New Economic Realities   //   February 23, 2024

As venture capital funds pull back on consumer, more private equity firms look to play a bigger role in startup investing

Private equity funding is playing a greater role in consumer startup funding, particularly as venture capital funding dipped last year.

Among startup brands, venture capitalists typically make early investments in promising companies — or sometimes even concepts — predominately based on the potential for big growth. But private equity involves making controlling investments in more established companies and helping sustain profitability.

In the current environment, more founders of brands are looking to extend their runways through PE. While the expectations from PE firms differ from receiving VC, startups are leaning on private equity to help them grow profitably, and with a concrete exit strategy in place. What’s more, some PE firms are starting to take a greater interest in earlier-stage companies.

PE’s interest in DTC companies is nothing new, with established firms like Great Hill Partners and L Catterton being some of the most prominent PE firms currently investing in digitally-native brands. But increasingly, PE money is pouring into consumer brands at a time when venture capital is becoming harder to come by.

According to Crunchbase data, only $130 million U.S. venture capital dollars went into the DTC sector in 2023 versus the $5 billion in 2021, making for a 97% drop in funding. While there’s no similar data on how much PE funding has gone into DTC brands over the past several years, new private equity funds are continuing to pop up that are focused strictly on consumer. Some of the high profile funds include Kim Kardashian’s SKKY Partners, whose fund is reported to be raising $1 billion. Last October, Brynwood Partners closed the Brynwood Partners IX L.P. fund, with over $750 million of committed capital planned to back consumer product business. 

L Catterton in particular is attractive to brands lately, as it has a series of recent success stories, such as Nutrafol and Tula Skincare. In 2019, L Catterton’s Growth Fund led hair growth brand Nutrafol’s $35 million Series B round, with participation by Unilever. Unilever then acquired Nutrafol in 2022 in a deal with a reported value of $1 billion. Meanwhile, L Catterton invested in the skin-care company Tula in 2017, which was acquired five years later by Procter & Gamble.

L Catterton was founded in 1989 through the partnership of Catterton, LVMH and Groupe Arnault, and has invested in more than 250 brands since launching. But now, it appears to increasingly be taking an interest in startups at earlier stages.

Wellness brand Wthn, which offers traditional Chinese medicine treatments and products, is the latest startup to turn to private equity dollars to fuel its growth. In January, the company announced a $5 million in series A financing led by L Catterton to fuel omnichannel expansion. Michelle Larivee, Wthn’s co-founder and CEO, told Modern Retail when she began to raise this round, she was approached by the PE firm with interest to invest.

“Our previous investors were mostly VC, whereas this is mostly PE,” Larivee said. “Catterton has a really strong track record in four-wall businesses that include service and wellness.” L Catterton joins Wthn’s previous investors, which include SoulCycle founders Elizabeth Cutler and Julie Rice and Goop’s Gwyneth Paltrow. “I was also really excited to partner with Whitney Kasey, who is the L Catterton founder who joined my board,” Larivee said. “She’s a former founder and operator and is really savvy from a business perspective.” 

Larivee said this support will largely go to opening new stores. Wthn launched in 2019, when it opened its first acupuncture studio in New York City. Soon after, the company shifted its focus to selling at-home products during the pandemic. Now the company is resuming the opening of more locations, opening a second studio in Williamsburg, Brooklyn in January, with plans in place for an Upper West Side location later in the year. 

Larivee said one of the biggest propositions for the investors is being in the growing Chinese medicine market. “They look at the business model and the fact that we’re really the only omnichannel brand that’s doing physical retail, paired with products that have gone viral and help set trends,” Larivee said.

The company sells packaged products like ear seeds and cupping kits through its website and at retailers like Bloomingdale’s and Erewhon. Monthly studio memberships, however, are the core of the company’s business. “They make up well over 50% of our traffic,” Larivee said.

Larivee said that Wthn’s studios have given more than 30,000 people their first-ever acupuncture treatment to date. The company offers both à la carte sessions starting at $85 for first visits, and memberships that start at $90 per month. Larivee is forecasting 3x growth for Wthn in 2024, which will mostly be achieved through the opening of two additional studios, as well as continuing to push into wholesale retail and launching new products focused on digestion and pain. “We’ll also expand our products, and hopefully be launching in new retailers both in the U.S. and internationally,” she said. “Expect to see us expanding nationally and outside of New York in the coming years.”  

Boll & Branch, a bedding brand that received $100 million in L Catterton capital in 2019, is another brand that took a different trajectory from that of VC-backed brands. Up until receiving an investment from L Catterton, Boll & Branch was bootstrapped.

Katia Unlu, chief commercial officer at Boll & Branch, said the company decided to take in PE funding to help fuel the opening of its standalone retail stores.

“For years, the VC model was pumping cash into the business and you just grow, grow, grow,” she said. “[VCs] have a target, an exit and valuation in mind they’re driving for,” Unlu said.  

In turn, Unlu said there is always “an underlying pressure to grow at all cost when you’re part of a VC-backed company. Whereas with PE investors, they typically don’t invest in businesses that aren’t profitable yet, and usually go for brands that are leaders in their categories.”

In the case of Boll & Branch, part of what interested L Catterton was the brand’s focus on 100% organic Fair Trade Certified bedding and being profitable within a year of launching in 2014. While the PE liaisons can act as an advisor, Unlu said “in my experience, brands are very much in control of their destiny without a time crunch.” 

However, even venture capitalists are now looking for similar propositions to private equity, by being more selective and backing brands with a clear path to profitability. 

Private equity dollars will likely continue to flow into consumer brands in the coming years. In January, a new $425 million fund, Forward Consumer Partners, was launched by former L Catterton partner Matt Leeds. The firm will focus on CPG categories, with a specific interest in funding companies that have low volatility. 

According to David Shiffman, co-head of Solomon Partners’ Consumer Retail Group, “VCs have always been focused on an exit, but the exit was very much IPO focused.” That is, until the bull market ended following the IPO boom of 2021.

Venture funding started crossing over to private equity when PE firms set up growth-oriented investment arms, Shiffman said. “[PEs] are not replacing the seed-stage type of investment, but what we found is a desire by private equity investors to write smaller checks for younger retail companies,” he said. “And that would compete with some of the later-stage venture firms.”

Venture capital also typically has multiple investors in the round, whereas PEs are usually the sole investor. Moreover, Shiffman said, private equity tends to have a higher level of diligence in the company’s finances.   

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 businesses before investing. “People aren’t investing in concepts anymore, they want to see scaled businesses that make money,” Shiffman said.

Like VC-backed companies, PE-backed brands are cognizant of these shifts. “Your fundamentals have to be right,” Unlu said. “It’s very much rooted in how to drive the next phase of growth while staying profitable.”