← How I Built This with Guy Raz
How I Built This with Guy Raz
e.l.f. Cosmetics: Joey Shamah. The Dollar Store Formula That Built a Cosmetics Giant
01:14:49
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- [00:00]
Guy Raz
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- [04:54]
Joey Shama
So honestly, we didn't even think about logistics. We were just following Glamour Magaz 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 in order.
- [05:13]
Guy Raz
Welcome to How I Built this. A show about innovators, entrepreneurs, idealists and the stories behind the movements they built. I'm Guy Raz. And on the show today, how Joey Shama started a dollar cosmetics brand that turn into a billion dollar business. Among the 33 cars that lined up to race the Indy 500 this year, one was particularly notable. It was painted in shades of pink and its driver, the only female competing this year, Katherine Legg. But perhaps as notable as the driver was the car's main sponsor. Not Pennzoil or Firestone or Coors Light, but rather Elf cosmetics. The first time ever that a beauty brand sponsored an IndyCar. And if you know something about ELF, that's not entirely surprising because Elf was essentially built as a disruptor brand back in 2004. At that time, people either bought cosmetics at the drugstore where they were cheap, or at the department store where they cost a lot more. And the assumption was that price equ equaled 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. But Elf products, 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 particular particularly popular with teens and tweens. When Joey Shama and his original partner, Scott Vincent Borba started Elf, 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 2014, but he managed to scale it to a pretty successful brand in 10 years. And today Elf is publicly traded with a market cap of around $4 billion. Not surprisingly, the $1 price point has gone away, but the products are still relatively inexpensive, between 5 and $15. As for Joey, he grew up in Brooklyn in the 1980s and 90s. His dad had an apparel business and most of the people in the community, including Joey's family, were of Syrian Jewish origin.
- [07:57]
Joey Shama
We are a very tight knit 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 a community of merchants. 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.
- [08:23]
Guy Raz
Whatever it was going to happen, it
- [08:25]
Joey Shama
was that was going to happen. I remember when I was in high school, I was president of a teen division of our community center. And the 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. 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.
- [08:55]
Guy Raz
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? Was that you were sort of groomed to do?
- [09:10]
Joey Shama
I mean, I think my parents. 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.
- [09:34]
Guy Raz
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?
- [09:46]
Joey Shama
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. 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.
- [10:08]
Guy Raz
Okay, I want to. I want to go to how this begins, because what I've heard is it's 2002, and you're at a party in Los Angeles, and you meet this guy, Scott Vincent Borba. First of all, what were you doing in Los Angeles? What was this party? You're a senior in college at that time.
- [10:25]
Joey Shama
Yeah. So that's a story that's out there, but that's not the real deal. Okay, good.
- [10:30]
Guy Raz
Okay.
- [10:31]
Joey Shama
So actually, I was introduced to Scott Vincent Borba through a mutual friend. And the concept was that Scott was a beauty maven. He really understood the beauty industry. He worked at a lot of different beauty companies. He was one of the first employees at a brand called Hard Candy. He was at Neutrogena, running the Neutrogena color cosmetics brand. And he had this idea that he wanted to create a line of cosmetics. And we were at. My father was looking maybe with me to invest in a business and to help. And that's kind of where. Where it came from.
- [11:06]
Guy Raz
So basically, you and your dad were kind of looking around for some ideas, and somehow somebody got to Scott and said, oh, I know these guys in New York who are looking to start something. Like it was. It was like, basically that.
- [11:18]
Joey Shama
Basically that.
- [11:19]
Guy Raz
Okay, he was living in la, right? Or was he Living in New York.
- [11:22]
Joey Shama
It was funny because he was living in Manhattan Beach, California and I was living in Manhattan Beach, New York. So that was just a funny coincidence, but he was in California.
- [11:30]
Guy Raz
What was Scott's concept?
- [11:32]
Joey Shama
Scott's concept was a line of cosmetics similar 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 2000s that were growing exponentially were 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 over from a drugstore or 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 planogrammed and it wasn't consistent.
- [12:34]
Guy Raz
So the idea is, hey, let's actually, instead of a plain wrap lipstick or seven, eight dollar, you know, CoverGirl or Revlon or whatever it costs, let's make something that is branded as cheap as the plain wrap.
- [12:49]
Joey Shama
Exactly.
- [12:50]
Guy Raz
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. Because it's a dollar store. Is that what you're thinking?
- [13:01]
Joey Shama
Yeah. Basically 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 artistry, if you may, is in the componentry where we couldn't afford metal, we had to go plastic, or we couldn't afford things that were multi parts. And it needed 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.
- [13:29]
Guy Raz
Okay, so you guys are on board with Scott. You're going to 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. Who did you start to talk to to see if you could actually make this stuff for, you know, for cheap?
- [13:53]
Joey Shama
So I headed over to Asia. It was the summer of 2003. We had one of my father's longtime 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 2003, and it took the better part of 10 months. It was June 2004 when we first had product to sell.
- [14:26]
Guy Raz
So let's kind of dig into this. I'm just thinking 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 gonna go into, you know, a. What's it called? A blister pack. Right. That you. 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 got to sell it for a dollar.
- [14:54]
Joey Shama
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
- [15:12]
Guy Raz
me understand, like, you know, blush, you know, or a powder mascara. How does that. Just the container and the brush and then the actual cosmetics, it's got to be like 50, 60 cents at most, so you can mark it up and make some margin.
- [15:33]
Joey Shama
So it's about. It was about half of that because our target could cost was about 35 cents. I think back to the simplicity angle. Everything we sold, we sold it for $0.59. So they could retail it for a dollar.
- [15:47]
Guy Raz
Right. Of course. How do you make it for. How do you make something like that for 35 cents?
- [15:54]
Joey Shama
Well, that's what it is. What I'm trying to say. That's what it costs.
- [15:57]
Guy Raz
Wow.
- [15:57]
Joey Shama
Like, that's how much it costs everybody. Now, yes, you can put active ingredients, and yes, this was 25 years ago. And yes, there are more expensive componentry and finishes and all that, but you're also paying for the 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, it won't work. But 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.
