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Brian Lee thinks the third time will be the IPO charm.
Lee is the CEO of The Honest Company, a maker of nontoxic, eco-friendly products co-founded and co-run by actress Jessica Alba, who helps lead the company’s creative team. After co-founding two other businesses — LegalZoom and ShoeDazzle — which experienced periods of success but no major hits, Lee believes Honest is the one that will go big and break the spell.
“You’re not changing the world at $500 million in revenue,” Lee said in an interview last week at the company’s Santa Monica, Calif., office. “You start making a true difference when you’re doing billions in revenue.”
That’s a long way off from the approximately $150 million it generated in 2014, but the company is just three years old. The difference Lee and Alba want to make with Honest is straightforward: To build a giant consumer brand that makes products that are safer for the people who use them as well as safer for the environment. To get there, Honest has taken a hybrid approach to distribution that is becoming more common in the e-commerce industry: A foundation in digital sales coupled with a presence in brick-and-mortar stores.
“We never started the company with the intention of only being an e-commerce brand,” Lee said.
The company now gets 30 percent of sales from brick-and-mortar stores, including Whole Foods and Target. The remainder comes from online sales, and more than 60 percent of those digital sales come from monthly subscriptions of multi-product bundles.
Honest began with diapers, baby wipes and cleaning products and expanded to soaps, shampoos and sunscreens. The company recently began selling baby formula and women’s deodorant too, and Lee says Honest will introduce a line of feminine care products later this year.
All of this has happened in about three years, which raises the question of whether Honest is doing too much too soon. Lee says no, that the company has found the right balance. He also said Honest will continue to consider new categories where it feels it can introduce a better and healthier product than most competitors.
So I asked Lee, half kidding, if Honest would consider a move into the giant, and growing, organic food market. I thought he would dismiss it straight away, since diapers and deodorant seem a long way from kale and wheatgrass.
“Perhaps someday,” he said without pause, noting both the size of the opportunity and the intense competition.
“But it’s something our community wants,” he added.
The cult-like love for the brand among the Honest community is a big reason investors are excited about this e-commerce business. Honest raised a $70 million investment last year led by public market investor Wellington Management Company. An IPO is the goal.
“It will allow us to control our own destiny,” Lee said in response to a question on whether it could be a buyout target by a bigger consumer packaged goods company.
If that IPO happens, venture capitalists as well as similarly structured online-to-offline retailers such as Warby Parker and Bonobos will study how public market investors value Honest. Will it secure the higher revenue multiples of pure e-commerce businesses or lower ones more in line with traditional retailers?
“We’ve been meeting with bankers of course and they don’t even know what teams to bring,” Lee said. “Sometimes they’ll bring their luxury brand team. Sometimes they’ll bring their e-commerce team. Sometimes they’ll bring their retail team. It is hard to define, but we are a brand that’s born online.”
Ahead of an IPO, big challenges will test Honest’s resolve. Honest has dipped in and out of profitability; it is not yet consistently profitable. And new competitors pop up all the time. Amazon introduced its own line of premium diapers in December but temporarily pulled them less than two months later because of bad reviews. Honest has refused to sell its own diapers to the e-commerce giant.
“They’ll be back, probably with a better diaper,” said Lee, who described himself as a customer and fan of Amazon. “Their misstep was that it wasn’t of the highest quality the first time around.”
With fast growth and a celebrity founder, Honest has also felt the downside of the limelight. Like Lee’s previous company ShoeDazzle, which runs a subscription shoe offering, Honest has its share of critics of its free trial program. People who sign up for a free trial from Honest have to cancel their subscription within seven days if they don’t want to be charged. Customers can mainly only cancel by phone, and there are plenty of reviews online that complain about how hard it is to get a customer service rep on the line.
In follow-up emails, Lee did not address the free trial criticisms, but said the company “takes extreme pride” in its customer service. He noted that the company has an A+ rating with the Better Business Bureau, and its Net Promoter Score — which is a measure of how likely customers are to refer a company to friends — is north of 70, which is very good. Honest is also testing one feature that would allow customers to cancel a subscription via a live-chat tool on its website and another that lets customers request a call back when waits are long.
“We are constantly investing in infrastructure to make service levels even more efficient as we ramp further,” he said.
This article originally appeared on Recode.net.
