Inside The Business of Beauty with Manica Blain

Welcome to The Great Pursuit, a podcast that dives into the state of entrepreneurship. We explore the trends, industries, and companies shaping the future, with lessons from the founders and leaders driving them. Hosted by me, Ethan Song, The Great Pursuit is designed to spark fresh ideas and deliver actionable insights, all while asking one crucial question, what's the point of it all? And with that, let's get started.

Welcome, Manika. Thank you for coming on the podcast. Thank you, Ethan. Thank you for having me.

Really appreciate you accepting the invite again. And maybe before we get started into the questions, would it be possible for you to give us a quick, short bio recap of the last few years? For sure. For sure.

So I started Top Knot Ventures about two and a half years ago, and it is my dedicated investment vehicle. I've now made 16 investments in 14 portfolio companies, like in terms of direct investments and also now paying another venture fund. But just rewinding back a bunch of years, started high-care investing banking, did that for five years, focused on consumer. The next chunk of it was in private equity.

Again, mostly focused on consumer. And I started my first venture capital fund in late 2014. and that was Canterbury Capital, $32 million fund that I started with a number of former Lulemon executives we invested in in brands like, like Fred Van Oak, Figgs, Cotopaxi, mostly apparel-focused. My pivot into beauty would have started about three, four years ago when I made my first beauty investment.

And since then, I've invested of the 14 portfolio companies within Top Knot Ventures, eight businesses are beauty businesses. Six of them are brands. Two of them are B2B platforms. So I've been spending a lot of time in beauty.

I think that's what we're here to talk about today as well. Yeah, I mean, I'd be curious actually what attracted you to the beauty space. I know you've always been a consumer investor, so that is not surprising. It's an area you're passionate about, but why beauty specifically?

Yeah, such a great question. Um, so yeah, I mean, look, I cut my teeth in early stage investing, probably investing in the hardest subsector of consumer to invest in. You know, if you think about apparel and you think about, um, things like just even the business model and the profile and, you know, in terms of margins, um, you know, 40% return rates often, you know, um, and, and seasonality, right. You miss your outerwear season you're not going to sell parkas in june um so there's just a tremendous amount of challenge within early stage not to say that you can't hit it and you obviously can um do very well as an investor in apparel um but when i when i when i first discovered beauty in in 2021 i just just even like the income statement like the pure p&l of a beauty business versus an apparel business was astounding to me you know i'm looking at the returns and i'm like are you like missing and like a decimal, like a ramp, like, you know, 0.

5% return. Like what, what is this? You know, the lack of discounting the lack of seasonality, you know, there's a little bit of seasonality here. They're nowhere near the level that you'll see in apparel.

Also just in terms of trend, right? Like in apparel, as, as you know, very well, like you're, you're hitting on, you know, the newest thing often within these legacy beauty brands um they will have a hero product you know that that that goes the distance that will be their hero product for a very long time um and and they don't have to you know there's certainly a lot of innovation and new product development that goes into these beauty brands you need to stay fresh of course but not nearly to the extent that you would within something fashion or trendy like apparel um you know margins are super high you're typically talking product margins in like 90 plus you're top you typically talk about fully loaded gross profit margins in like the 60 to 70 plus when i say fully loaded um you know i obviously mean net fulfillment logistics credit card processing fees all of that stuff um i also So being a consumer investor that I would say emerged during the DTC wave 1.

0 of like, you know, the early to mid 2010s. What I love about beauty is the loyalty and that you can see it through a DTC channel. Oftentimes, especially as these young brands launch and grow, they will do so initially via DTC. They do often go into retail, you know, relatively early as well.

But they do have a really strong, businesses that I'm attracted to mostly within beauty have a very strong DTC presence as well. They own their customer in that regard. You can see evidence of clear loyalty. You know, it's habit forming as well in the sense of the routine of beauty.

And, you know, if you're if you have a routine where you're relying on a certain night cream every night, you know, there's a little stickiness event. And you can see evidence of that when you're a finance nerd like me that likes to really drill into the data. So, you know, I think the other probably the most important thing that attracted me to beauty was the exit dynamic. Right.

