Christopher Gavigan — co-founder of the consumer goods empire Honest Company — is trying to bring order to the unregulated market of CBD.
Just weeks after the Honest Company's Wall Street debut, CEO and co-founder of Santa Monica-based Prima is charming investors of his own with a line of pricey hemp-infused serums and supplements.
The company announced a lofty $9.2 million seed-plus round on Friday led by Greycroft, H Ventures, Defy and Lerer Hippeau.
The startup prides itself in sending each formulation through clinical trials and tests with third-party regulators. CBD-infused supplements are currently unregulated by the Food and Drug Administration, leaving manufacturers and retail stores to set their own standards and regulations.
Gavigan is eager for an FDA stamp of approval, which he said will guide retailers currently left weeding through the saturated market of hemp-infused products.
He first launched the company in 2019 as an educational platform about hemp and cannabinoids, the compounds found in cannabis.
Five months later, the brand unveiled a line of dietary supplements, face creams and a "bath gem" that dissolves in hot water. Gavigan called the daily CBD supplement — priced at $45 per bottle of 30 softgels — "the essential nutrient for stress management for everyone."
"Stress, as we all know, is the epidemic of today," he said.
Each product contains CBD extracted from hemp grown on small farms in Oregon, the "Napa Valley of hemp right now," said Gavigan.
In 2020, he and his co-founders helped makeup retailer Sephora develop its own CBD standards to self-regulate new brands and products. That came after companies like Target started introducing "clean" product standards to mark diapers, detergent and cleaning products produced without ingredients dubbed toxic or unsafe.
It's the same approach to consumer goods Gavigan and Jessica Alba took for The Honest Company, which pledges sustainable goods free of 2,500 "questionable ingredients."
Before his stretch at The Honest Company, Gavigan served as CEO of Healthy Child Healthy World, a nonprofit advocating for safer, non-toxic consumer products for children.
"We have our own standards," the chief executive said of Prima. "We've banned over 2,800 ingredients we'll never use. Brands need to have that rigor within their own supply chain and formulation principles."
Prima sells direct-to-consumer and at a handful of retailers — Sephora, Nordstrom, Thrive Market and Erewhon — and will expand to new ones this summer. Prices are steep, but Gavigan said the company is planning to "amend pricing to make our products even more accessible."
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The Honest Company, Jessica Alba's Santa Monica-based maker of consumer goods that promise to be safer and eco-friendly, made a strong debut in its first day of public trading Wednesday.
Its stock closed at $23 a share, a 43% gain from the $16 opening price.
"I feel like this is where we really dig into this next phase of growth, and this is really the beginning for us in a lot of ways," founder and Chief Creative Officer Jessica Alba said Wednesday on CNBC.
Alba's 5.6 million shares and soon-to-vest options are now worth about $130 million.
However, that is dwarfed by the nearly 16 million shares that Scott Dahnke, board member and global co-CEO of the private equity firm L Catterton, owns. His stake is now worth around $360 million. L Catterton invested $200 million in the company in 2018.
Honest, which trades on the NASDAQ as HSNT, raised $413 million in its IPO. The company was founded by Alba and serial entrepreneur Brian Lee in 2011 and sells everything from eco-friendly diapers to skincare products to cleaning supplies.
Honest was rumored to be preparing an IPO in 2016, but after soaring growth in its infancy, the company struggled amidst quality control problems and questions about whether it could live up to its pristine image. The company voluntarily recalled its baby powder and baby wipes in 2017 after concerns they could cause skin and eye infections. The year before, it reformulated its laundry detergent after reports that it misled consumers about ingredients.
Honest has never made a profit but saw gross margins soar by 35.9% last year as the pandemic drove sales of sanitizing products, according to a regulatory filing.
Kyle Guske, investment analyst at New Constructs, says the stock is greatly overvalued and should be trading no higher than $7 a share.
"A valuation at $15/share implies the company's profits will be three times greater than Revlon (REV), and we think the chances of that happening are very low because of the formidable large incumbent personal care products companies with which The Honest Company is competing," Guske wrote in a research note. "The incumbents already own all the shelf space and dominate the industry."
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The Honest Company, the packaged consumer goods company founded by actor Jessica Alba and serial entrepreneur Brian Lee in 2011, filed paperwork with the Securities and Exchange Commission Friday to go public.
Selling everything from eco-friendly diapers to skincare products, it has never turned a profit. The Santa Monica-based brand is seeking to raise $100 million by going public, a move which it has flirted with several times during its past few tumultuous years. It will trade on the NASDAQ under the ticker symbol "HNST."
The SEC filing reveals Honest recorded a net loss of $14.5 million last year, which was hardly unusual. It has carried over $243 million in losses since 2017.
"We have incurred net losses each year since our inception and we may not be able to achieve or maintain profitability in the future," the filing warns.
Honest revealed it increased gross margins by 35.9% last year with revenue soaring by 27.6%, to $300.5 million in 2020 from $235.6 million in 2019. The wellness category did especially well, bolstered by the pandemic which drove sale of disinfecting and sanitizing products. Revenue in that category skyrocketed 116%.
Much of Honest's business hinges on its partnership with two mega retailers, which accounted for 45% of its revenue last year. And 70% of all retail sales came from Target and Costco, where the company is competing for shelf space against larger, more well-funded brands.
"The loss of our relationship with Target, Costco or any other large retail partner could have a significant impact on our revenue," the filing warns. "We also face severe competition to display our products on store shelves and obtain optimal presence on those shelves. Due to the intense competition for limited shelf space, retailers are in a position to negotiate favorable terms of sale, including price discounts, allowances and product return policies."
Honest was rumored to be preparing an IPO in 2016, and Lee, who departed in 2017, reportedly had been thinking about it since 2014, but after soaring growth in its infancy, the company struggled amidst quality control problems and investors who had grown wary of direct-to-consumer businesses that had to compete against the likes of Amazon.
In 2015, Honest became a unicorn, valued at $1.7 billion. But two years later it was raised a dreaded down round amidst stagnating revenue.
Several incidents tarnished its central marketing promise as a safe alternative to traditional brands. The company voluntary recalled its baby powder and baby wipes in 2017 after concerns they could cause skin and eye infections. The year before, it reformulated its laundry detergent after reports that it misled consumers about ingredients.
Unliever was reportedly close to buying Honest in 2016 but ultimately decided to acquire one of its main competitors, Seventh Generation.