Thrasio Business Model and the Indian Startup Ecosystem

Introduction

Thrasio, a US-based unicorn, has created a lot of buzz because of its unique operations of funding selective online brands. Thrasio follows an acquisition entrepreneurship template, by surfing the Amazon third-party ecosystem. The company acquires Amazon sellers’ businesses and scales them up.

The startup also received $100 million as a profit last year. In the startup ecosystem, it is now known as the Thrasio Model.

What is the Model?

Thrasio business model (“Thrasio Model”) revolves around Thrasio purchasing online businesses from different sellers on Amazon. It follows a fast acquisition template to offer an exit to Amazon sellers. Thrasio also follows a multi-brand and multi-product strategy, focused on consumer-brands.

Once the acquisition has been completed, Thrasio overhauls the company it acquired by customizing its product portfolio, changing the branding, and developing a long-term revenue growth strategy. Through its lifecycle, over 50 thrasherers live and breathe the brand as it becomes a profit-doubling machine.

In the words of Thrasio itself “We don’t optimize, we mastermind”. Informed by billions of rows of data sourced from hundreds of APIs every day, Thrasio’s teams make the best possible decisions to maximize sales of every product they own and purchase

Even though Thrasio runs the ecommerce business full-time, the previous owner still benefits long-term as they continue to get a percentage of future revenues. Thrasio’s acquisition platform is a win-win for every party involved, as there is a continuous revenue stream for both Thrasio and the previous business owner.  

Success of Thrasio

Thrasio was founded by entrepreneurs Carlos Cashman and Josh Silberstein in mid-2018 and have built a business that has been profitable since inception and growing multifold. Thrasio is a digital consumer goods company that acquires other third-party private label Amazon FBA (fulfilment by Amazon) businesses. The company operates by way of acquiring these businesses after which it optimizes the operations of these businesses. This is done in an attempt to expand their reach through the market, develop the product, as well as the supply chain management. This in turn leads to the expansion of the sales, improvement in financial growth and ultimately scales up the business under the umbrella of the acquiring company.

Thrasio is slowly becoming one of the fastest-growing ecommerce acquisition company. It recently reported $300 million in revenues and also obtained $260 million in public funding. The public investment raised Thrasio’s valuation to $1 billion, earning the company unicorn status. A unicorn status is given to Startups valued at $1 Billion.  Thrasio’s current portfolio includes 60 Amazon business acquisitions, 6,000 products, and a spot in Amazon’s top 25 sellers list. The company also reported that it has already paid sellers more than $100 million.    

Startup ecosystem in India

E- commerce in India has largely been inspired by proven models in the US and to some extent China. Many new startups in India as well have now adopted the Thrasio Model for their success and have attracted the investor’s eyes.  All these startups have a similar pitch. They acquire fast-growing online brands and build the portfolio of these brands. The parent company brings in its technology, marketing tactics, knowledge of industry and turbocharges the growth of these brands that they acquire.

The Thrasio Model has been doing the rounds in India’s startup and venture capital space in the last 2-3 months, with almost every top Venture Capital (“VC”) Firm contemplating an investment or already having invested in one such startup.

Each such startup has its own strategy, before making a buyout pitch. Some startups offer unparalleled market expertise, others are offering a ‘founder friendly’ relationship, and some others promise that their business - so far popular on Amazon or other such e-commerce platforms but obscure otherwise - will get media coverage. 

Funding has been the main activity in this sector so far the actual work is yet to begin. Over $300 million has been invested in Indian startups based on the Thrasio Model across 8-10 such models.

India has about 100-110 million e-commerce users according to a 2020 Bain report. Which is estimated to grow 30-35 percent year-on-year for the next decade but that also depends on various macroeconomic factors such as a rise in per capita income. Investors and entrepreneurs have been betting on India to become the next China - a bet that takes centre stage in a post-pandemic world, where India’s internet users are rising and China is becoming a saturated market.

Never before in the Indian startup ecosystem have a whole host of startups in a single sector raised so much money.

Startups in India that have adopted the Thrasio Model and made it big

One of the most talked about startup making its way to every news channel and website is 10Club. 10Club is a Bengaluru based company that acquires young e-commerce product sellers and scales them up. 10Club has recently raised $40 million in one of the largest seed-funding rounds for an Indian startup. The equity and debt round was led by Fireside Ventures, a backer of brands such as boAt and Mamaearth. Other investors include Heyday, a US-based startup, Class 5 Global, an American micro VC firm, logistics player PDS International and Secocha Venture, an investment firm led by Fevicol - Pidilite’s Sanket Parekh.