As an investor, as an early stage investor, when I say early, I'm typically typically writing checks for a business between like one and five. million dollars in in top line um but within beauty there's just such a strong um base of brands whose business model it is to acquire additional brands to bring under their umbrellas and think about unilever think about procter and gamble real firestorm purge church and dwight You know, Hank, there's so many personal care behemoth conglomerates who regularly will acquire brands to bring into their portfolios and to grow and continue to scale globally.

So the dynamic as more of an opportunity for an exit certainly was something that piqued my interest as I started to dive more into the category. yeah i mean those are great points i i almost feel like i should start a beauty brand right now based on how you convinced me so well but yeah but honestly i tend to agree with you i mean i also feel as beauty fits really well like social media influencers you know creators uh tiktok even specifically uh around creating content but it also fits experiential retail in an interesting way.

Obviously, Sephora is doing a lot in that space. And so it almost fits the zeitgeist where we are in society to a certain extent. And so that's why it is, to a certain extent, a great category. And as an investor, I also agree with you that you may invest in a fashion business, but unless it's one in a million that IPOs, who buys it?

That's a big problem as an investor in such a business. And we've seen that happen being an issue with a lot of brands. But I wanted to be a little bit controversial to start. I feel like one of the big trend in beauty in the last maybe even 10 years, but for sure five years, is really around sustainability, less ingredients, clean beauty.

But it feels like we are at saturation now. It feels like every brand is a clean beauty brand. Do you feel like it's the same? Yeah, I definitely think that it table stakes at this point, right?

Is what I think about clean beauty. I think, I mean, it's interesting because trends come and go. And obviously I think we in a moment right now where beauty is being categorized and positioned as more wellness as well which I think is really interesting because I think the consumer these are all obviously driven by consumer right Preferences and where the consumer is at But I think the consumer really is focused on the routine of wellness And that means different things for different consumers.

But I see beauty really playing into that, trying to evoke not only that emotional connection, but trying to represent a slice of that consumer's wellness. regimen routine and so that's that's that's sort of a i would say it's like the new buzz thing like like would you consider your they don't five years ago use your beauty brand clean whereas today i feel like how do you fit into wellness is like more of like the conversation is more when i'm when i'm having you know pitches in my inbox there's there's there's often now this this connection i would say over the last year or two i've really started to see increase into how a beauty brand fits into wellness for that consumer.

Well, I mean, even like thinking about new product categories, like, you know, let's say Jolie, Ryan there, like it's, you know, it's being marketed as a beauty product, but it's a showerhead. But it kind of makes sense because if your outcome is to have better hair, and obviously like I'm even talking about here now, we're talking about beauty as a general category, not just makeup, obviously. I think there's a lot of opportunities like that that are going to appear that you market at leveraging the same path or channels as beauty brands, but it's a little bit different.

You know, it improves your lives in different ways. And it is more holistic, like you said, in terms of wellness. Now, which is interesting to me because like five years ago, if you told me wellness, the first thing that would come to my mind, if you can like rewind that far back would be like, honestly be like a candle it'd be like um you know like a that's probably the first thing i'm thinking if i thought well or like or like vitamins or um you know like some kind of um you know like i'm not gonna say woo woo but i kind of mean like that's what i would think it's so interesting to see how my own definition of a as a consumer has evolved from what i might have like first thing that comes to mind when I think wellness to like what it is today, to your point, showerhead.

Yeah. Yeah. It's interesting because also beauty is so personal, right? Because the idea like how do you perceive your own beauty?

How does the external world perceive your beauty? And that changes every five, 10 years. New generation have new ideas around that. I mean, based on what you're seeing in the market, what are new areas of opportunities?

