Birchbox, the beauty subscription service once valued at $485 million, is  scaling back its plans for growth. In an effort to reach profitability this year, the startup has paused plans for at least three more brick and mortar shops, as well as its expansion into China.

In January of this year, Birchbox laid off more than 15 percent of its staff --  45 of 300 total employees.

"The decision to do the layoffs was the right decision for the business," said Hayley Barna, the co-founder and former co-CEO of of Birchbox, in a recent interview. "It's really about matching our costs to the current opportunities for the business." (Barna stepped down from her position in August 2015, but remains a board member.)

Birchbox raised $60 million in 2014, its most recent round of funding. The startup had hired J.P. Morgan Chase to help raise more funds in 2015, but ultimately failed to do so, the Wall Street Journal reports. Executives were said to be in talks with Singapore's Temasek Holdings, but never reached an agreement. 

A concerning trend for startups

Birchbox isn't the only highly-valued startup to cut back on spending. Dropbox has scaled back on its employee benefits, while other "unicorn" companies (Evernote, Jawbone and Tango) have cut perks, issued layoffs or shut down office locations. Prosper, a financial technology startup, recently announced it would cut nearly 30 percent of its staff. CEO Aaron Vermut even said he would forego his salary this year.

All told, global VC investment declined sharply in the first quarter of the year. There were 1,829 deals (the lowest volume since 2013) and only five new billion-dollar companies--compared to 13 in the previous quarter, according to a report from KPMG and CB Insights. Meanwhile, just one VC-backed company, SecureWorks Corp., has gone public in 2016 so far.

Many major VCs are now urging startups to focus more on profitability. "The reason we are all in this mess is because of the excessive amounts of capital that have poured into the VC-backed startup market," Benchmark Capital's Bill Gurley wrote in his blog in April.

A crowded market for subscription startups

Birchbox is up against steep competition. Ipsy, a beauty sampling service based in San Mateo, Calif., touts 1.5 million subscribers (compared to Birchbox's roughly one million).  YouTube sensation Michelle Phan, who co-founded the startup in 2011, says Ipsy has spent next to nothing on marketing. In 2015, her company pulled in more than $150 million in revenue. 

"Beauty brands are spending billions of dollars and not reaching their audience," said David Trujillo, a partner with TPG Growth. Last September, the VC firm co-led Ipsy's $100 million funding round. By leveraging thousands of beauty influencers (including eight stylists on staff,) the startup has built a "free agency service," he explained, which puts beauty brands in front of the Millennial generation.

Meanwhile, Birchbox recently announced changes to its loyalty program -- limiting the credits a customer can earn for writing reviews of products, for instance. Barna previously told Inc. that she isn't concerned about competition from Ipsy, because she views Birchbox as a retailer more than a sampling service. About one third of revenues come from full-size products sales, according to Birchbox. 

Still, the traditional beauty market is dominated by major players like Sephora, which last year launched its own subscription business.

"We view our competition as being the wallet-share of where women think about buying beauty products," Barna said. "For us, it's more women who are opting out of high-end beauty today because they don't feel comfortable in the traditional retail environment -- which is who I was before I started Birchbox."

Published on: Jun 17, 2016