New Ventures and Future Outlook

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They wanted us to make a website so we could get in the magazine We didn't think we were going to get an order Welcome to How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built He Gy Ros and on the show today, how Joey Shamma started a dollar cosmetics brand that turned into a billion dollar business. Among the thirty three cars that lined up to race the indy five hundred this year One was particularly notable It was painted in shades of pink And itss driver, the only female competing this year, Katherine Legg But perhaps as notable as the driver was the car's main sponsor, not Penzil or Firestone or Cor' Light, but rather Elf Cosmetics. The first time ever that a beauty brand sponsored an indie car. And if you know something about Elf, that's not entirely surprising. Because Elf was essentially built as a disruptor brand back in two thousand four At that time, people either bought cosmetics at the drug store where they were cheap, or at the department store, where they cost a lot more And the assumption was that price equalals quality Drugstore makeup just wasn't as good as the high end stuff But when Elf launched, it upended that model At the time, discount makeup cost about five or six bucks for a lipstick or blush. All of them cost a dollar. And the thing is, they didn't look or feel cheap And it meant that customers could take a risk of trying out more of their products, which made the brand particularly popular with teens and tweenens when Joey Shamma and his original partner, Scott Vincent Borba, started E. they ran into a lot of roadblocks For starters, the big box retailers weren't interested. They didn't think there was a market for their products But within a few years, the brand started to gain traction Joey sold most of the company back in twenty fourteen, but he managed to scale it to a pretty successful brand in ten years And today Elf is publicly traded with a market cap of around four billion dollars Not surprisingly, the one dollar price point has gone away, but the products are still relatively inexpensive, between five and fifteen dollars As for Joey, he grew up in Brooklyn in the nineteen eighties and nineties His dad had an apparel business and most of the people in the community, including Joey's family were of Syrian Jewish origin. We are very tight kn in the community We do a lot of things together. We have a very strong network And we are very entrepreneurial in spirit. You know, I came from community of merchs like we buy product, we sell product, we know how to do that And that's something I always aspired to. I wanted to do it differently So I had a passion for making money. I had a passion for making a name for myself And I had a passion for making an impact. Whatever it was gonna happen, it was That was gonna happen I remember when I was in high school, I was president of a teen division of our community center. And the woman who was running it at the time said, I don't know how, but I know you're going to be successful And I really go back to that that meeting that really stuck with me of saying, I'm going to be successful. I don't know how U If it was beauty, it was beauty. If it was yoga mats, it was yoga mats, it was apparel, it was apparel It was going to happen Okay, so you grow up in a home of, you know, your dad's an entrepreneur and did you Always, you know, were you kind of encouraged from a young age to join the business? wasas that you sort groomed to do U I mean, I think my my parents and and they really afforded me the flexibility to follow what I wanted to do I think it was a possibility, but my personal fear in life was joining my father's company and not being a productive member of it and just being the boss's son and not really proving my worth and being successful on my own And that was my biggest fear. Yeah. But I think you did wind up working with your dad for a while, right? I mean I know that for college you went to NYU and you studied business, but I think you also worked with your dad during that time, right? Yeah, so I worked with my dad and his apparel company as I was in college. so I would I was learning the basics. I was learning what a purchase order was. I was learning what a system was to track orders, what delivery dates meant how to sell I did a little bit of sales for some of the closeouts or the leftover inventory that they had. So That's how I really got my feet wet Okay. I want to I want to go to this begins. because what I've heard is it's two thousand two and you're at a party in Los Angeles and you meet this guy, Scott Binson Borba. first of all What were you doing in Los Angeles? What was this party? You're a senior in college at that time Yeah, so that that's a story that's out there, but that's not the real deal. Okay, good. Okay So actually I was introduced to Sct Vincent Borba through a mutual friend U and the concept was that Scott was a beauty maven He really understood the beauty industry. He worked at a lot of different Beauty compomanies. he was one of the first employees at a brand called Hard Candy He was at Nutrggina running the Neutroggina Color cosmetics brand. And he had this idea that he wanted to create a line of cosmetics And we were my father was looking maybe with me to invest in a business and to help and that's kind of where it came from So basically you and your dad were kind of looking around for some ideas. and somehow somebody got to Scott and said, Ohh, I know these guys in New York who are looking to start something. like it it was like basically that. Basically that Okay, he was living in LA., right? or was he living in New York It was funny because he was living in Manhanm Beach, California, and I was living in Manhaman Beach, New York. So that was just a funny coincidence. But he was in California What was Scott's concept Scott's concept was a line of cosmetics simimilar to that of hard candy, it was a value line of cosmetics. When we looked at the landscape of the retail market There were still a lot of big box retailers Two of the biggest ones in the early two thousands that were growing exponentially wereere the dollar chains. So it was family dollar, dollar general, they were Growing to five, six, seven thousand doors And the problem they had is they didn't have quality and consistency on their shelves So basically they either had an unbranded no focus on quality brand where it was two items on a blister card for a dollar, a lipstick and a nail polish or whatever or They had access to some branded merchandise that was left overver from a drugstore or it was a return or it was extra. So you had the covergirl colors that you didn't want. Maybe you could find the one you wanted. It was at a discount, but it wasn't plogrammed and it wasn't consistent So the idea is, hey, let's actually instead of a plane wrap lipstick or sevenenty eight dollars you know, covergirl or Revlon or whatever it costs, let's make something that is branded as cheap as the plane wrap Exactly. But you're trying to figure out this kind of wormhole, right? Can we get something good enough that is really cheap to manufacture that we can sell for a dollar, right? Be it's a dollar store Is that what you're thinking? Yeah, basasically what we learned really early on is when you break down the cosmetics to formulations and componentry