Key Takeaways

• The “missing middle” describes the funding gap for beauty brands with revenues between $17 million and $115 million, especially pronounced in Europe.
• Fragmented markets and reduced investment in consumer goods hinder growth-stage brands, with European deal activity lagging behind the U.S.
• Despite challenges, the growth stage represents an attractive investment opportunity, offering balance between risk and reward.

Missing Middle in Beauty Investment

The beauty industry’s funding landscape faces a significant challenge known as the “missing middle.” This term refers to the gap between early-stage venture capital and late-stage private equity, particularly affecting brands in the $17 million to $115 million revenue range. These companies find themselves too large for seed investment but not sufficiently de-risked for larger buyout funds. This issue is consistent across global markets but is especially pronounced in Europe, highlighting geographical differences.

At the recent Dealmaker Summit in London, moderator Nader Naeymi-Rad led a discussion on how the missing middle disproportionately impacts Europe. Panelists from notable firms like Felix Capital, Harris Williams, and Unilever Ventures examined what steps can be taken to improve support for these brands at a critical growth stage.

One fundamental issue highlighted is Europe’s market fragmentation. Jeremy Zucker from Harris Williams pointed out that Europe functions as a collection of numerous markets, each with its languages and distribution systems. This contrasts sharply with the U.S., which presents itself as a unified market, simplifying operations for brands. Additionally, generalist funds in Europe have gradually shied away from consumer packaged goods due to perceived opportunities in sectors like technology, which promise greater long-term stability.

Although similar funding pressures exist in the U.S., where investments tend to concentrate at both ends of the spectrum—early stages and large private equity deals—Europe’s unique challenges widen the funding gap. However, panelists acknowledged that the middle stage of investment remains one of the most promising areas in global beauty investing. They noted that this segment typically provides a balanced risk-reward profile, with brands often being more stable, established, and potentially profitable.

Olivier Garel from Unilever Ventures emphasized the lucrative potential of growth-stage investments, asserting that brands can leap from revenues of 15 million to 100 million euros within a few years, providing investors with significant upside while mitigating risks associated with early-stage initiation.

With generalist funds pulling back, niche investors and family offices now have greater leeway. This shift means fewer bidding wars in the European market, making it an ripe opportunity for those willing to invest now. Zucker remarked that capital flows over the coming decade will be shaped by investors building track records in this area.

Interestingly, around 40% of growth-stage deals in Europe now involve American funds, suggesting that for European brands, early engagement with U.S. investors can be a strategic advantage. The U.S. market’s influence on a brand’s scaling potential cannot be overstated. While there are successful European companies that do not venture into the U.S., like the skincare line Medik8, Garel reiterated that the vast U.S. beauty market offers unmatched opportunities for extreme returns.

In conclusion, while the missing middle poses a challenge for beauty brands in Europe, it also represents an attractive investment avenue that, if navigated successfully, can yield significant rewards. The current investment landscape necessitates innovative approaches and strategic partnerships, particularly with U.S. market players, to overcome obstacles and capitalize on potential growth.

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