Axios Pro Rata

A new generation of companies is forming to scoop up Amazon marketplace sellers — and venture capital firms are writing big checks to support the effort.

Why it matters: These e-commerce aggregators are all about data and using it to optimize and turbocharge sales, which means they’re using Amazon’s own playbook.

The big picture: Amazon’s third-party seller marketplace generated between $25 billion and $39 billion in profits in 2020, the company estimates, and experts expect it to only keep growing.

• One example is China's Anker Innovations, which is best known for its phone chargers and other consumer electronics accessories sold exclusively on Amazon. It's now valued at nearly $56 billion, following an IPO last summer that was hailed as a milestone for third-party Amazon sellers.

How it works: The aggregators target sellers that have found “product-market-fit" but still have a lot of room to grow. Otherwise, what upside would there be to acquiring them?

• They tend to pick businesses whose products are established and will continue to be popular in their respective category, instead of chasing quick hits or fad-based products like fashion. Aggregators also tend to be generalists instead of focusing on a product vertical or category.
• They also provide an exit path — and crucially, liquidity — to the entrepreneurs whose businesses they’re buying. For these small-business owners, this is likely the only kind of exit even available for them. Not everyone can have the trajectory of Anker.

Between the lines: Despite Amazon’s size and power, the consolidators don’t seem worried that the retailer could hike its fees or make other changes that would mess with their businesses.

• In short, they don’t believe it would be in Amazon’s best interest to hurt such a crucial piece of its empire, which would ultimately affect its ability to offer more and better products, at the lowest prices to its customers.
• “There’s this story out there that Amazon is this big threat,” says Thrasio co-founder Carlos Cashman, whose company raised $850 million earlier this year and is profitable. “Nobody looked at [Simon Property Group] as a competitor to Foot Locker — they’re not. They’re renting Foot Locker space for a store in the mall.”

Meanwhile: Some consolidators are specifically focused on acquiring successful businesses outside of Amazon’s marketplace.

• OpenStore, quietly founded earlier this year by Atomic’s Jack Abraham and Founders Fund’s Keith Rabois, plans to buy up companies using Shopify’s tools and make their wares available via a “single unified experience,” which Rabois loosely compares to a shopping mall experience.

Look ahead: It’s still early innings, and acquirers will falter if they don't properly manage the sellers they’ve bought. Plus, there's sure to be consolidation among the consolidators.

The bottom line: “It’s an economy on the verge of institutionalization,” Sebastian Rymarz, CEO of aggregator Heyday, tells Axios of the burgeoning sector.

For serial entrepreneurs, selling a business that’s generating millions of dollars in annual revenue on Amazon can help them focus on their next venture.

What they’re saying: "It’s a tough question to think about — 'should I have waited?’ But at the end of the day, de-risking and capitalizing to a large sum of cash… we have other things we’re building and can continue to work on," says Minnesota-based entrepreneur Josh Dittrich.

• Dittrich recently sold an Amazon business he started five years ago to Elevate Brands after growing it from an initial Keurig machine cleaning solution to more than 80 unique products, generating $10.3 million in annual revenue.

Between the lines: What happens after the sale is equally important, according to entrepreneurs, given that a significant portion of these deals include earn-outs tied to future revenue.

• "If 40% of your deal is based on what might happen, then you want to be careful who you’re selling it to," says Dittrich.
• Tom Wang, who sold Sdara Skincare to Thrasio in December, adds that he saw the earn-outs as a sign that the company was committed to growing his business. A few weeks ago, he saw Thrasio running online ads to generate Sdara sales directly (i.e., outside of Amazon), a route he never quite mastered while running the business himself.

The bottom line: This model will only work if it's also a win for the entrepreneurs selling their businesses.

Amazon marketplace rollups are far from just an American phenomenon. Here are some of the global players:

Europe:

• Heroes: The company not only says it wants to be the "Thrasio of Europe" — it even counts Upper90 as an investor, one of Thrasio's earliest backers.
• More: Berlin Brands, Razor Group and SellerX.

Asia:

• Global Bees: Hatched by Indian kids retailer FirstCry, the new venture has already raised $75 million from SoftBank, TPG and others.
• More: Una Brands, Rainforest.

Latin America:

• Valoreo: The young Mexico-based company says it's already eyeing a valuation of at least $1 billion early next year.

• Investors pour $1 billion into buying up small merchants on Amazon (Financial Times)
• Private equity targets Amazon sellers (The Information)
• The long tail (Wired)
• The great Amazon flip-a-thon (NY Times)

Amazon started in 1994 as an online bookstore and didn't go beyond that category until years later.

• Question: What year did it debut the Amazon Marketplace for third-party sellers? (Answer at the bottom.)

Select VC financings of U.S. aggregators in recent months

• Oct. 20: Perch — $123.5 million
• Nov. 18: Heyday — $175 million
• Jan. 11: Cap Hill Brand — $150 million
• Feb. 9: Branded — $150 million
• Feb. 10: Thrasio — $750 million
• Feb. 17: Unybrands — $25 million
• Feb. 25: Elevate Brands — $55 million
• April 1: Thrasio — $100 million