Good morning [%first_name |Dear Reader%],

It’s easy to forget just how long some of India’s internet giants have been around.

Take FSN E-Commerce Ventures. The company behind personal care and fashion e-tailer Nykaa was set up this month a decade ago. Amazon was more than a year away from launching its marketplace in India, and Zomato was still very much a tool for restaurant discovery.

And Flipkart had just become the country’s second-ever unicorn (the first was InMobi, a mobile advertising company). India has since added 93 startups worth at least US$1 billion.

But when it comes to internet companies that went public last year, Nykaa is by far the most valuable. With a market capitalisation of ~US$11.4 billion, it’s 1.4X of Zomato, 2X of fintech Paytm, and 2.5X of insurance aggregator PolicyBazaar.

While the fact that it’s the only profitable company of this cohort has certainly helped, there’s another factor.

Nykaa hates the marketplace model in cosmetics, but loves it in apparel

When the Nykaa website went live in October 2012, buying anything online was still relatively new for Indians. And earning their trust was a big challenge for e-commerce companies.

It was particularly so for Nykaa since it was selling make-up, hair care, and skin care products. We may be fine with a knock-off T-shirt but not an eye primer or exfoliator of dubious provenance. The consequences of the latter could be devastating.

So Nykaa decided to eschew being a marketplace filled with sellers in favour of being the seller itself, sourcing directly from brands or their authorised distributors. This would allow it to verify each product listing and strike up exclusive partnerships with luxury brands such as Hermès.

Nykaa began with 4,000+ stock-keeping units (SKUs) from over 100 brands. Now, it offers ~260,000 SKUs from roughly 2,600 personal care brands. Purplle, a smaller competitor with one-third of Nykaa’s gross merchandise value (GMV), operates as a marketplace and has around 50,000 SKUs across 1,000 brands.

By 2018, the road to profitability was quite clear for Nykaa. In the year ended March 2018, it trimmed its losses by more than a quarter to Rs 28 crore (US$3.7 million) even as its revenue surged over 2.5X to ~Rs 580 crore (US$76 million).

So when it ventured into fashion that year, one would have expected Nykaa to continue with the inventory-led approach it had perfected in cosmetics.

But it did something else: it embraced the marketplace model.

That’s not to say Nykaa doesn’t hold inventory at all in fashion. But it has chosen to be marketplace-first in this category. Two-thirds of its fashion GMV of Rs 665 crore (US$87 million) in the year ended March 2021 was through the marketplace, and global brokerage Jefferies expects it to go up to three-quarters of Rs 7,900 crore (~US$1 billion) in five years.