Why The Honest Company is looking at China, not Europe

Co-founder Brian Lee cites a booming population, plus a lack of trust toward Chinese-made products

(Updated with additional comment from Brian Lee)

It's not an exaggeration to call The Honest Company one of the most successful startups in the Los Angeles tech scene right now. It has raised $122 million in venture capital funding, most recently a $70 million round in August of this year. It has a $1 billion market cap at the last round, and is on a revenue run-rate of $150 million. 

The most obvious next step for a company with those types of number is international expansion, bringing the company's safe and chemical free products to a much larger customer base. But where is the next, best place for The Honest Company to go?

Many might thing Europe, but, in fact, the answer to that question is likely China, The Honest Company co-founder Brian Lee told Vator founder and CEO Bambi Francisco at Vator Splash LA this past Thursday.

There are a few reasons that the company is looking in that direction, the most glaring one being the sheer size of the country.

"The obvious reason is that there are 22 million children born year in China, so its a very large market. The middle class, and upper middle class, starting next year, will be the size of the entire U.S. population. So they're just growing so quickly," he said.

But there is a much deeper reason that China is now a market that is ready to be tapped, namely lax regulation that has caused the distrust of many products made in the country.

We all remember the lead paint scandal in 2007, when it was revealed that the potentially toxic paint was being used in children's toys exported to the United States and other countries around the world. There was another incident in China, which most of us probably never heard about, which Lee described as a "formula disaster," that caused the deaths of a slew of young Chinese babies. 

Sadly, incidents like that have just eroded the confidence of the Chinese people, and have given The Honest Company an opening to be a "mission and product that will really resonate in that market."

"Products that are sold, manufactured and sold, in China are not really trusted by the Chinese mother, the Chinese woman," Lee said. "And you see some sites in China that are growing astronomically. There's a company out there that started three or four years ago, they're doing about $70 million U.S. dollars per month right now, alone, and all they do is sell international baby products. There's that much distrust."

One thing that Lee did not touch on was whether or not The Honest Company would be setting up its own manufacturing plant in China. Right now, the company manufactures its goods in the U.S. and Mexico due to the high cost of shipping goods.

Obviously there will be some challenges if the company does do this, and it may pose a problem with the Chinese people who, as Lee noted, are distrustful of goods manufactured in the country.

Update: Lee tells me that the company will not be manufacturing its core products in China and will be shipping from Los Angeles. And that it would have no effect on the cost of goods sold in China.

"Shipping containers from LA to China is not as expensive as you would imagine. Actually cheaper than shipping goods from China to LA, as most containers going back are empty," he said. 

Over the next year, Whisper has a full plate. First it will be launching its line of chemical free baby formula in the first quarter of 2015, followed by the debut of Honest Beauty in the second or third, with the rollout in China coming sometimes in the latter half of the year.