Reports that Hindustan Unilever is looking to acquire Minimalist, a start-up in the beauty and personal care (BPC) space, for about $350 million is evidence of the difficulties direct-to-consumer (D2C) brands face in scaling up. This is not the first time that consumer giants are showing interest in buying out brands; about two years back ITC had picked up a big stake in Yoga Bar, with an intention to buy more from the promoters in due course. At the time Yoga Bar was available in 6,000 retail outlets across the country and boasted gross margins of about 45%. But revenues were just about Rs 100 crore. As the Yoga Bar promoters said in an interview to this paper, the support from ITC in terms of cash investments and a distribution network of four million outlets had prompted their decision to sell out. Building an offline presence, a channel that most start-up managements acknowledge is now critical to reach more buyers, can be quite challenging as Honasa Consumer has discovered. The revamping of the company’s offline distribution, entailing a shift to the direct distributor model from the super-stockist model, didn’t go down too well. The cost of the adverse impact on the inventory of about Rs 40 crore has been significant for a business that posted an operating profit of Rs 137 crore in FY24.
Even where there is no plan to build an offline distribution channel and D2C brands can get traction online, both on their own sites and also on platforms such as Flipkart or Nykaa, it is not easy to make money. Minimalist, one of the few profitable firms in the BPC space, did fairly well in FY24 to post Rs 374 crore in revenues but its profits were just Rs 10 crore. For their part, legacy offline players across sectors appear to be willing to pay top dollar for a strong online brand offering promoters a deal they simply cannot resist. That probably explains the sale of a 27% stake in Caratlane by promoter Mithun Sacheti to Titan for Rs 4,621 crore sometime back.
For all the success stories of top companies buying out start-ups, however, investments in seed-stage funding fell to less than $1 billion in 2024 with the number of rounds plummeting by 40% to 925. To be sure, the total investments in 2024 were up only by 6% at $11.1 billion. But even in 2023, investors didn’t seem to be as risk-averse; they put in more than $1 billion in seed-stage investments across 1,545 rounds. In 2024, though, there was a fair bit of reluctance to support yet untested businesses. Just about 395 start-ups got first-time funding rounds compared with 665 in 2023. One doesn’t blame the investors for turning cautious; more money was being made available to businesses than was probably needed and at valuations that were clearly unjustified. However, the fall in seed-stage funding is somewhat disappointing because that is what keeps innovation alive. It’s possible that there are not too many good ideas out there, but the few promising ones shouldn’t lose out for want of capital. That could hurt the ecosystem at a time when a new breed of entrepreneurs is working on some exciting business models. While valuations have corrected hurting returns, initial public offerings have given investors handsome exits. Some of the dry powder could perhaps be ammunition for seed-stage ventures.