Fresh Off Wander Beauty Exit, Serial Entrepreneur Divya Gugnani Talks Fundraising And Growing Fragrance Brand 5 Sens

Serial entrepreneur and investor Divya Gugnani has sold Wander Beauty, the brand of convenient beauty essentials she started with model Lindsay Ellingson in 2015, to holding company NamelessCPG, where it joins a portfolio with Everly, Wile, Ladybird Provisions, Awkward Essentials, Nakey and Hilo, for an undisclosed price.

The sale allows Gugnani to focus on her two other endeavors, 5 Sens, a clean fragrance brand she founded in 2022, and Concept to Co, an investment firm she established in 2014 backing early- to mid-stage brands such as Shaz & Kiks, Superzero, Blume, Chillhouse and Hawthorne that typically does four to five deals a year.

In a scorching fragrance category that saw sales spike 12% last year in dollar terms, according to market research firm Circana, Gugnani, who’s authored the book, “Pitch Perfect: Founders Guide to Fundraising for Startups,” believes 5 Sens is ready for hyper growth. Available at Sephora and priced each at $65 for a 1-oz. bottle, the mood-centered brand’s bestsellers include sweet gourmand In Too Deep, woody floral Catch Feelings and fruity floral Life of the Party.

The origin story for 5 Sens dates back to when Gugnani was 10 years old and began wearing fragrance to mask the curry her schoolmates accused her of smelling like. “My dad used to travel for work and buy me all these duty-free minis. I used to bathe in them. I didn’t leave the house without putting on fragrance,” recalls the Indian American. “Fragrance became just who I am.”

Beauty Independent chatted with Gugnani about what’s in store for fragrance this year, her tips for entrepreneurs pitching to investors and hiring for their businesses, tempered brand valuations, the effective way to approach networking, and why she’s impressed with Rhode’s road to Sephora.

How did you start 5 Sens differently from Wander based on lessons you learned?

I have made every mistake you could make. The biggest lesson I learned is to go narrow and deep. When I started Wander, I thought I could conquer the world. I did makeup, then I could conquer skincare. I said, let me be in Nordstrom, Neiman, DTC and Amazon.

When I started 5 Sens, I was like, I’m going to do one thing. I’m going to make a really incredible EDP with a French perfumer. I’m not doing body mist, I’m not doing body butters, I’m not doing cream. I’m narrowly focused on my assortment, dialing in to where there’s a a white space and going exclusive at Sephora and on DTC.

Investors have been scouring the fragrance category to pinpoint the next big fragrance brand. What are you seeing in the category?

If you look at clean color, it has been disrupted by brands like Tower 28, one of my investments, doing amazing formulations that you get from a prestige brand at an accessible price point and tapping into community. In skincare, Topicals, another one of my investments, same thing.

The makeup, skincare and haircare markets are very saturated and have lots of very strong players. There’s not one player in accessible, clean fragrance who owns the market and has disrupted it. There are tons of small players, none of which have gotten to any size, and the market is wide open.

I saw a white space. I surveyed so many customers. Everyone said the No. 1 thing about accessible fragrance is the quality sucks. There are accessible price points and fragrance, but the quality is not 15% juice concentration.

People want Tom Ford quality, and they want it at a $65 price point. At $65, you’re getting a plastic bottle from other brands, but, with 5 Sens, you’re getting an opaque bottle, which is something you’d get from Gucci, and a wood cap.

I obsessed over every single detail in the product, from the best French perfumer to collaborate with to the very high juice concentration to give you projection, silage and complexity that you get from a designer-level fragrance with eco-friendly ingredients and packaging.

What’s ahead for the fragrance category this year?

Explosive growth. It’s a booming category that’s here to stay. There’s a big trend in mists, and everyone is going after hair and body mists. You don’t have to use an EDP, and they’re easy to take on the go. There’s almost an oversaturation of mists, which is why we are not playing in that. If everyone’s doing it all at the same time, then it’s not a good thing to do.

In skincare, we saw an evolution of the customer becoming a skintellectual. There was incredible education in skincare. Now, there’s massive education happening in fragrance, and that’s one of the biggest trends. People are getting way more sophisticated about notes, complexity, how to wear fragrance.

