What Glossier got wrong

Since January 2022, Glossier has laid off about 80 employees (or a third of its corporate workforce), most of whom were on its tech team.

Although the company focused on technology when it was really a beauty business, it is not hard to see these layoffs in the light of the public market tech meltdown.

Many venture-backed companies believe they are tech companies — indeed, they were born that way — when in fact they are not. Leaders at these companies need to learn the business they are actually in, what makes those companies good, and direct their technical efforts towards those ends.

Technology companies get the richest valuations and are endowed with the highest multiples of any sector. Pursuing those higher multiples means going to great lengths to show, both operationally and financially, that you “look” like a tech company.

For a firm like Glossier, looking like a tech company is the difference between having a price-to-sales ratio of 5.44, like Estée Lauder, or 31.6, like MongoDB. Glossier founder and CEO Emily Weiss knows it, and her investors do, too.

Tech companies are highly valued for a reason: when they work, they have high growth rates and very high margins. Companies therefore often make product decisions to achieve a tech business profile — like investing in engineering or eschewing margin-hitting operations.

Hunter Walk, for example, pointed out that pursuing software margins may be one reason social media companies avoid the cost center of human moderation.

The difficulty with these types of decisions is that you will direct your technical talent at the wrong problems.

But the narration changes once you go public. The markets work by taking companies, categorizing them, and then evaluating them on well-known metrics. You don’t get to decide what kind of company you are.

You might market yourself as a tech company, and you may very well use technology, but if the public markets decide you’re a beauty company then, well, you’re a beauty company (at least for valuation purposes) until you prove otherwise.

Let’s look at the insurtech space, which has had arguably the worst performance of any tech sector in the past year. Which metrics do investors look for when examining insurance companies? They like metrics like claims ratios, expense ratios, and return on equity (if there is float), at least for managing general agencies (MGA), which form the majority of the buzzy insurtech recent public offerings.

Hippo Insurance, for example, in its SPAC investor presentation, emphasizes its technology and the adoption metrics, looking at NPS scores, cohort adoption and retention rates, tech stacks, and other consumer-relevant statistics. The term “loss ratio” does not appear until slide 28.

There are two slides of marketing analysis (payback periods and LTV/CAC, which are SaaS terms) before the loss-ratio cohort analysis. The team at ReInvent, in other words, approached Hippo like they would a consumer app. The market instead looked at Hippo like an insurance company. Hence, the disconnect and the eventual crash in value.

If you were starting an insurance company, the first thing you would think to do would be to understand the business you were starting and which characteristics make them good. The answers, as we saw above, are quite different for an MGA than for a consumer app.

Insurtech founders, though, are software engineers, and their investors are familiar with the language of software, not insurance. Most insurtechs made this error, and it is for that reason that their shares have all tanked. They perform very poorly on the metrics that insurance investors care about. Simply put, tech-enabled insurance companies are still insurance companies.

The fundamental disconnect is that software-enabled businesses don’t necessarily monetize the same way that software-based businesses do. With internet and pure software companies, the mantra has been “get users, monetize later.” The idea is that software margins are so high and audiences are so valuable that if you achieved critical mass, you would end up with an asset even an idiot could monetize at scale.

That isn’t always true for other businesses. There could be selection effects; scaling could be inefficient; gross margins may be low; and churn could be structural.

That is ultimately the problem that hit Glossier: it forgot what business it’s in. Fundamentally, it is a beauty company. What matters is making great products and ensuring that its target audience converts efficiently. Focusing on building a big tech team sucked up a lot of dollars and distracted the company from its core functions.

What this means, though it may seem obvious, is that the deployment of technology must be applied first and foremost to improve the core metrics of that business. If loss ratios are king in your industry, prove that your technology makes your underwriting better. If operations and taste prediction are the key, invest in a great data science team like Sephora did.

Technology can make most businesses better, but the business is still what the business is. Sprinkling software in doesn’t magically change the nature of your organization.

Companies like Glossier and Hippo are led by smart and charismatic founders who have put together superlative teams. The key is just to refocus on what makes them great. For Glossier, it is impeccable marketing and beauty products that make people feel good. For Hippo, it is insurance laced with technology that makes claims less likely.

Note: The original version of this article incorrectly stated that Glossier laid off a third of its staff in recent weeks.