A new crop of venture capitalists are here, and they’re specialists in the beauty industry.
Their pitch to founders is this: we’ll have time to give you special attention because we don’t make tons of investments, and we will help you grow this company, profitably, at a sustainable pace.
It’s not sexy, but so far, it’s working. These types of investors have been able to woo many of beauty’s fast-growing brands.
Traditional venture investors from the tech community can certainly write checks and advise on the digital side of beauty operations, with expertise in things like digital marketing and customer acquisition. But VCs often push top line sales growth at the expense of profitability, and they are rarely equipped to provide meaningful input on the more traditional mechanics of the beauty business — things like making good products, ensuring solid distribution and growing profitably. Instead, VCs tend to strew money around in lots of companies, hope that one or two of them will make it big, and simply deal with it when the rest fail. They also often prioritize scaling sales, but not profits.
Enter today’s beauty specialist VC firms, like True Beauty Capital, Willow Growth and others, that aim to do the opposite of that.
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True Beauty, founded by Rich Gersten and Cristina Nuñez, has already invested in Aquis, K18, Kinship, Maude and other brands. They recently closed a $42 million fund that was propelled by the growth their early investments were seeing, they said. Ultimately, their goal is to help brands gain traction without spending wildly on marketing. “We’re not writing $250,000 checks across 50 brands hoping that one of them is the next Drunk Elephant,” Gersten said. Instead, the firm is writing $1 million to $5 million checks in between 10 to 12 companies, and hoping that most of them find success. “We have more winners in our portfolio than we do losers, which is the opposite of what venture capital traditionally does. They sprinkle and they, in some cases, hope and pray that you’re going to have that one or two monster exit[s],” Nuñez said.
For Deb Benton, cofounder and general partner at Willow, distancing her investments from the traditional tech VC model has been important. She previously worked as the president and chief operating officer of NastyGal, the venture-backed fashion start-up that went bankrupt in 2017, and saw that the way VCs invested in beauty and consumer companies didn’t always work.
With Willow, her goal is to help founders build the businesses they want to build, versus focus on rapid scaling at the expense of margins, she said. She tells brands to be “maniacally focused on your margin profile” and on “bringing joy to your consumers’ lives” to drive repeat purchase. “We just don’t want to force these brands to have a billion-dollar exit to be successful, that’s irrational,” Benton said. Her firm backs companies across the consumer and beauty space, and recently invested $2.6 million in Dae, which is projecting 300 percent growth for 2021.
Venture capital is relatively new in the beauty space, but so far, few beauty companies who have grown via that route have had the billion-dollar exits their backers are seeking.
“I can’t think of a single one that scaled a truly digital business,” said Ilya Seglin, managing director at Threadstone LP.
There is the Honest Co., Jessica Alba’s CPG company that also makes beauty products, which raised about $1.4 billion via SPAC public offering earlier this year. Industry insiders pointed out however that the SPAC deal occurred only after Honest got a traditional private equity investment from L Catterton, an experienced consumer-focused firm. There’s also Glossier, which just raised another $80 million Series E with a $1.8 billion valuation, but they haven’t sold or hit the public markets yet.
“In general, the market is willing to value companies that are profitable and growing differently than companies that are unprofitable,” noted Steph Wissink, analyst at Jefferies.
Beauty companies are selling “confidence and aspiration,” said Wissink. “For VCs, that goes back to, can you get that level of intimate working knowledge of a business. You can have the best product with the strongest efficacy, but if you don’t have story and you don’t have aspiration, the consumer’s going to see it like vanilla ice cream. They’re going to look around you for pizzaz.”
Specialist beauty investors may be better poised to understand businesses, founder stories and product quality.
“This VC approach from people who understand the industry and can truly be a strategically helpful partner, it’s exactly what the category needed,” said Seglin, who said he is skeptical of traditional tech VCs backing beauty brands.
“You can’t scale a consumer product in a mature category the way you can do new technology,” he said. “To me, this [new] VC approach is really interesting … because they actually add value because of their understanding of the business, their connections, because they’ve seen what distribution expansion works and what doesn’t.”
Seglin noted that in beauty, the connections piece is particularly important. “It’s a clique and it’s who you know. A lot of relationships open doors,” he added. “With the right relationship you can find the right digital marketing partner, you can meet with a QVC buyer. And if you don’t know someone you can bang your head against the wall for a very long time.”
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