- [16:36]
Guy Raz
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?
- [16:47]
Joey Shama
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's 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.
- [17:14]
Guy Raz
So you have, you identify a manufacturer in China and how many, how many SKUs are going to be, how many different products you can make?
- [17:23]
Joey Shama
So 13 categories we started with and 67 SKUs. So we had eyeliner with a sharpener. We had a pressed 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 Stila, which was a high end brand at the time. An eyeshadow that had four colors in it. So a quad of eyeshadows that was, you know, it was across eyes, lip and face.
- [17:48]
Guy Raz
Eyes, lips and face. Which is how you came to call it. Elf eyes, Lips, face.
- [17:56]
Joey Shama
Right, exactly.
- [17:58]
Guy Raz
And who were you thinking were your competitors? Did you think that Maybelline and Revlon and l' Oreal were your competitors or not really, because they were charging four or five times the amount that you guys would be charging.
- [18:11]
Joey Shama
In terms of the space we were trying to get to, yes, very much. Maybelline, CoverGirl, there was some smaller brands. NYC and Wet N Wild, those are more of our core, core competitors because they were the value brands. Even Rimmel London. But both Rimmel London and NYC were owned by Cody. Wet N Wild was a standalone. But that was the problem in the early days that you had a few incumbents that owned a bunch of brands and controlled all the space at retail. So you had l', Oreal, which was l' Oreal and Maybelline. You had P and G, which owned CoverGirl 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 12 brands on shelf.
- [18:58]
Guy Raz
And so here's a question for you. We know from all the work we've done on this show over the last 10 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 were marketing. Right. Like if it's Revlon, it was Cindy Crawford. Right.
- [19:25]
Joey Shama
Or Cindy Crawford, Halle Berry. Yes.
- [19:29]
Guy Raz
And so that. 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 CoverGirl or Revlon were comparatively expensive.
- [19:43]
Joey Shama
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 apparel 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.
- [20:18]
Guy Raz
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 quality, to signal luxury. So there is that strategy too, 1,000%.
- [20:39]
Joey Shama
I mean, so much so that one of our biggest obstacles in the early years was retailers afraid to put our product on shelves because they didn't want to trade the customer down. If they're selling a $6 lip gloss and I'm selling a dollar lip gloss and the customer buys mine over theirs, then they just lost $5 of sales.
- [21:02]
Guy Raz
And by the way, the first order, how much did the first order cost roughly?
- [21:06]
Joey Shama
Did it cost you guys to bring in the goods? Yeah, it was $150,000 order.
- [21:12]
Guy Raz
And this was basically an investment that you guys put into it. You guys put this money into it.
- [21:17]
Joey Shama
Yes, we bought the goods. It was one container, it was about 600,000 pieces.
- [21:23]
Guy Raz
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?
- [21:31]
Joey Shama
Yes. We had a sales rep agency for Dollar General. I remember being at that meeting, we pitched the whole line. We went to Dollar General and Family Dollar and we said, we've got the answer for you. Quality over quantity. And they politely said, we like what you're doing, but we are committed to quantity over quality.
- [21:55]
Guy Raz
But that was just a few of the dollar store locations.
- [22:00]
Joey Shama
Did you try to approach others so we went. There's a trade show called ecrm. You meet a lot of retailers, you're kind of guaranteed a meeting, a 20 minute or 10 minute meeting with each retailer. And it's kind of like a round robin. And that's where we met 99 cent only and 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. Like it was. No, no, no, no.
- [22:36]
Guy Raz
Yeah. Up 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, every meeting you have with the 99 cent store dollar store people is like, no, no, no, no, no. Did you think maybe I was wrong?
- [22:59]
Joey Shama
Yes. Oh, yes. Very much. Very worried. Yes. When you're. This is my first foray 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, early 2004. 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 To Exist. And 2Exist had sent a package of underwear to the, 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, oh, we have a PR firm.
- [24:00]
Guy Raz
Interesting.
- [24:00]
Joey Shama
And I was like, oh, pr, that sounds cheaper than marketing.
- [24:04]
Guy Raz
All right, so you hear this story about a rod and the underwear and you find out, you figure out which PR firm was behind that plan.
- [24:12]
Joey Shama
Yep. 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 desk side editor appointments. So it was me. And it was one of the members of the PR firm who went over it. Who was, who was the rep on our account. Her name was Amanda.
- [24:32]
Guy Raz
Yeah. 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.
- [24:45]
Joey Shama
Yes, we had an agency in Costa Mesa, California, called Juno 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.
- [25:02]
Guy Raz
Wow. And was it, I mean, was it really expensive to do? I mean, now you make a logo on AI, and I'm not saying, but was it really expensive to do that? Must not have been cheap.
- [25:13]
Joey Shama
It wasn't cheap, but it wasn't really. 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.
- [25:26]
Guy Raz
Okay, so now you've got a, you know, this, this concept and. And you've got a design firm and. And you bring it around to these editors, right?
- [25:38]
Joey Shama
Yes, we went around to all the beauty editors in the city, in New York City, from Glamour to Lucky to Good Housekeeping to Oprah to Seventeen, Vogue, everything. And we pitched 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, oh, and by the way, everything's a dollar. And then they were blown away.
- [26:12]
Guy Raz
So you're kind of keeping it a secret until the very end.
- [26:14]
Joey Shama
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 $12 lip gloss I saw yesterday or I'll see at 4 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.
- [26:58]
Guy Raz
Okay.
- [26:59]
Joey Shama
But we have a problem because our readers need to be able to get you right.
- [27:02]
Guy Raz
We need to buy you.
- [27:03]
Joey Shama
So they gave us an ultimatum.
- [27:05]
Guy Raz
Yep.
- [27:05]
Joey Shama
They said, either you're in all Walgreens by next month, highly unlikely, or open a website so that the customer can get you.
- [27:14]
Guy Raz
But nobody shopped on web. I mean, not nobody, but people really didn't.
- [27:18]
Joey Shama
No, nobody shopped on a website. We didn't even know what E commerce was. It was like us and Amazon at the time.
