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It may not be as glamorous as D2C, but beauty tech is big money

Shifting consumer demands within beauty and retail are creating rich opportunities for U.S.-based beauty/consumer tech SaaS companies.
Sindhya Valloppillil Contributor Sindhya Valloppillil is the founder and CEO of Skin Dossier, a venture partner at Next Gen Ventures, a freelance writer and formerly a beauty industry executive and marketing professor.

Last week, Procter & Gamble (P&G) announced that it was terminating plans to acquire razor startup Billie following a U.S. Federal Trade Commission lawsuit to stop the deal.

Last year, Edgewell Personal Care ditched its debt-heavy $1.37 billion deal for Harry’s, Inc, formerly valued at $1 billion after the FTC sought to block the acquisition.

In addition to these FTC challenges, it is also now becoming clear that relying on VC-subsidized products and celebrating outrageous valuations can be problematic for D2C brands. With a few wonderful and rare exceptions such as Rothy’s (which raised $42 million but was profitable from the beginning and generated $140 million in revenue within two years of launching), D2C unicorns are addicted to the cycle of venture funding to feed growth in order to maintain a high valuation multiple.

The path to profitability has become a more important part of the startup story versus growth at all costs.

This works for a while; however, when the path to profitability appears murky and exit options either don’t appear or only appear from nontech companies with very conservative multiples, the walls start crumbling.

In a WWD article, Odile Roujol, the former CEO of Lancôme who launched venture fund FAB Ventures, said, “Generally speaking, the era of $1 billion valuations for beauty companies is over. The people that struggle have been the companies that spend so much money in just a few years.” She went on to say, “The big corporations now … are not ready to spend $1.2 billion, $1.5 billion on such a brand like Glossier.”

This change in sentiment from acquirers is further fueled by recent research on the challenges of turning hypergrowth companies profitable. In his Harvard Business School case study “Direct to Consumer Brands,” Professor Sunil Gupta wrote, “Acquiring DTC brands is easy for incumbent conglomerates, but making them profitable is challenging. More than three years after Unilever acquired Dollar Shave Club, it was still unprofitable.”

Unilever executives learned that the average cost of acquiring a new customer online was about the same as in stores. David Taylor, CEO of P&G, said his company was still figuring out how to turn recently acquired direct-to-consumer brands into profitable businesses.

Taylor summarized this dilemma, saying, “There are many, many launches that grow fast … a business model that makes money is a higher challenge.” Since making these realizations, incumbent conglomerates will be more cautious when considering the acquisition of hyped D2C brands that raised lots of venture capital.

Beauty tech is a better bet: Meitu and Perfect Corp.

What’s cooler than beauty companies that are (or were) valued at $1 billion? Beauty tech SaaS companies that are worth $5.2 billion at IPO. We don’t hear much about the leading global beauty tech companies such as Meitu and Perfect Corp. because their founders are not celebrity influencers, they don’t have massive Instagram followings here in the U.S. and they are not celebrated in our media. Although their companies are based in Asia and they raised money mostly from Chinese investors, their companies are global successes.

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