Function of Beauty

6 Min Read |

The beauty industry is in the midst of an apparent boom. In the United States, beauty sales rose to $17.7 billion in 2017 — a 6% increase from the previous year. And brands which have built their consumer base online are of particular interest to investors, which is disrupting industry conventions in a big way; international beauty businesses are losing out to smaller, digitally native brands.

Sutian Dong of Female Founders Fund suggests that the appeal of investment opportunities within the beauty industry lies in the loyalty of consumers. That is, once a brand wins over a customer, that customer tends to stay — buying the same products over the course of a number of years, and being open to their favoured brand’s new developments and launches. Female Founders Fund has invested in brands including Winky Lux, which offers high-pigment colour makeup at relatively affordable prices; and Manicube, which provides high quality manicures on demand and at locations convenient to the customer.

This isn’t to say that high profile beauty brands are not receiving investments in the current market — and companies like Glossier, Huda Beauty and Charlotte Tilbury have all been recent recipients of new funds. But it is clear that a change is in the works, as interest and partnerships with established investors is no longer reserved for the big names alone. For example, a hair care company, Function of Beauty, won a $9.5 million Series A round investment last February. The brand sells customizable shampoo, conditioner, and other hair care products, allowing consumers to select bespoke colors, scents and ingredients. And Prose Beauty, also a customizable hair care brand, secured $5.2 million last December in a Series A round led by Forerunner Ventures. Both of these brands share something else in common: a dedication to interaction with their client base online in order to create a sense of personal engagement and understanding.

 

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Overall, 2017 saw more than 149 investor deals within the beauty sector — the highest ever, as laid out in a report by CB Insights. The report highlights a 19% rise from the previous year in total deals. And it notes that those conventional beauty incumbents that are losing out to young, digitally focused brands are not ignoring the trend; there has been a sharp increase in M&A activity in recent years, allowing incumbents to absorb the success of small brands.

Estee Lauder acquired Too Faced Cosmetics in 2016, for $1.45 billion — a cruelty-free vegan beauty brand which carries makeup and skincare lines. And L’Oreal purchased It Cosmetics for $1.2 billion. It Cosmetics maintains a very active social media presence and runs regular campaigns focusing on movements within the realms of social justice, self-care, and female empowerment. Unilever also upped its acquisitions starting in 2015, snapping up Kate Somerville and Dermalogica — and continued to draw new brands under its wings in the years since, including Carver Korea, which Unilever purchased for $2.7 billion; and Hourglass Cosmetics for an undisclosed sum.

Solid branding and consumer engagement are of increasingly crucial importance in order for new brands to attract investor interest. But in the beauty industry, results remain key to success — which means that products have to work, and have to secure client loyalty. Jonathan Keidan, founder of the venture fund Torch Capital, said “A company might be able to pull off bad product with good branding at first, but I think it will be short-lived.” And Matt Scanlan, the founder of Softmatter Ventures, agrees; noting that “You know which products work right away from consumer behavior.” In other words, products should drive repeat sales and profits which, in turn drive, the organic growth of the company.

In addition, today’s consumers want to know what is in their cosmetic products — preferring natural and sustainable ingredients over harsh chemicals — and often want to see clinical evidence of their efficacy. People are less easily swayed by slick marketing campaigns, and more attracted to personality, transparency, and a brand’s efforts to do good in the world and provide healthy solutions to beauty needs. Scanlan notes that sustainability of ingredient sourcing is “a huge category-buster right now”, and is significantly changing the beauty industry. It’s affecting large brands as well as smaller ones, with Sephora in the process of implementing a sustainability initiative in store — based on a promise to address concerns about waste and begin more in-depth audits of its regular suppliers.

Scanlan does point out, however, that it’s very easy for brands to make bold claims about their natural and sustainable ingredients — and many are falsely doing so for the sake of marketing and PR. So he looks for independent accrediting bodies to ensure that the brands he invests in really do practice what they preach. For example, companies that have been Fair Trade certified by the Organic Consumers Association have assuredly been through a rigorous vetting process. He emphasises that this is even more important because today’s consumers are savvy, and know how to use the Internet to find out whether the claims made by beauty brands are authentic. With customers hard to fool, investors have to ensure that they put their funds and their trust in brands with checked and proven credentials.

Sutian Dong notes that the beauty brands that are really capturing investor interest today are those which are embracing innovation — and quickly. Companies need to stand out and do something different in order to win substantial investments and gain traction in a saturated market. Dong uses Winky Lux, mentioned above, as an example of how this works. She explains that the brand’s backend production and logistics network are differentiated in a way that allows them to bring products from initial concept to release on the market within just 45 days. This means that Winky Lux offerings are constantly fresh, perpetually evolving, and in touch with the desire and demand of a relevant consumer base. And an anonymous investor echoed Dong’s praise, sharing that he and his colleagues are actively looking to partner with a new brand which operates under a similar methodology to Winky Lux — with an impressively efficient speed-to-market workflow.

Another aspect which has risen in importance for investors is customization. Keidan suggested that the level of personalization offered by brands like Function of Beauty is “crucial across categories today”. Customers want to choose their products, and to choose what goes into their products — and that means that investors care about that potential too.

Brands must be able to meet the needs of their target audience — and in order to do that, they must know their audience in great detail. A brand has to know who its ideal customers are and how their products and services respond to the specific needs of those customers. Glossier provides a useful example of this, with extensive insight into the “cool girl” image of its consumers; insight which includes knowledge about what appeals to those consumers in a visual sense, as well as her interests and movements online and in the real world.

So brands must direct their marketing efforts — and their personalized attention — at the consumers who are right for them. They must engage with consumers online through social media, and find ways to incorporate natural and sustainable ingredients into their products and wider brand ethos as much as possible. And they are at an advantage if they possess an innovative spark. Brands that can keep up with a fast moving market and draw in investors with fresh ideas are set to win the funding race.

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