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Over the past two years, dozens of heavily-funded investment firms have formed with a singular purpose: Buying small companies that sell through Amazon.
In many ways, these so-called aggregators operate as mini private-equity firms. They quickly buy out popular mom-and-pop Amazon sellers, and then attempt to use their e-commerce expertise in marketing and logistics to drive additional revenue and profits across a wide range of brands.
There are now about 40 of these aggregators — with names like Perch, Thrasio and Cap Hill Brands — operating across the e-commerce landscape. And, in some cases, these buyers of Amazon sellers have hundreds of millions of dollars in the bank.
But is this a good business? On this episode of Day 2, our podcast about everything Amazon, we are venturing into a fascinating new corner of the e-commerce universe. Our guest is Ruben Amar, a former private equity investor at TA Associates who now leads Forum Brands, a 6th-month-old aggregator of Amazon sellers that’s already acquired a handful of businesses.
Listen below, subscribe to Day 2 in any podcast app, and continue reading for edited highlights from the conversation.
John Cook, GeekWire co-founder: Why are we seeing so many companies formed to buy Amazon sellers right now? What is the opportunity that’s driving this race right now?
Ruben Amar, Forum Brands
Ruben Amar, Forum Brands: We are in an ecosystem that is really, really the day zero for e-commerce consolidations. There are 99% of the roughly 50,000 sellers within the Amazon FBA [Fulfillment By Amazon] ecosystem that meet the acquisition criteria for many of these buyers and are all independently owned and operated. And if you think about the size of the market of the ecosystem, just in 2020, there were 1 million new FBA sellers that joined Amazon’s 19 global marketplaces. This is already adding to the 6.1 million third-party sellers that already existed before 2020. So this space is just massive. And every player, you can think about the different 40 players that you mentioned that came in into the space, will have a specific approach, a different strategy, and everyone will have to position themselves as a buyer of these businesses.
But the reason why this market has attracted so much attention is that the market of Amazon in 2020 generated $475 billion of GMV [gross merchandise value]. Sixty-three percent of that came from third-party sellers, millions and millions of small entrepreneurs around the world selling products that billions of people around the world are buying online, all of them operating thanks to this FBA system and platform that Amazon has built for them, through businesses that are generating millions of dollars of top-line [sales] and cashflow generative. So from a financial perspective and market-depth perspective, these new buyers have seen the potential of building a valuable business of consolidating a group of these brands and getting all the untapped value that these sellers have left on the table in order to grow a very, very valuable consolidated group of consumer brands.
Jason Boyce, Avenue7Media: Has there been $3 billion raised? Ruben, does that sound right? $3 billion in a year, raised to go and buy micro brands that are these third-party sellers?
Ruben Amar: That’s exactly, Jason. Half of it is from Thrasio, but yes, it is $3 billion raised across the 40 buyers that John has mentioned. I think some of this numbers are not even public. So I would consider this number even actually much higher.
Jason Boyce: I remember the days, back in the early 2000s, where I would go to a trade show and beg brands to let me sell their product. And then they would say yes. And then I’d say, “Oh, by the way, I’m selling on Amazon.” And they’d say, “No, no, no, no, we’re not selling to you. We don’t want any part of this Amazon game.” So that is a complete 180 from when I started in this game. … Have you seen the valuations go up as a result of this flood of money into the market?
Ruben Amar: Yes. Like every market that has inflow of capital, it is normal to expect valuations would increase and they have increased, frankly speaking. What is interesting is that if you think about the different channels in which Forum and many other buyers of these brands are buying these brands, you have the broker network. Think about these many online broker that had been here before the inflow of capital without naming all of them, the biggest one and the most active one is Empire Flippers. These brokers have done an amazing job helping sellers that did not even know that they had the option of selling their Amazon business find a right buyer. What has happened is that when this capital has been included in the market, the multiples in these very competitive auctions have increased quite significantly in the last six to 12 months.
