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Beauty-tech company Oddity just had the industry’s biggest IPO since 2021. The industry will be watching what happens next.
“We’re going public now because we want to create something huge,” says Lindsay Drucker Mann, global chief financial officer. “We want to unlock the most attractive and lucrative markets, and currently, they’re dominated by incumbent, mega-cap businesses. However, we believe the consumer has moved forward.”
The parent company of beauty brands including Il Makiage is investing in AI as a part of a research and development push.
The owner of cosmetics brand Il Makiage and wellness brand SpoiledChild debuted on the New York-based Nasdaq under the symbol ODD on Wednesday. Shares opened 40 per cent higher than their original IPO price.
The company was targeting a $1.92 billion valuation, with shares priced at $35, an upwardly revised range from the initial price of $32-$34. Trading began at $49.10 and closed at $47.53, giving the company a $2.8 billion valuation, with selling shareholders raising $424 million. L Catterton, the private equity behemoth, holds a 42 per cent share in the company, which closed a $130 million investment round in January 2022.
Drucker Mann says the company has proven the power of its platform with the launch of two successful consumer brands. “The market has been receptive, and we’ve honed our playbook when it comes to use of data, AI and machine learning.”
With the raise, the company says it intends to obtain more working capital, both for developing and launching new brands, as well as possibly investing a portion in acquiring or investing in other companies, though no such agreements are in place currently. The company says it seeks to marry together physical products with machine learning models, and in April of 2023, acquired Revela, a biotechnology company that focuses on new molecule development for cosmetic use.
Oddity’s secret sauce lies in its advanced technology capabilities, especially data science: Il Makiage makes use of a proprietary shade-matching algorithm to better pair consumers with correct products, which Oddity bolstered in 2021 by acquiring computer vision company Voyage81 to leverage its hyperspectral imaging capabilities. This technology can extract richer multi-channel information from regular smartphone cameras, such as blood vessels. Its IPO prospectus says 40 per cent of its workforce are “technologists”. Founded in Israel, the company claims to have attracted talent from Unit 81, the Israeli Defence Force’s tech innovation arm.
In 2022, Oddity generated $324.5 million in net revenue, with $25.9 million of that attributable to the launch of SpoiledChild in February 2022. The company claims to have a platform of over 40 million users, with 4 million of those “active customers” who made at least one purchase in the last 12 months. It also launched an in-house incubator in 2019 to pursue additional product categories.
Oddity is also profitable: net income reached $21.7 million in 2022, up from $13.9 million in 2021. In the first three months of 2023, $19.6 million was generated, up from $3 million against the same period in 2022.
The company debuts at a time when the overall IPO market is sluggish. Research from EY shows that capital raised was down 36 per cent year-on-year, and global IPO volumes fell 5 per cent in the year to date in 2023, though the US Federal Reserve’s decision to pause interest rate hikes after a year of consecutive increases may help bolster investment. Oddity’s most recent big IPO predecessors in beauty are Olaplex, which debuted in 2021 at a more than $15 billion valuation, and Indian beauty retailer Nykaa, which debuted in the same year at $14 billion. The pace of beauty IPOs has slowed since, and Olaplex’s stock has fallen nearly 80 per cent over the last year. Beauty-related investment has also slowed since the 2021 highs, with data from capital market research firm Pitchbook indicating later-stage investment tailed off from $735 million in 2021 to $443 million in 2022.
To set itself apart, Oddity is betting big on direct-to-consumer (DTC) sales, which account for its primary source of revenue, according to the prospectus. Throughout its prospectus, the company refers to “traditional beauty companies that rely on wholesale distribution models” as being at a disadvantage, and states that its products are specifically designed for a DTC model. DTC brands, while once disruptive, have faced increased obstacles in recent years, as rising customer acquisition costs and changes to companies’ ability to track user data have made it harder to reach new consumers on social media. Glossier, the archetypal DTC disruptor brand and fellow unicorn, entered into a wholesale agreement with Sephora in 2022.
Drucker Mann says Oddity’s insights show the customer wants to be online; discovery already happens online and Oddity’s platforms allow them to close the loop. “In store, you have associates who help customers not only choose shades, but products, and educate on how to use them. For us, we have machine learning instead. Our brands are scaling so fast because we’re satisfying pent-up demand.”
Beauty is a category where consumers are more likely to be swayed by emotional and sensorial responses to products, and how successful a brand manages to evoke a mood and feel that resonates. Drucker Mann thinks Oddity’s high-tech approach isn’t antithetical to that: “We deliver painstakingly tested best-performing products,” she says, adding that its profitability indicates strong affinity for its products.
Beauty technology companies have proven popular as investors race to identify which elements of digital transformation or molecule development will underpin the industry’s next shift. Bioengineering firms such as Debut, Bakar Labs and Arcaea have all attracted institutional investment including involvement from the likes of Chanel, Givaudan and L’Oréal.
However, consumers are on the fence about corporate access to their data, which forms a core component of Oddity’s offering. A number of states in the US have passed laws that prohibit the use of collection of biometric data without informed consent. Companies such as L’Oréal have already been hit with class action lawsuits via the Biometric Information Privacy Act. While not all biometric, Oddity claims to have over 1 billion unique data points on customer beauty preferences. Global data privacy acts such as the European Union’s GDPR, which affects the European Economic Area grow more muscular by the day as consumers seek to understand how their data is being used, and how to withhold consent. Drucker Mann says Oddity takes data privacy compliance “incredibly seriously” and protecting it is a “critical imperative”, but that consumers are happy to hand it over. “We create value, and they give us their data because we can legitimately help them when we have it. There’s a strong incentive on both sides,” she adds.
So what’s next after the closing bell? “Our priorities are launching new brands — we have our third and fourth already in the works,” says Drucker Mann. “Through investment and innovation into artificial intelligence and molecule discovery, we believe we can deliver the next generation of science backed high performing products that really solve user pain points.”
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