- [27:23]
Guy Raz
And you couldn't get into Walgreens because you couldn't get in anywhere.
- [27:26]
Joey Shama
No, not even. And even if we could, you'd need to set up ship, get in shelves off planogram. It was not even an option.
- [27:35]
Guy Raz
When we come back in just a moment, Joey gets a much coveted meeting with a buyer from Target. But then she asks a question that he simply cannot answer. Stay with us. I'm Guy Raz, and you're listening to How I Built this. Work can be a little weird. I've had plenty of those moments early in my career, and honestly, even later I remember stretches where I wasn't totally sure what the next step was supposed to be. And that's the thing. Work isn't always a straight line. And that's where LinkedIn comes in. LinkedIn helps you tap into ideas and insights from people who've been where you are, connect with others in your field, grow your network, and access tools that can actually help you find the right next step. Whether you're just getting started, thinking about a change or trying to accelerate where you are, LinkedIn is built to support you at every stage because LinkedIn is the network that works for you. Visit LinkedIn.com Hibt to learn more. Every day, shareholders meet to discuss important matters about the companies you invest in. Now Vanguard is making it easy to have your voice heard in those decisions. Alexa, Take me to Vanguard Investor Choice. Got it. Texting you a link where you can set your proxy voting preference for your Vanguard index funds and be heard by the companies you invest in. Just say, alexa, take me to Vanguard Investor Choice and make your voice heard. Vanguard investors own shares of our index funds, which own shares of the companies they invest in. Available for Vanguard Index funds that participate and Investor Choice. Vanguard Marketing Corporation Distributor do you want clear, transparent information about the ingredients in your favorite beverages? I do too. That's why today's sponsor, American Beverage, launched Good to Know. A website with tons of information about your favorite beverages. No spin or judgment, just the facts. So you can decide. Juices, sodas, even seltzers. Sometimes I look at the ingredients and say, well, what is that? I can't even pronounce it. And that's when I go to goodtokonofacts.org@goodtonowfacts.org you can check out more than 140 common beverage ingredients. You can find out what they're called, how they're used, and how they're reviewed for safety. Now you can get the facts about what's in your drinks without the chaos of random Google searches. All of this puts you in control because you know what's best for you and your family. So if you want information about the ingredients in your favorite drink without any spin, goodtonowfacts.org is a great place to start. Visit goodtonowfacts.org for more information. Hey, welcome back to How I Built this. I'm Guy Raz. So It's April of 2004 and Glamour magazine wants to feature elf cosmetics in an upcoming issue. But first, Joey has to make sure they have a working website.
- [30:45]
Joey Shama
So we called my web developer and I said, can you make us an e commerce part of our website? And we have 30 days to do it. He says, yes, we can do it. I say, and how much is it going to cost? And he said, $5,000. I said, $5,000? 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 $5,000. So we gave him $5,000. He built an e commerce site. If you saw the e commerce site today, you would cringe. It was the clunkiest e commerce site. Not to his fault. That was just the time. And basically we launched the e Commerce website on June 14, 2004.
- [31:32]
Guy Raz
Okay. So this was, and I'm sure there was like multiple steps. And because this isn't. It wasn't stripe. There wasn't. It was just hard to get a credit card in. I mean, it wasn't hard.
- [31:40]
Joey Shama
We needed a credit card processor authorized dot net. Yeah, it was a lot.
- [31:44]
Guy Raz
And then once you got the order, you would still have to ship it out. I'm assuming you charge for shipping too at that time.
- [31:51]
Joey Shama
So basically we decided early on we're selling dollar cosmetics. How do we charge for shipping? Yeah, I'm pretty sure the post office had like a flat rate, like if it's a certain size.
- [32:02]
Guy Raz
Right.
- [32:03]
Joey Shama
So we did a flat rate of $5.95 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 because you're already in it for at least 6, $7 and you can't send it back.
- [32:21]
Guy Raz
Yeah, and this is probably not ups, so it's not traceable. It's probably like, what, priority mail or something.
- [32:27]
Joey Shama
It was priority mail, yes.
- [32:29]
Guy Raz
Which means it could get lost and all this stuff. So, okay, so $5.99, whatever, flat rate, and you're going to sell it through the website, and it's complicated, but the other question I have is, how are you going to handle the logistics? I mean, you have it in a warehouse, sitting in a warehouse, but, I mean, who's going to package the stuff up and send it out?
- [32:54]
Joey Shama
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 gonna 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 had no idea that E Commerce would ever become something.
- [33:22]
Guy Raz
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. Like a credit card machine.
- [33:38]
Joey Shama
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's 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.
- [33:58]
Guy Raz
Okay. You've got 150 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 has gone into this business. You know, a lot of people may not even know this, but if you don't. There was a time where Glamour magazine or Vogue, like that moved product. It was a big deal. The early 2000s and the late 90s were like the heyday of big magazines. And if you even if a tiny mention could. Could have a huge impact. Yes, but this issue comes out, from what I understand, on June 16, 2004. And it's not a huge article about. It's like a couple lines about your cosmetics. Right.
- [34:42]
Joey Shama
It's one blurb and a picture of our concealer.
- [34:46]
Guy Raz
Okay. And does anything happen? Do you notice any movement right away or.
- [34:53]
Joey Shama
Yes, So I remember walking into the office and we had this screen, like a back 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 400 orders.
- [35:09]
Guy Raz
Wow.
- [35:10]
Joey Shama
And, you know, all the products, the $150,000 of inventory came 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. We, you know, we had pallets of inventory that only had this color out because that was the hottest seller. So there was stuff all over the place.
- [35:34]
Guy Raz
So you'd be like, on one, like, opening one box, I got the purple here. Somebody else is like, oh, yeah, I got the candy apple red lip gloss in this one. Or whatever. Like, that's literally what you're doing.
- [35:43]
Joey Shama
Yeah. I mean, after the first six orders, things just start, okay, what do we do now? So then we took them out of those assortment packs. We built 67 boxes. Each box had the unique item, everybody. I remember my brother, who'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.
