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Should VCs be investing in beauty brands?

Should VCs be investing in beauty brands?
From TechCrunch - October 7, 2017

In the last two years, Unilever acquiredCarver Korea for $2.7 billion. Estee Lauder purchasedToo Faced Cosmeticsfor $1.45 billion. CVC Capital Brands bought PDC Brands for $1.43 billion. LOreal purchased a trio of skincare brands for $1.3 billion, and alsoIT Cosmetics for $1.2 billion. E.l.f. Beauty did an IPO.

Venture capitalists didnt invest in any of these beauty businesses. They also skippedUrban Decay,Tarte, Bluemercury, Hourglass,Becca Cosmetics,DevaCurl, Paulas Choice,ESPAall beauty brands that have recently sold for hundreds of millions.

Theyre not technology companies. But neither are shoes, glasses, athletic wear, razors,mattresses or the other consumer investments that VCs have been making in recent years. Its partly because everything now has an online distribution platform.

So why have they missed out on this wave of beauty acquisitions? Some dont view makeup as a suitable venture investment, but others think theyre late to understanding the market and all of its promise.

The beauty category is one that has seen a lot of M&A activity over the years and I think it will continue into the foreseeable future, said Hadley Mullin, senior managing director at TSG Consumer Partners. She was part of the private equity team that invested in IT Cosmetics a few years before its billion dollar-plus exit to LOreal.

Megan Quinn, general partner at Spark Capital, said that the buying sprees are because the incumbents failed to innovate. You have these enormous conglomerates who have these legacy brands that arent translating to millennials, to Gen Z, and need to acquire this direct-to-consumer company in order to stay relevant. Quinn said that she is hoping to find a skincare brand to invest in. The margins in the beauty and cosmetics industry have been very healthy.

Tanya Soman, a venture partner at 500 Startups, says that in addition to looking for younger demographics, beauty shops are searching for technology to improve shopping visits. Brick-and-mortar retailers have also been trying to re-engage customers by looking to technology as a solution in order to provide a high-value in-store experience.

Some VCs have already made investments. Sequoia Capital recently invested in Charlotte Tilbury and IVP has Glossier as a portfolio company.Polaris Partners invested in Living Proof, which was bought byUnilever. Several have invested in subscription services like Birchbox and Ipsy, although those are distribution platforms for other brands makeup samples, rather than original products.

Julie Fredrickson, CEO of Stowaway Cosmetics has raised venture capital from Slow Ventures and Vayner/RSE, but she said that pitching a largely male VC crowd was difficult and that many investors didnt understand her business. Most of these brands are commensurately underfunded compared to tech companies in similar positions, said Fredrickson. Theres a chance for a totally new dominant player and no ones really gunning for it.

Mullin believes that having a 40% female team at TSG Consumer Partners helped them identify IT Cosmetics. Without a doubt, the fact that we have strong female representation in our leadership leads to meetings with women-focused brands. Entrepreneurs are really looking for a partner that gets their business.

Soman says that the reality is that most VCs are male, and its hard for them to see the value in a solution for a problem they dont personally experience. What all VCs do see is ROI, and thats what has given the beauty space the attention it deserves lately.

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