Deep-pocketed investors and veteran entrepreneurs are rushing to bet on Amazon’s third-party sellers. The stampede will change retail forever.
Business was booming for Adam St. George when he decided to shop around his four-year-old brand Angry Orange Odor Eliminator. Sold primarily on Amazon, his citrus-scented pet odor remover was racking up more than $2 million in annual revenue.
Within hours of listing the operation on an online brokerage, St. George was inundated with phone calls. Planned time off to visit family in Ohio morphed into a marathon of negotiations with brokers, family offices and individual investors. The winner: consumer-products startup Thrasio, which sent a term sheet within a week of the listing and insisted on a response the next day.
“They weren’t messing around,” says St. George, 52, who sold Angry Orange for $1.4 million in 2018, a sum beyond his wildest dreams that paid for a nearly monthlong vacation in Hawaii and a new fishing boat. “You get this big check and it’s like, wow. It’s a trip.”
That check, though, paled in comparison to the return expected by Thrasio, which quickly revamped Angry Orange’s operations and has since increased its annual revenue eightfold, to $16.5 million. Named after Thraso, a brave Amazonian warrior from Greek mythology, Thrasio was founded by two serial entrepreneurs in July 2018 with a single mission: to roll up third-party sellers on Amazon. Over the last two years, it has spent over $100 million snapping up nearly 100 businesses, boosting their revenue to more than $400 million; it now sells 10,000-plus items—massage guns, hiking poles and everything in between—on the nation’s biggest online retail platform.
“We are a white knight in this ecosystem,” says co-CEO Josh Silberstein, 45. His cofounder, Carlos Cashman, 48, explains: “[Amazon] has been the most potent creator of entrepreneurship and entrepreneurs the world has ever seen. . . . Then, when it starts to get too complicated when [these companies] hit a certain scale, we are there.”
Silberstein and Cashman are not alone. Lots of people suddenly believe that Amazon’s small businesses represent a big opportunity. Over the last 24 months, 10 to 15 companies have raised $100 million or more apiece, totaling at least $1.5 billion, to buy up Amazon third-party sellers, according to Jason Guerrettaz, cofounder of brokerage WebsiteClosers.com. Among them are a company started by a former Wayfair executive and one from the founder of Charming Charlie, the accessories retailer that filed for bankruptcy twice.
These entrepreneurs and their backers—including blue-chip private equity players like Advent International and JPMorgan, big venture firms including Khosla Ventures and monied individuals such as Zillow cofounder Spencer Rascoff, former Tinder CEO Elie Seidman and Los Angeles Dodgers executive Tucker Kain, are betting millions they can score big returns piggybacking on Amazon founder Jeff Bezos’ billions.
“The fervor in this space is absolutely crazy,” Guerrettaz says. He adds that sellers who got perhaps 50 inquiries a year or two ago now attract between 200 and 300 in just the first hour of a listing. “We probably receive 20 to 25 emails a day from different groups reminding us that they are well-funded, a buyer in this space and are looking for deals.”
It’s all part of consumers’ unstoppable migration to online shopping. Amazon is now the world’s third-most-valuable company, with a $1.57 trillion market cap that lags only Apple’s ($2.03 trillion) and Microsoft’s ($1.64 trillion). The Seattle-based giant sold $335 billion worth of products in 2019, according to Marketplace Pulse, up 21% from the prior year. Amazon accounts for roughly 40% of all e-commerce spending in the United States, according to eMarketer.
THIRD-PARTY SELLERS—COMPRISING MOSTLY SMALL AND MEDIUM-SIZED BUSINESSES—HAVE BECOME THE BACKBONE OF THE LARGEST E-COMMERCE MARKETPLACE IN THE NATION, GENERATING ROUGHLY 60% OF AMAZON’S PRODUCT SALES IN 2019, DOUBLE THE PERCENTAGE THEY REPRESENTED A DECADE AGO.
Independent merchants on the site have been a huge part of that success. There are over 2 million third-party sellers worldwide. In the U.S. alone, these businesses moved 3.4 billion items via Amazon in the 12 months ending in May, up from 2.7 billion the previous year. Over 30,000 of these sellers in the U.S. each generate at least $1 million in sales a year, and many rely on Amazon to handle retail’s messy logistics: delivery, returns and customer service. In aggregate, these small businesses are vital to Amazon, accounting for about 60% of its product sales, double the percentage they represented a decade ago. By and large, the pandemic has been good for these companies: During this October’s Prime Day, Amazon’s annual 48-hour sales event, third-party sellers had their two biggest days ever, according to Amazon, with sales rising nearly 60% year-over-year to $3.5 billion.
Of course, tying one’s fate to the e-commerce behemoth brings with it some risks. Amazon’s marketplace has hundreds of rules, constantly in flux, that companies must follow. Heaven forbid you run out of inventory, take too long to get back to a customer or give Amazon reason to suspect you’re manipulating reviews. At best, your search rank is demoted. At worst, you’re suspended from the platform.