- [36:12]
Guy Raz
Joey, I'm curious. I mean, did you get tons of orders from that Glamour magazine or just. Even if it was 50 orders a day, it was exciting. Or was it more than that?
- [36:26]
Joey Shama
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, not brand features. But 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.
- [36:56]
Guy Raz
Yeah.
- [36:57]
Joey Shama
And Good Housekeeping gave a feature of our lip gloss at a dollar versus a lip gloss that was sold in Sephora for $24 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 did a 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 A spike.
- [37:32]
Guy Raz
And by the way, in that first year, 2004, did you try and pitch Sephora?
- [37:36]
Joey Shama
No, there wasn't.
- [37:38]
Guy Raz
You knew that they weren't going to carry your products.
- [37:40]
Joey Shama
I mean, I don't think we could afford to be in there in that
- [37:44]
Guy Raz
first year of business because first orders come in in June of 2004. Do you remember how much you guys did in sales that year?
- [37:53]
Joey Shama
I want to say about 400,000.
- [37:55]
Guy Raz
Okay, so pretty good. I mean, means you sold out your initial inventory, which means you had to bring in more inventory, right?
- [38:03]
Joey Shama
Yes.
- [38:04]
Guy Raz
All right, so exciting. But was it stressful to you? Did you feel like. I am still worried that this might not work.
- [38:13]
Joey Shama
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 $125,000 a month of sales. Like, how am I going to hit that?
- [38:28]
Guy Raz
You had to hit that number.
- [38:29]
Joey Shama
We had to hit $125,000 of sales a month.
- [38:33]
Guy Raz
Why was that your target?
- [38:34]
Joey Shama
I don't remember why it was. I just remember that number. And I remember we, 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 the UK actually 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?
- [39:04]
Guy Raz
Yeah.
- [39:04]
Joey Shama
And I said, sure. At this point, why not? Like you're an account like any other and I don't have to worry about all the international complexities.
- [39:13]
Guy Raz
Wow.
- [39:13]
Joey Shama
So I'm saying we even you put all those together, I think we were able to hit maybe $125,000 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.
- [39:30]
Guy Raz
Were you worried that he might be just flushing money down the toilet?
- [39:34]
Joey Shama
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. I just had my first son in January 2004. And I had to, you know, we live in a community that has high expectations and we needed to figure it out.
- [39:58]
Guy Raz
Did it cause any tension between you and your dad?
- [40:01]
Joey Shama
No, 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 felt good about it and was managing it and wasn't afraid of it.
- [40:19]
Guy Raz
And I guess you could have if everything was just disastrous liquid, like try and sell it for, you know, a cut rate price and maybe recover some of your investment.
- [40:31]
Joey Shama
It's not that easy on a dollar product because you're already at $0.59 selling price. So I'm gonna sell it to you for what, 30, 20. I mean, it's hard.
- [40:40]
Guy Raz
Yeah. Okay, so 2004, you're, you know, you're kind of incrementally growing. And I read that you also managed to get a pitch to Target that year, that you managed to make a pitch to them. What was their reaction?
- [40:57]
Joey Shama
So the first time I met the Target buyer was one of that ECRM trade shows where you are scheduled to meet all the buyers in a 10 minute. And I tell her this whole pitch about quality cosmetics, color everything. And her response was elf. Why would I want to 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 sometime 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.
- [42:02]
Guy Raz
But that didn't happen in the first year that happened.
- [42:05]
Joey Shama
No, it happened later in 2006, May 2005, so.
- [42:10]
Guy Raz
Right. Because I read that the first real retailer, like significant retailer that you managed to get into was H E B, the supermarket chain based in San Antonio.
- [42:17]
Joey Shama
Yeah. So the H E B, that was one of our aha moments as a company because through all of our nos that we got in the early days, one of the biggest. No. 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 at Walgreens and I'm selling a CoverGirl lip gloss for $6 and I'm going to sell an L flip gloss for a dollar. Now there's $5 that the company, the retailer is not getting. And it was actually H E B, 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 954 pieces, something like that. And heb was open to putting these racks in each of their stores.
- [43:06]
Guy Raz
So this is like a. Like a six foot high rack or something like that?
- [43:09]
Joey Shama
Yes, exactly. So you could spin that rack and it had, you know, 954products, 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, at H e B.
- [43:25]
Guy Raz
And did it go into all the H e B stores or just a few?
- [43:28]
Joey Shama
I think it went into 30. But the best thing that happened with H e b is we get an email from the buyer the next morning saying, I was wrong. This brand is incremental and impulsive. Because they saw that because of the price. I wasn't buying one or the other. I wasn't not buying CoverGirl for $5 or $6 and just buying Elf. But I was buying Covergirl and buying Elf or I still have $5 to spend, but I'm going to buy five products because there's such an array of product and really, you know, maximize my dollar.
- [44:06]
Guy Raz
So essentially it wasn't actually eating into the sales of Covergirl or other more expensive products. It was just people were buying more product in that department.
- [44:16]
Joey Shama
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 all H ebs and then there were some H ebs that put four racks into the store, each store, and it became, it was our first viral sensation, I guess.
- [44:40]
Guy Raz
So how did that, you said it changed our approach. How did it change your approach in how you sold this? Try to pitch this product?
- [44:48]
Joey Shama
Because as we're meeting retailers and their response is, I don't want to trade my customer down. We're saying, look, H e B is doing it and it's not. It's adding incrementality, reality, they're selling more. It was a combination of impulsive, meaning I didn't want something, but I'm gonna go get. I'm gonna get it anyway because it's so cheap. Maybe I was gonna buy a candy bar instead I'm gonna buy a lip gloss. So there was no barrier to entry.
- [45:12]
Guy Raz
And you had data to back it up.
- [45:14]
Joey Shama
And we had data.
- [45:16]
Guy Raz
Okay. But H e B, you're still having a hard time getting into these other retailers. H e B is great, but from what I understand it's still gonna take some work. And. And h e b alone doesn't make your company profitable yet, right?
- [45:30]
Joey Shama
No.