Many brands are jumping on Amazon earlier in their life cycle. What’s the distribution roadmap for 5 Sens?

I’m seeing more and more brands even that consider themselves super elite getting on Amazon. There’s a trend towards making fragrance accessible in terms of distribution. I still believe a lot of the consumer action happens in store for this category because fragrance is so personal.

I believe that narrow and deep distribution when you’re building a brand and telling a story is way more important than shallow and wide. We’re exclusively in Sephora and on DTC. We have no plans to expand our distribution at this moment. We’re still at the stage where we’re building brand awareness, and the premier retailer who builds brands from ground up is Sephora. They help you tell your story and cultivate the audience around your brand.

What does it cost to start a beauty brand today?

It is way less expensive today to launch a brand than it ever was before. You have technology and tools that have taken out all the barriers to entry to launch a brand and made it way more cost effective. What you need is fractionalized human talent in areas where you need humans, and we live in a fractional economy since COVID.

Personally, I put about $455,000 into 5 Sens from Concept to Co to incubate the brand, and we’ve generated millions of dollars. I have a very seasoned fractional team that I have met through investing in 80 companies. Primarily, that money went to inventory. In fragrance, the cost of blending at smaller quantities can be very expensive. So, we partnered with Sephora and Ipsy when we first launched to create a larger volume.

You believe most founders seek funding at the wrong time. What’s the right time?

The best time to raise money is when you need it, not when you want it and are just raising money to blow it on TikTok ads. I’ll give you an example. I have a founder in my portfolio who is going from 1,000 to 6,000 retail doors. When you can go to your investors and say, “I have purchase orders, I have demand,” that’s the time when you as a founder can control the outcome of a quick process for the right money you need.

What funding sources should brands be exploring if they aren’t ready for or aren’t finding receptivity from institutional investors?

Don’t underestimate the ability to start early with friends, family, angel networks and crowdfunding. Many brands go too quickly to institutional when they haven’t figured out product-market fit or have a product that isn’t unique different from what’s out there and don’t have traction.

When you raise institutional money against that, you may never find out if you actually have product-market fit. You may be pouring so much money into it that people are just buying it for marketing as opposed to you having a product that customers really want to buy. You should raise small amounts of money, get early traction, and test the market with an offering or two. Then, when you have product-market fit, you put money behind it to scale.

What mistakes do entrepreneurs make when they pitch investors?

Let’s start with outreach to begin with. Be personalized, do the homework, make it short and have one clear call to action. Never send a pitch to someone who’s not a fit for your brand at the stage, size and category where you’re looking to raise. Every pitch you send should be catered to that investor.

It should be concise and relevant. If it’s more than 12 slides, I’m not reading it. Don’t exaggerate and send me a financial projection that shows you going from zero to $10 million or $20 million in a year when we all know you’re not going to do that. Mention something in the investor’s portfolio or a recent deal that they did so there’s a personal connection and they know you’ve done your homework and are a fit.

Then, what is the call to action in that email? Is it that you want me in real life? Do you want to have a coffee? Do you want me to review your deck? Do you want to have a 15-minute chat about distribution because you have questions? What is the ask?

People send cold emails, but try to get a warm introduction. And you’re going to have way more success if you network in real life. Go to industry events, meet investors.

Even though founders should be careful who they pitch to, you recommend they establish relationships with investors for possible investment down the line. How?

I’ll give you an example. I met body care brand Hanni founder Leslie [Tessler] through Cass Devor, who was the CEO of Cay Skin. I was like, “I don’t really do body. Body’s a small category, but I really like you, and I’d like to see you get more traction. Let’s be in touch.” She sent investor updates every quarter, and I kept track of the progress of her business.

Then, she sent me an email that she was rolling out to all doors at Sephora. When I got the email, I was like, “I’m excited, let’s have a conversation. Are you thinking of raising?” I co-led an SPV with Annie Evans of Dream Ventures and filled out her round with other entrepreneurs in our network.

You mentioned crowdfunding. Crowdfunding that crowds cap tables has been looked at unfavorably. What do you think of it?

It’s a disaster [if the cap table is too crowded], but the best thing about it is it tells an early-stage investor whether there’s any traction or excitement for a brand. If you can get on a video and sell thousands of people who’ve never heard of your brand and your product on it and get them to pre-order it and wait for it to be made, then you have something.

