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Investors pour $1bn into buying up small merchants on Amazon

Investors have invested nearly $ 1 billion this year in companies that buy blockbuster brands from Amazon to try and create digital consumer goods conglomerates similar to Unilever or Procter & Gamble.

Independent merchants in Amazon’s vast marketplace will achieve over $ 200 billion in sales this year, analysts predict, and tens of thousands of them have incomes of more than a million dollars a year, according to industry experts.

This created an opportunity to bring together dozens of emerging winners and grow their businesses. “Amazon is the new mall,” said Frederic Court, technology investor at Felix Capital. “It’s just gigantic.”

Just like 20 years ago, large corporations began to consolidate local independent gyms, dry cleaners and cafes into chains and franchises, “we think the same phenomenon will happen in the digital world,” Billy said. Libby, whose New York-based investment company Upper90 offers debt financing to these start-ups. “I don’t think people realize how big this will be.”

Roll-ups benefit from more financial power, better marketing, and greater bargaining power with factories and potentially even with Amazon.

Several of them were founded by refugees from the wave of Start-ups “direct to consumers” like Warby Parker, Casper, and Dollar Shave Club, who have been the darlings of investors for the past decade, but have mostly failed to build sustainable businesses.

Instead of trying to build new brands of consumer goods from scratch, the new companies each plan to buy dozens of small merchants that have already proven themselves on Amazon. Their targets could be to sell anything from dog leashes to food supplements.

In 2020, seven start-ups in the United States and Europe raised a total of $ 950 million to buy from sellers trading in the Amazon Marketplace. Most of them – including in Berlin SellerX and The razor, Based in London Hero and Heyday, based in San Francisco, didn’t even exist at the start of the year.

All hope to emulate the model of a two-year-old Thrasio, which itself took $ 360 million in new funding this year, and Anker, the Chinese maker of electronic accessories and the “native Amazon” brand which was listed in Shenzhen in August for a valuation of $ 8 billion.

“We want to be something like the digital Procter & Gamble,” said Malte Horeyseck, co-founder of SellerX, which raised $ 118 million in November from investors such as Cherry Ventures, Felix Capital and TriplePoint Capital. “It’s a huge market with over 2 million sellers, it’s very fragmented and there are lots of opportunities for synergies.”

The merchants they target are all part of the ‘Fulfillment by Amazon’ (FBA) program, who pay to store their inventory in Amazon’s warehouses, sell through their main website and app, and then have the item delivered ( free, to Prime customers) by Amazon.

“It’s an incredible infrastructure that Amazon has built,” said Riccardo Bruni, co-founder of Heroes, “and Amazon continues to invest billions of dollars to ensure it remains the most sophisticated infrastructure in the world.”

Amazon’s marketplace is over 20 years old, but it took most investors the pandemic e-commerce boom to see its potential as a platform for building large-scale businesses.

Shrestha Chowdhury, co-founder of Razor, which has raised € 25 million in debt and equity, calls her business a “pandemic baby”.

She and her four co-founders, who have backgrounds with German e-commerce group Rocket Internet and consulting firm McKinsey, were inspired to start the business in August by the sudden shift in consumer behavior towards the ordering online, as well as by the success of Thrasio in the US.

Ms Chowdhury said Razor used her own algorithm to sift through sellers and product reviews to find the most promising dealers, before contacting them automatically via email.

“We have technified the M&A process,” Ms. Chowdhury said, adding that Razor plans to acquire 60 merchants over the next 12 months. “We do due diligence on thousands of sellers every month.”

Workers at Anker in Shenzhen. The company listed in August at a valuation of $ 8 billion © Qilai Shen / Bloomberg

But finding the sustainable businesses in Amazon’s haystack is far from straightforward. Some merchants only have informal contracts with suppliers, making deals on WhatsApp and TransferWise with factories in India and China that they will never visit. Others use false opinion to inflate their grades. Some have even been accused of bribe Amazon workers or run counterfeits.

Faced with these pitfalls, it is necessary to act quickly, especially as capital is pouring into the FBA roll-up business model.

“The barrier to entry is low, so you have to scale yourself up,” Libby told Upper90. His company offers founders debt – unusual in high tech – because he says the vendors startups acquire are generally profitable and make a quick return. “The real challenge is [raising] enough capital to buy enough capital to apply these efficiencies, ”he said.

Another challenge will be the integration of acquired businesses. Amazon does not facilitate the transfer of a merchant’s assets or online branding, sometimes requiring them to ship all of their inventory out of their warehouses and then re-integrate as a new entity.

Thrasio now has a 500-step onboarding process, said Gabriel Ginorio, one of its first employees, developed through “a lot of trial and error”.

“We did this when e-commerce wasn’t so booming [as in 2020] So we had a little more flexibility to test things, ”he said, while admitting,“ We ​​are growing a lot faster than we can consolidate. ”

One of the reasons that institutional investors didn’t see potential in Amazon’s marketplace until 2020 is the so-called “platform risk”.

Disgruntled sellers have accused Amazon of stealing their ideas for its own “Amazon Basics” and other internal brands, though the retailer denies such behavior.

In November, the European Commission accused Amazon of distort competition by collecting data from third party vendors to profit from its own retail operation and launch its own competing brands.

Others complain that frequent changes in its product search rankings and coveted “Amazon’s Choice” labeling, new rules, or sudden account suspensions make it difficult to build a stable business. “Amazon is changing its [search] algorithms much faster than Google, ”Mr. Ginorio said.

On the plus side, these entrepreneurs say, the market continues to grow incredibly fast.

Amazon’s own revenue from providing services to third-party vendors grew by over 50% in the second and third quarters of 2020, suggesting a similar growth rate for the vendors themselves.

The Seattle-based company said small and mid-sized sellers made up about 60% of its physical product sales, while its own private label items, such as Amazon Basics, only made up 1%.

This gives these companies the assurance that Amazon will remain more of a catalyst than a competitor. “Not all Amazon Basics brands will win,” Ms. Chowdhury said.

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