With The Stock Market And VC Down This Year, What’s The Deal Environment Like For Emerging Beauty And Wellness Brands?

When beauty and wellness companies examine economic indictors, they can easily see many of them don’t look all that beautiful or well. For the stock market, 2022 has been a punishing year—and prognosticators don’t forecast its fortunes will dramatically reverse anytime soon. Venture capital funding has cooled off, and inflation levels haven’t been retreating much from historic highs.

To sort through the impacts of the conditions on the indie beauty and wellness sector, we asked 11 investors, investment bankers and beauty industry experts the following questions: How do you think the rocky stock market and venture capital slowdown is affecting the beauty and wellness deal environment, especially as it relates to emerging brands? What should emerging brand founders think about as they assess the market today and going forward?

Lauren Leibrandt Director, Beauty and Wellness Practice Leader, Baird

There is no escaping the macroeconomic volatility right now, and it’s impacting everyone, from the largest beauty conglomerates to the smallest beauty brands. As consumer discretionary stocks continue to be challenged in the public markets, emerging brands need to think about strategies for remaining flexible and nimble.

Investors are increasingly thinking about what happens in a recession scenario. Beauty is a recession-resilient category, but not recession-proof. Dealing with the challenges posed first by COVID, and then everything in between then and now helps demonstrate a company’s ability to navigate difficult stretches and come out on the other side.

Path to profitability is more critical than ever as well as managing your cash-flow burn. While early-stage funding has slowed down some, there is still plenty of capital available for brands with proof of concept. That proof of concept is now requiring more data points and tangible results so you may need to build more scale before raising money.

It’s a really crowded marketplace, and emerging brands that demonstrate a true reason to be and foster a cult-like connection with their consumer in addition to providing innovative products that are high performance are positioned to succeed.

As the definition of beauty continues to expand to include broader pockets of wellness, there is real opportunity for emerging brands offering modern solutions and real innovation. Health and beauty will continue to converge, and I’m personally excited about categories focused on the intersection of beauty, wellness and health, everything from vitamins and supplements to sleep, the microbiome, hormonal imbalances, mental well-being, stress, anxiety and the interconnectedness of it all through a holistic lens.

Tina Bou-Saba Co-Founder and Co-Managing Partner, Verity Venture Partners

It’s definitely a little scary out there, but I think you probably want to separate beauty as a category and beauty brands, and the investment side. Of course, they are connected, but there are different dynamics affecting them. The general view is that beauty is relatively recession-proof.

We have no crystal ball, but, when I think about categories, if I stack up my list of categories that I’m most worried about—furniture might be one I’m most worried about and something like milk would be what I’m least worried about—beauty and wellness is lower on my list of worries. If people feel nervous about spending, we should expect a little moderation, and that’s OK. I certainly think that founders who have seen their DTC business go way up for the past few years should know that isn’t necessarily what it’s going to look like in 2022.

On the investment side, the multiple compression and what we are seeing in the valuations of public companies and later-stage private company hasn’t dramatically flowed down to early-stage valuations yet, and most people would agree that you won’t see the same magnitude of downward valuation pressure on early-stage companies as you would at pre-IPO companies.

Nonetheless, when you get in an environment where people feel more risk-averse and are being more careful with the investments they make, it’s reasonable to expect the environment for early-stage consumer brands, including beauty brands, is going to be more challenging as capital providers retrench a bit.

What we think this means is that beauty founders who are raising money should be reasonable about their valuation expectations. I’m not suggesting that there will be dramatic compression, but I think there will be some moderation. So, it’s important for founders to expect that, and I think it will be important for early-stage brands to be extra mindful of their spending. If they are burning through cash every month, they should be thoughtful about what their runway is.

I’m not suggesting that founders should hunker down, but they should assume it might take a little longer and be a little harder to raise money than it might have been in the past. It’s not dramatic at this stage like what you would see at the later stage, but it would be crazy to think there would be no impact from what’s going on in the broader markets.

Brady Donnelly Managing Director, Sela

In a sense, the stock market shakiness is merging with existing supply chain issues to create something of a perfect storm for emerging brand founders. A decrease in consumer spending will likely hit new brands especially hard, as consumers will be less likely to experiment with new products and more likely to spend their money in safer ways.

Simultaneously, in the absence of venture investments, brands won’t have the capital strength to overcome supply chain issues in the way larger brands buying in larger volumes with the ability to absorb increased shipping costs will, giving those larger, better-known brands an additional leg up.

As such, emerging brands should minimize their risk and, as part of that, focus on sustaining themselves over pursuing growth at all costs. If they can ride this wave at lower revenues, they will come out on the other side with the chance to grow in an upmarket.

Claire Chang Founding Partner, IgniteXL Ventures

Even though beauty and wellness market has been historically resilient in the downturn markets, emerging brand founders should be thinking about capital efficiency and how to get to the product market fit fast and in the most capital efficient way. This means lot of small trials and errors and lots of learning so when you do have the money to spend, you will know how to make the money work for you.

