These days, as Joanna Glasner, a columnist for Crunchbase, put it, “Beauty is a pretty unattractive area for startup investors.” According to the business information resource, venture funding in the category dropped 50% to $300 million for the first half of this year. Glasner writes 2023 is “on track to deliver the lowest annual tally for beauty-related funding in years.” For global funding generally, Crunchbase estimates venture funding fell 49% in the second quarter from the same period a year ago.

Data from BeautyMatter underscores early-stage funding’s dry spell. In the first half of this year, the beauty trade publication finds beauty deals were down 32.3% from last year, although they ticked up 23.3% in the second quarter versus the first quarter of the year. The deal slump has hit early-stage deals the hardest, and BeautyMatter calculates that 55% of the second quarter’s beauty deals were later-stage growth deals.

Is early-stage beauty brand funding at its nadir and the VC party will promptly resume? Or will the lull persist as worries about an impending recession linger? Investors are split between those predicting the conditions of early-stage funding won’t radically improve soon and those bullish on it for the rest of this year and into next year.

“With the cost of business and growth to founders increasing, there is an overall market adjustment happening where investor and founder expectations need to align before overall deal volume ramps up again,” says Maggie Abeles, VP at NewBound Venture Capital. “It’s hard to say how long this will take, but, as always, we anticipate founders who focus on building relationships and finding alignment with their investors will have an easier time raising capital in the long run.”

Lila Sharifian, fractional CFO and head of beauty at Stage1 Financial and BT3 Ventures, recommends founders consider delaying fundraising and conserving cash. “We, like many other VC firms right now, are focusing more on our existing portfolio companies to ensure they are well-capitalized,” she says, adding, “From a beauty and personal care brand perspective, the early-stage funding landscape is challenging right now unless you essentially check every box for investors.”

Marla Beck, co-founder of Bluemercury and founder of Atmosphere Ventures, explains that the “funding landscape has returned to a more traditional life cycle, where seed may accessible, but, to raise growth capital, you have to show real growth.”

She elaborates, “I’m seeing companies of all types. Some that raised a round last year hit an inflection point and are now growing at an extremely healthy clip, doubling, tripling or more. These are the ones that will get their growth rounds done. I’m also seeing many that are entering the traditional VC ‘valley of death,’ where a company raises a seed round, but doesn’t get the revenue growth high enough, and therefore can’t get their next round done. This is especially true if their valuation was too high in the early rounds.”

Providing her view of the landscape, Alison Ryu, partner at Able Partners, says, “A lot of the historical growth in the early-stage beauty and health and wellness market was fueled by the abundance of available capital, but did not necessarily reflect sustainable business models. As interest rates have increased, the availability of equity and debt financing has tightened across stages. While many investors still have capital to deploy, we have seen more discipline around the ‘why now’ at current entry terms, a question that investors have to answer when weighing today’s risk and return profile against the next rounds.”

She emphasizes, “The brands that have strong fundamentals, including organic growth, solid gross margins and healthy unit economics tend to make it easy for an investor to underwrite the ‘why now.’…Early-stage brands who have historically had access to more capital to test and iterate in these areas now require more discipline to get to product-market fit early in order to build a best-in-class brand that could be a candidate for acquisition down the road.”

Verity Venture Partners co-founder and managing partner Tina Bou-Saba began to observe a shift following the direct-to-consumer boom in the 2010s. “Online customer acquisition has become very expensive, the cost to succeed at retail has increased and the space is crowded overall,” she says. “As a result, investor interest in early-stage brands has generally declined, with many investors wanting to see more traction and perform deeper diligence before getting involved, but investors are still quite interested in beauty and wellness.”

Charles Hudson, managing partner and founder of Precursor Ventures, agrees that “the shadow of failed DTC companies from the last decade still hangs over this space.” He says, “Many investors are still trying to figure out what it takes to build these brands into venture-scale businesses that can get to $1 billion in value…Valuations are down to more reasonable levels and rounds are smaller.”

Hudson approximates valuations for early-stage beauty brands have decreased 25% to 50%. Claire Chang, founder and managing director at IgniteXL, has seen valuations dip 20% to 40% at the seed stage and 10% to 20% at the pre-seed stage. She says, “We’ve also seen a lot of founders that entered the funding market in mid- to late-2022 reduce valuations substantially to shift with the market.”

Abeles highlights that a ubiquitous feature of the early-stage funding landscape shift is extended timelines for deal closures. “For example, what used to take three months may now take six to nine,” she says. “For that reason, we’re also seeing founders seek to extend the time periods between raises.”

In a market more favorable to investors, deal structures are changing, although Chang points out the changes aren’t dramatic. She says early-stage investors are prioritizing information rights or rights involving access to details about financial statements, budgets and the capitalization table so “they can accurate set expectations internally and with external stakeholders.”

Chang continues, “In the later stages, we have seen more stringent downside protection (i.e., 2x-plus liquidity preference), which founders should be somewhat wary of. In short, the power has swung back to investors in the past 12 to 18 months, but not as drastically in the early stages as in the later stages.”

Deal terms have long-term ramifications. Ryu says that the “structured rounds that recapitalize the business at significantly lower valuations with liquidation preferences” could “lead to scenarios where later-stage investors are rewarded while earlier stage investors are not, and this illustrates how the dynamics in today’s market could divide early-stage investors and later-stage investors when they have different incentives in the future.”

