Jessica Alba’s online retailer, Honest Co., is reportedly working on an initial public offering of stock even as many successful technology startups have stayed private amid a weak IPO market.
The question ahead is whether Santa Monica’s Honest, a producer of eco-friendly home goods such as diapers and dish soap, considers itself a tech company or a consumer products brand.
The IPO market, which hit a six-year-low last year, has been particularly unkind to tech lately, with some companies failing to meet their initial stock targets amid a volatile market.
However, Honest could have a good chance at convincing stockholders to uphold its estimated $1.7 billion valuation on the public market by emphasizing its retail and product strengths.
“They’re an interesting company because they fit more than one category,” said securities lawyer Jennifer Post of Raines Feldman in Beverly Hills. “They have a unique opportunity to differentiate themselves from tech companies that have overestimated themselves.”
Unicorn status
Honest Chief Executive Brian Lee has said for several years that he wants to take the company public, although he has not indicated when that could happen.
Bloomberg reported this month that Honest is working with Morgan Stanley and Goldman Sachs Group Inc. on an IPO, citing people familiar with the matter.
Honest and both banks declined to comment.
Last summer, Honest raised $100 million, bringing its funding total to $222 million since launching in 2012. In nailing a valuation above $1 billion, Honest landed in the elite “unicorn” class of private tech startups along with Snapchat Inc., Uber Technologies Inc. and Airbnb Inc.
The risk of underperforming after reaching high valuations appears to be at least one factor deterring the above trio of heavy hitters from braving Wall Street. Only two dozen tech companies went public last year, compared with more than twice as many in 2014, according to IPO analytics firm Renaissance Capital in Greenwich, Conn. It was the smallest cohort of tech IPOs since 2009, and their stocks ended the year down an average of 2 percent.
Consumer IPOs fared better compared with the previous year, however, especially Fitbit Inc., the San Francisco maker of the exercise-tracking device; Elmsford, N.Y., retailer Party City Holdco Inc.; and natural pet food brand Blue Buffalo Pet Products Inc. of Wilton, Conn.
Eric Liaw, a partner at Menlo Park’s Institutional Venture Partners and an Honest investor, said that the weak tech market probably resulted from an overall bull market losing steam.
Companies going public must inevitably leave some things to chance, he added. Promising startups such as San Francisco financial software firm Square Inc., which sold shares at levels below its valuation when it went public last year, still reaped some success, even if it didn’t match expectations.
“It’s kind of hard to read too much into that,” Liaw said. “It’s frustrating, I’m sure, but you can’t control that.”
Investor Mark Suster of Santa Monica’s Upfront Ventures said shifts in tech industry funding could end up helping companies resist growing too fast.
“Building a great company in capital-constrained markets in some senses builds a more sustainable company,” he wrote in a recent blog.
Fast growth
Honest doesn’t fit the tech mold of a game-changing app or software. Alba, 34, the actress famous for comic-book films such as “Sin City” and 2005’s “Fantastic Four,” co-founded the company as a new mother looking for healthful baby care products.
The venture launched with a handful of products, including infant formula, diapers and wipes. By mailing items through a subscription model in packages branded with colorful floral motifs, the company made $10 million in its first year, according to Forbes.
Since then, the company has expanded to 500 employees, including Alba’s mother, Cathy, as senior brand educator. In 2015, the company generated at least $150 million in sales, the magazine said.
Honest is slated to move to Playa Vista this year, leaving behind its 30,000-square-foot digs in Santa Monica for the top three floors and 83,000 square feet at a new complex in the heart of Silicon Beach.
Meanwhile, the products are now sold in 4,000 stores including Whole Foods, Nordstrom, Target and Costco. Still, 75 percent of sales are generated online, the bulk from diaper subscriptions.
In September, the company added 80 makeup and skin care products under the label Honest Beauty, which now sell nationwide in 250 Ulta stores operated by Ulta Salon, Cosmetics & Fragrance Inc. of Bolingbrook, Ill.
The transition to brick-and-mortar sales has been successful, said Liaw.
“We have started to sell products in stores, on shelves, and that’s seen positive consumer demand,” he said. “The company’s becoming omnichannel.”
But more sales mean more chances to rub consumers the wrong way.
Last summer, customers complained that Honest’s sunscreen didn’t work and posted photos of reddened skin to social media. In September, a customer sued the company for marketing products as natural after he said he found evidence of “synthetic” ingredients. A similar lawsuit followed this month, with consumers claiming that Honest products are “chemical soup.”
“It only takes a couple of experiences for products to not live up to their claims and that can have a negative effect,” said Raines Feldman’s Post, adding that any deficiencies could get magnified as a public company. “The public markets are as much emotional as they are financial.”
The scrutiny could intensify as consumers become more educated about healthful goods, said David Garfield, managing partner at Chicago retail analyst firm AlixPartners. As Honest adds items such as vitamins and supplements, it will need to make sure its growth across numerous product categories feels logical to shoppers.
“If people feel you’re slapping on the brand … then you incur a big risk,” Garfield said.