Formulations, yes, you can hit that price point The real artist tree, if you may, is in the component tree where we couldn't afford metal. We had to go plastic or we couldn't afford things that were multip parts and it need to be one part or one mold extrusion So we needed to really figure that part out But the actual cosmetics, we were able to hit that dollar price point Okay, so you guys are on Bba Scot. You can form this business and you guys had relationships in Asia with apparel businesses. so Tell me a little bit about how you started to see whether you could actually do this. What did you Who did you start to talk to to see if you could actually Make this stuff for, you know, for for cheap. So I headed over to Asia It was the summer of two thousand three We had one of my father long time Office managers was a very entrepreneurial guy. And he introduced us to the first factory that we worked with And I remember trying on the mascara in the factory, seeing if it was waterproof. had no idea what I was doing So this was in August two thousand three And it took the better part of ten months It was june two thousand four when we first had product to sell So let's let's kind of dig into this I'm just thking about like lipstick, for example, right? It's like whatever goes into the actual lipstick and then you put it in the lipstick container, which is plastic and it's got a cap on it. and then it's going to go into, you know what's it called a blister pack, right that that you can put on a shelf or something like that. How do you actually make that for a dollar I mean, less than a dollar, sorry, much less than you guys sell it for a dollar. So there were products out there We weren't the first person to sell lipstick for a dollar. We weren't the cheapest guy selling lipstick for a dollar We were just creating a brand around it. We were creating an emotional affinity. We were making sure it looked good and it felt good But still help me understand like, I you know, u blush, you know, or a powder. mascara. how does that the container And the brush and then the actual cosmetics, for it's got to be like fifty, sixty cents at most so you can market it up and make Some margin So it's about it was about half of that because our target coulds cost was about thirty five cents, I think back to the simplicity. Agle, everything we sold, we sold it for fifty nine cents So they could retail it for a dollar. Right, of course How do you make it for how do you make something like that for thirty five cents? Well, that's what is what I'm trying to say. That's what it costs. Wow. Like that's how much it costs everybody. now yes You can put active ingredients and yes, this was twenty five years ago. and yes There are more expensive componentry and finishes and all that but you're also paying for corporate overhead. you're paying for the infrastructure. you're paying for the spokespeople. you're paying for the marketing campaigns. You're paying for the shelf space. You're paying for the returns You're paying for the warehousing and all of that If not done efficiently, you won't work When you look at a pure cost of goods sold across the market for what we wanted to bring to market. It was not that challenging How were you guys, I mean, you had Scott involved, He was in LA You're in New York. Were you working out of offices of the apparel company? You know, you're working with contractors? Scott was in full disclosure, still working for other cosmetic companies. but working for us on the nights and weekends. He was doing the product development. So yes, we did use my father's apparel office My father is apparel company, had a warehouse in Edison, New Jersey. So we were definitely leveraging anything we could. across my father's supply chain And we were, you know, working nights and weekends when we needed to. So you have you identify a manufacturer in China And how many how many sUs are going to? How many different product you're going to So thirteen categories we started with and sixty seven SKUs. So we had eyeliner with a sharpener. We had a press powder that had salicylic acid in it We had a few lip glosses. One of them was a plumper, one of them was inspired by Stilla, which was a high end brand at the time An eyes shadow that had four colors in it, so a quad of eyeshadows. That was you know, it was across eyes, lip and face. Eyes, lips and face, which is how you came to call it elf. Eyes, lips Face, right Exactly. And who Who were you thinking were your competitors? Did you think that Mabeling and Revlon and Lororealer competitors are not really because they were they were charging four or five times the amount that you guys would be charging In terms of the space we were trying to get to, yes, very much. Mabbeeline, covergirl There was some smaller brands NYC and Wet and Wild Those are more of our core core competitors because they were the value brands, even Rima London. Both Rima London and NYC were owned by Cody When Wilde was a standalone. That was the problem in the early days. You had a few incumbents that owned a bunch of brands and controlled all the space at retail. Yeah. So you had L'orereale, which was L'oreree and Mabbelline, you had PNG, which owned Cvergirl at the time So there was no room to you to like box your way in two feet of space because it was all controlled by four or five companies, even if it was twelve brands on shelf. And so here's a question for you We know from all the work we've done on this show over the last ten years that The margins on cosmetics can be incredible. It's like vitamins. It can be an amazing business if you do it, right So the raw materials, even high end materials are not that expensive. and essentially a huge chunk of their costs or marketing, right?ike if it's Revlon, it was Cindy Crawford Right or Oy Crawford, Halley Berry. Yes. And so but that gives them a lot of reach and a lot of publicity You're saying that that is a big reason why even the sort of the the value brands like Cover Girl or Revlon were comparatively expensive Yes. I used to have a slide in one of my earlier sales decks that had, you know, if you look at the cost of the lipstick How much is actually in the lipstick versus going everywhere else? And that's, you know, we took that pel mentality from my father's business of you buy something, you mark it up, you sell something As opposed to you buy something, you pay to market it, you pay to get shelf space, you pay to promote it And then you sell it And we took out all that middle And we were just delivering value to the customer I mean, it's interesting because we have done brands on the show not just cosmetics, but let's talk about cosmetics for a moment that have very deliberately priced their products at a higher price point to signal to signal luxury So there is that strategy too. thousand percent I mean, so much so. That one of our biggest obstacles in the early years was retailers afraid to put our product on shelves. Yeah, because they didn't want to trade the customer down. If they're selling a six dollars lip gloss And I'm selling a dollar Lift gloss and they customer buys mine over theirs then they just lost five dollars of sales. And by the way, the first order, how much did the first order cost? Roughly to it cost you guys to bring in the goods? Yeah It was one hundred fifty thousand dollars order. And this was basically an investment that