However, a big portion of what we do is also getting in touch directly with some of the millions of sellers around the world. And when you think about the multiples in this avenue in this sector, the multiples have increased, but not as much as the auctions. And the reason for that is pretty simple: you have between 50,000 and 60,000 sellers that have brands that generate more than $1 million dollars. All of these 60,000 brands, 99% of them are still independent, which means that there’s still room of getting multiples that are close to the ones before all this capital got in. However, the multiples have still increased even on that avenue, but not as much as the heavily competitive auctions, as you and everyone can see through brokers.
John Cook: Are we getting to the point where you’re bumping into other aggregators, and there are bidding wars going on?
Ruben Amar: Definitely in the broker’s auction. In some of the deals we’ve done with brokers, we were facing competition from 15 to 20 buyers, which, coming from the investment world, it’s pretty, pretty, pretty brutal and aggressive. But what’s interesting in this situation is that the highest bid was not the winning bid. We have won some of these auctions without being the highest bid. The reason for that is that what people tend to forget is that the brand that these sellers have built is like their baby. The majority of them are not operating these brands 100% percent of their time.
They do it as an extra income for the day-to-day and to pay down the student loan, to pay down a mortgage, to build a new project, a new house and whatever you can think about. So what’s interesting is that the value of the brand for this seller is almost if not more important to them as the exit multiple or the exit dollar value that they were getting to their account. So the way we won some of these very competitive deals is by showing the sellers that when they sell their brand to Forum, we have the team in-house and the technology in-house that will really, really take the brand from level one to level five. So that one day, three to five years down the road, when they will walk around with their grandchildren, they will be able to find the brand that they’ve built six, seven years ago and they could tell their family, “Hey, I built this brand.”
Jason Boyce: So Ruben, I don’t want to get [Forum Brands VP of M&A Jen Kruk] in trouble here, she didn’t give me any specific information — it was more of a general comment. You mentioned that 15 to 20 buyers looking at each acquisition. And she shared with me that there was a call where they’re talking due diligence and they’re asking questions. And one of those 15 folks just jumped in and said, “I’ll give you an outrageous amount of money without due diligence.” Are you seeing that happen again and again, with just crazy money and making decisions without even doing their homework? How do you compete with that?
Ruben Amar: I’ve seen that happen, not often, because if you look at the quality of buyers in this space, it’s pretty impressive. They all come from very impressive backgrounds, very knowledgeable investors, very knowledgeable operators. So you will always have these situations where there is a very aggressive cowboy that comes in and just says, “Hey, I’m buying everything and I don’t even need to look at it.” That could happen. It hasn’t happened too much to us. And frankly speaking, if this really happened, it’s going to be very difficult to compete if the price is, call it, two or three, four times net income higher than us. But, frankly speaking, it hasn’t happened too much. It has happened maybe once or twice since we started Forum. I think that people will realize more and more, as they buy these businesses, how difficult it is to actually operate these businesses. So they will be much more vigilant as they do the diligence work before acquiring any brand out there.
Jason Boyce: In your private equity world, did you ever run into that situation where someone jumps in there with an outrageous offer without due diligence?
Ruben Amar: Never on the companies I’ve looked at, to be honest, never, but I’ve looked at the businesses that were much larger, much more complex with human capital involved. So it was technically impossible to do that. I’ve seen situations where I was competing with two or three or four buyers. And then, suddenly they’ve increased the price by 50%, without any expectation. That happened in my life, but yeah, a situation where there’s a buyer, without even looking at the business, just buying a business at 30, 40% above asking price, that’s something that I haven’t seen in my private equity world. I haven’t seen too much as well in this ecosystem.
A ‘gold rush mentality’
John Cook: So Ruben, you’re painting kind of a picture of almost like a gold rush mentality here. There are these sellers out there that they’re the gold and you and these other aggregators are the miners going out trying to find them. That’s a hard prospecting tool. And if you go back to the gold rush days, the ones that had the best prospecting tools were able to find the best mines to go after. So I am super curious what type of software or AI systems you’re using to dive into this to really discover those golden nuggets.