One of the core drivers of the down market is increased inflation, which affects consumer spending. So, startups should be focusing on making sure their brand and value proposition are in the must-have versus nice-to-have category. Assume the worst and think creatively about how to make your money go far, from creative marketing strategies to leveraging existing customer bases to expand new customer bases, etc.

Leslie Wolfson Engagement Manager, Swiftarc Ventures

It’s no secret that the market meltdown is posing a brutal environment for brands, particularly nascent ones. While this may be the case at this moment in time, I still believe the best sector to be in this type of market is beauty as it rarely gets affected.

The main approach when assessing the market today and going forward should be to secure your supply chain and work with your data. Focus on reducing your shipping costs, which lately have been taking up a significant chunk of profit margins, and focus on maintaining the right level of inventory based on consumer data and demand.

The industry as a whole is under significant stress driven by inflation ultimately affecting all areas of the supply chain, from sourcing and shipping to warehouse operations and labor costs. Listen to the data, lean in to consumer trends, and adjust your product assortment as needed.

Catie Bennett Principal, Fifth Century Partners

It’s certainly a rocky time in the economy right now with inflation at its highest level in 40 years, rising interest rates, continued supply chain issues, rising labor costs, and high energy prices. Our advice to emerging brands is to ensure that they are well capitalized to weather near-term economic challenges and support future growth.

We believe it’s imperative for companies to have a thoughtful strategy and growth plan as growth often requires substantial investment in inventory, marketing, people, infrastructure, among many others things.

Rachel ten Brink Founder and General Partner, Red Bike Capital

I think there will be a lot of rockiness, and founders need to be prepared:

-Cutting burn to extend runway, secondary to growth

-Expect lower valuations and longer fundraising process—2 to 3x longer

-EBITDA matters (even in VC)

-Look at venture debt

-War for talent still high, but easing

-Supply chain still a mess

Elizabeth Edwards Managing Partner, H Venture Partners

There's definitely downward pressure on valuations. This will slow down deals, but ultimately the dry powder is there, so founders that are listening to the market and reacting quickly will get their deals done. Overall, I don't see markets bouncing back anytime soon. How brands plan for and deal with inflation is going to be really important this year.

Ben Fenton Managing Partner, BFG Partners

I'm not sure the valuation compression in the public markets or M&A activity has filtered its way down to the emerging brands landscape yet. While there is still ample appetite to invest in emerging brands in beauty (and CPG more broadly), as a founder, I would anticipate capital raising processes to take longer for one.

It's always good advice to get in front of prospective investors well before you need to raise in order to build a relationship and rapport with potential investors. Focus on margins, profitability and an efficient path to scaling your brand.

Lastly, I do think value expectations have to come down and reflect what is happening in the public markets, a potential slowdown in M&A activity, and a rising rates and inflationary environment.

Kiva Dickinson Managing Partner, Selva Ventures

So far, I have seen the deal environment hold up pretty well, with high-quality brands continuing to attract funding at pretty similar valuations to what we saw three to six months ago. This in part makes sense because, unlike technology, we did not see valuations run up so aggressively in 2020 and 2021.

Public comps like Unilever, L’Oréal and Estée Lauder are certainly down in the past six months, but they still trade at healthy multiples and should be in a position to acquire compelling emerging brands in the coming years.

If I were the founder of an emerging brand, I would be calm in the face of chaos right now and take comfort that the consumer products funding environment has been resilient, but I would look to make a few quick adjustments.

First, reduce spend on growth that has long payback. You want to extend your runway right now, and investors won’t be as impressed by inefficient growth in the coming years. Second, raise capital whenever you can, especially if you have existing investors willing to put more in. Now is not the time to be sensitive to dilution.

Third, plan for consumers to reduce their discretionary spending later this year. Remember that the stock market is a leading indicator of the economy, and it appears that a recession is looming (or already here).

Ashleigh Barker Director and Head of Beauty, Lincoln International

While there is still an abundance of capital ready to be deployed, the fluctuations in the stock market and current macro environment we’re going through now weigh heavily on all aspect of one’s business, operationally as well as from an investment standpoint.

Some investors are still waiting to see how the highs and lows of COVID-period performance stabilize. Inflation and supply chain challenges add another layer to this, and now with the stock market volatility and predictions around a recession proliferating, there’s a lot of uncertainty ahead.

For these reasons, we’re seeing more and more brands exploring strategic options, which leads to a more competitive M&A/growth fundraising environment. This also means that investors are assessing their own risk appetite when it comes to making those early bets. As a result, a brand needs to have really strong proof points and a solid foundation that can mitigate some of these external variables.

My recommendation to emerging beauty and wellness brands: Make sure you’re keeping an eye on cash flow and have enough to get you through these next few months without having the well dry up.  The impetus to seeking capital should be based on helping to accelerate growth versus keeping your head above water.  This might mean holding back on launching in new channels right way and continuing to scale at an attractive steady pace versus seeking an accelerated pace of growth that can’t be sustained.

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