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The Rush to build Thras.io of India - Will it Work?
Golden Age for mid sized E-commerce brands!
In this article, we look at the Thras.io acquisition model and how it could play out in the Indian setting. The Indian Dream is a weekly newsletter that gives you latest Business Ideas, Opportunities and Trends direct to your inbox. Join 1,500+ other entrepreneurs looking for their next big business!
Imagine going into a super market and getting access to the financials, customer reviews and ratings of all the good, independent brands. You find that 85% of these small to mid-sized brands are run profitably and happen to share the same warehousing and logistics partner. And then, I give you access to billions of dollars. What would you do with the money?
Here's what Joshua Silberstein and Carlos Cashman, Founders of Thras.io, decided to do - they started buying these small to mid-sized businesses and built a roll-up company that now does ~$500 Million in Revenue and $100 Million in profit. All of this in 3 years.
Pure genius, in my opinion.
The supermarket in question here is Amazon - it has revenues of $386 billion of which 54% ($208B) comes from 3rd Party Amazon Sellers (independent brands). 85% of these sellers are profitable and a large majority of them use Amazon's Fulfilled by Amazon (FBA) services to manage their warehousing and logistics.
So, what is the Thras.io Model?
Back in 2018, Joshua and Carlos had this thesis of acquiring e-commerce brands and using economies of scale to build a large holding company.
They started out by scouting Direct to Consumer Brands (D2C) but eventually realised that all these brands operated differently and hence merging them to find economies of scale was not straightforward.
That's when they came across Amazon FBA Brands. Amazon's Fullfilled by Amazon (FBA) programme allows sellers to use Amazon's warehousing and logistics capabilities to sell their products to consumers via the Amazon platform.
The economies of scale truly kick-in if you can acquire Amazon FBA brands and run them together because they all use the same
platform to sell,
warehouses to store, and
logistics partners to deliver.
Joshua and Carlos realised these brands could be merged together and run as one big business.
That's exactly what they did. Thras.io has acquired 100 Amazon FBA business, that collectively do revenues of $500 million with $100 million of profit. Yes, Thras.io is profitable and is valued at ~$4 Billion dollar with a total fundraise of ~$1.7B ($1.2B Equity, $500m Debt)
Looking at Thras.io's success, other companies have started across the world with millions of dollars in funding. All of them are trying some variation of acquiring and operating Amazon FBA/Direct to Consumer brands.
Seeing all this action, the Entrepreneurs and VCs in India didn't want to be left behind. And the 'Thrasio for India' startups started popping up and raising capital. We'll get to that later.
Why is the Thras.io Model Successful in the West?
Firstly, why are merchants willing to sell?
Merchants find it difficult to scale their business because of operational and capital requirements.
Most FBA Merchants have the drive and creativity that's required to scale a product line. They are able to discover niche products, get it manufactured and market it to $1-5m in sales.
Beyond this revenue, the skillsets required to scale a product is completely different and so is the capital required. With scale, they start facing logistics and re-stocking issues, the marketing budget keeps increasing and that leads to higher costs of running the business.
To cross the threshold of $5m, merchants have to rely on external capital that comes in the form of debt. However, not all merchants prefer taking on additional debt and end up stagnating at a few million dollars in revenue.
Therefore, the thought of getting an exit and hard cash for their hard work is enticing. In a lot of cases, this could be life changing amount of money.
The Thras.io acquisition process is founder friendly.
Most FBA roll up companies complete the transaction within a month including the money transfer. The traditional M&A process takes several months to complete and thus the Thras.io model is far more enticing to the merchants.
Thras.io and its various competitors have basically built a playbook for M&A that is significantly aided by the fact that you can get accurate numbers directly from the Amazon Seller Account thus cutting down due diligence significantly.
In summary, Amazon Sellers like the idea of no-frills acquisition process than results in a hard cash exit for their businesses that they've scaled with all their hard work.
Secondly, what kind of brands does Thras.io acquire and how do they scale it?
In order to get this model right, it is important to buy the right kind of Brands. Thras.io primarily focuses on # of Reviews, Avg. Ratings and Search Rankings. In addition, they focus on hard good product categories such as Bathroom accessories, Kitchen accessories, and all kinds of commodity products that generally have low brand recall (therefore the sales are driven the Ratings, Reviews and Rankings).
They avoid acquiring tech products that change quickly, fads, food & beverage products, fashion and any products where there is founder risk (sales tied to the presence of the particular founder).
In order to scale these businesses, they focus on the following factors and have been able to develop strong in-house capabilities to improve them.
