A.I. Helped This Startup Build Beauty Products. But Can It Stay Profitable?

The direct-to-consumer beauty and wellness platform Oddity, best known for its ubiquitous Il Makiage social media commercials, is profitable and expanding in a market where it's becoming riskier for entirely online merchants.

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Despite growing market and economic instability, the Tel Aviv-based company appears to be planning an IPO, according to experts who spoke with Trade Algo.

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Oddity, the company behind the Spoiled Child skin and hair care line, the Il Makiage makeup line, and a third brand that is still in development, declined to say whether it intended to go public but did share some financial data with Trade Algo.

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Oddity has been profitable since its 2018 U.S. launch, according to the business, and will generate $380 million in gross revenues in 2022. Since 2018, the company's gross revenues have increased yearly by an average of double.

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Spoiled Child generated $48 million in gross sales in its first year on the market. Oddity declined to provide its return rate; returns are not included in their gross sales total.

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Oddity claims it is profitable the first time a customer buys a product, not simply in repeat sales, despite the high expense of customer acquisition for most DTC retailers, and it has more than 40 million users.

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The startup, which is equally a software company and a provider of beauty and wellness services, aims to upend the long-established dominance of legacy retailers in the sector by replacing the in-store experience with product suggestions based on data and artificial intelligence.

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"How is it feasible that this beauty customer spends all of her time online—on Instagram, YouTube, and other social media platforms—learning and finding inspiration, yet ultimately makes purchases in physical stores?

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Lindsay Drucker Mann, the chief financial officer of Oddity worldwide stated that, she needs aid, not because she wants to go to the store. She requires advice and assistance in making her decision.

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Oddity steps in at this point.

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How Oddity performs

The core of Oddity's business model is its proprietary technology, which includes technology created by a former Israeli defense official, and the billions of data points it has gathered from its millions of users. Oddity was founded in 2018 by brother and sister team Oran Holtzman and Shiran Holtzman-Erel.

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The shop emphasizes that it is a digitally native, wholly DTC business and that 40% of its team members are technologists, with no one on staff coming from the beauty and wellness sector.

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Oddity leverages data and AI to provide customers with personalized product recommendations rather than developing things that they would need to test out in a store. Additionally, it has plans to create countless other brands in the future using the same methods.

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The company claims that Il Makiage, the first product from Oddity, uses an AI-powered "powermatch quiz" to determine the "ideal" foundation match for every skin type. Customers are guided through a series of inquiries regarding their skin type and tone before the quiz scans a picture of their face to determine the ideal shade.

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The business claims that the algorithm is effective and more often than not, it correctly predicts the shade.

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According to Drucker Mann, the economic model would be turned on its head if it didn't function because there would be a ton of returns and no repeat purchases.

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Oddity uses its technology to analyze consumer trends to create new brands and goods. Then it goes to its suppliers, who also provide services to the traditional beauty industry.

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We present our vendors with like, incredibly detailed product briefs on "we want you to build x"... based on all the information we've examined," said Drucker Mann. We're actually delving more deeply into particular product characteristics that will matter to customers.

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The business claimed that it does not give its suppliers access to its data.

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The business bought Voyage81 in 2021. Niv Price, the former chief of research and development for one of the Israeli Defense Forces' most advanced technological units, created Voyage81 in 2019.

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Using a standard smartphone camera, the technology can map and analyze skin and hair features, find face blood flows, and produce maps of hemoglobin and melanin.

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To increase accuracy, Oddity is integrating the technology into its Il Makiage powermatch quiz. They assert that it "may replace a dermatologist's eyes" in the future.

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The Act Of Reading Tea Leaves

Oddity has taken a number of actions over the past 18 months that suggest it might be getting ready for an initial public offering.

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It appointed former Goldman Sachs executive Drucker Mann as its global chief financial officer in 2021. She worked for the Wall Street juggernaut for more than 16 years, most recently serving as its head of consumers and consumer-technology appropriate capital markets in the United States.

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She supported others who were attempting to go public in her job and brought many firms public. She oversaw follow-on offerings, private placements, and IPOs for consumers and technology companies as well as public and private equity funding.

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Eventually, in January 2022, at a valuation of $1.5 billion, Oddity raised $130 million from investors including Franklin Templeton and Fidelity Management. Previous to that, L Catterton, a titan of the private equity industry, was the only outside investor Oddity had attracted.

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Later on in the year, it announced the issuance of a "security token" that would eventually convert into a share of equity at an initial public offering (IPO) price that was 20% less than the opening price.

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The CFO recruitment, which was, in my opinion, unquestionably a strong indication for an IPO, is something Renaissance Capital's Matthew Kennedy, a senior IPO market strategist, looks for in IPO prospects. If the growth was strong in 2022, I'd say they were "burning on all cylinders" and appeared to be in a strong position to go public.

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He cited Oddity's token sale as more proof the business would soon have a public stock ticker. 

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They certainly had an IPO in mind, he said. Businesses who have no plans to go public don't announce in a press release that their tokens will convert when they do.

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Interest rate increases made last year's IPO market one of the slowest in more than a decade, but the ice is starting to break, and more and more businesses are starting to view mid- to late 2023 as a "viable listing timeframe," according to Kennedy.

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Kennedy keeps track of all initial filings for the clients of Renaissance Capital. He typically seeks out businesses with annual sales of above $100 million and the potential to turn a profit within a few years of going public.

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Oddity is not a phenomenon we had been monitoring, he added. But I believe we should still monitor it right now.

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We observe the passing of fads.

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Oddity's brands have some similarities to the popular Olaplex hair treatment range, a technology-driven cosmetics company, had its stock fall after failing to stem declining sales while experiencing strong growth at the time of its IPO.

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In order to convince investors that Oddity can maintain its quick growth over time and not become a fad, the company will need to go public.

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The biggest risk, in my opinion, is that they are expanding beyond the initial hoopla and that customer preferences might shift quickly. We do see fads come and go.

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DTC brands must find the proper product mix in order to remain relevant, maintain growth, and draw investors, according to Nikki Baird, a former retail analyst and current vice president of strategy at the retail technology firm Aptos.

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"The DTC difficulty and where many firms fail is, you have this entrepreneur who has this one wonderful idea for this product or they discovered some nut on some unusual tree in Brazil that they're bringing to market through their beauty care product," explained Baird. And yeah, that's fantastic for your lotion, but can you base your entire beauty line on this one feature that's the highlight of your first offering? ”

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Oddity claims it is up for the challenge and has even larger ideas.

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"I think the platforms of the future will be what come out of this period, right? I believe we are currently establishing those winners, Drucker Mann remarked. Therefore, in my opinion, we are genuinely building the next generation of Oddity, one of the most significant consumer enterprises of our whole existence.