Over the past decade, beauty saw an M&A boom as the sector’s biggest companies like L’Oréal, Unilever, Procter & Gamble and the Estée Lauder Cos. bought smaller, independent brands to build out their portfolios and give them access to Millennial consumers and exposure to the specialty channel. So big was the gold rush among the indie brands that many were sold for upward of $500 million, some for over the $1 billion mark, with astonishing double-digit multiples at play in certain deals.
Increasingly, though, the large players are taking a different approach to M&A. Instead of only making very big bets, they appear to have changed tactics and are also making a number of smaller wagers on what the future looks like through investments in very early stage beauty and tech companies. Some companies are making investments as low as $50,000 in emerging brands and many are capped at around $10 million.
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“Instead of buying companies outright, they are electing to invest in them and acquire a minority stake, which gives them a lot of color about the company, its products and its culture. I think of it almost as an engagement period before a marriage,” said Lindsay Carlson, a managing director at investment bank William Blair. “It’s a perfect opportunity to confirm that there’s a longer term, sustainable fit between organizations.”
Among recent deals, L’Oréal’s venture capital fund, Business Opportunities for L’Oréal Development or BOLD, was one of the participants in a $4 million funding round for French metaverse developer Digital Village.
Established in 2018, BOLD has invested in a range of disruptive start-ups including French biotech firm Microphyt, Japanese personalized beauty company Sparty and temporary tattoo-maker Prinker Korea.
Of its investment in the metaverse, Camille Kroely, chief metaverse and Web3 officer at L’Oréal, commented at the time that Digital Village’s solutions “will be powerful enablers for our brands and whose ideals of sustainability, accessibility and interoperability in the metaverse or Web3 are ones we share.”
Unilever Ventures has also been very active in beauty. Most recently, it invested $2 million in scalp care brand Straand in a pre-seed investment deal. The Australian hair care brand launched last summer and became available in the U.S. in February. Its other investments have included Beauty Bakerie, Curlsmith Exponent Beauty, Kopari, Minimalist, Nutrafol, Mira Beauty, Pangaea, The Inkey List, Trinny London, True Botanicals, Uoma and Womaness.
Beauty’s other top five players are also dabbling. The Estée Lauder Cos. unveiled its New Incubation Ventures in March 2021, making an investment in grooming brand Faculty, at the time valuing it at $3 million. It has also invested in British natural skin care and fragrance brand Haeckels.
But even before New Incubation Ventures was formed, it made smaller investments in Deciem and Have & Be Co. Ltd., the Seoul-based parent of Dr. Jart+ and Do the Right Thing, which eventually led to big acquisitions.
Tracey Travis, executive vice president and chief financial officer of Lauder, told Beauty Inc, “When you think about the amount of capital for a larger, full acquisition there’s a level of proof that we need in the brand’s performance in order to make that investment so that we can get an adequate return on a larger amount of capital from an investment standpoint. In a start-up brand where you’re investing $1 million or $2 million let’s say, the risk is much lower if that brand does not work out, so we’re really happy with the portfolio that we have right now and that’s something we continue to look into going forward.”
Procter & Gamble has also been making smaller investments through P&G Ventures, which launched in 2015. And while Shiseido does not appear to have a formal venture arm in the U.S., in 2018 it took a minority investment in luxury beauty retailer Violet Grey and in 2018 in beauty tech company Perfect Corp., which went public last year. In addition, it has Shiseido Beauty Innovations Fund, which explores investment opportunities among China’s emerging companies in cosmetics and wellness, as well as in related technology companies such as e-commerce and digital services.
Part of the reason for the evolution in strategics’ investment plans is seeing how much private equity and venture capital has made so getting in early gives them a larger share of the profits, banking sources told WWD.
These moves also help them learn more about sectors they may not be wholly familiar with, almost as a tool to investigate new technologies and ideas without going all in. L’Oréal’s Bold, for example, is going deeper into areas such as medspas, ingestibles and the metaverse than the company has currently.
However, while these funds are understood to be very active currently, their interest is not always met with open arms, as an early investment from one of the big beauty giants could deter a rival from wanting to acquire it down the line, sources said. There’s also a concern that if the original company that made the initial investment does not eventually follow through and acquire the company in question, then others could think there is something wrong.
But there can be successes in both directions, too. Unilever Ventures, for example, was an early stage investor in textured hair brand Curlsmith, sold to Helen of Troy for $150 million. Conversely, it was also an early investor in hair supplement brand Nutrafol, which Unilever signed an agreement to acquire a majority stake for an undisclosed sum last year.
“That’s the perfect playbook,” Carlson said. “If the founders get in and everyone sees eye to eye and is on the same page regarding the terms and structure of the deal, that’s a great strategy because you almost have a guaranteed strategic upon exit. But,” she cautioned, “should things go sideways you could find yourself in a trickier situation.”