Massive economies of scale and cross-share of learnings/tactics from one brand to another are the key reason why Thrasio increases the brand's profitability by ~150%.
What's Happening with the Thras.io Model in India?
It's raining VC $ for the Thras.io Clones of India. 8 startups have popped up in the past few years with more than ~$300m raised between them.
How Can the Thras.io Model Play Out in India?
Let's start by looking at the India Numbers.
Amazon reported in 2020 that they had 5,000 sellers that earned more than Rs. 1 Crore ($135,000) in revenue in a year out of the 7 lakh total sellers on the platform. Thus, we know that less than 1% of Amazon sellers in India have more than Rs. 1 Cr in revenue.
In addition to this, there are 70,000 Indian Exporters selling on 15 different Amazon International websites. Amazon doesn't provide data on how many of these sellers do more than Rs. 1 Cr in sales, but lets assume it's 10x easier to cross the Rs. 1 Cr barrier when earning in foreign currencies. That would mean about 7% of 70,000, or 4,900 Sellers.
By our estimate, the number of sellers on Amazon earning more than Rs. 1 Cr are probably ~10,000.
Unlike the US, India has a decent competitor in Flipkart (300,000 Sellers), and the merchants on Flipkart would make for good acquisition targets too. But, it is fair to assume that the same merchants are probably selling on Flipkart too. Even then, considering a 20% exclusive seller base on Flipkart that sells more than Rs. 1 Cr we are left with a market of ~12,000 sellers.
As you increase the the revenue barrier, the number of stores will likely fall very steeply. This is because the entire E-commerce ecosystem in India truly got built in the last 5 years as more users started trusting and transacting on these platforms (thanks to the Jio-led internet penetration and then forced digitisation with Covid).
This first step was only applying the revenue filter. Once you apply the ratings & reviews thresholds along with product categories that suit this model, the total number of sellers that fit the acquisition criteria might drop down to the low thousands, if not in the hundreds.
In addition to this, a lot of these merchants are manufacturers themselves (unlike the US) and it's not as straightforward to acquire these businesses.
All in all, the opportunity in India is not as obvious (yet) as it was in the US.
There is no doubt that the Indian E-commerce ecosystem will continue to grow. However, if we ask ourselves, "Is Indian e-commerce already at a stage where hundreds of millions of dollars can be poured into it for acquisitions into a roll up company?", our answer will be, "Doesn't look like it."
Of course the Entrepreneurs and Venture Capitalists who've entered this space would have done this basic research and still decided to go ahead with the investment. Here are a few ways this can play out in India:
These Roll-up companies will partially invest in smaller brands and help these merchants scale the products. The merchants could take care of getting the product manufactured (in some cases they'll be the manufacturers themselves) and the centralised teams at the roll-up company will operate the other business functions to grow. This way, they can partner with smaller brands and help them scale faster.
The reason Thras.io is successful is because they figured out an acquisition price (20 to 40x of Monthly Net Profit) that allowed them to scale the brands profitably. Given the heavy VC $ poured in this space, there is a risk of these roll-up brands going after similar set of brands and competing on the acquisition price. If they end-up paying a premium price the acquisitions might become unviable. Great for the E-com merchants though!
Given the D2C boom in India, there is a chance that one of these roll-up companies will focus on or pivot into acquiring D2C brands and trying build of economies of scale in managing these brands. While this sounds great on paper, this will be an operational nightmare as the various different D2C brands will have completely different operational stacks that will result in less economies of scale and more chaos! Happy to be proven wrong, but this model is probably going to create the least value compared to the other two.
Despite our predictions, the amount of VC $ poured into this model will have a net positive impact in the overall E-commerce industry in India and push for more independent brands to be built. There will be some casualties on the way as the market might not be as big and mature right now, but that's normal in the world of Venture Capital, a few winners often take it all.
What are the opportunities in this space?
There hasn't been a better time to be a seller on the E-commerce marketplaces. If you run a manufacturing business or can source products to capture a growing product category on Amazon/Flipkart, you will likely have great options to get an exit in 3-4 years once you've achieved some scale.
A lot of these roll-up companies will be on the lookout for acquiring brands and if you can become a broker or build deal flow somehow, you could be handsomely rewarded in this highly competitive market.
If you're stuck in your career and have any skills that will be required to scale these e-commerce brands, there will not be a better time to pivot and join one of these companies. Can save your MBA fees and give you tremendous experience. We personally know someone who did exactly this.
Build Tools & Services that are going to be required by the Roll-Up Companies. These hyper-funded roll-up companies will likely try and blitz-scale. This will require them to outsource a lot of the business functions resulting in great opportunities for people who can support them.
Unleash the Indies!