Like if I wanted to start something today, like what are some areas that you would say, like, take a look at that? oh it's so hard to say i mean if i had the right answer to that i'd probably be an entrepreneur and not an investor um but i would say i it's interesting i had a conversation the other day with a very senior um sephora executive here in canada and um she had such a an interesting insight we were talking about as you know i have an investment that i just made in a j beauty brand And Dan Dam, I have investment in Ayurvedic beauty brand, Pahajan.

And I have really been interested and obsessed with this idea of like the consumer being excited about exploring and embracing beauty beyond their own borders. And so we were talking about that in the context of K-Beauty. And, you know, specifically there are a number of K-Beauty brands that, you know, are rolling out at Aurora. And she was like, it's interesting because I've seen this.

And this was an executive that has been in skincare for 17 or 18 years. And she was saying that, you know, the consumer today, the younger consumer that's like stars and eyes excited about K-beauty, J-beauty, I-or-bated-beauty, you know, that whole, you know, from a broad sort of thing. Like this was, K-beauty was a big thing like 10 years ago, you know, 12 years ago. But she's like, but I guess they would have been toddlers.

So it's almost like what's old somehow is new again. comes back yeah it comes back i think the other question i have and it's part of my own investment thesis in these categories is that i wonder so much if they're like coming back and trending so much as like here to stay because i feel like the consumer has evolved their own um open-mindedness their own desire appetite to embrace to okay like why is it that in my mind i think a luxury as like a French brand? Like, could it not be, you know what I'm trying to say?

Like this beautiful Japanese brand or Korean brand or Ayurvedic brand. Like it's sort of a, I believe it's a change of how a consumer perceives beauty as well. And so I think that a lot of that coming back in part because the younger consumer today was just too young to remember when it was first introduced. But I also feel like there's an element of it coming back because of the consumer unmasked their appreciation or what they view as where beauty should come from.

I wonder if it's kind of like restaurants where you used to only eat one style of food, but now everyone's used to like, I may want sushi on Tuesday, but I'm doing Indian on Wednesday and I'm going to do an Italian restaurant on Friday. And you don't even think about it anymore. There are just different optionalities that you have. I mean, think about it.

Like, I mean, I was just, I'll give a shout out to another sort of Vancouver based brand and, you know, business. I'm a fan of like Cactus Club, Joey's, Earl's, you know, for any of your people in Canada will know those brands. And like, it's, you look at their menu and same thing. It's not like cheeseburgers and like American food or whatever, right?

It's like, they've got like this Indian like curry and this stir fry and this like, so it's, it's become so. mainstream and christened for sure. But I think you're really starting to see that in other parts that the consumer touches and beauty specifically. Yeah.

Look, I don't know nearly as much as you do about the beauty industry, but something else that I've read recently is the fact that a lot of people are worried about that there's going to be less M&A in the future. That we've seen some huge exits in the past, like Drunken Elephants and a bunch of other brands that were bought for like very large sums. There is concern that maybe there's too many startup brands, too many brands that are funded, not enough exits. What do you think about that?

Oh, listen, I started- I know you hope that that's not the case, obviously. Yeah, yeah, but I'll tell you why. I'll tell you why. I mean, tell me, tell me one big, like tell me the last time Procter & Gamble, you know, created, you know, something that even remotely competes or revels with like away hair care right like i will i will believe that when i start to see the large and no disrespect to them but i you know they have their legacy brands that do very very well for them um but you know you think about it and 10 years ago indie independent beauty brands maybe made up 10 to 20 percent of of beauty that was purchased by a consumer you know today i think it's something closer to 40 you know what so it's like the consumer is sort of like kind of rejecting the mother you know your mom's like estee lauder skincare in your cabinet and and looking for something like you were more reflects like it's it's i think the consumer is craving something different than from the legacy products that a lot of these bigger you know conglomerate um are known for and and obviously do very well But I do think that market share is decreasing overall, you know.

And so I think that until I start to see one of these large kumalans, like, build something internally that ends up rivaling, you know, some of what I've seen early stage space, i.e. like the drank elephants or the Tower 28s or the Samba Fridays, like, show me that happening in the large space, right? and for these long roads.

