Oddity F-1

Is it an emerging Israel beauty behemoth or a flash in the pan?

1/ Who would’ve thought the first tech IPO after a nuclear winter would be Israeli e-commerce beauty company @odditytech, producers of @ilmakiage and @spoiledchildnyc? If Oddity is any indication, going forward expect every single IPO filing to mention the words AI, data science and machine learning at least a few dozen times.  I have an enormous level of skepticism. That being said, let’s dive in. 

2/ TLDR: Unlike many of its D2C peers, Oddity has grown both quickly, and profitably. They claim they use data and R&D capability to build long term competitive advantage in beauty. Can they capture customer hearts and minds over the long term or, like many D2C business, will they eventually run head first into a wall?

3/ Just from a financial profile standpoint, there are some similarities between Oddity and the best consumer product IPO of the past 5 years, On Holdings. On is growing 78% YoY and has a 10.4% EBITDA margin. Oddity is growing 83% YoY and delivering a 14.8% EBIT margin.

4/ On the flip side, it’s also similar to Olaplex. When I wrote about Olaplex, before its Sept. 2021 IPO, it was growing 171% YoY and generating a huge operating margin of 55%. Olaplex fell quickly back to earth after its IPO and shrunk 39% YoY in Q1 2023. Let’s dive in to the data to try to understand if @odditytech is a sustainable grower or another @olaplex.

5/ Most beauty companies describe themselves leading with product and brand, but here it feels like an afterthought. Oddity defines its differentiation as coming from being outsiders, putting technology first and using data to drive the business. 

6/ The way Oddity’s “technology and personalization” differentiates itself is using “AI” to match products (starting with foundation) with a customer’s skin tone and hair color and texture. In store, MAC has been great at shade matching for a long time - Oddity claims to be better than anyone else digitally. 

7/ We can analyze this claim qualitatively through customer reviews and quantitatively through looking at retention and marketing costs. Let’s start by looking at the MakeupAddiction subreddit, under the thread “Is IL Makiage worth it?” Reviews are mixed - ranging from “damn, the match was perfect” to “there are drug store brands that are much better quality.”

8/ Retention tells a much more positive story. The company has 4M active customers as of March, defined by having purchased in the prior 12 months. The chart here highlights how each cohort has improved over the prior one. For customers who began in Jan 2022, they spent roughly $0.75 for each dollar of their initial purchase in the 12 months following their initial purchase, up from less than 15 cents in 12-month repeat spending for the Jan 2019 cohort. This shows they are getting better each quarter in driving repeat

9/ Is this retention strong because the product is truly integrating into customers’ lives or because the subscription is hard to quit! On Reddit there are multiple complaints like this one: “it takes an act of god and congress to get your subscription stopped.” I always worry about consumer protection and subscription complaints. State Attorney Generals can cause real problems and I’d be shocked if they don’t jump all over this given the high profile nature of the IPO.

10/ The other thing that investors have liked about Oddity is their successful launch of @spoiledchildnyc. While Il Makiage focuses on makeup, Spoiled Child is largely collagen-based hair and skin products to address aging. It launched in Feb 2022 and did $26M in year 1. Some view this as evidence that Oddity can successfully cross sell new products into its 4M consumer base. 

11/ The company is also investing real dollars against R&D. In late April, Oddity acquired biotech startup Revela for $100M to create brand new molecules for its cosmetics lines. It’s rare you hear an efficacy story in beauty which is in any way real. 

12/ A fellow Board member of mine at a portfolio company ran strategy for a global beauty conglomerate. He said “There is no doubt legacy companies have absolutely tons of data they are not good at using effectively. At the same time, makeup is not that hard. What is different between “AI” formulation and taking a quiz. Many times brands talk “AI” and “personalization” and it is essentially a quiz of nested “if=then” statements that gets to 5 different formulations no different than what P&G has on a shelf at Walmart.”

13/ So we have great growth, strong retention and question marks around whether the brand can capture hearts and minds in the long term. So what are the levers for growth and are they sustainable. 

14/ The company says it has the biggest on demand beauty media content library in the world. Can they continue to use proprietary content and social media to drive acquisition? We do not see detailed acquisition cost data in the IPO filing but we can look at marketing costs and operating leverage as a proxy for marketing power. 

15/ I hate when marketing is buried in SG&A, but SG&A as a percent of revenue fell from 66.8% of revenue in Q1 2022 to 56% of revenue in Q1 2023. That’s impressive, especially while posting 83.2% YoY growth.

16/ In addition to increasing digital marketing, other levers are launching new brands, international (only a quarter of the business today) and wholesale.

17/ Before wrapping, let’s look at IPO performance. The company started trading at $47.53 a share earlier this week, above its $35 IPO price. Its closing market cap was $2.7B, for a business that expects to do ~$300-$310M in H1 revenue (60-65% YoY) and ~$60-$65M in H1 adjusted EBITDA. 

18/ Whether this is cheap or expensive depends on if Oddity is enduring or a flash in the pan. The highest multiple in cosmetics is e.l.f. It’s growing 78% YoY, has a 15% EBIDA margin and trades at 58x LTM adjusted EBITDA and >10x LTM revenue. If Oddity’s growth continues at this pace, it would be on track to do $1B+ in revenue next year and could trade at >3x the $2.7B opening market cap. 

19/ On the flip side, we have all seen what happens when consumers IPOs underperform and crash to earth. 

20/ I come away from this IPO decidedly torn. Despite the screaming growth and great P&L, I just don’t know if Oddity is building an enduring brand or something more ephemeral.

21/ We’ll learn in coming quarters if Oddity’s D2C channel will top out, if the R&D advantages they claim are actually real, if the subscription is “too scammy,” and if other channels can scale. Perhaps, most importantly, beauty is about building long term customer relationships and having a pulse on ever evolving customer needs. We’ll see if Oddity can be tastemakers in the long term. 

22/ Finally, as a consumer investor, it’s interesting that Oddity and Cava were the first two IPOs in this window and both went well out of the gate. Many of my fellow VCs consider consumer dead and are flocking to enterprise. It feels like a narrative violation and a real opportunity.