Ruben Amar: Technology is dictating almost everything that we do at Forum, from sourcing and looking for this gold, using your words, to integrating and doing diligence on these gold companies and then growing these companies. If we could focus right now on the sourcing and finding these investment opportunities (which is probably where I spend the most of my time and where Jen, who Jason met, is spending all of her time, and where I brought a lot of knowledge from my days at TA Associates) is that we are using a lot of data science to basically scan the Amazon FBA ecosystem and look for, I would say, the most attractive Amazon FBA brands that are in line with our investment criteria and reach out to them.
Jason Boyce: Ruben, just to follow John’s analogy here of the gold rush. I’ve been in the seller game for almost 20 years. There are white hat tactics, and there are not so white hat tactics. How do you make sure that what you’re buying isn’t fool’s gold. How do you know that there haven’t been reviews that have been purchased that put your purchase at risk? How do you know there weren’t illegal rebates used to spike your ranking on Amazon? All of those things that happen under the hood that look great from the creek bed, that shiny gold, but when you grab it, it’s just a rock.
Ruben Amar: I will have two components to my answer: [Forum Brands co-founder Alex Kopco] has seven years of experience at Amazon. He has built some of the tools that the millions of FBA sellers are using today to manage their brands on Amazon Seller Central. All the operating team is composed of ex-Amazonians, whether it is FBA sellers or people that worked at Amazon. This allows us to build tools that we are using during our diligence, whether it is tools that scan the reviews, whether it is tools that go through every single number of the P&Ls of these brands, whether it is tools that allow us to go through the trademark registries, whether it is tools that look at any Amazon violation that happened in the past couple of years for the brand. We have a lot of tools that we have built between our technology team and our operating Amazonians team that we use in the investment team to do every single one of our diligence processes.
So think about it as the combination of our background as investors doing diligence, plus the Amazon team, plus the technological team, altogether we have a very, very detailed process for the diligence work that we do in 30 days, approximately, between the day that we sign in a line and the day that we wire the money, that allows us to scan everything about the brand and protect ourselves from the things that you’ve mentioned, like black hat tactics and many others, because we know, because of our DNA at Forum, how challenging and important it is for Amazon to have a very clean and safe and robust brand that operates on Amazon.
John Cook: Amazon has built this universe, and I’m just super interested about how they could potentially manipulate this to their advantage or perhaps make sure that some of these new aggregators that are coming on the scene don’t become gigantic billion-dollar powerhouses, because they probably want a piece of that. How does Amazon fit into the equation in here as the platform of platforms and how do you think about them in this equation?
Ruben Amar: Amazon has really positioned itself as the creator economy through its third-party seller ecosystem. In 2020, Amazon generated $475 billion of GMV. Sixty-three percent came from these third party sellers. And this number has grown 48% in 2020 through their 185 global fulfillment centers. We believe that basically the next century of multichannel commerce starts with Amazon. What’s interesting is that if you read the letter to shareholders from Jeff Bezos in 2018, he said, and I’m quoting, “Third party sellers are kicking our first party butt — badly.” Amazon private-label product sales represented less than 1% of Amazon marketplace GMV in 2020.
What does it mean? If you look at all the investment that Amazon has done in the last couple of years, they’ve invested billions of dollars to help improve the sellers’ experience with new technology and tools. What that means for us is that Amazon’s biggest source of profits, after AWS, comes from their marketplace economy. That’s something, if you look at like a valuation as SOTP [sum-of-the-parts] for Amazon on the public market, the second most-profitable business from Amazon is these third-party sellers.
Jason Boyce: Actually, Ruben, I think it’s the first, I think it’s the first, I think it makes more money than AWS.
Ruben Amar: You think so?
Jason Boyce: Absolutely.