The good news for early-stage funding is wins for larger beauty brands can have downstream effects—and there’ve been some major wins for larger beauty brands. Among the notable transactions this year are Oddity’s initial public offering valuing it at $2.7 billion, Kering’s $3.8 billion acquisition of Creed and L’Oréal’s $2.5 billion pickup of Aesop.

“We’ve definitely felt positive downstream impact from the beauty industry’s recent mega-deals,” says Chang. “I think, especially from the LP side, a lot of folks question how high the ceiling is for beauty exits. Being able to point to Creed, Aesop and now Oddity as examples of multibillion-dollar outcomes helps validate the return potential of the space. For entrepreneurs, we think it also paints a clearer picture of what they can work towards and what massive success looks like.”

Hudson hasn’t yet detected big exits influencing early-stage transactions. “This is because a relatively small universe of venture investors back beauty and wellness brands,” he says. “Those who do often look for companies to get to $5 million or so in revenue before making meaningful investments. The relative lack of funds focused on this category at the early stages acts as a lid on prices, no matter what happens in later-stage companies.”

Rich Gersten, co-founder and managing partner of True Beauty Ventures, says, “Early-stage brand founders do not always understand that the valuations placed on a Creed or Aesop do not necessarily apply to brands at their scale. Scale and profitability drive higher multiples. I would not be surprised if we are looking at a period of down rounds coming off the highs of COVID.”

True Beauty Ventures projects it will complete four deals this year, an amount that’s in line with deal completion in past years. Gersten says there’s no shortage of brands seeking deals. However, he qualifies, “There is a shortage of uniquely positioned and differentiated brands seeking investment.”

Bou-Saba has noticed deal flow accelerate of late. She says, “I was surprised by this because I feel like summer is generally slower for fundraising. I think that founders are seeing the IPOs and M&A…and are starting to gear up for a more favorable fundraising environment this fall and continuing into next year.”

Bou-Saba is similarly positive about fundraising environment toward the end of this year and next year. She says, “I believe that 2024 will bring additional consumer IPOs (for example, Skims) as well as large strategic M&A in key beauty and wellness categories. There are a number of fantastic brands that are acquisition ready and eagerly awaiting an improvement in market conditions and an acceleration in M&A. In my opinion, 2024 will be an exciting year for the space.” The publication Business of Fashion has identified Augustinus Bader, K18, Naturium, Westman Atelier, Glow Recipe and Summer Fridays as top M&A targets in beauty.

Lisa Sugar, partner at Sugar Capital, and Hudson share Bou-Saba’s confidence. Sugar says, “Given the macro environment of the stock market, inflation and M&A activity, the outlook for the second half of this year is more optimistic than what we have seen over the prior four quarters.” Hudson says, “I am enthusiastic about the future of beauty and wellness companies. I do think that investors will rotate back toward looking at this category.”

Andrew Ross, senior advisor and venture partner at XRC Labs, sounds a note of caution that “we still have a long way to go for things to work through the system though in terms of down rounds for series B/C companies that have not met growth expectations and for series A and seed companies that are struggling to find follow-on funding.” On a brighter note, he says, “It is still possible to create value in beauty, and it’s especially healthy that there are options for IPO as well as strategic acquisition.”

Bou-Saba reinforces that investor interest in beauty and wellness remains high relative to other consumer packaged goods categories. She says, “Beauty and wellness is the most attractive sector in consumer. It represents a massive domestic and global market with high margins, high consumer engagement and an ongoing trend toward premiumization. It is vastly more resilient and attractive than apparel or hardgoods, for example.”

Along with traditional strategic acquirers, Bou-Saba draws attention to a layer of acquirers like Waldencast, owner of Obagi Skincare and Milk Makeup, fueling smaller brand deals. She says, “There are brands out there with $20 million-plus in sales, positive cash flow, sticky customers and scalable distribution (for example, strength on Amazon. Such a brand may not make it through the filter of the largest strategics, but it has real value to a smaller strategic or financial buyer.” Under present circumstances, Ryu says there will be “opportunistic small-scale M&A opportunities for high-performing brands to acquire or acquihire customers, IP and talent.”

Orveon, parent company of Laura Mercier, Bare Minerals and Buxom, is hunting for brands generating roughly $50 million, according to CEO Pascal Houdayer, who participated in a panel at Beauty Independent’s Dealmaker Summit in May. Christina Hull, chief transformation officer at Orveon, says, “We are looking to acquire brands that reinforce our vision as the sustainable face care expert. We are interested in brands with a strong skincare offering where we can leverage our Orveon global footprint and omnichannel strategy, product innovation knowledge and digital acceleration capabilities.”

As Selva Ventures evaluates investments, principal Madeline Kaplan says she’s asking the following questions: “Where do men shop for prestige skincare? How do you scale a prestige men’s skincare brand?” At Able Partners, Ryu is zeroing in on the beauty and wellness segments gut health, haircare, sun care and longevity. IgniteXL’s Chang says she’s excited by “beauty brands that lead with science-backed clinical efficacy.”

Odile Roujol, founding partner at Fab Co-Creation Studio Ventures, an investor in longevity play Novos Labs and sustainability data platform Bluebird Climate, is concentrating on the merging of beauty and wellness, biotechnology, health technology and sustainability. She says, I’m focusing on purpose- and data-driven founders, companies leveraging the power of their communities and experts…More than ever the team matters. Maybe the big difference in the pipeline is that some of the new teams are lacking some superpowers needed in data and tech.”

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