Glossier

Venture capitalists are banking on beauty.

As evidenced and underscored by Glossier’s recent $24 million Series B round that the start-up took to founder Emily Weiss’ Into the Gloss web site and social media to announce earlier this week, it appears that investors are increasingly hungry for a piece of beauty start-ups. The round, led by Twitter and Snapchat investor IVP with support from Index Ventures, brings Glossier’s total funding to more than $34 million.

Following the less than welcoming venture climate that’s prevailed over the last year-and-a-half, this could be a much-needed sign that the mood is shifting.

The sentiment from the end of 2015 through most of this year was that money was tight — with the financial community still reeling from a few high-profile misses in the dot com space. Namely, Hudson’s Bay Co.’s $250 million purchase of Gilt Groupe at a quarter of the $1 billion valuation it once had, as well as the $15 million sale of former e-commerce darling Fab.com, also once valued at $1 billion.

But a few recent, solid exits, including Wal-Mart’s $3.3 billion acquisition of Jet, have whetted the VC community’s interest in the space. VC-backed Dollar Shave Club’s investors cashed in on the company’s reported $1 billion acquisition by Unilever — paid at a point when the company had roughly $152 million in revenue. And with valuations like Too Faced’s $1.45 billion purchase by the Estée Lauder Cos. Inc. on $270 million in revenue, and It Cosmetics’s $1.2 billion acquisition by L’Oréal on $182 million in sales, investors are looking at the beauty category and seeing dollar signs.

“There has always been an interest in beauty companies and the industry in general because of the margins and the recession-proof type of industry, because people always need these types of products,” said Frank Fazzinga, president of Grace Beauty Capital, which counts Harry’s, Glamsquad, Supergoop and Warby Parker among its investments.

Fazzinga maintained that billion dollar exits have helped validate investing in the beauty industry, as well as bring the financial and VC sectors hope that there are exits to be had besides going public or just building a larger entity. He said large exits may elicit even more interest from “more technology-type, heavier venture capital investors.”

“It won’t necessarily drive more money into the category. People are very wise to how they’re raising capital these days from VCs [to]…strategic investors [who] are very important, especially early on. Valuing your company the right way makes sure you don’t box yourself out from later stage growth checks,” Fazzinga warned.

Early signs point to Glossier being the market darling right now, but it isn’t the only beauty company investors are keen on.

Sources indicate that coconut oil gurus Kopari may be looking to raise some type of private capital. And even though it’s a different business model, on-demand beauty services company Nomi has raised more than $1 million from investors and is prepping for a $2 million Series A round. Magnetic makeup pencil brand TrèStique is raising its first significant round of funding that’s expected to close early next year, cofounder Jennifer Kapahi said in November.

“The private capital markets are embracing beauty brands growing up in social channels,” Okner said. “The investors are willing to give [them money] because they see a replicable model in the playbook that was established by NYX and Too Faced, and now by Glossier. It’s a well-defined playbook.”

Kirsten Green, founder of Forerunner Ventures, said she believes the sobering fundraising climate conversation that started 18 months ago actually proved to be a good thing for start-ups.

“People took the warning to heart, and there were really more conversations in every boardroom about cash management and being careful of getting ahead of yourself,” said Green, who has invested in Warby Parker, Birchbox, Hotel Tonight, Dollar Shave Club, Glossier, M.Gemi, Outdoor Voices and Draper James. “That has curtailed further struggles with fund-raising, and in best-case scenarios has made more disciplined companies that are attractive for fund-raising.”

Other venture capitalists agree. In addition to “strong exits,” 14W’s Nick Brown said entrepreneurs who are more open to different types of distribution — i.e. brick-and-mortar and wholesale partnerships — are the ones more likely to achieve success.

“When Everlane started and Warby Parker and Bonobos, which were a generation before Glossier, these, for the most part sold on their own domain,” said Brown, whose firm has invested in Glossier, Everlane, Moda Operandi, Lyst and Reformation.

Now, all of the early players sell wholesale and have physical retail spaces, which is one of the things Glossier founder Emily Weiss identified as a plan when the company unveiled the capital raise. Glossier also intends to enter new categories and up international availability, she wrote.