A more existential threat: that Amazon will notice your success and launch a competing private-label product, such as the coffee mugs and sheets sold as “AmazonBasics.” The retailer has been repeatedly accused of unfairly mining data to identify opportunities to undercut its top sellers. Some have also charged that Amazon strong-arms sellers into agreeing to onerous terms and abruptly suspends them with little explanation. Both the U.S. House of Representatives and the European Union recently issued reports accusing Amazon of anticompetitive practices. (Unsurprisingly, Amazon disputes these claims, arguing it has no incentive to rip off products from third-party sellers, which generate the majority of its product sales, and that it looks only at aggregate, not individual, seller information.)
“For all the negative press they get, they have undeniably created the world’s largest entrepreneur machine,” says Sebastian Rymarz, a former private equity investor and fintech executive who started his own firm, Heyday, to buy up these sellers. “Is Amazon suppressing seller listings and using data to compete? I’m sure it happens… but you have to weigh it against all the good they’ve created. Underneath it all is hundreds of billions of gross merchandise value, millions of entrepreneurs and a growth rate that is, like, [several times] faster than that of the fastest-growing economy.”
One of the biggest upsides for this new wave of savvy investors comes from the fact that these Amazon retailers are getting traction despite being run by amateurs. “There are very few [Amazon] brands you look at and say you can’t squeeze some more out of it,” says Chris Fryburger, founder of Cincinnati based nReach, which helps connect Amazon sellers with lawyers, marketing firms and other experts. “No one is really doing Amazon well.” As an early employee at Fundbox, a fintech that offers lines of credit to small businesses, Rymarz witnessed firsthand the number of successful, fast-growing online entrepreneurs who were just one invoice away from going out of business. “It’s the winner’s curse,” he says. He helped Fundbox speed up its loan process by integrating its software into accounting platforms like Intuit’s QuickBooks, through which many small businesses already managed their books. In 2019, he flew to Seattle to meet with Amazon executives about a similar partnership for its third-party sellers.
“I felt like I had been asleep under a rock. [Amazon’s] marketplace had gotten big almost overnight,” says Rymarz, 36, who joined Fundbox in 2014 after stints at Goldman Sachs and TPG. He started studying the seller base and quickly realized that most individual sellers remained very small, even as Amazon had gotten enormous. Although Amazon provided a lot of tools to sellers, there were still gaps, particularly when it came to using data to evaluate the competitive landscape and decide when to pull various levers, such as increasing ad spending or prices. “It’s easy to get started,” Rymarz says. “It’s very hard to grow.”
Excited by what he was learning, Rymarz left Fundbox in June, and by July had raised $175 million from blue-chip investors General Catalyst, Khosla and Arbor Ventures to start Heyday, which aims to acquire, launch and grow third-party sellers. He has been actively acquiring merchants with revenue between $1 million and $25 million that he believes have the potential to be ten times larger. He is also launching several new Amazon brands of his own, though he won’t divulge any details about them. “You’re going to see brands like Warby Parker now born on Amazon,” he says. “You’re going to see hundreds of Ankers.”
Anker, a Shenzhen, China–based maker of phone chargers and battery packs, is the most successful independent merchant started on Amazon to date and yet another reason why so many investors are rushing in. It racked up just under $1 billion in revenue in 2019, and went public in China in August. It’s now valued at nearly $11 billion.
THRASIO BUYS AMAZON THIRD-PARTY SELLERS AND THEN RUNS THEM THROUGH A RIGOROUS, 503-POINT CHECKLIST TO GOOSE SALES AND PROFITS. BELOW ARE A FEW SUCCESS STORIES.
If Anker is the most successful third-party merchant, then Thrasio can claim bragging rights as the leader among the roll-up artists. In just over two years, it has raised more than $500 million from, among others, Boston-based private equity giant Advent International, Seamless founder Jason Finger and Atlantic Records CEO Craig Kallman, including a $260 million round it announced in July at a valuation of $1 billion. It now claims to be one of the 25 biggest sellers on Amazon.
The key, according to Silberstein, is an effective “block and tackle” strategy. Every new business acquired by Thrasio is put on the so-called “conveyer belt,” where a core team of a half-dozen employees works through a 503-point checklist of best practices in an average of 34 days, farming out tasks to a deep bench of specialists in supply chain, legal and other departments as needed. For instance, the creative team makes sure each listing has at least seven high-resolution images that take up 80% or 90% of the allotted space on the online display page (larger images lead more people to click).
After buying Angry Orange, Thrasio introduced slick new packaging and partnered with pet influencers like Two Himalayan Cats, whose cute social-media posts drove not just clicks but sales, helping boost all-important conversion rates. Thrasio also identified a few dozen new relevant search keywords (such as cat urine odor eliminator and pet candle) and became the number one Amazon result for the majority of them. It’s now launching add-on products such as a spray canister with an attached blacklight, having noticed that pet owners most frequently purchased their odor removers with a separate blacklight to help them locate urine on the carpet. All these little moves add up to big revenue gains.
