Where money is expected to flow in 2021

January 13, 2021 Mary

This week, we delve into the themes that investors and strategics will be eyeing over the next year.

Even before 2020 ended, beauty and wellness deal activity gave us a taste of what to expect in the new year. For example, customizable hair-care brand Function of Beauty announced a $150 million strategic minority investment from L Catterton in December. And earlier that month, sustainable skin-care brand BYBI raised $7 million in a Series A. Both brands touched on key trends that will accelerate in 2021. But there are more themes, such as personalization, that we expect to buoy some companies over the next several, pandemic-filled months.

Ahead, Glossy outlines where we expect money to flow from strategics and private investors, and which beauty and wellness companies are poised to benefit.

Better-for-you hair care
Though makeup and skin-care sales slowed in 2020, hair care saw 11% growth in the third quarter to nearly $233 million, per NPD. Hair companies across the board have seen inbound interest from strategics, VC funds and PE firms. In addition to Function of Beauty, they include DpHue, an at-home hair-color line, and most recently, curly hair brand Curlsmith.

BFG, which led Curlsmith’s undisclosed series A round last week, was particularly interested in the company’s clean positioning. Clean hair continues to pop, with industry sources reporting that hair-focused conglomerates like Henkel and Wella are circling Briogeo for acquisition.

“We recognized that the textured, curly hair category didn’t really have any cleaner or better-for-you options. Most products are more chemical-laden, and Curlsmith had identifiable ingredients,” said Ben Fenton, partner at BFG Partners, that previously invested in acne-patch brand Zitsticka.

Curlsmith, which launched in 2018 and is available in all Ulta stores, takes a food-forward approach to its products, using avocado and prickly pear, among others in its ingredients. Not only did that resonate with BFG (which had more of a food and beverage footprint prior, and was formerly known as Boulder Food Group), but it it has been a key selling point with customers. Curlsmith is among the top 20 brands at Ulta overall, and Ulta CEO Mary Dillon called out the brand alongside Pattern by Tracee Ellis Ross for “nice growth” in third quarter earnings. Curlsmith generated $18 million in sales in 2020. Michal Berski, founder and CEO of Curlsmith, said the brand’s average basket size is $75-$80.

“Textured-haired [customers] were making their own hair recipes from real foods. After we identified that pain point, we made their lives easier by bottling their recipes and involving them in the co-creation process,” he said, referencing the brand’s products.

Berski added that, because the company had a strong retail footprint and had been lean with its resources, it was a prime target for investment. “You don’t need millions and millions to get into big retail, and it’s unnecessary to raise too much straight away. I paid $100 and made my first [store] on Shopify,” said Berski. Today, he said, he is approached monthly by small- and mid-size strategics, as well as PE firms, interested in acquiring Curlsmith.

Emily Gerstell, associate partner at McKinsey & Company, is also bullish on hair. “There is so much room to ‘premiumize.’ If you look at color, the split of premium color cosmetics to mass is around 60-40, which is the ceiling. In skin care, we are about 50-50 now, but a few years ago, it was 40% premium and 60% mass. Hair is 30% premium to 70% mass. As the hair category matures, like skin care has, a masstige effect is going to come into play,” she said. “Companies will be able to demand a price premium if they can tap into a health and wellness position.”

Functional and “cleanical” skin care
Skin care sales have slowed in the pandemic, but the category is not down and out. A subset of skin-care brands are filling pandemic-fueled voids, like those that fall into the functional category (think: problem and solution) and “cleanical” segment, the latter of which is a hybrid of the clean and authority-led brands that trended in 2020.

Last week, Hero Cosmetics, best known for its acne patches, received its first round of undisclosed PE investment from Aria, a new private equity firm founded by partner Trevor Nelson, formerly of Alliance Consumer Growth, and principal Jackie Dunklau, previously of Cavu Ventures. Founded in 2017, Hero Cosmetics has been profitable since its first year and is expected to close out 2021 with more than $80 million in retail sales.

“We were one of the brands that benefited weirdly from Covid. People had ‘maskne,’ and they were looking for an acne solution. People found us and our products, and 2020 became a year of tremendous growth. You can tell very quickly if something doesn’t help your acne or not,” said Ju Rhyu, Hero co-founder and CEO. She reported the brand saw a 300% increase in year-over-year sales in 2020.

