The Thrasio model: Dream exit or lost opportunity for brand owners?

Anyone clued into the start-up scene would know the waves that Mensa is making in the D2C sector. As the fastest Indian unicorn, Mensa recently acquired leather firm Estalon that marked its 15th acquisition overall. Other players such as GlobalBees, Evenflow, 10club, etc, are also other players in this fast-growing and exciting ‘roll-up’ segment capitalising on the Thrasio model. The craze behind this model has reached such a stage that some reports suggest VC firms are receiving almost identical pitches from companies looking to operate in this manner; acquire brands (usually online-only), create strong marketing and brand awareness, and increase revenues of all portfolio companies through economies of scale. The question is what is so attractive about this space that is drawing investor attention, and does it make sense for founders of brands to consider an exit opportunity if it comes knocking?

Background:

Thrasio was founded in the United States in 2018 by Joshua Silberstein and Carlos Cashman, to acquire ‘trending’ brands that sold products on Amazon, create a portfolio of multiple brands, and grow the brands through a mix of marketing efforts, working-capital, supply chain management and technological innovation. The economies of scale allowed them to achieve profitability of about USD?100 million on a USD 500 million revenue in 2020, a feat worthy of admiration and praise by any metric. This phenomenal performance skyrocketed the company’s valuation to USD 5 billion in October 2021 (up from USD 1 billion in July 2020), when it raised a cool USD 1 billion in its Series D financing. The model offers a win-win-win for all parties involved; it gives the founders an exit, provides Thrasio brands that can be scaled significantly with their expertise, and promises consumers with an enhanced consumer experience.

In the US, it was widely seen that once an Amazon third-party seller hit a revenue ceiling of USD 3-5 million, additional growth would require significant capital and expertise, which, for some sellers was a difficult proposition. Enter Thrasio, which would acquire the brands and thus, from the perspective of an Amazon seller, it was a golden parachute of sorts. Add to that the speed at which the acquisition took place (from discussion to money in the bank, usually within 45 days), and you have an irresistible model for investors and founders alike.

Indian context

While several startups are working on this model, many more are working on stealth-mode using similar models. These start-ups are also garnering significant funding from VC funds. For example, Business Standard noted that GlobalBees set a record for the biggest Series A funding in India when it raised $150 million in June 2021; Nine-month-old 10Club raised $40 million in one of the largest seed financing rounds in India; GOAT Brand Labs closed a $36 million Series A round in July 2021.

The model is not too distinct from how Thrasio operates, in that these start-ups acquire direct-to-consumer brands operating across a variety of categories. Usually, the potential targets are those in the annual turnover range of INR 1 – 70 crores, and the founders can be expected to receive approximately 4-5x EBITDA or 1.5x revenue. While these are merely ballpark estimates, commercial discussions around the transaction may result in variations.

Things to consider

As a brand owner who is digitally native, the spurt in the growth of Thrasio-styled start-ups highlights a huge potential pay-out down the line. This may augur well for companies that are run by passionate entrepreneurs who would like to see their brand scaled up but lack the expertise and capital to see that vision come to fruition. However, founders must be aware of the implications of the acquisition before signing the dotted line.

1.??????Valuation: While the metrics for valuing the company are evolving, no founder should feel constrained by the valuations simply because they’re provided by the acquirer. Remember, this is a fairly new model of business and valuation is merely a market perception of the value of your business. It’s not an exact science and hence should always be approached with a fair degree of assessment.

2.??????Brand growth: Founders would have undoubtedly created significant brand recognition and awareness throughout the life of the business, and in some sense, would have a strong connection with the brand. The growth trajectory of the brand post-acquisition would also be important for a founder to consider, especially if the acquirer and the brand have different views about the growth strategy and direction. A founder should strive towards some level of control in the path that the acquirer would like to take with the brand since the brand is a reflection of the values and personality of the founder himself/herself.

3.??????Retaining some control: Tying into the above aspect, founders must attempt to negotiate some form of control through a minority stake or contractual remedies to prevent a complete deviation from expected strategies. Unless necessary, a complete exit should be cautiously considered. Below are some ideas that founders can consider, ideas that would allow them to keep some skin in the game, and benefit from any potential upside:

a.??????Founder Shares

b.??????Royalty payments for use of brand (structures can be devised depending on ownership and licensing of the brand)

c.??????Professional engagement with the company post-acquisition

d.??????Earnouts upon the company achieving certain pre-agreed financial milestones

Conclusion:

Acquisitions for founders are a great way of achieving an exit and reducing operational and management challenges. The Thrasio model addresses that gap by helping the expansion through their economies of scale. While these acquirers indeed are perceived to provide much-needed exit opportunities, founders must not shy away from negotiating and receiving the true value of the brand they have built. Remember, this model succeeds in a large part due to the strong foundational base created by the brands themselves.

Disclaimer: Nothing in this post constitutes legal advice. All posts are my personal views and commentaries on my understanding of the world and a take on the show.

Please feel free to reach out to your attorney or legal advisor for specific issues, since the posts are contextual to the show and even though the issues may appear similar, there are likely to be certain distinctions that one may have to consider.