Ruben Amar: Point being is that it’s such a profitable source of business for Amazon. It’s such an important flow of growth for Amazon. At the same time, they’ve invested so much money to help sellers that we don’t see any point where Amazon’s third-party market will go away. We really think it will stay and will keep growing. And there will be more and more sellers that will get there because Amazon still thinks as a startup. Even though it’s one of the largest companies today, they operate this company as if it were still a startup. What it means is that they are innovators. And what it means is that when they know that they are now positioning themselves as the next-century creator economy for millions and millions of entrepreneurs and buyers in front of them, they create the new economy. It’s not even a marketplace anymore. It is a new economy.
We are very, very confident about Amazon going forward. There are some risks. Amazon, of course, might want someday to take a little bit more of the margins on, for example, the FBA fees. Maybe they will increase, one day, their platform fees. That could happen, but the growth engine will still remain there. And the ecosystem that is this new economy will remain there.
Risk of getting crushed?
John Cook: I’m curious what you think about the risks here for both the aggregators and the sellers to the aggregators. Because when I think about it from a technology landscape, I’m trying to think of other examples in the past where you had a giant platform, and then you try to create another platform on that platform. And it seems like if you’re in the middle there, every VC or investor will tell you, you don’t want to be in the middle, you’re going to get crushed. And so I’m curious what you think about that, Jason, and maybe Ruben, you can follow up on that.
Jason Boyce: I speak out about treatment of third party sellers by Amazon as often as possible. Amazon is in this middle place to be the judge, juror and executioner for your listing and for your seller account. And so I’d love to hear how Ruben plans to manage the seller accounts because there’s some other seller policy TOS [terms of service] issues to be wary of. But it is a very unique situation. Amazon is not the internet, but it certainly feels like the internet of products, and they hold the rules. I’m remembering back years ago, having conversations with folks at Amazon about Anker, a billion-dollar brand, Amazon-native, public company, and Amazon being very uncomfortable with the size that Anker had gotten to for a lot of reasons.
Obviously they’re spreading out their risk. If they have millions or hundreds of thousands of sellers versus one seller doing close to a billion dollars in a category that can be incredibly risky to their revenue stream. And so that’s the question I ask, Ruben, all the time, and I know you get it and I think you answered it really well. It’s not so much about what Amazon thinks. How do your investors feel about the fact that Amazon could come in, take a big swipe and knock off your sales for a good month or six months or 90 days until they decide you’re able to sell again? Do they know that that’s a risk? And how do you address that with your investors?
Ruben Amar: That’s a good question. There’s also a question of how do I address that in terms of risk management for my own company, right? We want to make sure that we are in business, as well. I think there are two components. First of all, the probability that Amazon will do that for all the products across all the brands is very low. They could do that for maybe a sub-sub-sub-category in which one big player owns 95% of the sub-sub-sub-category. That could happen. The approach that we have is that we really think about portfolio diversity. This is very important for us. So the way we do our deals, first of all, we will not do all our deals on a $100 million Amazon only business. We will look at businesses that have been able to build leadership within a sub-sub, or a niche, category in which they built a nice business that is generating between $1 million and $5 million of sales.
And the idea for us is really, take this business from this niche only on Amazon and get it into other niches on Amazon, but more importantly, take them very quickly into other channels. And we have a team in house that is spending all of their time on the multichannel off-Amazon business. The reason for that is that, as I said at some point in the previous question, Amazon is the starting point for next-generation commerce because of the ecosystem and the access to customers.
But from there, there’s such unlimited opportunities from a multichannel expansion perspective. And when you think about how do I explain it to my investors, how do I explain to my financial backers, from an Amazon perspective, we are diversifying our portfolio in terms of products, in terms of categories, we’re going after in terms of seasonality. Some products will be much more seasonal around Christmas. We get also some products that much more seasonal around New Year or around January. Some products are much more seasonal in the summer.