“We can help companies in so many ways that they just don’t have the capability to do as a small company,” says David Mussafer, chairman of Advent International.
For decades, consumer-products giants like Unilever and Procter & Gamble have paid huge fees to secure prime shelf space at grocery stores and spent heavily on TV advertising to drive sales. In the digital world, neither matters much. “If you think about the competitive advantages that Procter & Gamble, Unilever and Newell enjoyed 15 years ago, and you ask which of these are important today, the answer is none of them,” says Thrasio’s Silberstein.
Amazon is now the first stop for the majority of Americans looking to buy basically anything. In the digital world, search-engine optimization strategies to pop products to the top of Amazon results and online reviews play key roles. “The customer is telling us they care more about reviews than brand name,” says Chris Bell, a former Bain Capital and Wayfair executive who started roll-up company Perch last year. “They care more about reviews than [that] they saw an ad on television.”
Some traditional retail executives are clamoring to get in on the action. That includes onetime hotshot Charlie Chanaratsopon, who opened his first women’s fashion accessories store in 2004 at age 26. In less than a decade, he was worth an estimated half-billion dollars and had opened nearly 300 brightly colored Charming Charlie stores across America, each blaring pop music while shoppers browsed $15 scarves and $9 sunglasses. At its peak in 2014, Chanaratsopon’s chain pulled in $550 million in sales. But he got burned chasing success in suburban shopping malls; he stepped down in 2017, just before the company declared bankruptcy for the first time. It filed for bankruptcy again in 2019, and that July announced it was shutting all its stores.
Now, Chanaratsopon says he’s ready to “ride the rising tide and tailwinds” of Amazon. Boosted Commerce, which he cofounded with tech veteran Keith Richman in January, raised $87 million in September and has already acquired 10 companies that sell a hodgepodge of products from greeting cards to an antifungal body wash that treats jock itch. He and Richman say they chose these businesses in part for their good reviews and high search ranking. “I’m not a big hockey guy, but to quote Wayne Gretzky, you have to skate to where the puck is going,” Chanaratsopon says. “It used to be in malls. Now it’s evolved to Amazon. We believe we are buying Fifth Avenue digital real estate.”
As foolproof as all this sounds, there is plenty of room to fail. Richard Jalichandra, a 58-year-old tech executive, had been running an online supplements company called BodyBuilding.com that was getting destroyed by rivals on Amazon. Sure, competitors like GNC and The Vitamin Shoppe were moving to the platform, but the real threat came from the multitude of mom-and-pop businesses peddling their own supplement brands. “It was like death by a thousand papercuts,” says Jalichandra, who previously ran a workout-app company called MapMyFitness, which Under Armour purchased for $150 million in 2013.
That’s when he decided to go along rather than fight. He started 101 Commerce in 2017 and raised over $10 million the next year from VC backers including Austin, Texas–based Next Coast Ventures. Its audacious goal: to buy 101 Amazon merchants in two years. His firm analyzed 400 potential acquisitions in just two months and bought 10 of them. Then his investors got cold feet, deciding it was going to take too much time, money and resources to juggle dozens of brands. Jalichandra left in 2019, and 101 Commerce merged with Goja, run by a veteran independent seller from Florida, which had the technology and the manpower in place to oversee and optimize listings. At the time of the merger, JPMorgan, Next Coast and others put another $20 million into the company, which now has 110 employees who manage the new acquisitions.
“I don’t know how these other companies are doing it, because the risk and undertaking are not insignificant,” says Thomas Ball, cofounder and managing director of Next Coast. “You can’t bake a cake in 20 minutes at 900 degrees. It takes an hour at 300 degrees.”
Another problem: rising prices as too much money chases too few good deals. “I hate to say this, but brands that have no business being worth a lot of money are going to be worth a lot of money,” says James Thomson, a former Amazon executive and chief strategy officer at Utah-based Buy Box Experts, which helps brands sell on Amazon.
“My concern about this model is you are building upon rented land,” says Chris Yates, who runs Centurica, a due-diligence service for online acquisitions. “You are relying on Amazon to let you play in their sandbox.”
For now, Amazon claims it’s happy to share its space. “The emergence of these companies reflects how selling with Amazon offers small businesses powerful opportunities to build their brands and reach millions of customers,” says an Amazon spokesperson. Still, some are hedging: Boosted Commerce, for instance, also lists products on eBay, Facebook Marketplace, Walmart.com and a standalone website powered by Shopify, as well as Amazon.
Because Amazon still dominates online retail, though, most roll-up players have decided it’s worth the risk. The upside of piggybacking off the Bezos behemoth is just that big. Says Thrasio’s Silberstein: “If we exited at $10 billion, I’d give myself a C-minus. If we exited at $25 billion, B-plus. If we exited at $50 billion to $100 billion, A-minus.”