- [45:31]
Guy Raz
No. Okay. And what were you just. Aside from just product, what were your other huge expenses? Because you're not doing any marketing. So what were your expenses?
- [45:39]
Joey Shama
So at this point, we now had our own office. 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.
- [46:03]
Guy Raz
Probably some of the more experienced people
- [46:05]
Joey Shama
were expensive, very expensive.
- [46:07]
Guy Raz
And did you guys ever think about like, let's offer people equity for lower pay because it'll save us money?
- [46:15]
Joey Shama
No, I mean, people needed to make money. They needed to pay their rent and their equity 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.
- [46:28]
Guy Raz
Right, right. Didn't make sense to them. I mean, of course, I'm sure they were kicking themselves later, but we'll get to that. Okay, so you're an HEB and still. And do you remember by that point, by the time you're an HEB and you see this phenomenon there starting to feel like, okay, we're cooking now or still sleepless nights.
- [46:52]
Joey Shama
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 gonna get to the top of the mountain, so to speak.
- [47:02]
Guy Raz
What kept you up at night?
- [47:04]
Joey Shama
Failing. Not being able to. You know, my father was still helping fund this. We were close. Narrowing the gap maybe. 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 Covergirl and Revlon and l'. Oreal. Like, these guys control the space.
- [47:32]
Guy Raz
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.
- [47:44]
Joey Shama
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 spinner rack held 954 pieces, but once you sell 954 pieces, you have to send in another 954 pieces. So there was a lot like if, if, if a ten dollar item was needed to do a thousand dollars in sales, they were only need to sell a hundred items, we needed to sell 900.
- [48:12]
Guy Raz
Yeah, I mean, it's like a, it's like a Slim Jim at the gas station. I mean, the price, the price difference wasn't that high anyway. You gotta sell a lot of Slim Jims.
- [48:19]
Joey Shama
Exactly. And there's only four flavors of Slim Jims. Right. We have 67 items. I remember in the early years, we were making money and I told my father, 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 was my naivete.
- [48:49]
Guy Raz
Okay, so I read about this story that happens in 2006, and I wonder if it was. If it was sort of strategically manufactured, but it was a rumor that came out about Elf that actually really ended up being an amazing boon for the company. Tell me about this rumor and were you involved with it? Did you manufacture it?
- [49:17]
Joey Shama
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. But it was September 2006, and we had just come back from another industry trade show. 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 Elf 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 Bloomingdale's 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 viral spike, we were like the 80th most visited site on the Internet.
- [50:23]
Guy Raz
Wait, where was this rumor coming from? Where was it? Where were people hearing it or seeing it?
- [50:28]
Joey Shama
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 Elf Cosmetics, they say, oh, I got an email that you were being bought by Bloomingdale's in 2006.
- [50:51]
Guy Raz
So this rumor comes out and it turns out that people panic and they're like, wow, the price are gonna go up. We better buy. Buy it while we can.
- [50:58]
Joey Shama
Yeah, I mean, over. So we were getting about 300 orders a week at the time, depending on the virality. We went from getting 300 orders a week to 18,000 orders a day for the next six weeks.
- [51:11]
Guy Raz
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 going to drop off pretty soon.
- [51:20]
Joey Shama
So 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?
- [51:52]
Guy Raz
So how did you fulfill those orders? I mean, you know, could your, what did you do?
- [52:00]
Joey Shama
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.
- [52:37]
Guy Raz
When we come back in just a moment, a financial that finally lets Joey sleep at night and an ill fated sail that wakes him right back up. Stay with us. I'm Guy Raz 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. Thousands of businesses from early stage startups to Fortune 500s are choosing to build their websites in Framer, where changes take minutes instead of days. Framer is the pro site builder for creators, teams, businesses, anyone that wants a professional site and cares enough to get every detail right. You can close the gap between AI generated ideas and a ready to launch website with Framer's agents. Agents and humans work together to make your site work. Agents bring speed and scale, while you bring taste, judgment and control. Learn how you can get more out of your site from a Framer specialist or get started building for free today@framer.com Bilt for 30% off a Framer Pro annual plan. That's framer.com Bilt for 30 percent off framer.com built rules and restrictions may apply. This message is brought to you by Apple Card. Apple 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. Apple Card has no annual fee, no late fees, and no foreign transaction fees. No fees, period. Every credit card should be this easy. Get started in the Wallet app today. Subject to credit approval. Variable APRs for Apple Card range from 17.49% to 27.74% based on creditworthiness rates as of January 1, 2026. Existing customers can view their variable APR in the Wallet app or@card.apple.com Apple Card issued by Goldman Sachs Bank USA Salt Lake City Branch terms and more at applecard.com. Hey, welcome back to How I Built this. I'm Guy Raz. So it's the fall of 2006 and Joey is in China scrambling to fulfill an un unexpected surge in orders.
- [55:23]
Joey Shama
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 192,000 orders from China direct to customers customers in the US and then that really, you know, that year we were projected to do $2 million for the year.
- [55:53]
Guy Raz
Yep.
- [55:53]
Joey Shama
After this spike we did about $8 million. We were profitable.
- [55:58]
Guy Raz
Wow.
- [55:59]
Joey Shama
And we never looked back.
- [56:01]
Guy Raz
Wow. I mean, talk about trial by fire. Okay, so you get through this, but now you've got real, real sales. Right. And I guess it's around this time where you, you managed to, to finally convince Target to let you in.
- [56:16]
Joey Shama
So actually in 2008 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 end cap program for our stores?
- [56:33]
Guy Raz
End cap at the end of an aisle, probably facing the registers, right?
- [56:37]
Joey Shama
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, like every cart is passing this thing.
- [56:44]
Guy Raz
This is the primo spot. This is like the Park Avenue of Target.
- [56:51]
Joey Shama
This was like pinch me on my 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 2008 for holiday 2009. So still 11 months away. You don't ship till October for that. But we were like, we are in.
- [57:15]
Guy Raz
Okay, you're in Target. But from 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're urging them to lower the price or to offer coupons and you know, especially around food. Right. A lot of retailers are saying, hey, you got to cut off a dollar here. They're urging you to increase the price and you guys were reluctant to do this.
