Why This Beauty Investor Is Passing on Prestige Skincare

Like the cutting horses that inspired its name, which are uniquely skilled at separating a single cow from a herd of cattle, Cutting Horse looks to identify brands capable of standing apart from the competition.

Founded by Michael Wystrach—who co-founded wellness brand Beam, scaled meal-delivery company Freshly to more than $500 million in revenue before its $1.5 billion sale to Nestlé, and now leads veterinary services platform Petfolk—and former Highland Capital Partners principal Chris Protasewich, the emerging growth equity firm focuses on companies that sit between bootstrapping and traditional venture capital. It provides operational support as well as funding at a critical inflection point in their growth.

Cutting Horse recently closed an oversubscribed $75 million inaugural fund, exceeding its original $50 million target. The firm invests primarily in consumer products and services businesses generating roughly $1 million to $20 million in revenue, writing checks averaging $2 million to $5 million. The first five investments from the fund are Better Wild, Feel Goods, SuperTeeth, Ripi and Cassi.

It seeks to take a more hands-on approach than traditional venture capital firms, working closely with founders rather than relying on a small number of outlier successes to drive fund returns. All told, it expects to expand its portfolio to around 10 to 13 investments.

Jimmy Shen, VP at Cutting Horse who evaluates investment opportunities across beauty, personal care, health and wellness, describes the firm’s sweet spot as businesses with “undeniable momentum.” “Product-market fit is somewhat there. You’re starting to see it in the data,” he says. “We want to be the operating partners that back brands that are going from $1 million to $20 million.”

We spoke with Shen about the category he’s avoiding as other investors rush in, the niches he’s honing in on, and what founders should know about everything from valuations and customer acquisition costs to debt financing, board construction and team building.

Why are you not as interested in prestige skincare as other categories?

If you look at the venture ecosystem, there’s a ton of venture capital going into prestige skincare. A lot of these brands are well capitalized. Because they’re going after the same positioning, the same narrative and the same retailer, Sephora, it becomes really difficult to stand out.

Think about all the science- or derm-backed skincare brands out there. They’re all competing for the same narrative. CAC remains elevated because of that. Your CAC will never be efficient because you’re competing in marketing versus the next venture capital fund backing your competitor.

From an exit landscape standpoint, in the next few years, I believe there’s going to be a huge bottleneck in M&A because of all these skincare brands sitting in venture portfolios looking for an exit, and strategics won’t have enough bandwidth, capital or interest to acquire all of them. This bottleneck is already showing its effects as crowded market dynamics force some venture-backed players out, a trend highlighted when model Emily DiDonato’s skincare brand Covey shut down recently.

What are you seeing in terms of valuations?

Valuation is an art because you want to credit momentum and high growth, but there’s still so much left to be proven. If we’re looking at a brand launching into Ulta or Sephora, we really have no proof points on velocities. We’re mostly basing it on DTC performance and existing brand awareness. That makes these businesses hard to price.

If you look at the exit multiples in beauty, they can be 4X or 5X revenue. But for us, it is difficult to invest in when there’s still so much unknown, and we try to discount those expectations. If a brand raises at too high a valuation, investors feel pressure to grow into that price quickly to avoid a down round.

For example, if a brand doing $2 million in sales raises at a $40 million post-money valuation, you need to add so much fuel to the fire to get there. If revenue doesn’t materialize, the next investor may not want to pay that valuation. We spend a lot of time with founders trying to find something that works from a dilution standpoint while also being pragmatic.

We’re not the cheapest capital in the world. We believe that, given how hands-on we are and the amount of time that we spend with founders, we want at least 20% of a business from an ownership standpoint.

With Grüns touting its 3:1 CAC, it seems like everyone has been looking for this. How do you think about CAC?

There are two ways to look at it. The first is straight CAC and whether it’s becoming more efficient over time. The second is blended CAC, where you account for both new and returning customers. If that number is coming down, your branding, marketing and messaging are starting to resonate.

What I’ve seen over time to create a more efficient CAC flywheel is finding pockets of consumers that feel underserved. I was speaking with a brand doing a great job with women going through menopause, for example. Over time, the brands that create more efficient CAC tend to be the ones telling a story that’s different from everyone else in the market.

You mentioned in the menopausal space. What other spaces are you drilling down in as you’re looking at new companies?

I really like hair loss. The willingness to pay is extremely high, whether it’s due to menopause, GLP-1s or men’s hair loss. There are so many different consumers experiencing this issue. If you have a brand speaking to those customers, that’s really powerful. This demand is driving rapid expansion for specialized scalp and hair health brands, as seen with Monpure London expanding its US footprint through major retail partnerships.

