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Published February 3, 2021
Published February 3, 2021
Lumin via Unsplash

2020 has been an unprecedented year in all dimensions. The year has challenged all principles we knew on how businesses and investments operate, and we’ve observed the year go from the deepest, sudden dip in the markets back in March to one of the most impressive rallies in Q4 in both private and public markets with IPOs, SPACs, funding rounds, and valuations. This will have a clear impact on the forecasts for 2021, and how executives, founders, and investors will approach the coming year.

1. Consumers have experienced deep shifts in their values and behaviors, many here to stay

It is clear that 2020 introduced a major shift of unprecedented dimension in consumers’ trends and behaviors, both geographically and temporally. Many of these trends were already happening before 2020, but COVID exponentially accelerated their adoption.

Some of the main shifts are:

  • Delocalization from major urban areas
  • Need to reconnect with nature
  • Increased priority of health and preventive care
  • Adoption of digital technology and e-commerce
  • Reinvention of the work model and processes
  • Rediscovery of simple pleasures and luxuries
  • Mainstream awareness of environmental risks
  • Importance of prioritizing racial and social equality agenda
  • Home as new center of entertainment and social life
  • New ways of socialization and communication

Now the key question these shifts raise is: Which of these changes are here to stay and become permanent, and which ones will be just temporary?

2. We are entering a new innovation cycle

From extensive conversations with investors, executives, and founders, most businesses have suffered major losses in revenues and investment in 2020 and will take some time to come back to levels of business pre-COVID. At the same time, many entrepreneurs and investors are thinking about what changes in consumer behaviors and attitudes post-COVID are going to be fundamental and will be here to stay, and how brands out there will be positioned to take a leadership position in the new market.

In this context, early-stage companies and investing will boom with a high level of activity for two reasons. Firstly, there will be capital for early-stage investments given the check sizes versus growth capital or private equity. Secondly, this new market coming out due to COVID will present a great seeding ground for new ideas and brands that will become major players in a few years—we cannot forget that some of the most iconic companies of the 2010s were all children of the 2008 crisis (Airbnb, Uber, Glossier, Drunk Elephant, etc.).

We’ve been telling entrepreneurs often in the past months that challenge always brings opportunity, and we have in front of us one of the best markets to start a new brand. What these entrepreneurs need to keep in mind, and what will change in the early stage, is the need to have more sound and robust proven concepts, with clear strategies, roadmaps, and unit economics to drive sustainable growth. This is what early-stage investors are going to be looking for.

Lastly, there is also the possibility that we may see a new type of deal in the market that we called “distressed venture,” meaning start-ups that have solid proven concepts but that run out of cash and that will probably be acquired at low prices. This concept seems counterintuitive to the idea of venture capital, but this market is going to be the catalyst for this type of deal.

Beauty categories like wellness and skincare will hold up well because consumers are still not spending in other categories and they want to at least treat themselves at home, while color is now suffering as no one needs it to go to work, go on dates, or dinner, etc. However, once we are out of the current lockdowns, people are going to flock into the street, go back to work and their social life, even in a stronger manner than before, probably just avoiding large gatherings such as concerts or sporting events. If this is the case, we are going to see a strong comeback of makeup and color, in which case brands like Anastasia will fare well in this situation.

With this said, we are going to see a major peak of bankruptcies in the market, mainly driven not by category but by the fact that companies out there are in shock or trying to run business as usual and not adapting to the new reality, and are not going to make it. This is going to create a great opportunity for investors and corporates to acquire good-quality brands and assets at a deal if they are cash-rich and liquid.

3. This will be an investor market with a boom in activity

For smart investors, 2021 is going to become a perfect market where you can get access to cheap capital and deploy it in great deals with strong underlying assets. We are going to see a boom in the number of deals and a steady decline in valuations and multiples. All investors, no matter if they were in the middle of a deal or not, are in a wait-and-see position.

There has been a lot of capital in the market in recent months into VC and PE with new freshly raised funds, and the firms are ready to deploy them. They are just waiting to see and make decisions based on two factors: what brands are taking the necessary measures to come out of the situation as winners, and what brands are not, and where they can get a great deal for assets that are worth it.

In terms of valuations and multiples for brands, this is going to be determined by their ability to pivot and adapt during this year to the new reality. In particular, how quickly they can build both their own DTC and e-commerce with their retail partners. Physical retail will still suffer importantly this year, and we expect to see steep declines in foot traffic probably with permanent effect given the shift to e-commerce, not just coming from lockdown but from a more fundamental consumer behavior change—avoiding crowds of people in-store and being more comfortable with shopping online. Therefore, it’s critical for brands that built their success and exit on strong physical retail to use this time to shuffle their strategy, organization, and resources to support DTC and e-commerce. This will define the impact on their valuations, and if they leave this situation as winners or losers.

We also see a transition from a “growth at all cost” to a “sustainable growth” mindset was already underway before COVID, and the current situation has just accelerated that. For a long time, I have been a challenger of the idea that investors and founders can apply venture capital principles to consumer categories like wellness and beauty. The reality is that investors cannot apply the same principles. When you build consumer tech products, e.g., Instagram or Spotify, scalability is exponential and the marginal product cost of scaling the customer base is practically zero.

However, when you are selling physical products, there is always the hard reality of cost, including product and logistics. For this reason, our approach over the last few years has been always to focus not on profitability but on unit economics and healthy unit margins. If your brand has healthy net margins (60% range), then you can highly likely build a profitable business.

The other principle we have always questioned is the idea of large teams and organizations that comes from tech and digital products. Throughout our experience, we have seen brands running efficient businesses with very lean structures. If you focus on these two principles, with healthy unit economics and low fixed costs, then you can navigate a situation like COVID easily, as the only thing that it requires is adjusting your variable costs (mainly marketing in many cases) to see things through.

Lastly, we also expect that investors will value brands that are nimble and flexible and that can adapt quickly to the changing social and economic landscape, as changes in the market and volatility are much faster and extreme now than they were just a few years ago. This may have an impact on how some investors structure deals to be more performance-based versus straight-up acquisition. But again, none of this is new, and smart investors have been looking at things this way for the last year or two. It is just going to become now the mainstream way of thinking for investors in the industry.


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