Why fundraising in sextech is so painful, and 4 strategies to make it less so

Olena Petrosyuk looks into crucial topic around fundraising when it comes to sextech and how founders can succeed in a challenging market.
Why fundraising in sextech is so painful, and 4 strategies to make it less so

Raising capital in sextech has never been a walk in the park. When it comes to sextech, investors sure like to talk the talk but not so much to walk the walk. In 2022, sextech startups raised a mere $275.8 million, which is less than their counterparts in the lingerie or pet tech sectors. 

While the $80 billion market reflects the public appetite for new sex gadgets, kinky apps, and educational platforms, the interest from VCs is yet to catch up.

This raises the question: Why is it that convincing investors to part with their precious capital seems more challenging for this sector than for the vast majority of other industries? 

The answer is complex, but if you boil it down, it’s all about the risk and reward ratio trivia. VCs are on the hunt for billion-dollar companies, and so far, none have galloped out of the sextech space. On the other hand, the hassle that comes with the territory is very real and obvious. 

The good news is that this is changing. More funds like Cake Ventures and Backstage Capital are waking up to the fact that sextech isn't just naughty—it's necessary. They're now beginning to recognize sex-related startups as a crucial part of their health, wellness, and diversity packages.

Crowdfunding's getting in on the act, too. Eva, a company that's put a hands-free wearable vibrator on the market, pulled in a record-breaking $575,000 on Indiegogo. Even Kickstarter, once shy about anything remotely risqué, has begun to welcome more sex-related startups.

The question is, how do you join the exclusive club of sex tech successes that have beaten the odds and raised venture capital? The answer lies in getting into VC's head to understand the blockers holding them back from investing in sex wellness and crafting a pitch that tackles those concerns head-on. Being in venture consulting for years, I’ll share first-hand insights on how to do that.

Why fundraising is still a struggle: Key turn-offs for VCs in sextech

The lack of VCs' enthusiasm toward the sexual wellness sector isn’t all puritanism, although that too. The reason comes from numerous operational and legal blockers that stall the only thing investors are after — growth.

Throw in the constant fear of a slandered reputation, and you’ll see why so many VCs are trying to steer clear of sextech. These include:

Vice clauses and the ‘headline risk’

Vice clauses are written rules that forbid funds from investing in categories considered ‘problematic’: arms, sex, tobacco, alcohol, gambling, etc. 

The larger and more established the fund, the more likely it is to have conservative LPs opposed to putting money into areas they think can compromise their reputation. 

But don’t think smaller and more progressive VC funds are completely immune to this ‘superstition.’ Even without ink on paper, some funds might not want to associate with sex tech to not disappoint some of their investors and prefer to steer clear of the whole sector altogether. 

Advertising and marketing bans

Running online ads to promote sexual products is akin to a moving target. Big Tech has also proven to be a big prude. Numerous censorship policies prevent companies in the ‘taboo’ industries from showing their ads to potential customers and shadow-banning the accounts.

The limitations are numerous, with the majority rejecting anything remotely implying pleasure. 

Sexual wellness companies Dame Products and Unbound even launched a website, “Approved/Not Approved,” where you can experience the frustration of trying to get their ads out there. 

This crackdown seriously affects companies’ bottom line, often cutting their revenues 2-3-fold. And we don’t even mention the effects of various email marketing or martech platforms’ restrictions.

Payment processing bans

Setting up a payment system is another battle that keeps growth at bay for many sextech companies. All major payment processors like Paypal or Stripe are incredibly selective and stringent about the types of companies in the ‘adult space’ they work with. 

The number of restrictions is wide and includes any imagery or messaging that is overtly sexual or just implying, automatically cutting off access to payment services for most companies in the space. 

This leaves companies with three less-than-perfect paths: overhaul their whole outlook to fit the requirements, opt for niche payment providers, often losing an arm and a leg on higher transactional fees, or create a new financial system tailored to their needs.

Shortage of recruitable talent

Recruiting talented specialists is one of the necessary conditions to get a startup off the ground and take it to millions in revenue. 

Unfortunately, this is another task sextech founders struggle with way more than those from traditional industries. Most people are reluctant to work in a controversial industry, which dramatically shrinks the pool of qualified specialists sextech founders could tap into. 

With a strong team being an early company’s engine, this problem reflects poorly on startups’ growth speed and fundraising potential. 

Pitching strategies for sextech founders that will help you get funded

When Lewis Carroll wrote, “Here we must run as fast as we can, just to stay in place. And if you wish to go anywhere, you must run twice as fast as that,” he almost certainly was referring to the sextech fundraising landscape.

Due to the difficulties we touched on, it takes more for the sextech founders to convince investors that they can grow into a serious market player and bring 10X+ returns. 

The following pitching strategies will help you do that and generate more traction with investors.

Make it about more than sex

The biggest win for the sex industry by far has been the fact that sex is finally perceived as an integral part of our health and well-being. Appealing to this broader and less stigmatized connotation of sex when pitching to investors is something we see sextech founders often neglect to do.

Doing this is crucial for two reasons. First, associating your vision with notions beyond sex helps to beat the one-dimensional view that deters some investors from associating with sextech. This is one of the reasons why sex/swinger apps like Feeld, Grindr, and others that successfully raised funding have always positioned themselves under the dating apps or social networking umbrella.

Another reason to tie your idea to a broader-than-sex concept is that VCs and angels only put money behind companies with big, inspirational visions and missions. 

By connecting sex to wellness, health, or sustainability, your mission and messaging will gain a broader appeal, leading to a bigger market share and higher potential cash-in for investors.

Prove you have validated your idea 

Once investors see that you have a big vision and a ripe market, they want to know if your product really is (or is going to be) the answer to the problem.

