The Amazon roll-up play — where one company creates economies of scale by buying up and consolidating multiple smaller third-party merchants that sell their goods via Amazon's marketplace — continues to be a strong e-commerce trend, and in the latest development, one of the hopefuls in this space is announcing a major injection of capital to fuel its own place in the field.
Elevate Brands, a New York- and Austin-based startup that acquires and runs third-party Amazon merchants, has picked up $250 million in funding, money that it will be using both to continue investing in its technology, as well as to buy up more small businesses.
Elevate is already profitable, with 25 brands currently in its stable, many of which also have come to Elevate with patents for their products, CEO and founder Ryan Gnesin told TechCrunch. The plan will be to continue to enhance the systems it has in place for evaluating potential M&A and analyzing the landscape overall — today its algorithms use some 100 million data points, it says, to find suitable acquisition targets — and to continue building out other organizational efficiencies.
Elevate's funding is coming as a mix of debt and equity — quite standard for these e-commerce businesses that are raising huge rounds to go after the roll-up opportunity — with backers including a number of individuals and investors with track records in fintech and e-commerce. They include FJ Labs, Novel TMT, Adam Jacobs (who had founded The Iconic in Australia), the founders of buy now, pay later business QuadPay, Intermix (acquired by Gap) founder Khajak Keledjian, Ron Suber (of YieldStreet and MoneyLion), and more. No valuation is being disclosed.
It's estimated that there are some 5 million third-party sellers on Amazon today, with some 1 million sellers joining the platform in 2020 alone. Thrasio — one of Elevated's larger consolidator-competitors — believes that there around 50,000 of them are making $1 million or more annually in sales. Elevate estimates that the Amazon marketplace, currently valued at $300 billion, will double in the next five years.
Unsurprisingly, all that has led to a number of companies like Elevated racking up hundreds of millions of dollars in debt and equity to consolidate the most promising of these businesses. Their rationale: the founders and management of these third-party sellers may lack the appetite to stay with their businesses for the longer-term, or they may lack the capital to scale to the next level; so consolidating these businesses to leverage investments in technology for better market analytics, marketing, manufacturing and supply chains is the logical solution.
Given the size of the market opportunity, that's led to a lot of investment. Thrasio has raised nearly $2 billion — in both debt and equity — for its efforts; Heyday recently raised $70 million from General Catalyst; The Razor Group in Berlin raised $400 million. Others with huge war chests include Branded; Heroes; SellerX; Perch; Berlin Brands Group (X2); Benitago; Latin America’s Valoreo and emerging groups out of Asia including Rainforest and Una Brands.
Elevate's pitch to the market is that it's a little different from the rest of the roll-up pack, in that started out as one of the millions of third-party sellers itself.
“We started selling at the end of 2016, testing the waters by selling a few private label products,” Ryan Gnesin, the CEO and founder of Elevated, told TechCrunch in an interview. That gave the company an early look at how to handle supply chains in manufacturing, and to think about how to differentiate its products from similar ones that are sold alongside them on Amazon. By 2017, Elevate was managing some 8,000 SKUs under that model.
That shifted in 2018 to a wholesale model, he said, reselling established brands on Amazon. It ran into trouble multiple times in that period, with Amazon shutting it down three times under suspicion of running counterfeit activities.
“We got caught up in an algorithm because we were scaling so quickly,” he said. “They assumed we were doing something wrong.” All of that helped Elevate learn how to navigate the waters more adeptly, with the first shut down taking three months to fix, but the second only one month, and the third a mere 24 hours. Eventually, in 2019, the company decided to take what it had learned and apply it to a wider range of brands, which it would pick up by way of acquisition.
“We began as third-party merchants and so we truly relate to them,” he said. “We didn’t just wake up and start buying Amazon businesses. This is what we are in our core, operators first. Anyone can buy a business, but the ones who can grow them are the most successful. That is our long-term view.”
Companies that become the target of roll-up acquirers are an interesting lot. As Gnesin describes it, in many cases the businesses Elevate talks to were built as side-hustles, and so when they take off, the founders are just as happy to pass them on to someone else for a decent exit than they are to stay the course. This is one reason why some of the acquisitions end up staying confidential, he said. Another is that the sellers are simply getting on, looking to retire, and don't have anyone to pass the business on to. Other times, this is just how entrepreneurs work. “If they make $5 million in a sale to Elevate, they will keep back $4 million for themselves, and use $1 million to start their next business,” he said.
As for target companies, Elevate right now doesn't focus on any specific product categories as other roll-up players might, although that may change in the future as the company gets more focused. What is a priority, however, is intellectual property — which to me is notable, given what sometimes feels like a genuine lack of differentiation when you look for products on Amazon.
“We have preferences for businesses with patents, since those tend to be more differentiated,” he said. From there, it goes to those that have strong traction and brand pull. “When a product is doing well on Amazon, there is an enormous amount of data there, and so you tend to have copycats. We look for business that can maintain a competitive position, adding new variations and taking that to other marketplaces. And all of that important in the building of communities. If you can build it that gives you an additional competitive advantage.”
Acquisition valuations vary, he added, but on average are around 4 times a company's Ebitda, but might go as high as 5 times or as low as 2.5x, depending on how competitive bidding is. Elevated's acquisitions typically are already making between $2 million and $3 million in sellers' discretionary earnings, he added.