Advice and strategy for early-stage sex tech startup founders

Fundraising is still 'a paradoxical issue'

As of this month, personal care and beauty retailer Sephora is selling vibrators on its U.S. website. It is a significant milestone not just for Dame and Maude, the startups it partnered with, but also for the sexual wellness product category.

These startups operate in a different environment than the one founders encountered just a few years ago, but raising money is still no easy feat, a “paradoxical issue” to navigate, according to Andrea Barrica, CEO of sexual wellness education platform O.School. “When you go into a space where very few people have gone, with a lot of barriers, arguably you need more money, but typically we have to do it with less money upfront,” she told TechCrunch.

To understand how early-stage sex tech startups can address this challenge, we also spoke to founder Lora DiCarlo and investor Carli Sapir, founding partner at Amboy Street Ventures. As for Barrica, she now sits on both sides of the table – in addition to being an entrepreneur, she is angel investing and raising a fund.

Our conversations indicated that things are opening up: There are more funding sources to leverage, and convincing investors is easier than it used to be. But fundraising is still more difficult than in other verticals.

More than a few venture capital funds will never invest in sex tech due to “vice clauses” that contractually obligate them to pass on companies that offer products or services in categories like alcohol, tobacco, gambling, weapons, porn — and sexual wellness.

“The larger the fund, the more common it is” for it to have a vice clause, Barrica said, adding that the restriction is wide-ranging: “I’ve met small funds that have conservative LPs.”

To find out, she said, “You just have to ask the fund managers or partners: ‘We’re really excited about sexual wellness as a part of health and wellness. Is this going to be a problem with one of your LPs?'”

Asking a broad question about their concerns is a good idea, because even without a written clause, fund managers might not be keen on investments that could upset their limited partners. “We VC funds raise a new fund every three years or so, and they don’t want to lose any investors,” Sapir agreed.

DiCarlo recommended doing standard research, such as looking up VCs on a resource like Crunchbase. There are quite a few VCs, so to find ones that might support your startup’s vision, she suggested, “look at the companies that they’ve invested in the past.”

You might have no luck pitching investors who invested in your direct competitors, so broaden your search. “A lot of the time, most VCs aren’t going to invest twice in pleasure, but if they’ve invested in gambling, like sports gambling, or any kind of cannabis or sex tech or pleasure in any way, then they probably don’t have a vice clause,” DiCarlo noted.

You can also copy VC behavior and directly pitch high-net-worth individuals and family offices (very rich people who have set up a structure for investing). “We’ve definitely seen that as a really viable pool of capital,” Sapir said. “It’s really the ‘headline risk’ that makes VCs and institutional LPs get nervous in the [sex tech] space, but as an individual, it’s a lot easier to put capital here.”

If you don’t have access to people in these circles, networking at conferences is another way to meet individuals and business angels who are willing to invest in sex tech, Sapir suggested – she was attending one when we talked. In addition, she pointed out a list of femtech and health tech accelerators that Femtech Insider put together, and whose focus arguably overlaps with sex tech.

In a challenging sector, it can make sense to look for specialized investors who will add value beyond the money they invest.

“Fundraising is only one hurdle in the industry. There’s also the problem[s] of advertising, marketing, consumer education and medical expertise in this field,” Sapir said. Amboy Street Ventures is one that offers operational support: “We’ve set up a value enhancement team, which is our partnership with the Healthy Pleasure Group, to be able to help our founders with those parts of the challenges as well.”

Besides the vice clause and systemic issues in venture capital, risk awareness alone can block VCs from investing in sexual wellness, Barrica said. “I do think they see the market potential. They know that sex is big, but the risk out kind of outshines it – they just see a lot of risk.”

Some of the risk associated with sex tech, such as the potential for being excluded from common payments and social media platforms, is sector-specific. But Barrica said she also sees a connection to wider challenges: “In general consumer companies, it’s really hard to acquire customers right now,” so entrepreneurs should have a robust acquisition strategy figured out before they seek out investors. Similarly, crowdfunding can help founders demonstrate consumer interest in their products and services, which investors will find reassuring.

After a successful campaign on Indiegogo in 2014, Dame Products benefited from Kickstarter’s first exception to its no-sex-toy policy in 2016. Fast forward a few years, and there are now several crowdfunding platforms available to sex tech founders.

Lora DiCarlo launched a public campaign on Republic in 2021. But the company pivoted to raising a Series A round when the campaign fell through despite thousands of backers. DiCarlo said Republic’s compliance team withdrew it, but Republic’s site asserts that her company did. When asked if she’d do it again, DiCarlo replied, “I personally would not, and certainly not with that platform.”

She said the failed campaign proved “that we would be very successful, given the opportunity to actually go for an IPO in the future, if that should be our choosing.”

Crowdfunding isn’t the only method to prove your startup’s exit potential. In August 2021, sex tech players Lovehoney and WOW Tech merged at a combined $1.2 billion valuation.

From exits to retail agreements, pioneer startups are taking huge steps toward destigmatizing sex tech as a whole, Sapir said. “Each battle that they win, they really are opening the doors for other brands to come up behind them.”

However, the other side of the coin is that new entrants will need to show that they are capable of differentiating themselves enough to acquire customers.

“One of the biggest parts of our due diligence,” Sapir explained, “is understanding the competitive landscape and why each company would stand out from our competitors and sell faster. [ …] So it’s really important to find [your] target audience and make sure you do have some protection around your company, especially in the early days.”

Connecting their pitch to the broader concept of health and wellness can also help avoid some of the stigma attached to sex and masturbation, said DiCarlo.

“We’ve done studies where we ask people, ‘Why do you pursue pleasure?'” she said. “And the top three reasons were: ‘I want to sleep better,’ ‘I want to feel less stressed out,’ and, ‘I want to feel good.’ And to me, that doesn’t scream sex, that screams mindfulness and well-being.”