A few weeks earlier, a similar Direct to Customer (“D2C”) startup Mensa Brands founded by ex- Myntra and Medlife co-founder Ananth Narayanan, raised $50 Million in a mix of equity and debt in its Series - A Funding round from Accel Partners, Falcon Edge Capital and Norwest Venture Partners among others. 

GOAT Brands Labs headed by Flipkart veteran Rishi Vasudev which is a latest fashion and retail venture based on the same lines as the Thrasio Model has also received funding from New York-based investment firm Tiger Global amounting to $ 20 million.

Another such startup which has been in the news is Evenflow Brands. Evenflow acquires and scales third-party brands that sell on ecommerce marketplaces such as Amazon & Flipkart. Evenflow has been known to be in the advanced stage of discussions to raise an undisclosed amount from Mumbai-based VC Equanimity Ventures.

Pros and Cons of the Thrasio Model for small businesses

Pros

i. Big cash payouts – these startups pay the businesses money based on the valuation done which usually is much more than they make in a year through their sales in the e-commerce space.

ii. Speedy Exit – for those founders who wish to get an easy, hassle free exit from their businesses, this seems the best bet. The entire process is smooth and quicker as compared to the traditional exit mechanisms and completed within 4-6 weeks.

iii. Legacy and Goodwill – the most important thing any founder could be worried about is the brand image and the goodwill attached. The Thrasio Model focusses on scaling up the acquired businesses and also smoothening the supply chain. With this being the main objective of these startups, the interest of the founders in terms of brand image is protected.

Cons

i. Losing long-term profitability – the most important reason for these startups to acquire smaller businesses is the potential they see in the business. They will make the business reach new heights with their expertise but the founders also lose out on the long term profitability attached to the businesses growth.

ii. Losing your ownership – eventually when the startups functioning with this model purchase controlling stakes in the business, the founders lose their controlling rights in all future operations. The fact that most of these startups work collaboratively with the founders to scale up the business, the founders in that case have negligible say in the operations of the business and are bound by the decisions taken by these startups.

Viability in the Indian Startup Ecosystem

The numbers are the key factors in determining the success of the Thrasio Model in India. The vital role in the success of Thrasio in the USA was of the sheer number of brands and the revenue generated by each in the e-commerce marketspace due to the availability of consumers.

The USA has hundreds of thousands of brands and the smallest of them are also able to generate a revenue of a few million dollars which makes the Thrasio Model perfect. On the contrary India has about 10000-15000 brands in total. Even though India has a huge consumer base of approximately 100-110 million the most of the consumers in India prefer traditional retail markets over the e-commerce setup. The online market is relatively small and is also the reason why industry giants such as Nykaa and Lenskart realized the need to go offline.

The entire conundrum lies in how the startups will maintain this balance between online and offline businesses they will have on board, because in the current market scenario the majority of consumers still prefer offline marketplaces and retailers.  If these startups consider acquiring offline-led brands, they may get huge share of the large offline market, but that would be vastly different from the Thrasio Model, which is internet-led. 

Another important consideration for the success of these startups is also based on the correct valuations of the businesses acquired. These startups intend to pay the businesses about 4-5 times of Earnings Before Interest Taxes Depreciation and Amortisation (EBITDA), or 1.5 times of revenue. If it gets bought at 7 times EBITDA and that becomes the industry norm, these Thrasio Model startups will enter into deals at extremely high valuations and even if the company grows 10 times its valuation may not be justified and commensurate. The valuation multiple shrinks and purely because of the entry price, an otherwise solid investment may not yield much.

Investors are also contemplating a valuation fight and warning startups of the same. This is inevitable since all the startup will approach the same top sellers. They will then be in the position to command the price as they wish and that’s where the problems begin. 

The future of these startups based on the Thrasio Model will be determined by what price they buy the brands at, and how they buy them - using equity or debt. Companies usually prefer using debt to fund acquisitions. Using share capital for buyouts results in founders diluting their stake more than needed and is less efficient. For illustration - Mensa’s $50 million round, more than $30 million is debt.

The top startups have already finalized on the next few rounds of funding that is to take place in the coming future, but if the growth of their American, European and Latin American counterparts are any indication, these startups and their investors could be in for a wild ride.

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