While investors are shying away from many consumer-related industries, beauty is still attractive, according to a new report.
XRC Ventures, an early-stage venture fund, polled its network of U.S. and European investors and found that 80 percent plan to invest the same or more in beauty in 2024.
“Consumer investors are most bullish on beauty because the multiples in the category have held up and that’s largely to do with it being viewed as recession proof — its ability to continue to grow while there’s consumer tightening that’s happening,” said Diana Melencio, a partner at XRC Ventures and author of the report.
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“And there’s a huge appetite from the conglomerates to acquire these emerging brands as a means for growth,” she added.
Some recent acquisitions in the space include Unilever’s purchase of K18, Shiseido snapping up Dr. Dennis Gross and Puig acquiring Dr. Barbara Sturm.
While the “must-haves” for an investment spanned a variety of areas, a clear common thread centered on founder conviction and defensible differentiation, added Melencio.
In the challenging environment of 2023, with overall venture funding down 42 percent, the consumer sector at-large found itself out of fashion as attention shifted toward AI, according to the report.
This shift continued the trend of generalist VCs shying away from consumer-focused investments, with funding for the sector down more than 80 percent from its peak in 2021, dwindling to $800 million. This marked the first year since 2017 that sector funding failed to surpass $1 billion.
However, within the consumer sector, not all segments were equal. Beauty, for instance, outperformed every other general merchandise and consumer packaged goods category in 2023, boasting double-digit revenue growth and posting an uptick in M&A with healthy sales multiples of 3x-7x.
But still, beauty and personal care remains underappreciated, with VC funding experiencing a decline of more than 50 percent year-over-year in 2023, Melencio said.
“In our view, generalist VCs are missing out and consumer specialists are clearly bullish. Of the consumer product categories, beauty and personal care is a bright spot and an area with significant opportunity: attractive valuations and strong exit price — buy low, sell high as they say. It is the category most favored by early-stage consumer VCs we spoke with for this reason and continuing demand by strategics to grow through.”