All of that is a perspective of building valuable businesses that are, in terms of risk perspective, very well-managed and diverse, but on top of that, my investors feel very comfortable because we have built in-house capabilities to take these brands from Amazon-only to Amazon-majority, to maybe one day, Amazon as 30, 40% of the business. And that’s what we do. We are a brand builder. We are here to buy very high-quality businesses on Amazon and really grow them into very valuable [direct to consumer] brands going for the next five to 10 years, where if you look at the business five to 10 years from now, Amazon would still be a big part of the business, but definitely not the only one.
Jason Boyce: That’s interesting. I think that’s a really smart strategy, especially on the European side because Amazon Marketplace isn’t as big in Europe as it is here in the United States. But Ruben, I’ll tell you, at our peak business in my eight-figure top 200 seller business, we had the same product, the same price, the same listings, the same images, the same assets for the brand listed on our own website, on Amazon.com, Walmart, Sears, Jet, Newegg, all the other marketplaces. And we did about maybe 10% on our own website. We did, if you combined all of the other marketplaces, it was collectively about 10% and on Amazon, it was 80%.
I also think you’re spot on with his whole concept of challenger brands or brands that are upending the rule. I think that’s what I really love what I’m hearing from your, Ruben, is you guys are looking at a core brand and you’re going to build that brand and make it the next sort of Procter & Gamble brand, if you will.
I agree with you 100%, the next billion-dollar brands, and maybe some in your portfolio, are going to have started as an Amazon seller or an Instagram seller because they have this unique relationship directly with the consumer who has put their credit card in the cart and have been honest and told that brand what their experience with the product was. And the folks that iterate on those brands over and over are going to be the winners. The days of Procter & Gamble coming in and dropping a $50 million TV ad campaign on a mediocre product are over. So I feel like what I’m hearing you say is that’s the kind of brands that you’re looking for and looking to provide some fuel to grow to sort of own the future.
Ruben Amar: Jason, this is exactly spot on. P&G, Unilever, in the offline world, 50 years ago, built the most valuable consumer brands around the world today, through acquisitions. What we are trying to do is a similar approach, building this digital tech-oriented platform of the next-generation consumer brands so that we can sell to everyone on the planet through any marketplace.
Now, I just wanted to build on what you said that is very important. It is very easy to say, “Hey, I want to buy a business on Amazon and grow it to many other marketplaces.” You mentioned something very interesting. Even though you were selling on your own website, still 90% of the business was on Amazon. The reason for that is that for many years, technology was not really available, and to be honest, still is not available to be able to really manage at scale a brand that is very active, not only on Amazon, but on many different marketplaces.
Imagine how much struggle you had to go through, when you were managing your very large business, only with 80% of Amazon, in terms of inventory management system, in terms of marketing, in terms of expansion, in terms of keyword search, in terms of competition, all of that was not only on Amazon. So imagine when you reached a scale that your business was, but you have five to 10 different marketplaces in different languages, different legal requirements, different types of customers, a customer in Europe will not think in the same way as a customer in Asia or a customer in the United States.
The only way to manage a very large online consumer business multichannel at scale is if you have a stellar technology platform that fuels everything that you do, from the moment that you acquire this Amazon-only brand to the moment where you sell through all the channels that are available around the world. It cannot work if you don’t have the technology that allows you to do that.
John Cook: Do you view yourself as a technology company or an investment company? You don’t like this term aggregator. Why don’t you like that term and how do you differentiate between the investment component of what you do and this technology component of what you do?
Ruben Amar: “Aggregator” is, for me, the wrong word to describe the business. We’re building a portfolio through acquisition, but we view our business as a CPG [consumer packaged goods] operating company. Because when you’re thinking about aggregator, it implies that the main driver of value and, if you think about it, success for us, will come through acquisitions. The reality is that the acquisition is basically the starting point, the go-to-market strategy. Instead of building a brand from scratch, we decide to go to market and acquire a business, but all the value, everything, the only reason Forum Brands will be successful is through brand-building and not aggregating. So to answer your question about how do we see Forum: It is a technology-driven consumer company and our go-to-market strategy of these consumer tech companies is acquisition.