What’s your approach to networking?

When I went to business school, they kept telling us network to get work, meet as many people as you can, you never know what’s going to happen from it. I’ve learned that networking can drain my time and often provides almost no value. Instead, I’m selective about events and spend real time at those events.

I just went to the J.P. Morgan dinner at Cosmoprof, and I sat next to two people. I now know their entire lives. I had deep conservations and built very strong personal connections with those two people, but I didn’t meet other people at the table. I think those two personal connections are going to be more valuable to my life versus having superficial hellos with 10 people.

What positions should beauty brands hire for early on?

As the CEO and founder hiring in the early stages of your business, you need two things: people with a good attitude and raw intelligence. You’re spending a lot of time with these people, you better like them. I have a New York to Tokyo test. If I don’t want to get on a plane from New York to Tokyo with you, then I can’t hire you. It doesn’t matter how many degrees you have. You need raw intelligence at the early stages of a company because every single person in the company is wearing five hats.

When you start scaling past $10 million, $15 million, $20 million, you start looking for domain expertise. Every hire you make at that stage needs to make the pie bigger. They need to bring a unique and different skill that doesn’t exist in the organization.

Hire everybody in the off season. This is how you don’t use recruiters. As a CEO, meet people every week. If you need a CMO in two years, this week you meet one or two. Every conversation is going to help you understand what a CMO does and what pieces of the CMO scope you should be looking for. Then, when you are ready to hire a CMO, you have an Excel spreadsheet full of candidates.

What’s your prediction for beauty M&A this year?

There’s been a lull in the market and a slowdown in strategic appetite. I think that’s going to come back this year because there are brands that are well positioned and at the size to transact. Now that we’re not in the midst of an election, I think the markets are going to stabilize. We were in a period of time where rates were just going up. The interest rates being so high put a kibosh on M&A deals because loans were expensive to get, but, when money becomes cheaper again, then you can do more deals.

What role does private equity play?

There was very little money in the beauty space years ago. PE was doing manufacturing and other businesses. PE deals as rely on debt, so you have to service debt payments and need to have consistent cashflow. So, they need businesses that have predictability of revenue and cashflow to make debt payments.

Beauty is attractive for PE. The consumer has a massive appetite for it, it’s a huge total addressable market, the profit margins are incredible because you can make a beauty product at 10% of the retail price, and it gives you stable, consistent cash flow. So, these guys start jumping in, then what happens is the market shifts. It’s oversaturated with so many brands being launched, brands are hot and then not, the rates go up and strategics start pushing away from M&A deals. The PE guys are holding all these brands that they can’t get to strategics.

There’s been this weird place that we’ve been in the last year, which is PE is holding a bunch of brands that haven’t had an exit. We have to see strategics step back into the market, and then we will see what happens to PE activity, but I think PE has been lukewarm on the category in the last year because they’ve bought into it so heavily and are waiting to see what happens.

What about valuations?

They’ve come down. We were in a frenzy where PE guys started doing deals earlier on, and growth equity guys started getting into venture. Everyone shifted down because they wanted to get in earlier. Now, everyone’s going up in the cycle. A guys are doing B deals. B guys are doing later stage. They want to see the survival of the fittest and customer feedback and traction versus before when they would write a check for an idea. That has brought valuations down, and I think they’re in a healthy, normal place.

I’ll give you an example. A pre-seed deal of a company early stage that either had launched or was about to launch a couple years ago could get a valuation from $7 million to $10 million. Now, that same company has to get to $1 million of revenue and it’s looking at a valuation that’s between $5 million and $7 million.

The publication Puck recently reported that Hailey Bieber’s brand Rhode is going into Sephora. What’s your take on the brand?

Rhode has done a genius job marketing. They focused squarely on a few products early. She launched the lip product and built a cult following around it. She was very entrenched in telling the story of the brand. She already had a community and built engagement by taking people behind the scenes and showing them what she was doing. And her marketing strategies were excellent. Who doesn’t know about the phone case?

She was narrow and deep with her distribution. She was DTC. She didn’t go into every retailer. She said, let me build DTC, let me build my community and now let me go to Sephora and win. I think she will do phenomenally there.