And then I believe you I totally believe you I just haven seen it yet So but I will tell you why I think M has slowed down I will tell you why I think you starting to start little bits of pauses I mean I think there was this point of view of waiting until a brand got to a certain size, like $50, $100 plus million, and then then be excited about an acquisition because then it could really make a dent in their portfolio. Well, guess what happens when a brand gets to $100 million plus in revenue, it becomes really expensive.

You know what I mean? Like it's, I think the appetite to, because it's still risky, right? It's still like you don't quite know when that brand moment may be over and maybe it'll never be over. And maybe Summer Fridays is absolutely a legacy brand.

Gosh, I hope it is. I'm a big fan of, you know, their brand and their JetLight Math. I think it's incredible with those founders and that team is able to do, and shout out to Netta from Prelude for for for for getting on that early but I mean I think that there's a reluctance and a reticence to overpain for something that might not exist in a few years so what I think you might start seeing more of is increased activity actually earlier on so don't come to me when you're already in the middle east in australia like let me buy you early and let me enjoy those synergies yeah on my own and watch you ride two billion dollars like i i actually predict more of that for the right brand um and so i predict i i expect to see potentially more more mna activity and interest even if it means like toehold pieces like smaller um investments in you know giving them optionality in terms of you know because because why i mean i think it's rare beauty is obviously not anything i'm close to i don't have any inside information this is me speculating and this is me reading headlines like everybody else but you know anyone beauty knows that that was a a failed process whereby they didn't end up with a buyer at the end of the day and and i think it was a few reasons why i think that happened but again this is all speculation I have no inside information.

But I think part of it was how quickly that business grew. And like, is this a moment or is this a thing? Is this a real brand? Right.

And because the business had grown to such a large sense, I think it was like 200 million plus in top line. like it came with a pretty big like price tag right so it's like okay so i'm gonna bring this into my portfolio but this brand like wasn't even around like five six years ago like do i feel like overpaying for this and then bringing this in and then moment in time i think the second piece of it is that that brand very much is selena gomez in terms of the face in terms of what that brand's know far i think that there's been a lot of fear around just celebrity and cancel culture and you know like it's it's we've seen the mighty fall in many regards and i i think that there's a little bit of like i don't know like i think at the time at the same time i mean like obviously the celebrities and the artists are the biggest brand of our generation and if you if you go to sephora like half the brands but maybe not half okay like 25 of the brands whether it's lady gaga's brand or like Rihanna, obviously, would fancy, but like there's so much like celebrity or influencer back brand.

What are your thoughts about that? Like where do those end up? Well, that's just what I mean. Like they can do.

I think there's a difference between something being incredibly successful and having a moment and producing a ton of cash flow and like, like great. I think there's a question around, will this be legacy? Will this be forever? Is this a moment that we are having?

because this celebrity to your point the brand of our day is celebrity for sure they're in their moment right now like this is their moment but like what happens when that suns out like i think there i think there's a question around that right i think there's a question around the longevity of a brand that's celebrity or influencer backed beyond when that celebrity becomes relevant you You know, so I can see that potentially being an issue. Yeah, I mean, it's true, especially I feel like when a celebrity is fairly young, you just don't know what's going to happen when the next generation comes in.

And they might still be very relevant or they might not be. Right. We just don't know. There's that risk there.

Like you said, you might be willing to pay a low price. But when it's like we talk about billions of dollars, that's what a risk comes into play. but it is interesting I agree with you is that we don't see a lot of independent beauty brands going all the way to IPO I think we've seen some in the hair it's not that they don't exist but like even a company like Glossier or maybe like Rare Beauty like that's the path that they have to take but it seems to be quite challenging I mean I think the IPO markets have been challenged and I think they've been a lot more volatile in the last several years in the last few years especially but I think I mean it's interesting I feel like Glossier is having a really interesting part too.

That is actually one story within the last 10 years where I think I can actually see a world in which Glossier IPOs and becomes a modern day Estee Lauder. I can see that happening. It's doing very well within Sephora is what I understand. the fragrance as well as just the products.

