In less than 24 hours, I heard about one beauty brand that quietly sold for low single digit millions and another that’s on the brink of closure unless it can find a buyer. Both play in growing categories and have had decent buzz and solid media coverage since they launched.

A handful of enormous M&A deals in beauty – Aesop fetched $2.5 billion in April and Creed $3.8 billion in June – remain the outliers; many founders are struggling to raise money to get their brands off the ground ­or keep them up and running post-launch. Scaling a direct-to-consumer business is expensive, and so is expanding into retail and nurturing a wholesale relationship across hundreds, and in many cases, thousands of stores.

Investors are always on the hunt for their next billion-dollar deal, yet founders are finding it’s increasingly harder to raise capital. Last year, a number of venture capitalists told me they were steering clear of CPG investments because of a volatile economy – despite beauty’s proven resiliency and double-digit growth across many sub-sectors.

I caught up with five beauty investors who invest at varying stages of a brand’s lifecycle (they write checks from the seed level to $10 million and up) about how they’re looking at the space. They told me why and how they’ve changed their investing theses since the proliferation of celebrity beauty; influencer beauty; the Covid-19 pandemic; a DTC rush; the boom (and bust) of “unicorn” brands and more.

Where to place bets is hard. There’s not a definitive formula for predictive growth right now, but here’s how some investors are thinking about it.

Get Into Wholesale Early

When True Beauty Ventures’ Rich Gersten and Cristina Nuñez were looking at potential brands to invest in in 2020 and 2021, the two prioritised brands putting wholesale partnerships first – even though “brick and mortar was dead,” at the time, said Gersten, TBV co-founder and managing partner.

But not just with any retailer (or type of retail channel). He and Nuñez encouraged their portfolio (which includes Dieux, BeautyStat and Youthforia) to enter the specialty retail channel via Sephora or Ulta Beauty.

“If you’re an indie brand going into mass and no one knows who you are, then you’re dead,” said Nuñez, co-founder and general partner.

She and Gersten use performance at Sephora and Ulta Beauty as a barometer for gauging the longevity of a brand. To help, they’ve newly enlisted View From 32, a beauty consultancy started by Lindsay Ullman, Gabriella Giron and Cassie Cowman, three former Sephora merchants. The firm’s portfolio brands have access to the trio’s expertise on retail strategy, operational support, product development and retailer terms and negotiations.

“People are looking for more than just capital,” Gersten said of today’s founders. “If you launch at Sephora and you’re not successful, the odds of that investment being successful for us go way, way down.”

Strong Revenue Does Not Make a Strong Brand

For Kevin Murphy, managing director of Sonoma Brands, revenue was once “the end all be all” at the time of investment.

“I used to use company size more as a metric for a brand having checked a bunch of boxes that are important to us. It’s true that revenue does indicate that to a degree, but revenue is just a marker of the things I’m really looking for – founder strength, brand magic, brand and product fit,” Murphy said, nothing that he and his team “shouldn’t be so fixated” revenue.

Instead of waiting for a company to reach a certain revenue threshold to prove themselves, Murphy spends most of his time today talking to founders of smaller brands. The firm recently invested in a new colour line, Ciele from makeup artist Nikki DeRoest and former Hourglass executive Cerre Francis, which launched at Sephora last week.

“A business can be performing really well and mask that the underlying brand is maybe good but not great,” Murphy said of “performance marketing businesses masquerading as brands.”

Patrick Finnegan, founder of Intuition Capital, agreed.

“It comes down to, ‘Are you able to create an audience without spending a ridiculous amount of money?’ and are you able to consistently stay current with culture?” Finnegan said. Intuition has invested in K18, Vacation, Ceremonia and more.

The consensus is that shiny, young brands growing at breakneck speed are no longer attractive investments.

David Cohen, director of Electric Feels Ventures, an investor in Westman Atelier and Neen, said brands that are “breaking out” are those that are growing profitability.

The Gig Is Up on Celebrity-Led Brands

Generally, investors wait for patterns, or what they perceive to be working, and then fund brands that align with these patterns. This is why a million DTC beauty brands launched after Glossier or why we’re inundated with celebrity and influencer beauty lines post-Fenty Beauty. Investors analysed data and spreadsheets from Facebook, Instagram and other benchmarks coined as measures of “success.” Except, we’ve been largely unsuccessful at knowing what the “next big thing” is.

Nuñez said that True Beauty Ventures looks for founders with an ability to create demand for their products and create and cultivate community – which in turn drives organic growth in capital efficient ways for their companies.

“Sometimes when there is a celebrity or influencer ‘founder,’ it’s not their sole gig to be a founder of a beauty brand. They’re splitting their time and they have other revenue streams and responsibilities,” Nuñez said. “When things get really rough, when you’re a true founder you buckle up and ride it through. That doesn’t happen in those other scenarios [with celebrities] – it’s just another gig.”