Where are the Amazon Aggregators?

The (very quick) rise and fall of the next Procter & Gambles

Amazon aggregators represent the peak in the Covid bubble in my mind. These companies grew incredibly quickly, raised a ton of money at very high valuations, and as far as I can tell none of the assumptions investors made in funding the company have borne out.

In brief, the model goes like this:

1. There are a ton of small “Fulfillment by Amazon” or FBA businesses. They sell physical goods through Amazon’s website and then Amazon handles the logistics of shipping the goods to customers. Often they’re run by a single person or small team.

2. The “aggregator” acquires a portfolio of these small FBA businesses.

3. The aggregators use their data, technology, and capital advantages to grow the businesses and run them more efficiently. For example, the aggregator might build a software platform that could empower a single manager to run several FBA brands across a category.

Thrasio was the poster child of these companies and raised $1B at a $5-10B valuation. I remember reading that press release during my last job at CircleUp and wondering how Thrasio could possibly be growing so quickly. Many other aggregators popped up with the same model and CircleUp consulted for a few of them, helping them analyze data on Amazon brands so that they could prioritize which ones to acquire.

I was puzzled but intrigued at how a space I had never really thought about could blow up overnight. The people we worked with in the space were moving very fast; it felt like a rush to buy the best FBA businesses before the sellers started demanding higher valuations. It was clearly a numbers game, with young associates fresh from banking jobs combing through Amazon businesses and barraging the owners with requests to buy them.

I remember analyzing Amazon reviews of grill covers to help an aggregator find the best FBA seller to acquire. I imagine selling grill covers on Amazon can be a pretty good business, but people talked about Thrasio becoming “the next Procter & Gamble,” and it just seemed ridiculous that there could be a $10B+ company composed of a hodgepodge of these small, anonymous Amazon sellers.

Below is an example of how I understand the aggregator playbook works, and we’ll look at which assumptions went wrong.

The key assumptions needed to make these businesses work at the valuations they received are below. I expect each of these were much more challenging than founders and investors expected.

• The aggregator must be able to acquire good FBA businesses at scale

  • Deals are messy and doing a lot of them requires a lot of discipline and process even in a normal market. Then the huge amount of capital the big aggregators raised attracted a lot of competitors to the space and meant there were many aggregators going after attractive FBA brands. This meant aggregators would either pay high multiples for good FBA businesses or have an adverse selection problem where only low quality businesses would be willing to sell.

• There must be multiple arbitrage where the aggregator can acquire FBA brands at low multiples but be valued at a high multiple.

  • Because of the increased competition, the multiples that FBA sellers were willing to accept for their businesses got bid up and the gap between the multiples aggregators were paying and the multiples that they were valued at closed. Then when the tech bubble popped and valuations of high growth businesses imploded, this multiple arbitrage went away entirely.

• The aggregator must be able to improve the businesses, making them more profitable over time.

  • I imagine it was just a lot harder to realizes synergies across these businesses than the aggregators assumed, and they found they weren’t able to improve the businesses in line with their projections. This quote from the FBA subreddit sums up that point of view nicely:
    “My guess is that all these suits with fat wallets learned very quickly that they are not OPERATORS and the folks they hired to operate these brands didn’t have the passion or magic that a true brand owner has. They didn’t have the knowledge, experience, and most of all, the grit to press through the daily hand grenades and absurd explosions that is the “every day in the life of an Amazon Seller” - source

I ended up interviewing at one of these companies in late 2021. The interview process was rushed and everyone I talked to seemed to be working very hard. They offered me a job and when I was choosing between them and my current company one of the executives I interviewed with urged me to join, saying they were going to raise another round of capital soon and their valuation would double.

Their executive team was impressively pedigreed, some of them former managing directors at big investment banks. It seemed like there must be a large opportunity that this “smart money” saw. But I just couldn’t wrap my head around what they were actually doing that made these sky high valuations make any sense and I passed. Very soon after that the bubble popped and the company did a bunch of layoffs. Thrasio, the leader in the space, declared bankruptcy.

The first lesson I take from all of this is that acquisitions and operational excellence are both very challenging. It is a large assumption that aggregators can run businesses more efficiently when they are combined and things that look good on spreadsheets tend to not look so good in reality.

The second is that when the value of a model rests upon financial engineering (here, the multiple arbitrage between what FBA sellers were willing to accept for the brands and the multiples that venture investors put on aggregators), that value will probably not last very long.

And the third is that I am glad I trusted my intuition and didn’t join them. I didn’t fully understand how what they were doing was valuable and that seems like a good reason not to invest time or money into something.