India recorded $49 billion PE-VC investments till September 2021, 41% of which has been in unicorns. In the eleven months of 2021, India has added forty one unicorns in its kitty and NASSCOM estimates this number to touch fifty by the end of the year. In this rally of innovation and increasing valuation, brands like Mensa Brands, GOAT Brand Labs, Globalbees, Evenflow Bzaar, Upscalio, 10Club and Powerhouse91 owned by some of the celebrated serial Indian entrepreneurs are amongst those rapidly making their mark in the startup space and taking advantage of their first move as adopters of the Thrasio business model in India.
Google and Bain and Company reports the birth of 7000 start-ups in India in the year 2020.
The model emulated from Thrasio, a US based Consumer Goods Company since 2018, has become a global buzzword amongst startups and has raved the digital market space by introducing the ‘acquisition- entrepreneurship model’ to sell quality consumer goods online. Within two years of its operations, the company has remarkably recorded revenues of $600 million in 2020 earning a profit of $100 million! With a valuation of $10 billion as of October 2021, they plan a foray soon into the potential Indian markets. The business draws indistinguishable interest from the startups and the investors in the country wherein the investors have pooled in close to $2 billion so far, debt and equity together. For a startup, to be able to break even and to earn profits within a short span deserves a lot of merit.
For those unaware of the model’s success mantra, the startup buys out third-party sellers in the digital space ( Thrasio targets sellers primarily on Amazon, US) by offering to upscale their brands at the global level using the startup’s expertise, say, in the areas of supply chain, technology, optimization and marketing. They target sellers that are profit making and are also recognized brands across multiple product lines. What prompts these sellers to get sold to another business when their going has been good? As per the Thrasio founders, these sellers would have started some years ago but now reached a stage where their resources are limited to expand. Secondly, the company proposes a lucrative exit price consideration for the sellers. The compensation value for the existing seller is agreed upon as the multiplier of the acquired business’ twelve months’ profits prior to its acquisition. A win-win for all!
The Indian entrepreneurial ecosystem envisages huge prospects in this business model. According to Amazon India, above four thousand sellers on its marketplace crossed INR 1 crore in sales in the year 2020. As per a Bain report more than ten thousand brands are active on digital space. Voila! Good potential for acquisition by the Thrasio modeled startups and they start minting! Mensa brands races to the unicorn status in six months and declares that it has broken even. It already has twelve acquisitions up its sleeves. Evenflow confirms its third acquisition recently of a brand specializing in fitness products.
While everything sounds hunky- dory, I am compelled to assume that the startups in this race have indian-ized the model, looking beyond the Western assumptions and mindset. The idea is to adapt to the Indian business environment contemplating the long run interest of the stakeholders – the startup, the prospective third party sellers and the ultimate consumers. India’s market dynamics as an emerging economy is different from the developed nations- we have vast diversity in region, preferences and aspirations. The Indian e-commerce space is relatively new compared to the developed nations. We have about 150 million online shoppers as of 2020 and the number is expected to grow to about 220 million by 2025, as reported by Grant Thornton.
Allowing for the possibility of the enormous scope for both the sellers and the buyers to grow in this space in the forthcoming days, I wonder if the sellers, most of whose business is necessity based, would like to compromise their ownership at this stage. In order to deal with this, if the startups compromise on the basic criteria of acquisition- profitability and brand of the acquired, it may leave them gasping for sustained profitability, i.e. back to square one! Based on the possible secondary information available of some of the acquisitions by these startups, I have observed that some of the acquired sellers have been in businesses not more than 5-6 years old and the brands not the top of our mind recall.
Will this pose a challenge in the coming future to the financial numbers of the startups acquiring the former? Moreover, the adoption of this model means inching towards a changing market structure concentrated within a relatively lesser number of players. On one hand, while it may assure economies of scale for the supply side, on the other, for the highly price sensitive Indian consumer, it means killing aggressive price competition by limiting the number of sellers in the digital space. Is the Indian market ready for this change? Are we contemplating a vicious circle wherein, over a period, the entrepreneur-seller will re-chase volumes over values thereby unfavorably hitting their bottom-line? An article by Harvard Business Review suggests not a single strategy for India, rather strategy for each state in India.
“There’s a way to do it better- find it” –Thomas Edison