For five years, Jessica Alba's Honest Company has done all of the things expected of a tech startup: The company raised $222 million from high-profile venture capitalists, landed unicorn status in 2015 with a $1.7 billion valuation, and talked openly about gunning for an IPO. The problem is, Honest, which makes diapers, cleaning products, and cosmetics, has never been a tech startup. And it seems the company is finally coming around to that fact.

Honest's board of directors is reportedly talking to consumer packaged-goods executives about joining the company's management team and board, with the possibility of replacing CEO Brian Lee, according to Recode. Lee told Recode he continues to be CEO but when asked about the discussions, he said, "We're always looking to do what's best for the company."

Despite Honest's e-commerce roots, looking and acting more like a traditional consumer packaged-goods company seems to be the future. In September on stage at the Startup Grind conference in Los Angeles, Lee told me that about 40 percent of sales now come from offline stores such as Costco, Target, and Whole Foods. Most of Lee's startup experience has been in e-commerce, first at LegalZoom and more recently at the subscription shoe business ShoeDazzle.

Honest faces hard decisions after a particularly hard year. The company grappled with negative press and lawsuits over whether the company's products are as natural and non-toxic as advertised. Honest then put IPO plans on hold to consider acquisition deals, only to see one of its suitors scoop up fellow natural products brand Seventh Generation in September. Lee told Recode, "We couldn't come to a correct structure and correct value and correct partnership." Considering that Seventh Generation was an established, profitable brand that could be bought for a reported $600 million, it's easy to see why. Honest was reportedly looking for a price above $1 billion but lower than its valuation. In 2016, Honest's revenue was a reported $250 million.

Attaining a tech startup valuation when you're not actually a tech startup doesn't do you any favors. As others have already noted, Honest agreed to an onerous term sheet that included a minimum IPO threshold and a deal that gives investors more than their money back when the company exits--and that's before anyone else gets anything. So Honest has, to a degree, painted itself into a corner--hence the urgency to retool and staff up with some more traditional retail experience. The company laid off 80 employees in December. High-level executives including president Sean Kane, CFO and COO David Parker, CTO Oleg Pylnev, and CMO Chris Thorne have also left the company.

In hindsight, Lee said something particularly telling back in 2015. Referring to a potential IPO, Lee told Recode, "We've been meeting with bankers of course and they don't even know what teams to bring. Sometimes they'll bring their luxury brand team. Sometimes they'll bring their e-commerce team. Sometimes they'll bring their retail team. It is hard to define, but we are a brand that's born online."

Honest has always known how to define its lifestyle brand--and it has the fierce customer following to prove it. Now it needs to clearly--and quickly--redefine the business.

Published on: Feb 10, 2017