As consumers stayed inside in 2020, some trends in the beauty space slowed down while others burned brightly. Self-care became a priority, pushing skincare to greater heights, while makeup fell onto the backburner. Investors want in.

According to an April report by CB Insights, funding to the beauty and personal care space hit an all-time high in 2020, with over $2 billion of investment, and 2021 is shaping up to be much of the same. By early April, funding had already exceeded $1.1 billion, up from $238 million invested in the first quarter of last year.

Interest in the sector has risen for years as investors like Unilever and Lerer Hippeau pushed capital into startups in the area. The number of deals in the beauty and personal care space has steadily grown since 2011, with over 200 deals each year from 2016 onwards, according to CB Insights. In 2020, there were 236 deals in the category, compared to a blockbuster 278 in 2019. But 2021 is forecast to be even higher, at an anticipated 292 deals.

While the investment market for beauty and personal care is still red hot, skincare and clean beauty have gotten an extra boost, as have direct-to-consumer brands. Investors are looking for companies that not only play in those key categories but have also built loyal followings to spur demand for their products.

Amanda Baldwin is familiar with the feeling. After working at beauty giants like Estée Lauder and LVMH, she pivoted to working at private equity firm L Catterton, one of the top investors in the personal care and beauty space by CB Insights' measure, to help grow the next batch of beauty brands. She came over to SPF-focused skincare and makeup brand Supergoop about five years ago as president, taking an investor's eye to the startup.

"There are some things that you can add to the mix, whether that's strategy or how to build a team, but there are some things that you're given, that it's either there or it's not," Baldwin, who has been CEO of the company since January, said.

"And the magic of Supergoop was there right from day one: The brand name, the colors, the aesthetics, its entire aura I really felt like was just magic in a bottle. I'd been at Clinique, I'd been at Dior, I saw what it meant to build incredible, lasting global brands, and I felt like all the building blocks were in Supergoop, and here was this wonderful founder who was saying, 'Help me build this.' So there was just like a lot as an investor that I really fell in love with, in terms of the fundamentals of the business and the category."

The interest from investors is certainly there. But what does it take for clean beauty brands to scale?

Building a multi-billion dollar brand? 'It helps to know what one looks like'

While it might not be fair to qualify it as luck, part of the success of clean or natural beauty brands, and brands that cater to skincare and preventative care, is that trends are shifting in their favor. Aside from other (30%) — which includes personal care and fragrance, along with some additional categories — skincare companies have taken the highest percentage of deals from top investors (20%) over the 2015 to 2021 period, according to CB Insights. Makeup came just after, at 14%.

"Skincare companies have seen the most attention from top investors," CB Insights researchers wrote. "Over the past several years, consumers have shifted away from makeup in favor of a longer-term and more proactive approach to beauty."

They also pointed to the fact that demographics like men and young consumers are adopting skincare more readily now, leading to a market value of $184 billion. The market saturation of natural or clean products also has a ton of opportunity ahead of it, according to Jaime Schmidt, founder of Schmidt's Naturals and co-owner and investor through venture capital firm Color.

"It's been saturated in a lot of ways. We see so many brands in the industry, we hear people talking about naturals a lot more frequently, but there's still this huge untapped audience," Schmidt said. "I think it's smart for brands to continue to innovate there. I think also it really truly is the way of the future. I think there will always be a subset of customers who don't prioritize that as much, but I think when you have a product that works equally well but has a cleaner ingredient profile, you're just going to choose that one."

Efficacy is one of the keys to future growth. CB Insights noted in its report that it expects clean ingredient companies to move on to "backing up their efficacy" in the future, including through "providing clinical trial data or having connections with health professionals." The company pointed to Unilever's recent investments in True Botanicals and Nutrafol as proof of the "intersection of 'clean' ingredients and effective, science-backed products."

Unilever has invested in six companies in the past year, including three that make skincare products, according to CB Insights. 

Efficacy was also top of mind for Schmidt when she founded Schmidt's Naturals. The idea for the company first began because Schmidt wanted healthier alternatives to use on her body while pregnant. When she started selling her products at farmer's markets and getting great customer feedback on them, she chose to focus on deodorant, in part because of the efficacy question.

"I started getting a better sense of what it was they wanted and where the opportunity was, and I realized it was in deodorant," Schmidt said, adding that deodorant was the category that "really needed some innovation" of the areas she made products in. "I recognized the opportunity to innovate there. And not just in the efficacy, but also in the branding, and the different fragrances that could be used, and just the way that naturals were marketed. It just felt like it was time to bring them a little more mainstream."

As more players enter the space, it's become about much more than just making an effective product, though. As an investor, Schmidt is more concerned with finding brands that are innovating in a stale category. Sustainability and clean, natural ingredients aren't a requirement for all of her investments, but having a meaningful purpose that the founders can articulate is. Any brand can take a sustainable approach to its products, but if it doesn't have strong ownership in a certain area or an understanding of its reason for being, Schmidt generally isn't interested.

Another element of Schmidt's Naturals playbook is making the price of its products accessible to as many people as possible. It can be a hard task for natural brands, and it's one of the reasons consumers avoid some more environmentally friendly products. For Schmidt, the solution is finding the right suppliers to build relationships with and getting more distribution points, which allows for price cuts. But it means founders have to be OK with taking a margin cut for a time, Schmidt said.

