Why VCs are pouring money into beauty brands

The beauty industry is changing, and venture capitalists are taking notice.

According to a recent report from Nielsen, 96% of traditional beauty retail channels (meaning brick-and-mortar options) are controlled by the top 20 cosmetics manufacturers—but on the flip side, 86% of ecommerce channels are controlled by companies outside the top 20.

That means smaller ecommerce businesses are dominating the landscape for direct-to-consumer sales and subscription services. And this year more than ever, venture capitalists are looking to get in on the trend.

Just over three-quarters of the way through 2018, US-based companies in the beauty industry have already raised a record amount of VC funding, coming in at a total of $812 million and counting, per PitchBook data. Last year’s total was about $634 million. Deal count is set to be on par with last year’s and almost hit a high reached in 2014.

Here’s a closer look:

Of the 50 VC deals for beauty companies that have closed so far this year, several have been for companies that sell makeup directly to consumers. Among them are Glossier, which brought in $52 million, and Mented Cosmetics, which raised more than $3 million.

But it’s not all about makeup—other types of companies in the personal care sector are also getting in on the funding boom. One of the largest rounds in the space so far in 2018 was a $112 million funding for Harry’s, which ships razors and shaving supplies to its customers. Hims, a provider of wellness products including hair loss prevention kits, brought in a pair of funding rounds in the first six months of the year. And fragrance subscription service Scentbird raised $18.6 million in May.

So, why are venture capitalists flocking toward beauty companies? It’s partly because businesses that specialize in cosmetics and other personal care products are getting good at using technology to sell their products.

Beyond the online platforms brands are building for direct sales, they’re taking advantage of social media more than ever. Glossier, for instance, launched its makeup on Instagram before it even had its website. Glossier founder Emily Weiss said at TechCrunch Disrupt last month that more than 70% of millennials purchase beauty and fashion products through Instagram. YouTube is also a major platform for beauty brands. So far this year, an average of more than 1 million beauty videos are viewed on the video site every single day, according to a BBC report. That’s up from averages of 800,000 per day last year and about 500,000 in 2016.

Another impetus for investors backing private beauty companies is that they’re paying attention to what customers want. Consumers are increasingly drawn toward personalized beauty products, including those that offer a variety of shades for a diverse customer base. Early last year, Shiseido bought MatchCo, a venture-backed startup that makes customization software meant to help users find products that match their skin. Mented Cosmetics specializes in makeup made for darker skin tones. And singer Rihanna is the founder of Fenty Beauty, which provides foundations meant to work with all skin tones.

Consumers are also increasingly interested in buying products from companies that place an emphasis on natural ingredients. NPD Group, a marketing research company, found that the clean beauty market grew by 10% last year, versus 3.8% for the mass beauty industry. Many private companies are catering toward customers who want green, organic products. For example, Goop, which sells personal products through its website, trends toward natural brands meant to enhance wellness. And True Botanicals, which raised about $8 million in VC funding earlier this year, sells natural skincare products.

Whatever a company’s focus, the opportunity for ecommerce businesses in the beauty industry is likely to continue to grow. According to statistics portal Statista, ecommerce sales accounted for just about 10% of all global retail sales in 2017, and the share is projected to steadily increase past 17% over the next few years.