you guys put into it. You guys put this money into it. Yes, we b the we bought the goods. It was one container. Yeah. It was about six hundred thousand pieces. And the strategy was While we're manufacturing this, we're going to start to pitch dollar stores, dollar general. Is that what you thought you would do Yes U We had a sales rep agency for Dollar General I remember being at that meeting pch the whole line. We went to Dollar General and familyamily Dollar And we said, we've got the answer for you, quality over quantity and they Politely said, we like what you're doing We are committed to quantity over quality But that was just a few of the dollar store. locations. Did did you try to approach others So we went there's a trade show called ECRM. Yeah. You meet a lot of retailers. you're kind of guaranteed a meeting, a twenty minute or a ten minute meeting With each retailer, And it's kind of like a aroundound robin And that's where we met ninety nine ccent only and dollar tree But you know, as we were trying to get out there, we just kept hearing, We're committed to the quantity. This doesn't make sense. I don't want to trade my customer down I don't have room for it likeike it was No, no, no, no U until this point, I mean, you're trying to get this into dollar and dollar general, which was the whole point of this product. You're thinking, that's where we go, That's where our market is That's where it's going to crush it. And you have zero validation. every meeting you have with the ninety nine cents store dollar store people is like, no, no, no, no, no. Did you think maybe I was wrong Yes. Oh yes, very much. very worried. Yes, when you're this is my first far A into business I'm newly married. I have You know, I'm trying to build my career You know, you have to live like how are we going to make this a business. I mean, we knew we thought we had something, but it was It didn't feel like it at the time. And I remember I think it was in about February or January Um, early two thousand four, I was driving to the city And it was just as Alex Rodriguez was signed by the Yankees. And there was an underwear brand called T exxist And to exxist had sent a package of underwear to to his hotel or apartment. And they were talking about it on the radio And I was like, wait How did like, how did this happen and actually knew one of the people involved with the company And I said, how did that happen? He's like, Ohh, we have a PR firm. Interesting. And I was like, oh, PR That sounds cheaper than marketing. All right, so you hear the story about AroD and the underwear and you find out, you figure out which PR firm was behind that plan I reach out to the PR firm. I tell them about the concept And I don't know if they loved it or wanted another client, but they scheduled what they called deskide editor appointments So it was me and it was one of the members of the PR firm, who went away. who was the rep on our account? Her name was Amanda Okay. now, so here's the thing. you bring it to these editors, right and you're showing them product and you have a brand. like you I'm assuming you hired like an agency to come up with a logo for Elf and a look Yes, we had an agency. in Cast domestic California called Juneo Design They created the logo, some of the lookbooks, some of the brand catalog And then we also had a digital agency that built the website And was it I mean, was it really expensive to do? I mean, and you know now you make a log on AI. and I'm not saying, but was it really expensive to do that? must not have been cheap It wasn't cheap, but it wasn't real. I mean, we were bootstrapping it. We didn't have any revenue coming in. My father was funding everything we needed. and it was we did everything as cost effectively as possible Okay, so now you've got a this concept and And you've got a design firm and you bring it around to these editors, right? Yes. We went around to all the beauty editors in the city in New York City, fromom glamor to lucky, to good housekeeping, to Oprah. seventeen vogue gl everything and we pitch them. about this line of color cosmetics that we wanted to bring to the market We walked them through the whole line, how it went from eyes, lips, face, how it was inspired by prestige. how it was the quality was great product And then at the end, we said, o, and by the way, everything's a dollar. And then they were blown away. So you're kind of keeping it a secret until the very end with the price I think there was the wow factor that like, okay, here's another guy showing me another line of cosmetics, like It looks good, but Why is it any different than the other twelve dollars lip gloss I saw yesterday or I'll see at four o'clock today But then when we told them the price Then it was like that was the like the winning factor. And then I remember it was late April I was walking in the city. I got a call from the PR firm Great news Glamour magazine wants to put you in the magazine for the next month's issue Well, it was actually Glamour magazine called me up and said, we want to put you in the magazine. Okay, but we have a problem because our readers need to be able to get you. Right, We need to buy you. So they gave us an ultimatum. Yeah. They said, either, you're in all Walgreens by next month Highly unlikely. or open a website so that the customer can get you But nobody shopped on webs. I mean, not nobody, but people really noobbody shopped on a website We didn't even know what e commerce was. It was like us and Amazon at the time. And you couldn't get into Walgreens because you couldn't get in anywhere. No, not even. And even if we could, you'd need to set up, ship, get in shelves, off cllanogram. not even an option Whenn't we come back in just a moment, Joey gets a much coveted meeting with a buyer from Target Then she asks a question that he simply cannot answer Stay with us, I'm Guy Ros and you're listening to how I built this This message is brought to you by Apple Card Aple card is designed with your iPhone in mind making it easy to get started and even easier to use Apple Card is a no fee credit card you can apply for right from the wallet app on your iPhone Gaple card has no annual fee, no late fees, and no foreign transaction fees. No fees, period. Every credit card should be this easy. 