A sure way to do that is by showing that your concept generates strong interest (and positive feedback in the later stages) from your target audience.

How you demonstrate traction depends on your stage and the data at your disposal, but here are the most effective ways:

  • Include quotes with positive feedback from potential customers or early users in your pitch. Depending on the stage, this feedback can be about your overall concept or a ready product. Running questionnaires among your potential or existing customers is the best way to mine quotes
  • Brag fast-growing social media following and high engagement on platforms like YouTube, Twitter, Instagram, Reddit, TikTok, etc., to show that the masses rally around your initiative
  • Showcase high ratings and multiple downloads on AppStore or Google Play
  • If you have previously raised money through crowdfunding, mention it. Very few things reassure investors of your concept’s potential as much as the end-users’ willingness to finance your launch
  • Show the growing number of repeat purchases or other customer retention metrics that signal a product-market fit

Remember: a good idea validated by early traction will always generate interest from investors, so talk to your audience and demonstrate strong proof of concept.

Show that you know your way around the industry-related challenges

The execution, namely the go-to-market (GTM) strategy, might be the hardest part for sextech companies. Investors know that and want to ensure the founders can handle an array of industry-specific restrictions and get their product out there. 

All that — on top of tackling the traditional challenges of getting a startup off the ground. 

To prove to investors you’ve got what it takes, think of levers that make a GTM journey less bumpy. Most products in the sexual wellness category are banned from advertising, so investors will want to see that you can work your way around that to reach your ideal customer persona.

This can be:

  • An established network of partners, suppliers, or distributors
  • A contact list of influencers or celebrities open to promoting your product/platform 
  • Strong social media community supporting the brand/idea (talk about the followers/engagement signals)
  • Organic growth with increasing traffic and purchases/downloads 
  • Access to newsletters
  • Established connections with topical media outlets (name the media), and so on.

The key here is to show that you have outlined ways—both conventional and less so—to reach your potential customers and offset the numerous growth bans. 

Important: Show investors you have the right people to execute your plan! They will be seriously examining your team slide to see if you are the right person for this market and make sure you have great specialists on your team.

Avoid making a one-person team slide with you being the only figure—this only shows investors that you couldn’t get anyone on board with your idea, which is a huge red flag. As we said before, hiring in sextech is generally a problem, so showing you solved it will grant you extra points with VCs. 

Create a hyper-relevant investor outreach pipeline

The process of targeting investors is no different from sales: the warmer the lead, the higher the chance of turning it into a customer. Nowhere is this logic more pronounced than in sextech.

When creating your investor pipeline, be it a venture fund or an angel, start with those with a vested interest in the sexual wellness niche and slowly expand the funnel. This way, you’ll not only target people who are more likely to invest but will also network with people who have relevant experience in the space.

Also, start pitching early! The earlier you start, the more feedback you can gather and apply to optimize your future pitches. 

Target funds or individuals that:

Prioritise diversity and inclusivity

Funds with such ethos are run by open-minded and often sex-positive managers or partners. These funds generally aim to help the underdogs of the market to make their way, provided the product has real value for the end customers. 

Backstage Capital, Xfactor Ventures, Amboy Street Ventures, and Cake Ventures exemplify funds dedicated to financing companies that are run by or cater to women, people of color, and other groups that have been underrepresented on the market. 

Since sextech stands at the frontline of breaking the stigma around health and sexuality, particularly for women, such funds view this industry as full of opportunities rather than blockers. “There is a huge business opportunity in sextech,” says Christie Pitts, partner at Backstage Capital. 

She follows by stressing that women control most of the purchasing power yet remain severely underserved as customers in this segment. So, if your startup is founded by or caters to women as a primary customer segment, including such funds in your outreach list is necessary.

Have a history of investing in “taboo” industries

If a fund or an angel has a history of investing in so-called “taboo” industries—that is, cannabis, gambling, end-of-life treatment, pleasure, etc. — it’s safe to say that sextech companies stand a chance, too. Just look up companies in these spaces, check who recently invested in them, and what the investment portfolio of these funds is to see how you fit in there. 

For example, by going to a profile of Dutchie — a cannabis technology startup — you can see who invested in it and what kind of companies these funds usually invest in. More often than not, these funds have either invested in sextech or would consider doing so. Just make sure they didn’t invest in your direct competitors to avoid a conflict of interest. 

Expressed interest in investing in sextech and sexual wellness

Some funds’ managers, individual investors, and even governments might openly express willingness to invest in sextech. Your task is to scout the internet for quotes from such people or organizations and pitch to them. 

It can be a partner at a random fund, a high net-worth person, or a dedicated sextech fund (which is yet to appear, so keep your hand on the pulse). It can also be one-off government initiatives like the UK government’s Future Fund that financed Killing Kittens—a company that organizes women-led adult parties in London and New York—as a part of their Covid-19 response.

Being intentional and focusing on finding and leveraging such momentums can make all the difference.

The best times for sextech are ahead, starting now

Despite all the hoops sextech startups still have to jump through to get their foot in the door, there has never been a better time to do that. The sexual health and wellness movement is only gaining momentum, with new steps being taken daily in this direction. 

Giant retailers like Sephora and Bloomingdale’s are now selling sex-related consumer products next to condoms and pregnancy tests. New niche payment providers dedicated to sextech, like TickleCharge, join the arena. New funds, angel investors, and even governments step up to the plate to support sextech entrepreneurs. 

Founders just need to do their homework, understand the investor perspective, and pitch with this perspective in mind.

Lead image: Photo by Azmarina Tanzir

This article was authored by Olena Petrosyuk, Partner at Waveup, a global advisory firm, helping clients around the world to transform and grow their businesses

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