What makes a beauty brand worthy of investment in 2018

As digitally native brands continue to disrupt the beauty industry’s status quo, more and more investors are rushing to back them up.

It doesn’t hurt that beauty at large seems to be having a moment, with U.S. beauty sales rising to $17.7 billion in 2017, a 6 percent increase from the year prior. Skin care accounted for 45 percent of those gains, which is not surprising, given that every media outlet from The New Yorker to New York Magazine has unpacked its current vogue.

But the consumer stickiness and loyalty the beauty category affords makes it appealing in the long-term, too, according to Sutian Dong, a partner at Female Founders Fund, which has invested in brands like Winky Lux and Manicube.

“That results in very predictable revenue,” she said. “But more and more people are also realizing that it’s a really compelling place to make tremendous margins at scale.”

Buzzy companies like Glossier, Huda Beauty and Charlotte Tilbury have all received recent funding, but new investor cash isn’t just reserved for high-profile brands. Last February, the customizable hair-care company Function of Beauty secured a $9.5 million Series A round led by GGV Capital, while its competitor, Prose Beauty, raised $5.2 million of its own this past December in a Series A round led by Forerunner Ventures.

All in all, the beauty sector saw an all-time-high of more than 149 deals in 2017, according to an April report from CB Insights, representing a 19 percent jump from the year prior.

Even the traditional beauty players left in the wake of these younger brands are catching on to their appeal, which has led to a frenzy of M&A activity over the last few years.

After scooping up Smashbox early in 2010, Estée Lauder purchased Too Faced Cosmetics for $1.45 billion in 2016. The same year, L’Oréal purchased It Cosmetics for $1.2 billion. After Unilever acquired a slew of brands in 2015, including Kate Somerville and Dermalogica, the company continued its buying spree last year, shilling for brands like Carver Korea ($2.7 billion) and Hourglass Cosmetics (for an undisclosed sum).

But the beauty startup space is increasingly crowded, and not all new, digital-first brands meet the mark for investors. What it comes down to is a combination of product efficacy, transparency, innovation and customer connection.