- [57:53]
Joey Shama
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 at the time we're 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 $3.
- [58:22]
Guy Raz
Okay. Was it the same product inside?
- [58:25]
Joey Shama
So yes and no. The same quality of product was offered on both the Elf and Elf Studio. However, often the Elf Studio 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 Elf and the Elf Studio line.
- [58:49]
Guy Raz
But it really does. 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. You know, they're used to us being a dollar.
- [59:03]
Joey Shama
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 $1 price point. Because if we could take a $35 item that they get at prestige retail and bring it down for $3, she wants that. If it's a $12 lip gloss that we can bring for a dollar, she wants that. But it just needs to continue to convey value.
- [59:35]
Guy Raz
Okay, so you, up until this point, your sales and Target were for trial products like you're going on vacation and you just buy a bunch of things. How much of a game changer was it when Target says, okay, we want you to have this second tier. In addition, was it a small bump or was it a significant bump?
- [59:54]
Joey Shama
The biggest win was our ability to, to compete on. Everything you do in the food and drug 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 ELF first launched in Target, they were forecasted to $60 per linear foot per store per week. Out of the gate we were at a hundred dollars per store per week week. So we were already performing on par or better than a lot of the than expectations and a lot of the competitors.
- [60:31]
Guy Raz
And you were already D2C for six years at this point. So now you're, I mean this is the beginning of the D2C craze, right? 2010s. Before, before we get into this, here's a question for you. You not only do you weather the financial crisis of 20, let's say 7 to 9, and it continues really to 2012 when the market only fully recovers. There's always this story about financial crises or recessions and it's lipstick is always used as an inelastic. Like people will still spend money on lipstick because you know, it's something people are comfortable spending money on and it's kind of recession proof and people still want to look nice. Was that true? Did you see that happening in real time?
- [61:17]
Joey Shama
Not only did we see it happen in real time, it's what propelled our success. Because like you said in 2007 and 2008, 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.
- [61:36]
Guy Raz
I don't.
- [61:37]
Joey Shama
And l' Oreal launched a brand called Hip Hop 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 at Duane Reade at cvs.
- [61:54]
Guy Raz
Wow.
- [61:55]
Joey Shama
And that was an utter failure. That failed miserably quickly. And that is really what opened the door for Elf Cosmetics to get shelf space at Target and really continue to become a brand that's thriving in the retailer space.
- [62:13]
Guy Raz
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.
- [62:24]
Joey Shama
Yes. Because if you're not going to go to the salon, you might as well find the next best thing so interesting.
- [62:31]
Guy Raz
Yeah. All right. I mean, you guys are growing and you're finally. You started this business really launched in 2004. 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 2009, what you guys were doing in sales a year?
- [62:51]
Joey Shama
I remember at the end of 2010, we were doing about $30 million in sales.
- [62:57]
Guy Raz
Wow.
- [62:58]
Joey Shama
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.
- [63:11]
Guy Raz
Sure.
- [63:12]
Joey Shama
And you have immediacy of cash. So I'm now gonna have to wait. When I sell to Target or if I sell to retailers, I buy the goods, ship the goods, then get paid 60 or 90 days later. As opposed to the Internet business, I'm able to get paid right away. So we're really able to grow from 10 to 20 to 30 million with very little additional debt or leverage.
- [63:35]
Guy Raz
Joey, how many hours were you working on this a week? Like, now we're getting into 2010. Was it all consuming?
- [63:42]
Joey Shama
Yes. I mean, again, I'm a Sabbath observer. So we work 24 6.
- [63:46]
Guy Raz
You stop working on sundown on Friday until sundown Saturday. You don't answer your phone. You don't. No calls with China, you just stop.
- [63:54]
Joey Shama
Yes. We take a day off. It's a great rest day. And it really. It gives time for family. But other than that, if you're not sleeping, you're working.
- [64:04]
Guy Raz
Okay. So you get to a point where, you know, things are looking pretty good. 30 million a year. And I guess in around 2010, at some point you get an unsolicited call from an investment banker saying, hey, we have a client interested in maybe making an offer.
- [64:27]
Joey Shama
I get a call. It was January 2010, 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.
- [64:40]
Guy Raz
And who is she?
- [64:42]
Joey Shama
Her name is Vinette Ho. She was at a small boutique investment banking firm called Finanko. And she said, you know, this is what we do. We'll take you to potential investors, then we'll narrow the field, we'll ask for indications of interest, and then we'll get some final offers, and we'll see what we want to do. And we'll start with a $25,000 retainer. I said, this all sounds nice, but I don't know you, and I'm not giving you 25,000 on a hope that this is actually going to work out. So she came back and she said, okay, we're going to waive 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.
- [65:26]
Guy Raz
Okay, 30 million a year in sales. So let's just say the valuation was 5,6x. Sounds about right. More or less.
- [65:34]
Joey Shama
At that time, it was closer to 8 to 10x.
- [65:37]
Guy Raz
Okay. Right. So there's a number out there. Are you comfortable saying what the valuation was in 2010?
- [65:43]
Joey Shama
At that time, the valuation of the company was probably. It was about $70 million.
- [65:49]
Guy Raz
Okay, $70 million. So here's a question for you. At $70 million valuation, why. Why were you open to selling some or all of the business at that point?
- [66:00]
Joey Shama
The first reason was we had an opportunity to do something for the family, which was perhaps not generational wealth, but wealth for definitely more money than I've made in my life. I was 29 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' Oreal and Revlon were working on the next thing to take me out in 30 seconds. I had no idea. 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.
- [66:55]
Guy Raz
Got it. Okay. So you get bids, and you end up accepting an offer from a private equity firm, TSG Consumer Partners. Right. And they're going to take a minority share. So 49%, 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 probably, I'm assuming, anywhere from 7 to 15 million dollars in the bank.
- [67:18]
Joey Shama
Correct. More than that, but. Correct.
- [67:21]
Guy Raz
And 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?
- [67:30]
Joey Shama
So there are situations like that, but because ELF didn't need their additional capital, so all the money, 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 salary like 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.