Having experience with investing helps in more ways than one when it comes to scaling a brand. Supergoop's Baldwin credits her experience as an investor with the financial chops that help her grow the company profitably. That, in addition to working at beauty giants in the past, has given her a decent blueprint for Supergoop.

"My days on Wall Street definitely taught me to respect the numbers, to understand the numbers, as a private equity investor to really understand the power of, 'How do you build a really strong [profit and loss statement]? How do you grow something, but also in a very profitable way? How do you create value in an organization?'" Baldwin said. Her experience at LVMH and Estée Lauder has helped on the operations side. "It's easier to build a house if you've lived in a house. When you start at a few million dollars, and you're trying to build something that I fundamentally believe will be a multi-billion dollar global company one day, it helps to know what one looks like."

While trends are in favor of skincare and personal care items right now, some of the same trends are also cropping up in makeup, according to CB Insights. Products with clean ingredients are a priority, and as consumers return to makeup post-pandemic, brands that blur the lines between makeup and skincare may also do well, the company said, citing Kosas Cosmetics as an example.

Formulating makeup products with clean ingredients is harder than it sounds, though. Schmidt noted that making a "truly natural makeup product" means using a limited list of ingredients, and it may not be worth it in that category to demand 100% clean or natural products compared to others, like deodorant, where it's more doable.

She sees a trend in beauty toward more customizable products in the future, like skincare brand Proven (Schmidt is working with the company for the TV show Going Public), which formulates unique products based on specific skin concerns so consumers don't have to figure out what's right for them on their own.

"Customers shouldn't be expected to be like experts in skincare," Schmidt said. "It's overwhelming, we have all these options and all these ingredients and all these different product attributes and things that we have to try to make sense of, and then we're just stuck."

'Do just one thing and do it really well'

As investors search for the next big brand in beauty, three categories are top of mind, according to CB Insights: clean formulations, brands that tackle skin health conditions, and DTC companies like Glossier that have strong communities and loyal followings. While Schmidt's Naturals and Supergoop are both positioned well in terms of prevailing trends in the space, Baldwin and Schmidt also attribute the success of their brands to the loyalty of their consumers.

In Supergoop's case, it's the loyalty of a lifestyle choice. Supergoop was founded with the aim of getting rid of skin cancer by making products with SPF that consumers actually want to use. (So much so that its first major digital media brand campaign launched Monday, during Skin Cancer Awareness Month, to remind consumers to wear SPF every day.) Its customer base, therefore, is less impacted by changing beauty trends, according to Baldwin.

"It's really about a health and wellness choice. If I decide that I'm going to wear SPF because I know that's the number one thing I can do for my skin, that doesn't necessarily have anything to do with the skincare cycle or makeup cycle," Baldwin said. "We equate it to brushing your teeth every day or wearing a seatbelt — you don't all of a sudden say, 'You know what? I'm good.'"

Even the pandemic didn't change much for Supergoop, Baldwin said. The need for sunscreen was still there, especially as consumers went outside more frequently than in prior years. The company's Glowscreen, which was initially launched for events like festivals, ended up being "great for Zoom."

Supergoop's staunch focus on SPF has led to a series of skincare and makeup products that all are positioned to serve its loyal consumers' lifestyle. In addition to just straight sunscreen, the brand sells a variety of other products with SPF, including Glow Oil with SPF 50, Shimmershade eyeshadow with SPF 30 and Unseen Sunscreen with SPF 40, which the brand positions as a primer.

Glowscreen is a good example of how the company tries to marry its SPF focus with larger beauty trends. It was created from the insight that a lot of women were looking for a "glowing dewy finish," so Supergoop created a product that would treat that desire while also including the SPF its customers came for.

"If I can give you a beauty product or a skincare product that you love to wear anyway, and then slip in the SPF, that's my best shot at encouraging you to wear it every single day," Baldwin said. "The first insight that drove the product development of this brand was not that there wasn't enough sunscreen, but that nobody actually enjoyed wearing it."

Baldwin's vision for growth, therefore, won't be found in deviating from the brand's SPF focus but in continuing to find new ways to create products with SPF that consumers will want to wear every day. "I think if we keep doing that, we will always have a new idea," Baldwin said.

Similarly, Schmidt was hesitant to expand too early with Schmidt's Naturals. The brand had started with deodorant, but Schmidt heard feedback from a lot of customers who wanted more products. She listened to requests, noting which products were most frequently requested, including soap and toothpaste (both of which the brand now sells), but Schmidt kept the focus on deodorant for several years.

"I understood early that it was important to do just one thing and do it really well," Schmidt said, adding that the bar was incredibly high with how loyal Schmidt's Naturals' customers were. Anything else the company launched "had to be equally great." 

Rather than staking future growth on expansion, Schmidt remains focused on deodorant, which has the highest loyalty of its product categories. The company operates in household care as well, but Schmidt believes there's still more room to innovate in deodorant and maintain the relevancy of its hero product.

Why have consumers stuck by a deodorant brand for so long?

"The efficacy is just so important. Where other types of products, the branding can look really good and it just could be like a fun thing to use, but you don't depend as much on the efficacy," Schmidt said. "I think that's why the brand loyalty is so strong in deodorant, and why so many people are excited to try to get into that category because they can see just the loyalty that comes with that type of product."