Beyond purely being in the acne category (which is also expected to see increased investment interest), Hero has also proven that its best-selling acne patches can transition into a full-fledged assortment. Last year, the brand debuted the Lightning Wand, a serum to reduce acne marks, and a Rescue Balm, a product to reduce redness. Those two products, along with its Original Mighty Patch, are the top-three selling products on its site. The brand is launching a cleanser, toner and moisturizer in late January.

Dunklau underscored that it’s harder to grow fast as a skin-care brand in the midst of a global health crisis, if you only have gimmicky or buzzy products and packaging. “Consumers want products that work. When we were looking at the pimple patch landscape, Hero is the leader. The reason for that is the management team has been super thoughtful with how they’ve built the brand, and because the the products work so well,” she said. “Anecdotally, and in the repeat order data, we’ve seen customers say Hero’s is the best hydrocolloid pimple patch, over and again.”

Though natural skin care is slowing, Dunklau said brands like Hero also fit into the trending cleanical space, also occupied by brands including Dr. Dennis Gross. “The question with clean is: Does it work? With a doctor or an aesthetician or other expert proving a brand’s efficacy, it shows customers that they don’t have to compromise with clean,” she said.

Michel Brousset, founder and CEO of incubator and accelerator Waldencast, expects science-based brands to see a rebound because of this. “We’ll see a rebirth of this category. Based on pandemic consumer behavior, people have rediscovered fact-based, science-based brands. They want expert and science-backed beauty products and are increasingly skeptical of unsubstantiated marketing stories,” he said.

But Nelson argued the definition of an expert can vary wildly within cleanical. “If you look at where the growth has happened in skin care, what’s well-performing is authority-based skin care, where you have a doctor or an expert selling the product. But across a lot of categories, we’re watching a trend of consumers believing [people other] than doctors, and dermatologists — like a self-educated mom, for example, who had a skin issue themselves, and has created something for herself and her family. She has become just as respected as an authority,” he said.

One only has to point to the success of beauty outsiders-turned-founders like Paula Beth Begoun of Paula’s Choice and Tiffany Masterson of Drunk Elephant to see that has worked out quite well.

Peak personalization
Late last year, industry insiders murmured about possible exit options for Il Makiage and Function of Beauty, such as IPO or acquisition. Their large swath of customer data, along with their actual effective beauty products, make them incredibly valuable to investors and strategics alike, especially since said data can be used to inform more company offshoots.

“Personalization, a trend still in relatively early innings, will continue to mature and will be utilized more widely by consumer companies,” said Jordan Gaspar, managing partner at AF Ventures. AF Ventures previously invested in ingestible beauty company The Nue Co. “We expect the merging of digital platforms, data and science to allow companies to take personalization to the next level. Additionally, we will see the entrance of personalized beauty and wellness brands entering into traditional retail settings, while still offering the personalization that their customers have become accustomed to.” A clear example of that is Function of Beauty’s move into Target.

Brousset agreed. “We are investing in data, AI and mass personalization. The trend for technology and biohacking was already in play and has accelerated during the pandemic. People have more time to learn and understand technology and how it benefits their life. Consumers are even more health-conscious and want to live their life knowing how to optimize it based on AI and algorithms.”

Beyond companies like Il Makiage and Function of Beauty, who are among the first in their class, Gaspar expects the trend of personalization to expand into sports nutrition, hydration and the broader beverage space.

Health meets beauty
As the pandemic has forced consumers to become more intimately aware of their overall lifestyles and health, investors expect companies with a greater overlap between wellness and beauty to see wins. “Having just witnessed the broader system nearly fail this past year, we continue to believe in the convergence of beauty, nutrition and wellness,” said Brian Thorne, partner at growth equity and venture capital firm Silas Capital. “More specifically, we expect the momentum behind clean and ingestible beauty to only accelerate post-pandemic, as consumers become that much more attuned to what they’re putting into and onto their bodies, as a form of preventive personal health care.”

Gasper took that one step further with a bigger bet on ingestible beauty. “The line between personal care, beauty and food was beginning to blur pre-Covid, and now, 10 months in, that trend has only further accelerated,” she said.” Consumers are shifting their focus toward multi-functional products that not only [improve] physical appearance, but also improve overall health. In turn, we see several companies capitalizing on this consumer shift and driving the growth of these products through online communities and strategic consumer awareness campaigns.” — Priya Rao, executive editor