C Citigroup Inc

By Katie Roof and Yuliya Chernova 

Several small Los Angeles area investors are set to make a bounty if payment company PayPal Holdings Inc.'s $4 billion purchase of local startup Honey Science Corp. goes through.

Before its most recent round last year, the startup that finds discount coupons for online shoppers collected capital mostly from smaller local investors. Honey raised $49 million in venture capital in total, a Honey company spokesperson said.

Citi Ventures led the most recent investment in Honey last year, valuing the company at around $700 million, according to a person familiar with the deal. Ramneek Gupta, managing director and co-head of venture investing at Citi Ventures, confirmed it backed Honey last year but declined to disclose the company's valuation at the time.

The size of PayPal's acquisition is unusually large for a company emerging from the growing but still nascent Los Angeles startup ecosystem. Other regional acquisitions have included video doorbell system Santa Monica, Calif.-based Ring Inc., which sold to Amazon.com Inc. for more than $1 billion last year. Venice, Calif.-based Dollar Shave Club Inc. was bought by Unilever PLC for about $1 billion in 2016.

Santa Monica-based seed-stage firm Mucker Capital, for example, is expected to receive proceeds of $280 million from the $3 million it invested in Honey, according to the person familiar with the investment. Erik Rannala, co-founder and managing partner at Mucker, declined to provide specifics, but said the deal would return several multiples on Mucker's second fund, which was below $20 million in size and began investing in 2013.

Honey was founded in 2012 and helps consumers save money on e-commerce transactions. Honey has a suite of money-saving services, including a price-tracking tool and a rewards program. Honey has approximately 17 million monthly active users, PayPal said in a release.

"From the beginning, what they were focused on was building better shopping experiences for consumers," Mr. Rannala said.

Mr. Gupta of Citi Venture added that Honey has been in the process of setting up financial products, such as a credit service whereby consumers could borrow money at the time of purchase.

The high price PayPal is paying may speak to the discounts Honey Science can bring to PayPal's payments customers and the potential for businesses to feature promotions.

Honey had over $100 million in revenue last year, said PayPal Chief Executive Dan Schulman on an investor call Wednesday. Honey expects to generate $250 million to $300 million in revenue in 2019, according to another person familiar with the matter. PayPal declined to comment.

PayPal said that Honey was profitable last year, on a net income basis. The deal is expected to close in the first quarter of next year.

Dustin Rosen, a managing partner at Wonder Ventures, said that the return on his firm's investment will exceed the size of his $4 million debut fund. Mr. Rosen invested $150,000 in Honey in 2016.

"It shows the massive scale and potential of companies not built in Silicon Valley," he said. He said that a lot of prominent investors passed on the deal because they didn't recognize the value of Honey's data.

Honey's other investors include Detroit-based Ludlow Ventures, and Los Angeles-based Bam Ventures, founded by prominent Los Angeles entrepreneurs Brian Lee and Richard Jun, who were co-founders of LegalZoom.com Inc., ShoeDazzle and The Honest Co. Anthos Capital, of Santa Monica, is also a Honey investor.

PayPal says that Honey will remain a separate brand after the acquisition. Co-founders George Ruan and Ryan Hudson will continue to lead Honey's team.

Write to Katie Roof at katie.roof@wsj.com and Yuliya Chernova at yuliya.chernova@wsj.com

(END) Dow Jones Newswires

November 20, 2019 21:20 ET (02:20 GMT)

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