John Cook: So do you see IPOs or a secondary M&A event of these companies that you create as being a larger payoff for you at Forum?
Ruben Amar: That’s a great question. So going back to the analogy of private equity, what we do in private equity, and of course it depends on at what stage you invest and how much activism approach you take to investment, private equity. But the majority of the time, you, as a private equity firm, you will invest in a business, whether it is a minority of majority, and you will have other people that are not employed or in control of your private equity firm basically grow the business. You will help them, depending on your degree of involvement, but at the end of the day, private equity firms do not operate the business that they acquire. We operate these businesses that we acquire. So this is very different from a private equity model.
For us at Forum, we have a very long-term approach. The reality is that we want to build a holding company of very, very large brands that have their place and they can sell 10 to 15 years from now. Of course, there might be some situation in which we will have an opportunistic approach by strategic players, or maybe one day, there will be an opportunity for the whole holding company to go and do an IPO, you never know, but if we think about the strategy for the brands themselves, it’s to take them from day zero for us when we acquire them, and keep growing them, growing them, growing them for many, many more years, because that’s where the real value is. The value is through building long-term sustainable brands that everyone in the world want to acquire.
John Cook: It seems like, as you do that, there’s a lot of challenges here in front of you. You’re building out your own tech stack. You’ve got Amazon that could or could not turn the dial up or down on these. You’ve got big competitors, too. I mean, they’re heavily funded companies coming into the market. And finding those gold nuggets is a challenge, too. I mean, that’s not the easiest thing to do. When you look across the landscape of your challenges as you’re starting this new business, what stands out to you as the thing that keeps you up at night?
Ruben Amar: You’ve basically highlighted all the challenges that we are going to face and that we’re facing every day. Just to be clear, I think there will be many winners in this space. The space is big enough for them to have 10, 15, 20 winners. Everyone will have eventually their own strategy. Right now it’s Day Zero of the consolidation market I told you about. It seems like everyone is doing the same thing, but eventually, and very quickly, people will have to identify their own strategy. The solution for Forum to be successful is to have the best people in every single step of the value chain and what we are trying to achieve at Forum.
Success come only when you have people that are excellent and that are in a team where they feel they are part of a dream and a big mission, and it’s not easy to do. When you recruit five, 10 new people every month, it’s not easy to do, especially on Zoom, but we spend so much time and effort every day to be able to build this environment where we can attract the best talent. And I believe that that’s the only way we will be able to win and be one of the winners in this ecosystem.
Jason Boyce: I love that, Ruben. John, I’m going to add two more threats. And I think the antidote that Ruben has been describing — branding, branding, branding — is going to serve them well. What are the other two threats? China factories coming in and dropping products onto the Amazon platform at prices that most brands in the United States can’t even pay for in the first place. And then additionally, we had this great guest, in our first episode of the Day 2 podcast, Peter Dering, who really understands the importance of brand. That’s what I tell clients and prospective clients every day. You can’t compete with Amazon Basics. You cannot compete with the China factories that are dumping goods in many cases onto amazon.com. But what you can do is you can sprinkle the pixie dust and you can build a brand and you can create this moat.
And I love your strategy, Ruben, of holding onto these brands, because every day, every month, every year, that brand is out there, wowing customers, and then you’re iterating on these as you get that real-world customer data from real shoppers on Amazon or your own site, etc., and you’re iterating on that, when you go from year one or two to year 10, that brand will continue to build that brand equity. You’ll be able to sell your product at a higher price than the Amazon Basics in the China factories, because it will be better. It will be more beautiful. There’ll be more equity built into it. Ruben, I love that about what you guys are building over there, but John, there’s a lot of risk in this game. So it’s another reason why I’m amazed: $3 billion raised. It’s insane.
Edited and produced by Jason Dildine.