- [67:58]
Guy Raz
And now you had some money.
- [67:59]
Joey Shama
Yes. That's when we started sleeping at night.
- [68:02]
Guy Raz
I understand that. I mean, I think there are entrepreneurs who would say, I could see where this is going and I just turned this thing down. Right. But you're saying, hey, this can go the other way at any moment. Like you had healthy paranoia.
- [68:16]
Joey Shama
Yeah, look, and I would have done a lot better if I did that in the long run.
- [68:22]
Guy Raz
If you didn't sell?
- [68:24]
Joey Shama
If I didn't sell. But 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 10 years since then. This was the smallest, by far the smallest.
- [68:40]
Guy Raz
Right.
- [68:40]
Joey Shama
But it was the most impactful. You know, the stress of your life is now it's much more. Less. You're not stressed on. Are you going to make it? You're excited about what the future is going to bring.
- [68:53]
Guy Raz
Yeah. Now, I know that sort of not too long after that, maybe a year or so after that, Scott, who was involved in the beginning, he leaves. And from what I've read, I mean, first of all, do you keep in touch with him? Do you have any connection with Scott anymore?
- [69:10]
Joey Shama
So Scott left a little before that. Scott left in 2008. Scott came to us, 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 stake 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.
- [69:56]
Guy Raz
Yeah, he became. Already 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' Oreal in 2013, approached you, you and your minority owner, to buy. Buy you out. And you guys went deep in this negotiation. Tell me about that offer, that conversation.
- [70:25]
Joey Shama
So it was actually Revlon that reached out first.
- [70:28]
Guy Raz
Okay.
- [70:28]
Joey Shama
And after I got a call from Revlon, I called my good friend Vinnette, and I said, vinnette, what do I do? So she goes, okay, 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' Oreal came through with the best offer. They offered us about $225 million for the whole company. And we were very excited at that point, and we were ready to sign. And now this is lock, stock, and barrel. We're selling the whole company. We are done. We did it 12 years ago. We started. We're ready. We're getting our checks, we're leaving. And all of a sudden, Vinette calls, and she said, l' Oreal's passing. It wasn't happening.
- [71:21]
Guy Raz
You were gonna get over $100 million, you and your dad, from that deal, because you had 51%. And was there any clause in the negotiation that if it fell apart, you'd get some money or. No.
- [71:32]
Joey Shama
No. Zero.
- [71:33]
Guy Raz
So you were just assuming that everything is. And you get a call that they're pulling out. Why?
- [71:39]
Joey Shama
So at the same time that they pulled out of the ELF Deal, they also bought a different company called Urban Decay.
- [71:45]
Guy Raz
Sure.
- [71:46]
Joey Shama
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 Urban Decay deal. Wow.
- [72:07]
Guy Raz
So they were really. We did Urban Decay on the show. Fascinating story. Founded by Sandy Lerner, who also co founded Cisco Systems. It's a fascinating story. So you are. Must be. You must have been crushed.
- [72:20]
Joey Shama
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's. It was a blessing in disguise. And in 2013, we regrouped and then we did a process, and that's how we got tpg.
- [72:42]
Guy Raz
TPG comes in. This is a different company, right? Different private equity. And they come in to buy a majority stake from you and your dad, and they value the company at $265 million. So they're going to buy a majority stake, which means that you guys are going to hold on to a sliver of the company.
- [73:04]
Joey Shama
So that was when we were selling to L'. Oreal. We were selling 100% of the company. When we met TPG, they're like, no, we really like what you bring to the table. We want you guys to roll equity with us and we want you to stay on, 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 stake 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 going to be my problem anymore, but I'm still going to have equity and upside. It just. It was like a freeing experience. And they brought in a CEO, Tarang Amin.
- [73:49]
Guy Raz
He's still the CEO.
- [73:51]
Joey Shama
He's still the CEO. He's delivered a lot of value for shareholders. He took the company public in 2016.
- [73:59]
Guy Raz
It's amazing. I mean, so you guys stayed on for about a year and a half, right. 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 by the time you finally, you actually left, you were done, you were out, out, out.
- [74:19]
Joey Shama
Yes. We worked with Tourang and team for about a year and a half, a little bit more. But it was probably the most important, impactful two years of my career because I call it my master's program.
- [74:32]
Guy Raz
Yeah.
- [74:33]
Joey Shama
Because I was able to learn how it's done on the other side, how Clorox execs and P and G execs and like how they look at the business, how they structure teams. It's a mixture. It's a blend of the entrepreneurial spirit and the best in class work ethic that they do. And I put it together.
- [74:52]
Guy Raz
Okay, so you are out of the picture, but you now really have created wealth, like significant wealth for yourself. And in a way that you can kind of just, I don't know, do whatever you want. You can invest money, you can do nothing for a while. And I guess for a while, you actually did. Not much. But tell me about that period, because it sounds like you actually were not happy.
- [75:23]
Joey Shama
Yeah. So my father and I officially left ELF in December 2015. And I vividly recall one morning when my kids got up to go to school, and I sat down on the couch and I started watching House of Cards. And then a few hours later, my kids came home from school and I was still watching House of Cards. And I'm like, I can't do this anymore. And at that point, we were working on something else, but it was taking a long time. But I knew that retirement life at 35 years old was not for me.
- [75:55]
Guy Raz
Yeah. And probably not a great example for your kids, right? To be.
- [76:00]
Joey Shama
Yes, that's for sure.
- [76:01]
Guy Raz
And I think within a year, maybe less, you started a new company that you called Fit for Life. And I guess I should explain because it's kind of a cool concept, because I guess you basically partner with big brands like Reebok or Gaiam, which does yoga products and Fila, and I guess you basically get the licensing rights to sell products with their branding on them.
- [76:25]
Joey Shama
Yes. The way we look at Fit for Life is anything that you see in a gym that's not a machine. So any of the mats of. The small weights of jump ropes, weighted vests, all that, those are the things that we do.
- [76:37]
Guy Raz
And you manage the whole process of, like, manufacturing, distribution, sales.