It's a newer generation that's discovering the brand. I could see that one going the distance, actually. Yeah, interesting. I mean, we'll have to see, right?

We'll have to do an episode to talk about the IPO, Glossy IPO, when we get there. I wanted to ask you, obviously, you're investing in early stage. What's that investor's landscape look like? Let's say you were a founder starting beauty brand today, what does that look like?

Is it a standard seed series A? Are you talking about private equity? What would be that path? In terms of raising capital for an early stage brand?

Exactly. Yeah. I think that, I mean, where we're at in the market right now, from what I'm seeing, the appetite to invest in something without the product market fit and without the evidence of loyalty and and it is very low you know i think that 10 years ago was a very different i would even say five years ago it was a different story i think that the complication and challenge in how expensive customer acquisition costs has become has been made very very difficult to buy into okay this isn't gonna work even though we haven't even really started yet so i would say i think um for a beauty brand and and and this is tough but we've had conversations about this before too like i think the best beauty brands that will will do well and will go the distance um will be those that quite frankly might have had like slow growth early on really iterated on product really iterated on their community you know built their community very organically like it will take time right People would know this, but when Sasha started Ilya in 2010, I mean, I just I've got to give a shout out to Beauty Independent.

They did a brilliant webinar with Linda Berkowitz, who was Sasha Plotlik's right hand person that she brought on and I think was introduced by Alison Hahn for Sephora. And then she came on in 2016. between 2010 and 2016 by 2016 ilia was still apparently and this is from the mouth of linda berkowitz doing a million dollars in sales yeah you know what i mean like it takes a minute it takes a while for you sometimes to find your product market fit it takes a while for you to find the right moment in the market you know for for for it to really start to scale considerably And I think that people forgot about that People look at Ilya they like oh yeah great amazing how this huge moment launched at Sephora It like they don hear the story from Sasha words I listened to a bunch of her podcasts I find her super inspirational as a founder And I mean just like walking around you know Vancouver like trying to schlep her lip product There's no complexion of her.

There's just lip to like various stores and boutiques. And like people don't remember that piece of the overnight success story. Because I think overnight success stories are rare and they will continue to be rare in beauty. I think that anybody that's starting a beauty brand today needs to be prepared for the long haul.

And it might take two or three years. It might take five years for you to develop that evidence of this is something to be able to go with third-party investors, institutional investors, and raise money. I think family and friends, capital, is always going to be your rich uncle that's willing to deport your dream, right? You know, if it's not your rich uncle, it might be your friend's rich uncle or aunt or friend.

or like any friend of the family will continue to be. I mean, my, I guess my question to you is, you know, or to a beauty brand founder that's launching that isn't prepared to bootstrap and isn't prepared to side hustle and keep their day job for a few years while they figure out if this is something. Like you're putting your friends and family capital at a huge amount of risk because who's going to fund this next, right? Like I would say slow growth, start early, do this as a side hustle, like entrepreneurship 101.

Like I feel like we're going back to the basic principle of starting something. Yes, it's hard in the early days and we're no longer in a market where people are throwing money at you because you've got a great idea and a concept. Yeah, I mean, I think that's almost better to a certain extent because like you said, like it's more authentic, it's more organic, it represents your life's mission or your personality. and consumers will feel that.

That's why I think it's powerful. But I wanted to pick your brain about what happens after. Let's say you get to a few million dollars and you raise a little bit, maybe a couple million dollars. I feel like that gap to get to the next level is misunderstood.

Do I have to get to $20, $30 million? Do I have to raise another round? Or do I just have to be profitable? The beauty about beauty is that because of the margin profile of a lot of these businesses um you don't tend to see within beauty like a series a b c d e f you know alphabet soup right like you typically see a path where they've raised an amount of seed and then maybe there's a growth round maybe it's followed by another and that's it and you're kicking off like you're like and if you're not like then we got to have a conversation right like i mean it's um you know i am aware of brand you know consumer brands not in beauty but consumer brands you know they're kicking off like 200 300 million dollars in revenue still aren't profitable like why are you doing you know so i i think beauty is great in that regard from like a margin profile can scale doesn't doesn't necessarily need um a crazy amount of capital And that's where you're seeing like, look at Elle Catterton with Elevate, right?

