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Thrasio, an Amazon aggregator, has filed for Chapter 11 bankruptcy in New Jersey to restructure its finances, aiming to reduce its debt by approximately $495 million and defer interest payments for a year post-bankruptcy.
Thrasio’s business and investment strategy
Thrasio acquires small businesses on Amazon and enhances their products to meet consumer preferences. They estimate that 1 in 6 US households has purchased a Thrasio product. Over the past five years, the company has raised over $3 billion to expand, acquire more companies, and improve supply chain operations, but financial difficulties began as consumer spending patterns shifted and economic uncertainties rose.
In this discussion, we've shared insights and lessons on what other aggregators, holding companies, and roll-up buyers can learn from this narrative.
- Portfolio Risk: The Thrasio aggregator business model inherently carries a portfolio risk due to its concentrated investments in the e-commerce sector. For holding companies operating within a singular vertical—like Forum Media Group and Phoenix Games—accurately forecasting market demand is crucial. Their growth is deeply intertwined with the dynamics of their respective industries, and the larger these holding companies grow, the harder it becomes to outpace the market demand of their industry. This intrinsic risk underscores the importance of being constantly aware of the market dynamics when operating as a holding company, though it does come with the advantage of gaining deep domain knowledge and expertise. The case of Thrasio's bankruptcy, resulting from an overestimation of e-commerce growth post-COVID-19, serves as a learning point. Holding companies in sectors facing declining demand, such as traditional publishing, must have strategies to diversify and reinvest in areas with higher growth potential. An example of this is one of our clients, Forum Media, transitioning from traditional to digital businesses, leveraging their industry knowledge to navigate towards more promising opportunities.
- Valuation Hypes: Thrasio's active efforts to raise funds for buying Amazon businesses played a big role in creating excitement in the market, which led to higher valuations of these businesses. Beside Thrasio, other online business aggregators like Branded Group (with $150 million raised), Elevate Brands ($372.5 million raised), unybrands ($325 million raised), and Win Brands Group ($90 million raised) have also secured substantial investments. My discussions with e-commerce business brokers have shown a clear change in how these businesses are valued; whereas e-commerce companies were once sold for 1 to 3 times their EBITDA, they now command prices above 5 times EBITDA since these aggregators began competing. This change shows how the actions of investors, especially those consolidating businesses, have significantly impacted the worth of e-commerce companies, highlighting the dangers of following market fads. The investment “hype” has dramatically increased competition and investment costs, making such investments less profitable. This situation serves as a warning about the negatives of pursuing temporary market excitement, emphasizing the need for careful and strategic investment choices.
Thrasio's journey from a booming Amazon aggregator to filing for bankruptcy serves as a compelling narrative on the complexities of rapid expansion and market speculation, offering invaluable lessons for future aggregators and holding companies on the importance of sustainable growth and market adaptability.