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I'm Gy Raj So it's April of two thousand four, and Glamour Magazine wants to feature Elf cosmetics in an upcoming issue. But first, Joey has to make sure they have a working website So we called my web developer and I said, Can you make us an e commerce part of our website? And we have thirty days to do it He says, Yes, we can do it. I say, and how much is it gonna cost And he said five thousand dollars I said five thousand dollars. I don't know, That's a lot. I can't really afford it. We're not selling the product. I go, How about I give you some equity in my company He said, I don't think so. I think we really need the five thousand dollars So We gave him five thousand dollars. He built an e commerce site If you saw the e commerce site today, you would cringe It was the clunkiest e commerce site, notot to his fault. that was just the time And basically we launched the e commerce website on june fourteenth, two thousand four. Okay, so this was and I'm sure there was like multiple steps and because it wasn't stripe. wasn' it was just hard to get a credit card and it wasn't hard. Weed a credit card processor authorized. net. Yeah, it was a lot. Once you got the order, you would still have to ship it out. I'm assuming you charge for shipping too at that time So basically we decided early on, we're selling dollar cosmetics How do we charge for shipping? Yeah re pretty sure the post office had like a flat rate, like if it's a certain size. Right. So we did a flat rate of five dollars and ninety five cents And we did not accept returns. Okay. So it's hard. You're going to buy cosmetics on this internet thing that you've never purchased on before and you're really going to hope you like it becausecause you're already in it for at least six seven dollars and you can't send it back. Yeah And this is probably not UPS, so it's not traceable. It's probably like a priority mail or something It was priority mail, yes, whichich means it could get lost and all the stuff. So Okay, so five dollar ninety nine cents whatever flat rate and you're going to sell it through the website and and it's complicated. And but the other question I have is How are you gonna to handle the logistics? I mean, you have it in a warehouse, sitting in a warehouse But I mean Who's going to package this stuff up and send it out So honestly, we didn't even think about logistics. We were just Following Glamour magazine's lead. They wanted us to make a website so we could get in the magazine We didn't think we were going to get an order So we didn't think it all the way through. We did have a credit card processor you know, in the warehouse there was an office So we had some workers and people in the warehouse that could help out if we got two orders, three orders Who knew? We didn't We had no idea that e commerce would ever become something. And now it's just you go, you shopify or whatever and it's all automated. But then if somebody put their credit card in you would get like some kind of email or some kind of communication, which you then had to take that information and manually put it into a processor, right? likeike a credit card machine. It was so cumbersome We needed to print it out and then go into the portal, put the credit card number Some of the credit cards would bounce back, then we'd have to email the customer. Your credit card iss not working. Then we would come back and then we'd print the label and then weigh the package and then drop it at the post office Okay, you've got one hundred and fifty grand worth of inventory plus the shipping costs plus all the ancillary costs. I mean, who knows how much you're in now, how much cash is is gone into this business. You know, a lot of people may not even know this, but but if you don't There was a time where Glamour magazine or Vogue like that moved product. It was a big deal. early two thousands And late nineties were like the heyday of big magazines, and if you even if a tiny mention could have a huge impact Yes But this issue comes out from what I understand on june sixteenth, two thousand four And it's not a huge article about it's like a couple lines about your cosmetics, right? It's one blurb and a picture of our concealer Okay, and is Does anything happen? Do you notice any movement right away or Yes. so I remember walking into the office and we had this screen like a backke end to the website. where if someone placed an order, you'd see the order, the date, and the value So all of a sudden, we walked in day one And we had four hundred orders. Wow And, you know, All the products, one hundred fifty thousand dollars of inventory cameame in the assortment packs And I remember my father's CFO who was helping out We were opening boxes. this one had purples in it, this one had pinks. you know, we had paalltes of inventory that only had this color out because that was the hottest seller. So there was stuff all over the place. So you'd be like on one like opening one bike I got the purple here. Somebody else is like, oh I've got I got the candy Apple red liip gloss and this one or whatever. Like that's literally what you're doing Yeah, I mean, after the first six orders, things just start like, what do we do now Th then we took them out of those assorment packs. we built sixty seven boxes. Each box had the unique item Everybody, I remember My brother Wh's now a doctor. He came in He picked a few orders. That was not for him. He never came back, went to med school. We never saw him again in the business But we were finding anyone that could help us pick and pack orders Joey, I'm curious. I mean, did you u get tons of orders from that that glamour magazine or just You know, even if it was fifty orders a day, it was exciting or was it more than that I think it was more than the dollars. It was the validation. It was like, yes. We believed that we had something here. So over the next year and a half We had a lot of these glamour placements which were honestly great placements and we wouldn't be here without them And then we had even better placement. We had like We not brand features. there was one feature that we had in Good Housekeeping magazine Now If you remember good housekeeping, there was nothing better than a good housekeeping seal of approval. Yeah. And good housekeeping gave a feature of our lip gloss att a dollar. versus a lip gloss that was sold in Sephora for twenty four dollars of Stilla cosmetics And they said Whichever one you buy, you will love it I had that blown up in the office. That was a huge win for us Oprah magazine backstory cover where they laid out all our makeup And then they made like a piece of art of our makeup around a dollar sign And they did a whole article. And every time one of those bigger ones happened We felt the spike. And by the way, that in that first year, two thousand four, did you try and pitch Sephora? No. That wasn't. You knew that they weren't going to carry your products I mean I don't think we could afford to be in there In that first year of business you really first order is coming in June of two thousand four. Do you remember how much you guys did in sales that year I want to say about four hundred thousand Okay, so pretty good. I mean, means you sold out your initial inventory, which means you had to bring in more inventory, right? Yes. All right. so Exciting. what was it Was it stressful to you? Did you feel like I am still worried that this not work Every day, every night. nights were worse than days because days are busy. but yes, I remember Maybe the next year, we had like a budget of like one hundred twenty five thousand dollars a month of sales Like how much had to hit that you had hit that number. We had to hit one hundred twenty five thousand dollars of sales a month. Why was that your target I don't remember why it was. I just remember that number. And I remember we had our web business. We had very, very small regional business where you had like a chain with four stores or six stores or eight stores that carried our product And then we had a few international inquiries. I remember one from Australia and one from um, the UK, actually in in Wales. And they started like, can we copy what you're doing and kind of take it to our market and buy the product from you. Yeah. And I said, sure, at this point Why not? L you're an account like any other and I don't have to worry about all the international complexities. Wow. So I'm saying even you put all those together, I