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Are brands beauty’s next big investors?

In the past year, an influx of brands with investment capabilities—Sundial, Huda Beauty and Harry’s—have hit the scene, working in investment capabilities as part of their broader business strategies.

This class of investors is new for beauty, which had already attracted interest from private equity firms, venture capitalists and strategic operators. Brands making investments on their own add another layer of competition to an already busy space, but it may also portend the conglomerates of the future.

Take Huda Beauty. The product business of power influencer Huda Kattan set up a fund specifically to make investments when it received a minority investment from private equity firm TSG Consumer Partners in late 2017. While the company continues to search for brands to acquire or invest in, it has also diversified its business by creating subbrands in-house—which, even without acquisitions, will evolve Huda Beauty into a multibrand beauty business. Asked about the possibility of buying versus building, Kattan said, “We’ll definitely be building a lot of our subbrands, but if there are any owners out there, any founders…who have a very strong perspective, I would definitely love to invest in them. We’ve tried to look for brands to invest in. There isn’t anything we’re working on right now, but if the opportunity arises, we’re hoping to do that.”

Brands themselves acting as financial backers is a trend that Financo managing director Vennette Ho terms “value-add VC”—meaning early-stage capital, but with the benefit of money from someone who has sector experience.

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“It’s an interesting phenomenon and you’ll probably see more of it because all of these new entrepreneurs are about building a community,” Ho said. “They see it as supporting a new crop of entrepreneurs.”

Harry’s, the men’s shaving start-up, had a similar idea to fund new business concepts when it took a minority investment from private equity firm Alliance Consumer Growth. The business said back in February that it would use some of the capital to “build brands across multiple categories.” Then, in October, it launched Flamingo, the first brand from its in-house incubator. Flamingo is an at-home hair removal business for women, and aims to capture market share in the women’s shave category, where traditional brands are suffering from sales stagnation and in some cases, decreases.

The largest example of a brand investment fund is Richelieu Dennis’ Sundial, which set up the New Voices Fund, a $100 million fund to provide early-stage capital for women of color entrepreneurs, as part of its deal with Unilever in 2017. Sundial, the owner of SheaMoisture, Madam CJ Walker and Nubian Heritage, has long made sure the women who work as part of its supply chain are compensated fairly and able to run their own businesses, a concept Sundial refers to as community commerce. But after hosting a series of town hall meetings across the U.S., Sundial learned that its consumer base in its home market needed support, too.

“We learned women of color receive less than one cent of every dollar that private equity and venture capitalists invest in this country,” Dennis said recently at the WWD BeautyVest conference. “If they’re not getting the opportunities to participate in the economy and create wealth for themselves and for their families, than how are we able to expect them to continue to grow and to support us as consumers?”

After this AHA moment, Dennis got to work starting the fund, but when Unilever came knocking, he thought the project was something that would deter the consumer packaged goods giant from buying his business.

“We had started putting the fund together before we had the initial conversations with Unilever, so when we started to have the conversations I said, ‘Hey, this is what we’re doing; I don’t think we’ll be able to do a deal because this is going to compete against what you guys do.’ And they said, ‘No, no, no, that’s exactly why we want to partner with Sundial, because you guys are thinking about issues and you’re trying to find ways to solve problems,” Dennis said. “We took what was going to be a $20 million family fund and grew it into a $100 million fund….Today we’ve invested in some 10 companies and we’ve committed somewhere in the neighborhood of $50 million in capital.”

The fund still has more than 5,000 applications for funding that have come through its web site that it needs to go through, he said. Companies that have received New Voices backing include Beauty Bakerie, Beautycon Media, Mented, the Honey Pot Co. and the Lip Bar.

Unilever’s willingness to contribute to the New Voices Fund was a big part of Sundial’s decision to sell the company to them. Situations like that—where potential sellers weigh options outside of the purchase price—are likely here to stay, according to Moelis managing director Andrew Shore. It helps acquirers stand out in a marketplace where the buyer has many options in terms of capital and investments, he says.

“It’s part of a trend—it’s a way for buyers to differentiate themselves,” Shore said. “While it’s nascent now, I believe it’s going to spread its wings and become a more forceful and powerful trend in the M&A environment.”

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