The venture capitalist is mystified. He has seen half a dozen startups pitch to him and his partners at a top firm in the last month or two. That’s in addition to three newsbreaks from media outlets about similar startups, which piqued his interest. All these companies have a near-identical pitch. They want to acquire fast-growing online-first brands and build a portfolio of such brands. The parent company will bring in its technology, marketing chops and turbocharge the growth of the brands they acquire.
This so-called Thrasio model has been doing the rounds in India’s startup and venture capital space in the last 2-3 months, with every top VC firm contemplating an investment or already having invested. “This is India’s next revolution in the consumer space. This is Flipkart in 2008, or Swiggy in 2015,” said one investor in such a firm.
Until now, except their funding rounds- these companies’ plans and more importantly, challenges, have not been covered. The hype and secrecy around Thrasio-based models are contradictory yet tightly linked. At least three of these startups don’t even want their name in the market yet and their founders’ LinkedIn profiles say they work at a ‘stealth mode startup.’
The hype is such that of the eight people Moneycontrol spoke to for this story- investors in these firms, investors making up their mind and entrepreneurs running them, not one could speak on the record. Some don’t want to be perceived as having doubts about this business (even though they actually do) while others are secretive about their plans in order to have a competitive advantage. They all requested anonymity.
What is Thrasio?
Thrasio, founded by Joshua Silberstein and Carlos Cashman in 2018, capitalises on two key American trends- having a brand for everything, and brands scaling quickly on Amazon. The US has “a culture of brands,” one investor says. Many American brands relevant even today- Whirlpool, Brooks Brothers and Colgate, are hundreds of years old. Very few other countries have the sheer number of brands the US does. Many of them dominate nationally, some internationally.
In the era of online brands, Thrasio buys the hottest up-and-coming brands which sell on Amazon and gives them the marketing, cost-optimisation and technological chops that Thrasio specialises in. It turbocharges growth for these profitable companies. In 2020, Thrasio generated $500 million in revenue and $100 million in profit- a word that eludes far bigger and well-known internet firms the world over. The three-year-old upstart was valued at $3 billion in February according to Bloomberg, and at $3.5 billion a month later, as per a person aware of the matter.
Another similar firm, Perch, a Boston-based startup founded in late 2019, was valued at a billion dollars earlier this week, when SoftBank’s Vision Fund 2 led a $775 million Series A round. Perch is also profitable and operates over 70 brands.
The people in play
This is the thesis that Mensa Brands, founded by former Myntra CEO Ananth Narayaan; GOAT Brand Labs, founded by Flipkart fashion head Rishi Vasudev; and at least six more startups have. Narayanan, Vasudev and FirstCry founder Supam Maheshwari have raised $150 million just between the three of them for this.
Add to that Powerhouse91- backed by Snapdeal’s Kunal Bahl and Upscalio, founded by ex-Purplle Chief Marketing Officer Nitin Agarwal, both looking for money currently. Except Upscalio, other transactions have been reported by The Economic Times, The CapTable and Entrackr.
Former Uber executive Utsav Agarwal co-founded 10 Club, another such firm along with Bhavna Suresh, former CEO of Philippines-based real estate marketplace Lamudi. Agarwal however left 10 Club to start competing player Evenflow, which is currently looking to raise $6-7 million.
Many of these players have studied the market deeply. One person said Evenflow’s Agarwal has spoken to 400 Amazon sellers in the last six months, understanding their plans, processes, and potential to buy out.
Each company has its own strategy, the proverbial ‘wine and dine’ before making a buyout pitch. Some offer unparalleled market expertise, others offer a ‘founder friendly’ relationship where the Amazon seller will still run the company, and some others promise that their companies- so far popular on Amazon but obscure otherwise- will get covered favourably by the media.
One founder, while pitching to these sellers, keeps calling it a ‘partnership’, because he feels acquisition is a ruthless word and may rub a seller the wrong way.
“If you can’t smoke a cigarette and have a cutting chai with these guys, there’s no way you can buy them,” one founder says.
Yet, funding has been the main activity of this sector so far, and the actual work is only starting.
“All these companies have raised rounds based on the first slide of their pitch deck. Nothing more. Now the real work begins. And I already don’t think more than 2-3 of these Thrasio-models will become big,” said an investor in one such startup.
About $300 million is being invested across 8-10 such models in the next few months, and even as the race begins, not everyone is on equal footing. Some are already being written off by prospective investors.
