VCs Combing For New Sectors Look To Hair Care Startups

Investors are starting to recognize that hair care is a big business.

The global hair care market is estimated to reach $211.1 billion by 2025, according to a recent report by Grand View Research, Inc. And the number of startups popping up to address hair-related issues is growing by the year.

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Since its inception in 2013, San Francisco-based direct-to-consumer hair color startup Madison Reed has raised $70.1 million from the likes of Plug and Play and Norwest Ventures. Most recently, the company brought in $25 million in a round led by Comcast Ventures.

“The hair color industry is dominated by dinosaurs,” said Heidi Dorosin, Chief Marketing Officer of Madison Reed. “That box of at-home hair color sitting on a drugstore shelf hasn’t been updated since the 1960s.”

Madison Reed is just one of a number of hair-related startups that are raising money and looking to disrupt the industry.

In June, San Francisco-based Hims raised $50 million in venture funding, bringing its total venture haul over time to $97 million. It’s important to note that Hims is not exclusively focused on hair, but one of its offerings addresses hair loss.

New York-based Keeps launched in 2017 with its own line of FDA-approved treatments to help men “keep” their hair. The company in January raised an undisclosed amount of money in a round that included participation from Maveron. Function of Beauty, a New York-based startup that offers customized hair care products, has raised $12.2 million since it was founded in 2015. And last year Philadelphia-based Shedul.com raised $6 million for its hair salon online booking platform.

So what’s driving founders and VCs to care so much about hair?

Cashing In On Color

True Ventures venture partner Amy Errett may have passed on investing in Dollar Shave Club, but that doesn’t mean the former general partner of Maveron—a venture capital firm co-founded by Starbucks’ CEO Howard Schultz—wasn’t intrigued by the fact that so many consumers were willing to buy directly from companies such as Warby Parker online.

Errett began thinking of ways the model could apply to women. Five years ago, she founded Madison Reed, a startup that aims to revolutionize the hair color industry by going direct-to-consumer. Its proprietary algorithm helps women find a color match. The company also claims to have launched the first chatbot in the hair color category, using artificial intelligence to make color recommendations based on a woman’s photo.

For the first years, women could only purchase the brand’s hair color online. But in 2017, Madison Reed opened in New York and San Francisco its first color bars offering “fast, inexpensive color.” The company plans to open more than 20 color bars nationwide by the end of 2019, noted Dorosin. The company is using its latest round of capital to expand both its current e-commerce business and physical footprint.

The size of its team has grown by more than 50 percent in the past year, and it’s on the cusp of a rapid expansion in hiring, according to Dorosin. The startup has also doubled its sales each year since the products launched in 2014.

Startups Grow Faster Than Hair

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

“There, I realized technology was transforming the way products are formulated and created,” he told Crunchbase News back in December. “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.”

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. More than two million people have taken the quiz, according to Dossa.

Since I last spoke to Dossa, the company has continued to expand its production capacity. It started off with 1,000-square feet in 2016 and will soon be up to 50,000 square feet, he said.

Function of Beauty also just passed the 100-employee mark, more than doubling since last year. (Although Dossa notes not all are full-time workers.)

“In the beauty industry, there’s a ton of different products, and hair is one of the more complicated things,” he said. “There’s so much variety from person to person. Everyone has their unique hair type, goals and preferences and these things are always changing. We’re here to help people to adapt to those changes.”

Michael Duda, founder and managing partner of New York-based Bullish, is no stranger to investing in the direct-to-consumer model. His firm was an early investor in blockbuster brands such as Birchbox, Harry’s, Peloton, and Casper. Function of Beauty marks its first investment in the hair care space.

Quite a few of Bullish’s employees have worked with large consumer brands such as P&G and Unilever. Ironically, Duda points out, they are now funding companies that are disrupting those companies. Historically, the amount of innovation around hair care has been little, he said.

“We believe that personalization and customization is going to be a very tough thing to duplicate,” Duda added. “We saw what they [Function of Beauty] are doing and the people behind it and thought it was all super compelling both from the vision and execution standpoint.”

Besides personalization, Duda believes consumers’ shift to organic, non-GMO foods is spilling over into skin and hair care.

“With these products, what they don’t have is more intriguing than what they do have,” he said. “Function of Beauty has a good product and proposition, and they’re building a great company to ensure that’s the case for years to come. We’re extremely bullish on what they’re doing.”

Hair isn’t going anywhere, so it’s safe to say that we’ll only be seeing more innovation and investing in hair-related startups.