“That’s a powerful mechanism for an investor to gain some additional conviction. Any concerns you have about how big someone’s dot-com business might be is alleviated by the fact that you have other distribution channels that, over time, feed into their dot-com business,” Brown continued, adding that when a company opens a new store, they generally see a life in their e-commerce site from consumers in a nearby radius to the new door.

But exits or physical retail aside — Brown said none of this matters if a company has strong performance, citing Glossier as an example.

“The landscape is becoming more inviting to investors but…it doesn’t matter how the market is or how a market responds to a space when you have an opportunity to invest in an exceptional business. You do it regardless of how people are currently viewing the space,” he said.

The beauty category’s high margins are also a draw for many investors. Clara Sieg, a partner at Revolution Ventures, the venture capital firm started by AOL’s cofounder Steve Case, credited “incredibly high margins,” low cost of shipping and consumer’s obsessive consuming of content related to product, tips and trends, as traits that could make for a great return on investment for a venture firm.

“Those dynamics support the opportunity to combine great product with great content and build a brand around it, as companies like Glossier have done,” Sieg said. “We’ve also seen a very active M&A market, fueled by legacy conglomerates wrapping in emerging and high-growth beauty brands in an attempt to stay relevant and expand their product suites.”

But in addition to its placement in the beauty category, Glossier stands out to investors because of its direct relationship with its customers.

“If you have direct engagement with a consumer, in particular the Millennial consumer, that is extremely valuable,” said Ilya Seglin, managing director at Threadstone LP.

“Venture capital investors are getting some really good, solid benchmarks on indie brands that have been able to scale and gain prominence through influencer marketing and alternative distribution channels….I think that’s heightened their interest in investing in the indie, socially grown beauty brands,” said Martin Okner, managing director at SHM Corporate Navigators.

But despite this interest, coupled with more online beauty ventures popping up in the market, not all are faring as well as Glossier.

For instance, subscription service Birchbox began to experience growing pains earlier this year. The first sign that was in trouble occurred in January when 15 percent of the staff was laid off amid a restructuring of the business and a second layoff swept in June, where an additional 15 employees were let go.

In August, Birchbox raised $15 million from existing investors that was meant to act as a cushion as the company worked itself toward profitability in the back half of the year, but at that time, the financial community had doubts about the viability of the company.

Glossier’s digital prowess is one of the things drawing investors. The brand’s earned media value is up more than 36 percent year-over-year to more than $4 million, according to data from Tribe Dynamics. “Glossier consistently engages their community of influencers — regardless of the size of their followings,” said Tribe’s Brit McCorquodale. “By investing in these relationships, especially with influencers who have moderately sized followings, Glossier has focused on strengthening genuine bonds with influencers devoted to the brand to build a tight-knit family of loyal contributors over time, driving consistent EMV.”

Selfie culture has played its part, too. The new crop of companies that emerge digitally first, including Glossier, ColourPop and most recently, Lime Crime, have all managed to launch in a social media-first way that resonates with Millennials.

“If MAC [Cosmetics] was really hot in the Nineties because they had RuPaul because they played with themes that were outrageous — [we have to ask ourselves] what is the 16-year-old today attracted to? They aren’t going to MAC anymore. The conversation has changed,” said Green, naming Lime Crime, which has 2.5 million Instagram followers, as the MAC for today’s Gen Z consumer.

But despite a long list of pros that have the finance and venture industries flocking to beauty, a source cautioned that investing in beauty companies doesn’t work in the same way in which many VC investors are accustomed.

“It takes much more money initially to get a beauty brand off the ground, and you really need to invest a lot of money to get it to scale. It’s not the same as throwing $3 million dollars at 10 different companies, and when one hits it’s going to hit really big and it doesn’t matter if the other nine failed,” said a financial source.

Another financial source agreed with the assessment that Glossier’s latest raise doesn’t necessarily signify a massive shift in the VC markets towards beauty specifically.

Michael Duda, managing partner at investment and advisory firm Bullish, believes that companies looking to attract similar capital infusions should “show proof that you uniquely understand the marketplace and who your target is and how you have a very specific way that you’re going to win them over.”

“There’s a lot of money out there, and strong propositions are still getting funded,” Duda said.

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