Market size
One investment banker says that the US has “hundreds of thousands of brands” and even the smallest of online brands generate a few million dollars in revenue. That sort of scale makes it perfect for Thrasio or Perch to acquire.
India, on the other hand, has 10,000-15,000 brands in total, this banker says, and while a house of brands is certainly appealing, how many such houses can truly make it big- become multi-billion dollar companies- remains in question. Mensa, GOAT and the others are looking at brands across small and large sectors- fashion, apparel, home decor, arts and crafts, bedding, yoga mats, bedsheets, premium food items, kitchenware and more.
India has about 100-110 million e-commerce users according to a 2020 Bain report. And while this is estimated to grow 30-35 percent year-on-year for the next decade, that will also depend on macroeconomic factors, particularly a rise in per capita income. Investors and entrepreneurs have been betting for years that India will be the next China- a bet that takes centre stage in a post-pandemic world, where India’s internet users are rising and China is thought to be a saturated market by many. Yet, 62 percent of China’s shoppers shopped online in 2019, compared to 11 percent in India. The market sizes are worlds apart as of now.
“The Indian retail market is huge. The online market is relatively small. I think some of these brands may have to try an omnichannel strategy, because in India so far, online-only brands have not worked- unlike the US. Even Nykaa and Lenskart realised at some point that you have to go offline," said another investor in this space.
Therein lies the conundrum. Many of these entrepreneurs and investors are betting on the power of the internet, the scale it provides and the consequent ability to generate profits. If these companies acquire offline-led brands, they may get a sliver of the large offline market, but it will be a deviation from the Thrasio strategy, which is internet-led.
Founders are already realising this, and two founders Moneycontrol spoke to think they will have to buy a few offline brands a few years down the line to solve the market size issue.
At the same time, other numbers tell a story. Last year, Amazon India said that it had 4,152 sellers with annual revenue of Rs 1 crore or more. If 10 Thrasio-model startups buy 15 brands each in the next 18 months, that would still be a small portfion of the overall sellers who are seeing scale on Flipkart and Amazon.
Valuation- Beauty in the eyes of the beholder
All these startups could see their strategy succeed or evaporate depending on only one thing- the prices at which they acquire these sellers. These 8-10 startups are looking to acquire e-commerce sellers who have annual revenue of Rs 1-70 crore (some are aiming at Rs 1-10 crore, while others are eyeing Rs 5-50 crore).
Founders say they want to pay about 4-5 times of Earnings Before Interest Taxes Depreciation and Amortisation (EBITDA), or 1.5 times of revenue. So a brand with Rs 10 crore of revenue and Rs 3 crore of EBITDA can be acquired for Rs 12 crore.
This valuation is important. If instead of Rs 12 crore, it gets bought out for say Rs 20 crore, and 7 times EBITDA becomes the industry norm, these Thrasio-companies will be getting into deals at extremely expensive valuations, and even if the company grows say 10 times from there, its valuation may not be commensurate because now it will be valued at 3-4 times EBITDA or even less, since it has scaled and may not grow further. The valuation multiple shrinks and purely because of the entry price, an otherwise solid investment may not yield much.
Investors are warning founders that a valuation fight may be down the road, and it may be hard to avoid. “Now all these players- GOAT, Mensa, etc are well funded and they all want the best, hottest brands. They all approach 10-15 of the best sellers, and because the seller is being courted by everyone, he can command his price. That’s where the problem starts,” one investor says.
The future of these models will be determined by what price they buy brands at, and how they buy them- using equity or debt. For example, in Mensa’s $50 million round, a significant portion is debt, sources said. Narayanan declined to comment on the equity-debt breakup. Companies prefer using debt to fund acquisitions. Using share capital for buyouts results in founders diluting their stake more than needed and is less efficient.
“All the companies are negotiating with venture debt firms or high-net-worth individuals for loans. How many of them are able to secure debt remains to be seen” one founder said.
The takeaway
Never before in the Indian startup scene have a whole host of companies in a single sector raised so much money only on promise. Neobanks in 2019 came close, but investment activity was not this broad-based. Incidentally, some of the neo banks such as Jupiter and Epi.fi are getting off the blocks only now, rolling out their platforms.
These ‘house of brands’ are expected to rapidly buy online brands in the next year or so. One investor says that for the 2-3 most funded players, their next 2-3 rounds of funding each are already guaranteed. That could mean that more than half a billion dollars are poured into a promise.
But if the dizzying growth and aspirations of their American, European and Latin American counterparts are any indication, these companies and their investors could be in for a wild ride.
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