- [76:42]
Joey Shama
Exactly. So, yes, we have relationships with retailers. We sell to Target and Walmart and Amazon. We are making the product, but they maintain the brand. That's their job. And our job is to operate the company and together with them, create great products.
- [76:57]
Guy Raz
What a fascinating business. I mean, it's. And. And is it a good business?
- [77:01]
Joey Shama
It's a good business. The fitness business is a good business, but it's not nearly as exciting as the beauty business.
- [77:07]
Guy Raz
Yeah, right.
- [77:08]
Joey Shama
Beauty business is trendy. It's quick. There's virality. There's. There's a lot of excitement. There's a lot of M and a deal. Like, there's a lot going on. The fitness business is. I'm sure you own a yoga mat. When's the next time you buy your next yoga mat? So the velocity is a lot slower and it's less. Less exciting.
- [77:28]
Guy Raz
So which brings me to your next business, which makes sense because you get back into the cosmetics business, the beauty industry business. You start Another company AS Beauty, but this time you guys are acquiring brands and. Right. Tell me a little bit about this business. This is an interesting business.
- [77:48]
Joey Shama
So in late 2018, I get a call from my good friend Vinnette. She's telling us about a portfolio of beauty brands that was owned by private equity to compete with some of the big guys. It was not doing very well and they asked us to look at the business, at the possibly buy the business. Two months later they were getting in worse situation and they were going to file for bankruptcy. At that point we looked at it again and the benefits to bankruptcy is that it kind of hits a reset. So any bad contracts, any old monies owed and things like that all go away and you're able to start on a new slate and go forward from there. And we now run a company called AS Beauty, which owns the assets and the company of Laura Geller Beauty Julep. And we closed on that deal in February, February 2019.
- [78:40]
Guy Raz
And it still has a following because people remember those brands.
- [78:43]
Joey Shama
Yes. So when we bought the business, it was a down trending business, but it was still a business. And now we are growing the business very nicely both online and on Amazon.
- [78:57]
Guy Raz
It's interesting because you, you know, you think about, think about like big brands in the 80s, like Guess jeans or, or Massimo. And Fila is huge in Southeast in 80s Asia, I know, which was huge when I was a kid in the 80s and 90s. But a lot of these brands that, you know, people in their sort of 40s, 50s, 60s will know it's like owned by somebody else, maybe it's been sold multiple times, but still using the brand, it's just an interesting business to me.
- [79:23]
Joey Shama
Yeah, I think when you look at the retail environment, there's so much clutter out there. So any point of differentiation is valuable. So when you have a brand like Guess or Fila that you've grown up with, like Reebok, you remember those pump up shoes from the 80s?
- [79:37]
Guy Raz
Right, of course I have.
- [79:38]
Joey Shama
So that's something that cuts through the clutter and allows you to stand out as well as gives the customer confidence that this is a brand and that there's, there's something behind it.
- [79:47]
Guy Raz
So you've got, this is what you focus on going back to Elf. It, it's amazing. I mean it could have, you know, you could have sold it, walked away and, and you know, and we've done, we did Beauty Counter, we've done other, some other brands that once they sold it, it went downhill. The opposite happened with Elf. It Grew and grew and grew. I think I just checked their market cap. It's like $3.8 billion. I mean, it's a big company. It's doing really, really well. Do you think that how you started this brand in 2002 and really launched in 2004, you could do this, you could recreate the playbook today?
- [80:28]
Joey Shama
I think when we created the brand in 2002 and 3 and 4, our biggest obstacle was how are we going to get space in a retail environment controlled by four guys? I think today, now it's how are you going to own the most amount of attention from the consumer on Instagram, Snapchat and Meta? So could I have done it today? Probably. Would it look different? Definitely. Do I have the tenacity and goal to do it again? Probably not. I wouldn't start a business at this point in my career. I think buying a business is a much easier entry. But I think if I was a young entrepreneur and I needed to cut through the clutter 1000%, if you're creative and committed, you can find a way to do it.
- [81:17]
Guy Raz
Yeah. Joey, when you think about this journey that you took, you know, of course you had a lot of. I mean, you did have help from your dad. There's nothing wrong with that. But still, it could have failed, right? It could have gone nowhere, certainly when the dollar stores didn't validate this idea. And then you think about where you got to. How much of that do you think had to do with just the grind you put in? And how much do you think had to do with getting lucky at times?
- [81:43]
Joey Shama
So I think when you get lucky and when you have the desire to be successful, that's when you will be successful. So I go back to that elevator story I gave you a little earlier. That when my father said, like, this is it. You either figure it out or you pack up and go home. I didn't manufacture that Bloomingdale's email, but I could have tried to, but I doesn't mean I would have been successful. You can't wait for luck and you can't manufacture opportunity. But when that luck is there, you gotta take advantage of it, come hell or high water.
- [82:18]
Guy Raz
That's Joey Shamma, co founder of Elf Cosmetics. By the way, you know how we mentioned that Joey's former partner, Scott Vincent Borba, left the beauty business to join the priesthood? Well, just a few weeks after Joey and I did this interview, Scott was in fact ordained as a Roman Catholic priest in the Diocese of Fresno, California. When he left the world of business Scott also left the trappings of his former life behind. He said that he gave up his fancy house and car, his Gucci suits and his 401k. And as for his new life, Scott told the New York Times that he's looking forward to serving God and working with his parishioners. Hey, thanks so much for listening to the show this week. Please make sure to click the Follow button on your podcast app so you never miss a new episode of the show. And as always, it's free. And if you're interested in insights, I ideas and lessons from some of the world's greatest entrepreneurs, please sign up for my newsletter@guyraz.com or via substack. This episode was produced by Carla Estevez, with music composed by Ramtin Arablouei. It was edited by Neva Grant with research by Olivia Rockman. Our audio engineer was Patrick Murray. The production staff also includes Kerry Thompson, Alex Chung, Sam Paulson, Casey Herman, J.C. howard, Chris Massini, Catherine Cipher, John Isabella, and Elaine Coates. I'm Guy Raz, and you've been listening to How I Built this.