Toni Ko had no idea she was starting a multimillion-dollar brand when she founded NYX Cosmetics at age 25. But the first-generation Korean immigrant—who came to the United States at age 13 without knowing a word of English—had her finger on the pulse of what consumers wanted as a self-professed “cosmetics junkie.” “My focus was on creating a high-quality product and selling it for an affordable price,” she says.
Betting $250,000 she raised from family and friends on 12 lipliner colors and six eyeliner pencil colors, she built the company into a fast-growing juggernaut that brought in $2 million of net revenue (sales minus discounts and returns) in 1999, its first year.
“I built a solid, dedicated customer base immediately,” says Ko. “I knew year one the brand would be a success. The reviews for the products I was selling were so positive.”
By 2014, she sold the company—which was then on track to bring in annual revenue in the $100 million to $120 million range and had a presence in 75 different countries in stores such as Target and Ulta—to L’Oréal for a reported $500 million, making it one of the biggest beauty acquisitions at that time.
The Los Angeles-based entrepreneur realized the power of indie beauty brands early and, since 2019, has been running her own incubator for indie brands, Bespoke Beauty Brands. Now a new crop of entrepreneurs is discovering big beauty conglomerates like L’Oréal and Estée Lauder, and even consumer packaged goods brands like Procter & Gamble (P&G) are eager to get in on the action and buy them out.
An Attractive Industry
Mergers and acquisitions (M&A) activity in the beauty industry is taking place at a “fervent” pace, according to investment banking firm Capstone Partners, with 75 deals taking place in 2021—an increase of 56% over 2020.
The beauty industry has even outpaced the consumer industry as a whole. Why? Demand for beauty brands is elevated, with young consumers “shaping the rise of new brands,” Capstone states.
Meanwhile, beauty brands raised $2.69 billion in venture capital funding in 2021, a giant leap from the $1.15 billion raised in 2020, according to the research firm Pitchbook. Venture capitalists invested in 227 beauty startups in 2021, with a median deal size of $2.75 million.
And more investors are jumping into the fray to compete with the big beauty and consumer packaged goods brands that are eagerly buying up small beauty brands. Venture capitalists have noticed that 86% of online sales channels for beauty brands are controlled by companies outside of the top 20 cosmetic makers. Many investors see the potential to grow indie brands that are already savvy about selling their products online and through social media, like Instagram and YouTube.
“Many of these big companies can’t get to the ‘micro-demographics,’” says attorney Andrew Sherman, a senior partner in the Washington, D.C. office of international law firm Seyfarth Shaw. “If they are targeting a particular age group or demographic, they can’t get to the heart of the community the way a small, nimble company can. If they see the ability to acquire a company that is already really growing, they are more inclined to pay a fair or an expensive price.”
As a result, 2021 saw the acquisitions of a host of brands you may have heard of: skincare brands Farmacy Beauty and Tula (P&G), cruelty-free haircare-product maker OUAI (P&G), bodycare brand Sol de Janiero (L’Occitane) and vegan skincare maker Youth to the People (L’Oréal) to name a few of the higher profile deals.
“The capital required to start a beauty brand has been as low as it’s ever been—you need a website, some inventory and you are good to go,” says Richard Gersten, co-founder and general partner at the fund True Beauty Ventures, and an investor in beauty brands since 2002. “But the capital required to scale a brand is probably as high as it’s ever been. It creates a proliferation of newly launched brands with little capital, all trying to grow—thus the need for investors to participate earlier than ever before.”
In this environment, many beauty entrepreneurs are eager to sell so the fledgling brands they started can reach a wider audience. In the old days, if a big company acquired an indie brand, it may have meant the end of the smaller brand’s quirkiness or edge. That’s not necessarily true anymore. “Some acquirers do a good job of keeping the brand niche-y,” says Sherman.
So how do you position the brand you dreamed up (or might be envisioning as you mix your own shampoo in your kitchen) as a hot acquisition target?
It starts with experimenting with your product and your marketing—whether that’s by spreading the word on Instagram, Facebook or YouTube or becoming part of an incubator program—until your brand has real traction with customers. Gersten recommends protecting your intellectual property, such as the formula and the brand, then concentrating on a few hero products and not spreading yourself too thin among retail channels. “Several brands were recently sold to corporate buyers that all had a strong Sephora partnership in common,” Gersten says.
It’s also essential to build strong ties with the fans who love your brand. “The overarching principle is to have a well-defined, loyal customer base,” says Santiago Nestares Lampo, who invests in e-commerce brands as co-founder of Benitago Group in New York City. “What makes a good beauty brand great is people are buying the same brand over a long period. The more loyal the customer base is, the longer one person spends and the greater the lifetime value of the customer is. Then, over time, the more money you can, as a business, spend on acquiring the next customers. That makes it more scalable.”
Benitago Group concentrates on brands with a strong presence on Amazon. So, to see how committed customers are to a potential acquisition target, Bentiago will look at the number of reviews on Amazon and the ratio of sales to reviews—information the brand owner provides during due diligence. If you have loyal customers who could potentially buy more from you, that tells Nestares’ team there is untapped potential in the business. “You might be unprofitable but sitting on a gold mine,” Nestares says.
To gain an edge, make sure you invest in audited financials early, advises investment banker David Barnett, managing director of Columbia West Investment Banking in Scottsdale, Arizona, whose firm represents health and wellness brand founders in M&A. “It’s an expense owner-operators don’t like to spend money on, but it comes back in spades once it’s time to sell,” he says.
Although it can be exciting if buyers come courting, it’s important to protect your own interests, says Barnett. He recommends working with a strong M&A team and a strong securities attorney who has a good knowledge of market terms and conditions.
“Find someone to represent your interests,” he advises. “It’s typically way more complicated and way more in-depth than selling a house.”
The right representative can help you navigate terms of the deal that will affect how you live your life the next few years. Some deals require the owner to stay on as an executive for anywhere from six months to five years and might include an “earn out,” while others don’t. But like most deals, it’s all negotiable until you’ve signed the contract. The good news is that many buyers will be interested in making the terms work for you.
“It’s an exciting space because it’s been growing like crazy for a long time,” says Barnett. “And even if there is a recession, people typically continue to spend money on it.”
Jump-Start Your Beauty Brand
Incubators and accelerators for independent beauty brands are proliferating, and they can be a great place to launch a new product—often offering access to both expertise and funding. “If we get in early, we can help you avoid making some mistakes,” says Gersten.
Here are a few that are helping founders get started and make it happen for their brands.
Sephora Accelerate: Focused on founders of color, this five-year-old incubator offers a six-month, intensive bootcamp and the opportunity to launch your brand at Sephora.
FORMA Brands: This incubator/accelerator, run by former Bare Escentuals CEO Simon Cowell, has helped launch brands such as Bad Habit, Playa Beauty and Jaclyn Cosmetics.
L’Oréal Open Innovation: This program aims to establish partnerships with emerging companies from around the globe to develop personalized and innovative beauty products, devices and digital services. It has partnerships with Founders Factory, a London-based accelerator,
and Station F, a global beauty accelerator in Paris.
Luxury Brand Partners: With salon brands including R+Co, Smith & Cult and IGK in its
portfolio, this company, run by industry veterans, develops artist-driven beauty brands.
SOS Beauty: This incubator, which launched brands such as Fable & Mane, Merit and OUAI, helps with formula development, package development, manufacturing and brand management.
Elaine Pofeldt is an independent journalist who specializes in careers and entrepreneurship. She is the author of “The Million-Dollar, One-Person Business” and her work has appeared in Fortune, Money, CNBC and more.
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