think we were able to hit maybe one hundred twenty five thousand dollars a month. but I think it was barely to cover costs. There was no growth Any new inventory had to be funded by My father's capital, like it was were you worried that he might be just lushing money down the toilet Yes It was it was stressful. I mean every sales meeting was maybe this was the unlock In the early days, I remember I was newly married. I was living in an apartment over my parents' house just had my first son in january two thousand four. And I had to, you know, we live in a community that has high expectations And we needed to figure it out Do caause any tension between you and your dad He didn't have very, very deep pockets, but he believed in it and he was happy, I think, from what I saw to not stress about it He was felt good about it and was managing it. wasn't afraid of and I guess you could have if everything was just disisastrous liquidated, like try try and sell it for c rate price and maybe recover some of your investment It's not that easy on a dollar product because you're already at fifty nine cents selling price. so I'm going to sell to you for what thirty, twenty I mean, it's it's's it's hard Okay So two thousand four, youre, you know, you're kind of incrementally growing. And I read that you also manageed to get pitched a target that year that you managed to make a pitch to them. What was their reaction So the first time I met the target buyer was at one of that ECRM trade shows where you are scheduled to meet all the buyers in a ten minute And I tell her this whole pitch about quality, cosmetics color everything And her response was, Ef. Why would I wanna put something called elf on my face And that was like, I didn't know what to say. I don't even recall my response, but That was a challenge and it ended up actually We stayed in touch with the buying team. I believe she went off the desk And I don't know somehow We got a call Two months or somet timee later where they had an opening. And they had not in the cosmetic section But in what they call the trial and travel section So we were able to put two or three different items there the same item different colors and we had a bin And that really was ended up being a game changer for us. But that didn't happen in the first year. It happened It happened later in two thousand six M two thousand five two So right Beause I read that the first real retailer, like significant retailer that you match get into is HEB, the supermarket chain basin in San Antonio. Yeah, so the HEB, that was one of our aha moments as a company Because through all of our nose that we got in the early days, One of the biggest know that we got was we like the product, but we don't want to trade our customer down. Like if I'm a retailer, if I'm a Walgreens and I'm selling a covergirl lip gloss for six dollars. And I'm going to sell an L flip gloss for a dollar. Now there's five dollars five that the company, the retailer is not getting Um, and it was actually HGB which is a high volume supermarket chain in Texas That said, we're going to try it And at that point, we had developed for the local markets this four sided spinner rack It held about nine hundred and fifty four pieces, something like that and HGB was open to putting these racks in each of their stores. So this is like like a six foot high rack, something like that. Yes, exactly. So you could spin that rack And it had, you know nine hundred and fifty four products depending on the size of the product So basically we sell it, we sold this into her. And the thing sold out in minutes. And at HEB. att HEB. And did it go into all the HEB stores or just a few? I w think went into thirty But the best thing that happened with HEB is we get an email from the buyer the next morning saying I was wrong This brand is incremental and impulsive becausecause they saw that because of the price, I wasn't buying one or the other. I wasn't not buying Cvergirl for five or six dollars and just buying ellf But I was buying covergirl and buying Elf. Or I still have five dollars to spend, but I'm gonna buy five products because there's such an array of product and really, you know maximize my dollar So essentially, it wasn't actually eating into the sales of Cvergirl or other more expensive products. it was just peopleeople were buying more product in that department Yeah, it was adding more to their top line, not taking away from their sales volume And that changed our whole sales pitch and the whole everything going forward. And then we went in old HEBs and then there were some HEBs that put four racks into the store each store and it became It was our first viral sensation, I guess So how did that you said it changed our approach? How did it change your approach and how you sold this try to pitch this product because as we're meeting retailers, And their response is, I don't want to trade my customer down, We're saying, look, HGB iss doing it and it's not. It's adding incrementality They're selling more It was a combination of impulsive, meaning I didn't want something but I'm going to go I'm going to get it anyway because it's so cheap. Maybe I was gonna to buy a candy bar and said I'm going to buy a lip gloss. So there was no barrier to entry. And you had data to back it up. And we had data. Okay, but HB you're still having a hard time getting into these other retailers from you know, HEB is great, but but from what I understand,'s still going to take some work. And and HEB alone doesn't make your company profitable yet, right No, no, okay. And what were your just aside from just product, what were your other huge expenses? because you're not doing any marketing. So what were your expenses So at this point, we now had our own office U, we were building somewhat of a staff I was still very involved in every element, but I was leveraging Some people, now that my father's apparel business was changing a little bit We brought on two or three people from that business And then we brought on someone right out of college, but she was great to help with some of the marketing and product stuff. Probably some of the more experienced people were expensive Very expensive. And did you guys ever think about like, yeah, let's offer people equity for lower pay because it'll save us money Um, no him People needed to make money. They needed to pay their rent Their equity really really wasn't worth much because we didn't even know if we were going to have a business It wasn't the currency people were looking for at the time. Right, right. D didn't make sense to them. I mean, of course, I'm sure they were kicking themselves later, but that Okay, so So you're in HTB and still and do you remember by that point, by the time you're in HB and you see You know, you see this phenomenon there starting to feel like, okay cooking now or still sleepless nights. Still sleepless nights There's a large hill to climb. A to be profitable and then B to be successful. So like how are we really going to get? to the top of the mountain, so to speak kept you up at night failing being able to, you know, my father was still helping fund this We were Close narrowing the gap, baby But like, how big can big be? I'm selling dollar cosmetics What do like where do we go from here Where's Target? Where's Walmart? Where's Walgreens, where's the big guys? Like how do I I'm competing with Cvergirl