officer from May 31, 2020, to January 12, 2021.
The family-run factor also helped Falguni, an investment banker for 18 years with Kotak Mahindra Group, to have a strong grip on the business and a stronger grip on shareholding.
Falguni’s business and captable acumen gets endorsed by one of Nykaa’s later-stage investors. On condition of anonymity, they told YS that it all depends on how a founder wants to raise capital and how they want to build their business.
“From the beginning Nykaa created a very capital efficient business. They were not focused on giving discounts to get customers. Instead, they took other measures and conserved capital,” the investor added.
As far as the other measures go, Nykaa had adopted the omnichannel route in 2014. In less than 3 years of its existence, this otherwise capital, inventory and resource intensive strategy was bound to be costly, yet an efficient measure to build a brand.
On the other hand, generally for ecommerce, advertising and discounts were the go-to measures for acquiring customers. It was only in early 2021 that many online-first beauty brands started expanding their offline presence, as performance marketing costs have been skyrocketing.
Falguni, is also believed to have used her investment banker acumen to the best of her ability by opting for an unconventional funding-raise strategy, leveraging near two decade-long investment banking experience. Instead of raising money from venture capital firms, the former I-banker went to family offices and private equity firms in the later stages.
After its November listing, when Nykaa announced its second quarter results for FY 2022, its advertising and marketing cost had skyrocketed in the quarter of its going public.
Given that Nykaa had spent an estimated Rs 37.8 crore – 15.6 percent of the total estimated IPO expenses – on advertising and marketing as well as printing and stationery expenses for the IPO, it was natural for analysts to take note of the major spend during the quarter.
During the FY 2022 second quarterly analyst call, Falguni said, Nykaa’s marketing cost, which went down during the first and second pandemic wave, would be increased “in a very conscious manner“.
“We are (now) increasing our marketing spends because they were artificially depressed in the first half of FY 2021 and the period of COVID impact,” Falguni told equity analysts on November 15, 2021.
Clearly, it would take another investment banker with decades of experience and zeal to startup in the 50s, with family support on business operations, to become the next family-owned and family-run tech startup. Until then, Nykaa has the claim-to-fame for being the unusual and unseen novelty in the startup world.
