Based on the slew of M&A deals at the end of 2023, the current headlines of an impending Rare Beauty sale and the recent Galderma IPO, the beauty investment space appears to be strong.
In late March, VC firm XRC Ventures published the “Consumer VC Benchmarks: Seed-to-Series A” report detailing that strength and its implications, guiding smaller beauty brands hoping to raise funding and highlighting several investing trends. Since 2015, XRC Ventures has invested in over 140 early-stage brands, including beauty device company Solawave, Billie personal care and Naked Sundays skin care.
Among the trends the company called out was a strategy shift for generalist investors like Andreessen Horowitz and Lerer Hippeau — specifically, moving away from investing in the consumer category to focus on other areas like artificial intelligence. Additionally, M&A is back and at a healthy clip, with sales multiples ranging from 3x to 7x of a brand’s annual revenue. Yet despite this, VC funding for beauty and personal care has significantly dipped, with a decline of 50% year-over-year for the first quarter of 2024, according to XRC research citing Crunchbase data.
Andrew Ross, senior advisor and venture partner of XRC Ventures, spoke with Glossy about the report’s findings and XRC Ventures’ investment philosophy, plus he shared his thoughts on popular investment categories. Before joining XRC, Ross served as evp of strategy, new business development and integration for The Estée Lauder Companies.
How would you describe XRC Ventures’ investment philosophy?
“We look at three things. First, there is a where-to-play decision driven by consumer growth trends. And we look at that with a five- or six-year [runway], because you want something that has a tailwind to it — like the dermatological space or beauty devices, which are areas that are growing fast. Secondly, you’re dead already if you don’t have a strong enough gross margin from the beginning, because [without it] you can’t invest enough back into the brand to grow it. Third, it is about the founder and whether it’s a beautiful brand with the brand equity that indicates it will be around for [decades]. We’re always trying to balance those and understand them. What I love about the earlier stage brands is that you have amazing founders who are turning your preconceived notions on their head because they’re thinking about the industry differently.”
What are the implications of general venture firms moving away from consumer brand investments?
“You’re boiling [the market] down to venture firms that are probably more aligned with founders on how long things will take, what it takes [to succeed] and what a reasonable return [on investment] expectation is. Beauty has amazing multiples [of return on investment] within the consumer sector, but they’re not tech multiples [of 10x], and we saw a lot of companies get caught up in that. Glossier is a poster child for that. It’s a beautiful brand, but it got caught between tech investment expectations versus being a great brand that should grow and be nurtured with [proper] expectations and timing. A funding gap exists, in that good founders are not being invested in because investors are very wary about deploying capital. Even if firms have theoretical dry powder [to invest with], they are reluctant to call on that capital to make new investments.
But [recent acquisitions] have had great multiples. People are always looking for a bellwether. There’s a consistent quality M&A market for good assets. That’s what investors and founders should take heart in regarding this particular climate.”
What are your thoughts on the buzziness of body care? Is there too much hype?
“Body care is the new hair care. It’s a category under development by Sephora and Ulta Beauty and other retailers, in terms of how big the category can be and the subsegments possible. You’re starting to see subsegments, like brands that lead with scent versus treatment. But there are also a lot of brands jumping into that category to extend their brand or drive growth without necessarily thinking about the point of difference and value it’s delivering. The challenge with body care is the price and gross margin are historically lower than facial skin care. Typically, its gross margin is 10-15% lower than facial skin care. That’s why many brands try to find a premium difference in their products. Those who aren’t thinking hard about their differentiation will fade away because it won’t be accretive to their business. But it’s a category here to stay and will keep growing.”
Are there certain types of brands you’re not interested in anymore?
“I don’t want to be negative because I never want to discourage an entrepreneur. But everyone is skeptical of celebrity- and influencer-based brands that have nothing beyond the surface of a brief earned media value impact. Many celebrities have an incredibly authentic relationship with the brands they’re trying to build, and I’m not sick of seeing those.”