and Revlon and L'real? L these guys Control the space. And when you're selling something for a dollar You have to sell a lot of it. for it to be a successful business, right? You can't just rely on one regional chain of grocery stores Yeah, you have to be anywhere and everywhere and and you have to constantly be shipping it in because even if you set like our four sided spinnerack held nine hundred and fifty four pieces Once you sell nine hundred and fifty four pieces, you have to send in another nine hundred and fifty four pieces. So there was a lot. Like if a ten dollarars item was needed to do one thousand dollars in sales, they would only need to sell a hundred items We need to sell nine hundred I mean, it's like a it's like a slim gym at the gas station. I mean, the price the price difference wasn't that high anyway. You got to sell a lot of slim gyms. Exactly And there's only four flavors of slim gyms, right? We have sixty seven items I remember In the early years We were making money and I told my f like maybe a little later, but I said, okay, the company made money Where's my share And my father turned to me, he goes, he left. He's like, No, no, no, you got to invest that back in You have to do it again and then eventually you'll get there. but that's kind of that that was my naivetete. Okay. I read about this story that happens in two thousand six. and I wonder if was if it was sort of strategically manufactured, but it was a rumor came out about Elf that actually really uh ended up being an amazing boon for the company. Tell me about this rumor And and were you involved with it? Did you manufacture it? So I always tell everyone, if I manufactured it, I would have done it over and over and over again. So I definitely can't take credit for it. All right. But it was september two thousand six And we had just come back from another industry trade show Um, and I remember we were in a recap meeting with we had a sales rep at the time who was there And we were all of a sudden the phone rang and outside of being the CEO of the company, I was also the receptionist and the customer service care rep So I answered the phone and she says, the woman says, Is this ellf cosmetics? And I said, yes. And she says, Is it true I said, is what true She said, I just got an email that you're being bought by Bloomingdaales and that all your cosmetics are going up in price I said, I don't news to me And then I checked the website and all of a sudden We see orders coming in by the tens and hundreds And it was I think at one point through this viralal spike We were like that eightieth most visited site on the internet. Wait, where was this rumor coming from? Where was Where were people hearing it or seeing it? It was just an email. It was one of these like We have no idea where it started till today And everybody got it. My target buyer got it. My aunt in California got it. My cousin, my Everyone you spoke to till today when I say ellf cosmetics. they say Oh, I got an email that you were being well by Boomingdaales in two thousand six. So this rumor comes out and it turns out that people panic and they're like, wow, the price are going to go up. We better buy Buy it well we can Yeah. I mean, over so we were getting about three hundred orders a week at the time, depending on the varality We went from getting three hundred orders a week to eighteen thousand orders a day for the next six weeks Okay, that's exciting, but were you also a little bit worried that, oh, what if people actually think this is true? the orders are are going to drop off so. So that Our excitement was great. This is I mean, the orders were coming in rapid fire But we didn't have the inventory to support those orders We didn't have the process to reorder, to pick, to pack to do anything So we didn't know where it was going to stabilize or what it was going to mean in the long term. But right then we were just drinking from a fire hose and we were just trying to figure out How do we get these orders to our customers? How do we continue to build off this virality and find ways to take this to the next level How did you fulfill those orders? I mean, you know couldould your What did you do So I got on a plane and I went to our factories in China. I went with our agent And we had to figure it out I remember when I first got to China, our first or second night there I called my father and I'm like, I don't know what to do. like this is too much. I can't do this And I remember I was on my blackberry in the elevator And he tells me this is it You either figure this out, or we pack up and go home Like this is what you built. This is what you wanted to do. This is your opportunity When we come back in just a moment, a financial deal that finally lets Joey sleep at night and an ill fated sail that wakes him right back up Stay with us, I'm Guy Ra, and you're listening to how I built this Whether you're starting a website from the ground up or thinking about a complete overhaul Framer is a complete website platform that can help launch and keep on improving your site in one place. 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R So it's the fall of two thousand six and Joey is in China scrambling to fulfill an unexpected surge in orders We had to find a warehouse, we had to Make the goods We had to create a system to pick and pack the goods. and all this was done on the fly as the order velocity was continuing And it took about six to eight weeks And we shipped one hundred ninety two thousand orders from China, direct to customers in the US And then that really, you know, that year, we were projected to do two million dollars for the year. Yeah. After this bike, we did about eight million dollars. Profitable. wow. And we never look back I mean, talk about trial by fire. Okay, so you get through this But now you've got real Uh Re sales, right And I guess it's around this time where you managed to finally convince Target to let you in So actually in two thousand eight I get a call from Target. Now we had a very small relationship with Target. We were in the trial and travel section And the target buyer said, what if Elf made us a holiday endca program for our stores. Endca at the end of an aisle. probablyably facing the registers, right Yeah. I mean, this is, you know, when you walk into target they have what they call the racetrack. this is on the end like every cart is passing this thing. This is the primo spot. This is like the the Park Avenue of Target. This was like pinched me am I dreaming? Like it was like the premier retailer. First of all, Target was always like the retailer growing up because my father was doing business with them. It was in line with our values. It was Perfect. Now this was november two thousand eight for holiday two thousand nine. So it's still eleven months away. You don't ship till October for that, but we were like, we are in Okay, you're in target But Um What I understand, they actually want you to raise the price. They don't want you to sell it for a dollar which is interesting because most of the time when retailers, CPG retailers go to Target, they they're urging them to lower the price or to offer coupons and you know, especially around food, right? A lot of times retailers are saying Hey, you got to you got to cut off a dollar. Here, they're urging you to increase the price. And you guys were reluctant to do this So they