I’m also starting to like color cosmetics. There has been a narrative of an oversupply on the brand side and a lack of demand from the strategic side, but I try to think about what the best acquisition categories over the next five years will be. Given that there’s less VC dollars flowing into the space, I think people are sleeping on it.

I love mass beauty. If you walk through a Target or a Walmart and look at those shelves, they’re flooded with products that are decades old. There’s still so much opportunity for a brand to break through into the mass category and have low-price-point, high-efficacy products. This mass-market appeal is a proven path to scale, much like how clean brand Versed built its business around mass retail before expanding its footprint.

The reason K-Beauty has become so popular is that it’s low price point, and everyone knows it’s high efficacy. People grab it because they know it’s going to work, and it’s accessible. I continue to like oral care and body care as well. Categories offering something at a premium for the mass customer are especially interesting to me.

What about four-wall concepts?

I like four-wall businesses because the exit universe is very clear, from growth equity to private equity. Venture capital has traditionally been pretty allergic to capex-intensive businesses. You can’t scale them quickly. It’s a brick-by-brick business. But I think there’s an opportunity to invest before private equity and be a growth partner.

In terms of categories, I like hair-loss services. I love Great Many. I also think there’s still room for wellness concepts, particularly recovery, including saunas and cold plunges. It’s really about understanding the box economics, real estate pipeline, consistency across geographies and how you can minimize buildouts and optimize cash-flow generation out of every box.

Why are you interested in service businesses now?

We’re increasingly living in a world where people are chronically online. That’s one reason I find service businesses interesting. Whether it’s wellness, fitness or youth enrichment, consumers are looking for experiences that bring them together in the real world.

I like categories where willingness to pay is high and customers come back repeatedly. That’s one reason businesses like aesthetic services, fitness and certain wellness concepts can be so compelling.

There seems to be this tension in beauty and wellness M&A between interest in young, fast-growth companies like Grüns or companies showing business longevity like Medik8 and Color Wow?

I love more disciplined growth. I don’t need a portfolio company to be Grüns, three years to an exit. I like to see a thoughtful rollout, but, in the early days, I would like to see 100%, 200% growth every year.

If you’re getting real retail traction and proven velocities, other retailers will start paying attention. That’s a good sign you can sustain roughly 100% year-over-year growth for the next few years.

I don’t need a brand to grow to $100 million, $200 million or $300 million overnight. That usually requires a lot of marketing spend and growth capital. We’d rather help a brand go from $2 million in sales to $25 million over a few years than chase hypergrowth at all costs.

What do you recommend for brands thinking about debt financing?

If you can, raise equity first because it helps you get better debt terms. Debt sits in front of equity, so lenders view the business as less risky once equity capital is in place. I’d also encourage founders to run a process. There’s not just one lender out there, and you want the best terms possible because you don’t want to become constrained by interest payments.

Debt can be a great tool for inventory financing and managing cash conversion cycles, especially in retail, where retailers don’t always pay on time. It’s a useful source of non-dilutive capital. We spend a lot of time helping founders think through alternative forms of capital and negotiate the best terms possible.

What board structure works best for early-stage brands?

At the seed stage, you don’t want too many voices in the room or you won’t get anything done. I think two board seats for founders and one for investors is a fair way to get things moving.

Over time, I’d consider adding an independent board member, ideally someone who’s built a company before and understands the nuances of scaling a brand, whether that’s retail relationships, hiring or operations. By the series A stage, a structure of two founders, two investors and one independent board member can work well.

The advantage startups have over strategics is speed. A smaller board allows you to make decisions quickly, and that’s important in the early stages. That’s also why your lead investor matters so much. You’re going to be working closely with them for years, so founders should diligence investors as deeply as investors diligence them. It’s hard to get unmarried when they’re on your board.

How should founders think about building teams today, particularly with AI changing how companies operate?

I would hold off on C-suite hires and focus on hiring doers and specialists. By definition, C-suite executives are often managing teams, and in the early days you need people executing. For finance, I think founders can start with fractional support. There’s no need for a full-time CFO that early.

For sales and marketing, it’s important to have people on the ground telling the brand story and working closely with retail partners. The best founders identify the areas where they need help and build around those gaps. You can run a very lean team in the first few years, and that’s usually better because cash is king.

This interview has been lightly edited for clarity and brevity.