Grooming for Beauty Startups

The beauty industry is starting to look really good to venture capitalists.

Glossybox, which delivers beauty product samples to its community of subscribers, just landed an eye-popping $72 million investment led by the Samwer brother’s Rocket Internet. Coterie, which provides an online shopping experience for prestige beauty products, recently received $1.5 million in funding from SoftTech VC. And social beauty store closed a $5.4 million Series A round led by Capricorn Investment Group, the investment arm of eBay founding President Jeff Skoll. Even Jennifer Aniston is entering the fray. The actress teamed up with Polaris Venture Partners to become an equity partner in Living Proof, which turns scientific discoveries into women’s beauty products.

What’s the allure? For starters, the U.S. beauty market is big and getting bigger. The high end market, called prestige beauty, grew to $9.5 billion in 2011, an increase of 11% compared to $8.6 billion in 2010, according to research firm The NPD Group. Driving the industry is the never-ending obsession in our society with staying young and remaining pretty.

“People are emotionally connected to their own beauty and aging process, so this is an area where they’re not likely to skimp,” says Kirstin Green, managing partner at Forerunner Ventures and an early investor in Birchbox, which pioneered the concept of mailing out monthly packages of beauty product samples to paid subscribers. She calls Birchbox “one of the easiest investments I ever had to make.”

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Source: Photo by Oscar Urizar, Red Eye Collection

Kirstin Green of Forerunner Ventures calls calls Birchbox, which mails monthly packages of beauty product samples to paid members, “one of the easiest investments I ever had to make.”

“People are emotionally connected to their own beauty and aging process, so this is an area where they’re not likely to skimp.”

Kirstin Green

Managing Partner

Forerunner Ventures

From a venture perspective, what’s most interesting is that the market is still underpenetrated relative to other ecommerce categories. A lot of beauty products were very late moving online because the high-end brands wanted to protect their image. “You won’t find these prestige brands on Amazon,” says Stephanie Palmeri, a principal at SoftTech VC.

For the most part, luxury beauty products have remained confined to department store counters and specialty retailers, such as Sephora, where brands could better control the retail experience. But now that malls are experiencing less foot traffic and department stores are consolidating and closing, beauty brands realize that they too have to change or risk losing their customer base.

“Growth is not coming from the expansion of new counters in department stores, so it has to come from other channels,” Palmeri says.

Investors Palmeri and Green are betting that sites like Birchbox and Coterie will become the premier destination for online beauty supplies. One way these sites are doing this is by establishing exclusive relationships with the top brands. For instance, Coterie now has partnerships in place with nearly 100 high-end brands, which represents a significant competitive advantage, Palmeri says.

Plus, the online beauty market is attractive because of the margins and repeat buyers.

“Once a woman buys a product, she may buy it five, six, seven more times,” Palmeri says. “And most products have about two to three months of daily use. So we can predict when customers will repurchase, and thus we can better target them online in a way that was never possible offline.”

While firms like Forerunner and SoftTech are taking a next-generation ecommerce approach to beauty, some intrepid investors are wagering on the creation of actual beauty products themselves. For instance, Polaris Venture Partners incubated its own beauty company called Living Proof, which makes a line of high-end hair products. The company has recruited scientists from Harvard University and MIT to develop new products, and now has a celebrity investor in Aniston.

While potentially riskier, investing in beauty brands directly can prove profitable. SkinMedica, a maker of specialized anti-aging treatments backed by the likes of Apax Partners, Domain Associates and EuclidSR Partners, was acquired by Allergan for $350 million in 2011.

Green is confident that acquisitions on the ecommerce side, too, are just around the corner. She notes that companies like Birchbox have collected data and about consumers, such as preferences and purchasing habits. She adds that the large beauty brands will increasingly covet that information.

“There is a real need to be a data junkie and get intimate with your consumers,” she says. “If you are a beauty conglomerate and you don’t have that direct customer relationship, it’s conceivable that you will now go out and buy it.”