wanted us to increase the price, but not of our everyday merchandise They appreciated the incrementality and impulsivity claims that we were making But they still felt that we needed to continue to grow the price point So Time while launching a small line called Elf Studio. And basically if we had a four foot section in target Half of the section was a dollar And half of the section was now three dollars. Okay, was it the same product inside So yes and no Same quality of product was offered on both the Lph and Lf stududio However, often the elf stududio was dual ended It also was bigger So if this was one ounce, this was one and a half or two ounces It had a little bit more pearlescence But for the most part, we stood behind the quality of both the ellf and the ellf stududio line. But it really doesn it sounds like it wasn't that different in terms of what you were offering. But I mean, why would a customer think that like that's a question I would ask you at the time. If I was on your team, I'd say, Joey, I don't know if people are going to buy this. know, they're used to us being a dollar One of my buyers told me a long time ago something that really stuck with me Price is what you pay And value is what you get And as long as we're committed to continuing to offer our customer extreme value She doesn't want us to be stuck to the one dollar price point Be if we can take a thirty five dollars item that they get at prerestige retail and bring it down for three dollars. She wants that If it's a twelve dollars lip clos that we can bring for a dollar, she wants that But it just needs to continue to convey value Okay, so you up until this point your sales and target were for trial products like Youre going on vacation and you just buy a bunch of things How much of a game changer was it when Target says, Okaykay, we want you to have the second here in addition Was it wasas it a small bump or was it a significant biggest win was our ability to compete O everything you do in the food and drrug mass arena is sales per linear foot So if you're in a four foot section They want to know how much volume, how many sales you're going to do per foot on that four foot basis So when L first launched in target They were forecasted to do sixty dollars per linear foot per store per week Out of the gate, we were at a hundred dollars per store per week So we were already performing on par or better than a lot of the then expectations and a lot of the competitors. And you were already D toC for six years at this point. so now you're I mean, this is the beginning of the D to C. ase right two tenens. beforefore we get into this, here's a question for you. You not only do you weather the financial crisis of twenty thousand Let's say seven to nine, and it continues really to twenty twelve when the market only fully recovers There's always a story about financial crises or recessions. and it's lipstick is always used as an inelastic. L peopleople will still spend money on lipstick because you, it's something people are comfortable spending money on. and it's kind of recession proof and people still want to look nice. Is that was that true Did you see that happening in real time Not only did we see it happen in real time It's what propelled our success Because like you said, in two thousand seven and two thousand eight, During the financial crisis, it happened to be at the same time That Revlon launched a brand called Vital Radiance. Now you probably don't remember ever heard of it.'t And Lorreal launched a brand called Hip to compete with Mac. And the major premise of both those brands was we are going to sell more expensive cosmetics in the drugstore arena We are going to compete with Sephora A is Duane Reid at CVS. Wow. And that was a utter failure. That failed miserably quickly And that is really what opened the door for Elf Cosmetics to get shelf space a target and really continue to become a brand that's thriving in the in the retail space. So even though so many businesses were struggling at that time, It was a combination of price point and the product people still bought Cosmetics, people still want to look good. Yes, because if you're not going to go to the salon, you might as well findind the next best thing That's so interesting. Yeahah U I mean, you' You guys are growing and you're finally, you started this business, really launched in two thousand four, six years in You got to be feeling like, okay, this is now we are cooking with gas here. Do you remember roughly by the end of two thousand nine What you guys were doing in sales a year I remember at the end of twenty ten. We were doing about thirty million dollars in sales. Wow And we were able to do it a lot because of the mix of business between web and retail was a great mix for a growing business Because when you're operating on retail on web business, you have a high margin business. Sure. and you have immediacy of cash So I'm't have to wait when I sell to Target or if I sell to retailers I buy the goods, ship the goods then get paid sixty or ninety days later as opposed to the internet business I'm able to get paid right away So we're really able to grow from ten to twenty to thirty million with very little additional debt or leverage Joey, how many hours were you working on this a week? Like now we're getting into twenty ten.ere were was it all consuming? Yes, I mean, Again, I'm a Sabbath observer, so we work twenty four six. You stop working on sundown on Friday until sundown Saturday. You don't answer phone you don't no calls with China, you just stop. Yes, we take a day off. It's a great rest day and it really it gives time for family Other than that, if you're not sleeping, you're working. Okay So you get to a point where, you know, things are looking pretty good, thirty million a year And I guess in around twenty ten At some point, you get an unsolicited call from an investment banker saying, hey We have a client interested in maybe making an offer. I got a call. it was January twenty ten And this woman calls me as a cold call And she's like, I see what you're doing. And we'd love to kind of represent you and seek a sale process And who is she Her name is Vaneto She was at a small boutique investment banking firm called Financo And she she said, you know, this is what we do. We'll take you to potential investors Th then we'll narrow the field. We'll ask for indications of interests. And then we'll get some final offers and we'll see what we want to do. And we'll start with a twenty five thousand dollars retainer I said This all sounds nice, but I don't know you and I'm not giving you twenty five thousand dollars on a hope that this is actually going to work out. So she came back and she said, Okaykay, we're going to wave the retainer But we want to do this process with you. We really like the company you're building. And I remember we got a lot of private equity interest. Okay, thirty million do a year in sales. so let's just say the valuation was five, six X. sounds about right, more or less at that time. It was closer to eight to ten X. Okay, bre So there's a number out there. Are you comfortable saying what the valuation was in twenty ten at that time The valuation of the company was probably it was about seventy million dollars. seenty million dollars. So here's a question for you at seventy million dollars valuation Wh Why were you open to selling