Beauty Startups Lose VC Momentum, But Aim To Get It Back With Personalization

Even in ancient times, there is evidence that cosmetics were a big deal.

Kohl—as worn by Cleopatra, for example—was traditionally made by grinding stibnite. It was used to contour, darken the eyelids, and apply as mascara for eyelashes.

In today’s world, major global conglomerates have dominated the sector with most consumers purchasing their cosmetics from drug or department stores. But with the advance of technology, and the increasing popularity of social media as a marketing tool, the beauty industry has proven itself ripe for disruption.

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More companies are offering customized makeup and hair care products for consumers via apps and websites. That’s especially appealing to younger consumers who have grown up using devices and technology to shop. Investors have been slow to get excited, but there is evidence that the beauty industry is about to enjoy a number of new, well-funded competitors.

Most recently, Taiwanese beauty app developer Perfect Corp raised $25 million in a Series A round led by China Creation Ventures and joined by Yuanta Asia Investment, Extol Capital, and CyberLink Corp. And earlier this year, Function of Beauty – which offers personalized hair care products – raked in $9.5 million in a Series A round led by Menlo Park-based GGV Capital.

The industry has also seen some impressive exits. In 2016, L’oreal agreed to acquire prestige beauty brand IT Cosmetics for $1.2 billion in cash in a deal that marked its largest purchase in eight years. Also in 2016, Estee Lauder bought out makeup brand Too Faced Cosmetics for $1.45 billion. Notably, the brand targets millennials and Generation Z, with 85 percent of its consumers reportedly under the age of 40, according to The Street.

Julie Fredrickson – co-founder and CEO of Stowaway Cosmetics, an analytics platform for increasing convenient consumption of cosmetics – noted that 70 percent of the beauty industry is run by about 10 conglomerates.

“It isn’t as saturated as people think. It’s mostly all run by the same people – very acquisitive people,” she told Crunchbase News. “I think the venture world is missing that.”

The Beauty Of Data

If Crunchbase data is any indication, interest in the sector has actually waned in recent years. But industry observers believe that trend will change as more investors realize the value and potential of beauty tech startups.

Globally, venture funding into beauty startups experienced a four-year surge. In 2015, that surge ended at a peak of $921.9 million across 187 deals, compared with just $120.9 million over 86 transactions in 2012. However, by 2016, activity slowed to $608.9 million across 150 deals, with no clear recovery in sight as 2017 comes to a close.

Despite the declines, one particular beauty model seems to have legs.

Function of Beauty CEO and Co-founder Zahir Dossa came up with his beauty startup while working on his PhD at the Massachusetts Institute of Technology (MIT).

“There, I realized technology was transforming the way products are formulated and created,” he told Crunchbase News. “And with the idea that every single person is unique and different, we should be able to leverage technology to create unique and different products for each and every person.”

Unique Styles

Indeed, the idea of cosmetic and hair care products being customized to the individual is one of the most common aspects of companies that are raising venture money.

Further, Dossa recognized that the cosmetics and hair care industry had “tons of middlemen.”

“I figured that it was possible to eliminate many of those as possible through technology as a whole,” he said.

Function of Beauty works by having the consumer take a hair quiz on its website. The results of that quiz then determine the formulation of shampoo or conditioner created specifically for that individual, Dossa explained.

“We use a lot of advanced manufacturing to automate that entire process,” he added. “Rather than doing huge batches of development, we’ve been able to narrow it down to combining ingredients one product at a time.”

Founded in February 2015, Function of Beauty launched in October 2016. It has since seen “phenomenal” growth and now has 72 employees, according to Dossa.

“Word of mouth has been our biggest driver of sales,” he said. “We’re very much a function of our customers’ desires and requests so we’re exploring moving outside of the U.S. and Canada and into new product lines.”

Hans Tung, managing partner at GGV Capital, was attracted to the idea that Function of Beauty essentially marries personalization with body grooming.

“More and more – especially in the U.S but increasingly globally – we’re seeing brands emerging reaching out to younger millennial consumers who are growing up with social media, ipads and smartphones,” he said. “They just have a different relationship with brands.”

In Tung’s view, companies that marry technology with brand positioning, supply chain management, and social media have the best chances of success.

He was impressed with Function of Beauty’s ability to personalize hair care products.

“It’s a massive category mainly dominated by huge companies such as Unilever and P&G,” Tung told Crunchbase News. “It’s been done the same way for decades. Once it’s disrupted in this way, it’s not as easy for incumbents. Fortune 500 companies just can’t change their standard operating procedure just like that.”

Overall, he believes personalization is going to play a huge role in many consumer sectors.

“I believe Function of Beauty is well-positioned to take advantage of that in the beauty and grooming categories,” Tung told Crunchbase News.

Looking ahead, Stowaway Cosmetics’ Fredrickson notes that beauty is a massive sector that has the potential for “new dominant players to come in what was otherwise a consolidated space.”

“It has incredible margins and massive exits,” she said. “And these large companies aren’t translating enough to millenials.”

Startups that are able to successfully marry technology with personalization, convenience, and ease of delivery appear to be the ones most poised for success.

Illustration: Li-Anne Dias