They start, Corey, I'll give a shout out to her. I mean, they were part of, you know, some larger successes and created a vehicle whereby they would, you know, start to invest a little bit earlier because I think these are words that she's used with me is, you know, might get to a point where we might miss it, right? Because if we're not investing early enough. And so you are starting to see, you know, I'd say Sandbridge would be another really smart consumer investor that I really respect.

They're behind, you know, Ilya and another brand in my portfolio as well. And like, they're starting to invest a little bit earlier as well. So they don't miss things. And yeah.

yeah another question i had was like just the idea of like shop space right because i feel like in every new independent brand's journey at some point i have to go into either ulta or target or like sephora one of those stores depending on what product it is or all of them in some cases but those stores can only carry so many products in their stores and it feels pretty jammed now any challenges there that you foresee so here's what i'll say i think it's always going it should i've always felt that it should always be important especially if you have an exit mind to retain a decent part of your business direct i think that your retail and your director d2c need to work really closely together i think you become more valuable as an acquisition candidate if you have a really strong base to DTC.

You can better serve your consumer, guest, clinic, whatever you call them. And I think that the reliance purely on us for Ulta to really scale, I don't know. I mean, it's risky. It's very risky.

And from an acquirer's point of view as well, you know, like if you're, I'm not going to mention names, but there have been a few other failed processes in the last year that you'll know of you know as well that um brands that we thought would sell and they didn't and part of what i heard in terms of chatter was you know in some cases a product segment you know lick with too much you know in terms of the pie like in terms of a product being being being too much of the total revenue but but also concentration in retailer like the entire business was aura Like that's so risky, especially because it's a newer brand.

But what happens if all of a sudden Sephora decides? So I think that like, yes, do I agree that having retail relationships and strong ones are vitally important to scale and achieve potential exit or even just massive scale, right? Absolutely. However, I think there's a balance in terms of nurturing your own direct channel.

keeping that relationship with your consumer really strong. And I think they can work together, actually. I don't think that one necessarily cannibalize the other. I think you can work very closely with your retail channel with Amazon.

Amazon, if you asked me five years ago, I'd be like, oh my God, stay away from Amazon. It's like a brand killer. Like, whatever. I mean, all of us have changed our tomb, you know, me included.

I think you need to be where your customer is, right? And you can do it in really careful ways, you know, limited types of schemes. You know, I think that reliance on one sole retail partnership, though, can be quite frankly really dangerous if you're looking to scale and achieve a positive outcome with a strategic exit. Makes sense.

Well, look, we don't have much more time, but I definitely want to bring you back in a quarter. But before we go, what are you looking for in 2025? IPOs, M&As, companies you can name. What's exciting for you this year?

What's exciting for me this year? You know, I'm really excited about a bunch of brands within my portfolio that are at some really pivotal points. So looking to just further support them. I've been really, as they've built teams and bringing in the right people, bringing in the right superheroes.

I think that's so important in the early stage within beauty, especially when you've got something with product market scale and it's working, bringing the right team along. So I've gotten really close to that piece of business for my portfolio companies. I'm excited about a little bit of M.A.

You know, I feel like 2024 started off with a bang, you know, with K-18 and, you know, Dr. Dennis Gross and Barbara Sturm. And there was, you know, there was this whole wave and, you know, we didn't really see much of it for the rest of 2024. And there were a lot of things in play, too.

Right. So I think I'm excited to see where things land. I'm excited to test whether my hypothesis is correct in terms of, you know, some of these big strategics having general apprehension and overpaying for assets that they feel maybe have in the moment and whether you will start to see them coming in earlier on into the journey of a brand. Yeah, those are just some of them.

All right. Awesome. Well, thank you so much for coming out. Really appreciate your time.

Thank you for having me.