some or all of the business at that point The first reason was We had an opportunity to do something for the family, which was Perhaps not generational wealth, but wealth from Definitely more money than I've made in my life I was twenty nine years old I was able to put money away and if everything else fell apart, I would still have financial flexibility and The second reason was I didn't know what I didn't know Maybe L'orel and Revlon were working on the next thing to take me out in thirty seconds. I had no idea Um and then the third thing was really just Like It's not what you know, it's who you know So I think being connected with these guys who are in this private equity world that are selling companies every day. They know the steps. they know the game plan to make you sale ready for the future Okay, so you get bids and you end up accepting an offer from a private equity firm, TSG Consumer Partners, right? Yes. And they're going to take a minority share. So forty nine percent, you guys are still going to own a majority of the company And you're going to get a check. You're going to get, you know, probably, I'm assuming anywhere from seeven to fifteen million dollars in the bank Correct, moreore than that, but correct Explain how it works. They basically buy a minority share you get a check and then Do they also put more money into the business to grow it? So there are situations like that, but because Ef didn't need their additional capital. so all the money Um, you know, a few things change that you have things you can't do. So I can't sell the company without them. I can't hire some crazy salad. likeike there's a few guardrails. but for the most part, there was very little difference from the day before we closed to the day after we closed. except on the Ownership structure, we now had a partner. And now you had some money Yes, that's when we started sleeping at night I understand that. I mean, I think there are entrepreneurs who would say I could see where this is going and I just turn this thing down, right? But you're saying This can go the other way. at any moment. likeike you had healthy paranoia Yeah, look and I would have done a lot better. If I did that in the long run, if you didn't sell. If I didn't sell I don't regret what I did one minute of one day And I always say Elf has had subsequent liquidation events over the last T years since then This was the smallest, by far the smallest. Right. But it was the most impactful. you know, the stress of your life is now It's much less You're not stressed on are you going to make it You're excited about what the future is going to bring. Yeah Now I know that little sort not too long after that maybe a year or so after that. Scott who had you had who was involved in the beginning, he leaves And and from what I haveve read, I mean, first of all, do do you keep in touch with him? Do you have any connection with Scott anymore? So Scott left a little before that. Scott left in two thousand eight Scott came to us and my father and I. And we started another business called Borba which was a nutraceutical beverage And the concept of the beverage was it's skincare through Nutrition. So basically you drank two of these a day and your skin was clearer And Scott found a partner for Borba and he took the Borba business, they bought our steak out and they took it that business and then we stuck with the elf business. So it was a very amicable split Since then, Scott and I have lost touch. I think the Borba business never really took off I believe Scott. became a pastor at some point. I don't know. Yeah, he became al became a priest, which is an amazing story. Okay, so that that was that. and now you are you've got a private equity partner. And it turns out that L'orereal in twenty thirteen approached you, you and your minority owner to buy you out. And you guys went deep in this negotiation Tell me about that offer that conversation. So it was actually Revlon they reached out first. And after I got a call from Revlon, I called my good friend Vinnette and I said, Vnette, what do I do So she goes, Okaykay, you guys are still you guys, it's a little early. Normally these take a few more years, but you guys are killing it, you're really doing so well so quickly, like let's run another process So we met now with more strategics. We're interested and actually L'real came through with the best offer. They offered us about two hundred twenty five million dollars for the whole company And we were very excited at that point And we were ready to sign Now this is lockstock and barrel. We're selling the whole company. We are done. We did it twelve years ago, we started We' ready we're getting our checks. We're leaving and all of a sudden calls and she said, L'reale's passing It wasn't happening You were going to get over a hundred million dollars, and your dad from that deal because You had fifty one percent. And was there any clause in the negotiation that if it fell apart, you get some money or no Now zero So you were just assuming that everything is and and you get a call that they're pulling out why So at the same time that they pulled out of the elf deal, they also bought a different company called Urban Decay. Sure. So I think they were trying to just play both sides or see what got them to the finish line. They blamed it on the fact that they couldn't get comfortable with our supply chain and that we were so low cost and they had some they weren't comfortable with it But I think that it was really because that they were focused on the Uurban deceay deal. Wow. So they were really we did Uurban deceay on this show. It found a fascinating story. It found it by Sandy Lerner also co founded Cisco Systems. It's a fascinating story So you must be, you must have been crushed It was crushing in the moment But in hindsight, it's such a blip on the radar of what it's become and How much money we subsequently have made through this that It' it was a blessing in disguise. And in twenty thirteen, we regrouped And then we did a process and that's how We got TPG. TPG comes in is a different company Right, Different private equity and they come in. to buy a majority steak from you and your dad And they value the company at two hundred sixty five million dollars So they're going to buy a majority steak, which means that you guys are going hold ono a sliver of the company So that was when we were selling to L'oreale, we were selling one hundred percent of the company. When we met TPG They're like, no, we really like what we bring to the table We want you guys to roll equity with us and we want you toay stay involved and stay as equity holders And I remember when they finally gave us a firm offer And the offer was we're going to buy a majority steak in the company And we're going to bring in a CEO to lead the company. It was like a weight was lifted off of me. and I'm like, wait, it's not gonna to be my problem anymore, but I'm still gonna have equity and upside. It just it was like a freeing experience And they brought in The CEO, Tangamine. He's still the CEO He's still the CEO He's delivered a lot of value for shareholders. He took the company public in twenty sixteen. It's amazing. I mean, so you guys stayed on for about a year and a half, right if during the transition But really it was you were kind of winding out, you were winding down your time. You were and I'm assuming