Private equity funds are playing a larger role in consumer startup financing, especially since venture capital funding has fallen in the last year.
Among emerging brands, venture capitalists typically make initial investments in promising companies, or sometimes concepts, primarily based on their significant growth potential. However, private equity involves managing investments in more established companies and helping them maintain profitability.
In the current environment, more brand founders are looking to extend their runway through PE. Although expectations from PE firms differ from VC acceptance, startups rely on private equity to support profitable growth and have concrete exit strategies in place. Additionally, some PE firms are starting to take a greater interest in early-stage companies.
PE interest in DTC companies is not new, and established firms such as Great Hill Partners and L Catterton are some of the best-known PE firms currently investing in digitally native brands. But now that venture capital is harder to come by, PE money is increasingly flowing into consumer brands.
According to data from Crunchbase, only $130 million in U.S. venture capital went into the DTC sector in 2023, compared to $5 billion in 2021, a 97% drop in funding. Although there is no similar data on how much PE money has been poured into DTC brands over the past few years, new consumer-focused private equity funds continue to emerge. Among the high-profile funds is Kim Kardashian's SKKY Partners, which has reportedly raised $1 billion.Last October, Brynwood Partners closed its Brynwood Partners IX LP fund, with more than $750 million in committed capital slated to support its consumer products business.s.
L Catterton has a string of recent success stories, including Nutrafol and Tula Skincare, making it particularly attractive for brands these days. In 2019, L. Catterton's Growth Fund led a $35 million Series B round for hair growth brand Nutrafol with participation from Unilever. Unilever then acquired Nutrafall in 2022 in a deal reported to be $1 billion. Meanwhile, L. Catterton invested in skin care company Tula in 2017, which was acquired by Procter & Gamble five years later.
L Catterton was founded in 1989 through a partnership between Catterton, LVMH and Groupe Arnault and has invested in more than 250 brands since its inception. But now there seems to be more interest in early-stage startups.
Wthn, a wellness brand offering traditional Chinese medicine treatments and products, is the latest startup to turn to private equity funding to fuel growth. In January, the company announced $5 million in Series A funding led by L Catterton to fuel omnichannel expansion. Michelle Larivee, Wthn's co-founder and CEO, told Modern Retail that when the company started raising money, he was approached by PE firms interested in investing.
“Previous investors were mostly VCs, but this time they're mostly PE,” Larivee said. “Catterton has a very strong track record in his four-wall business, which includes service and wellness,” said L. Catterton, SoulCycle founders Elizabeth Cutler and Julie Rice. He joins Wthn's previous investors, including Goop's Gwyneth Paltrow. “Whitney, who is the founder of L. Catterton and joined my board of directors, was also very excited to partner with Casey,” Larivee said. “She's a former founder and executive, so she's very savvy from a business perspective.”
Larivee said the support will primarily go toward opening new stores. Wthn was launched in 2019 when he opened his first acupuncture studio in New York City. Shortly thereafter, the company shifted its focus to selling household products during the pandemic. Now, the company is reopening more stores, opening a second studio in Williamsburg, Brooklyn in January, with plans to open a store on the Upper West Side later this year. There is.
Larrivee said one of the biggest propositions for investors is tapping into the growing herbal medicine market. “They're focused on their business model and the fact that they're the only omnichannel brand that actually does physical retail, and they're combining products that go viral and help set trends. ” Larivee said.
The company sells packaged products such as ear seeds and cupping kits on its website and at retail stores such as Bloomingdale's and Erewhon. But monthly studio memberships are the core of the company's business. “Those are well over 50% of his traffic,” Larivee says.
Larivee said Wthn's studio has given more than 30,000 people their first acupuncture treatment. The company offers both a la carte sessions starting at $85 on your first visit, and memberships starting at $90 per month. Larivee predicts that in 2024 he will grow Wthn three times as much as he did. This will primarily be accomplished by him opening two additional studios, continuing to expand into wholesale and retail, and launching new products focused on digestion and pain. “We also want to expand the product and hopefully launch it in new retail stores in the U.S. and internationally,” she said. “We look forward to seeing our company expand nationally and beyond New York in the coming years.”
Boll & Branch, the bedding brand that received a $100 million investment from L Catterton in 2019, is another brand that has followed a different trajectory than venture capital-backed brands. Until receiving investment from L Catterton, Boll & Branch was self-managed.
Katia Unruh, chief commercial officer of Bol & Branch, said the company decided to accept PE funding to facilitate the opening of standalone retail stores.
“For years, the venture capital model was just injecting money into a business and growing, growing, growing,” she said. “[VCs] You have a goal in mind, an exit, an evaluation, and you move towards it,” Unru said.
Conversely, Anru said, “When you're part of a venture capital-backed company, there's always an underlying pressure to grow at all costs.” PE investors, on the other hand, typically don't invest in businesses that aren't yet profitable, and typically invest in brands that are leaders in their categories. ”
In the case of Boll & Branch, L Catterton was interested in the brand's focus on 100% organic, Fairtrade certified bedding, which turned a profit within a year of its 2014 launch. While PE liaisons can act as advisors, Unlu says: In my experience, brands are largely in control of their own destiny, regardless of time. ”
But even venture capitalists are now exploring similar propositions to private equity, by being more selective and backing brands with a clear path to profitability.
Private equity money will continue to flow into consumer brands for years to come. In January, a new $425 million fund, Forward Consumer Partners, was launched by former L. Catterton partner Matt Rees. The firm focuses on the consumer staples category and has a particular interest in funding low-volatility companies.
“VCs have always focused on exits, and exits have been focused on IPOs,” said David Shiffman, co-head of Salomon Partners' Consumer Retail Group. . That is, until the bull market following the 2021 IPO boom ends.
Shiffman said venture capital started moving into private equity as PE firms established growth-oriented investment arms. “[PEs] “It's not a replacement for seed-stage investing, but what we're finding is that private equity investors have a desire to write small checks for young retail companies,” he said. Stated. “And it's going to compete with some of the later-stage venture companies.”
Additionally, venture capital typically involves multiple investors in a round, whereas PE is typically a single investor. Additionally, Schiffman said private equity tends to have a higher level of diligence in corporate finance.
Regardless of the type of investment being made, both venture capitalists and private equity firms are increasingly looking for many of the same things in a business before investing. “People aren't investing in concepts anymore. They want big, profitable businesses,” Schiffman said.
PE-backed brands, like VC-backed companies, are recognizing these changes. “The basics have to be right,” Unruh said. “It’s deeply rooted in how to drive the next stage of growth while maintaining profitability.”
