Did Amazon aggregators raise too much capital?

10 August 2023

Since 2020, 93 ecommerce aggregators have raised total funding of over $16 billion, majority of which was raised in a single year in 2021. By startups benchmarks fundings rounds in hundreds of millions are rare and draw a lot of attention. Though did aggregators raise too much capital that overheated Amazon M&A market and inflated acquisition prices?

people presenting a pitch

Aggregators, positioned as fast-growing startups, raised funds from a wide investor base, including venture capital, private equity and private debt funds. Around 75% of the funding came as debt for acquisitions and the remaining 25% was equity or equity-like instruments. Since a lot of capital is for new acquisitions, aggregators have more flexibility in managing their cash burn compared to regular startups because aggregators generate cash revenue from acquired brands and can postpone new acquisitions.

Nevertheless some aggregators rushed acquisitions to achieve operational breakeven that resulted in pro-cyclical acquisitions at peak valuation levels. As a result, capital deployment by aggregators peaked in 2021 and early 2022, but then capital for new acquisitions drained and aggregators began facing issues with integrating and managing the acquired businesses.

Rushed handovers of new businesses and problems with understanding how to grow newly acquired products prevented aggregators from improving operational performance of the acquired brands. The situation was complicated by rising interest rates since March 2022 and overall downturn in tech. All of the above lowered investor confidence in the aggregator model.

Business model of ecommerce aggregators is relatively new, but at the same time it shares a lot of traits with private equity (PE) funds. PE business model has proven its resilience through decades since 1970s and by today these funds have accumulated an astonishing $7.6 trillion of assets under management, which is equivalent to 7.6% of the global GDP.

In the PE, a General Partner (GP) of the fund raises capital from Limited Partners (LPs) to acquire or invest in existing businesses. Median first time PE fund size is $100-150 million, which is close to rounds raised by the aggregators. Typical lifecycle of a PE fund includes a 3-5 years capital calling period for new acquisitions followed by a 3-7 year harvesting period, when the fund exits the investments and returns capital to LPs.

The key difference between PE and aggregators is that aggregators don’t plan exiting acquired brands and have wider operational capabilities to run them indefinitely. However, indefinite time horizon and management of operations are not unheard of in the PE too - there are evergreen funds and firms with value creation strategy based on hands-on management of acquisitions (e.g., 3G Capital).

Long time periods for capital calls provide PE funds with flexibility to pick best moments for acquisitions and avoid periods of inflated valuations. This is different from aggregators' approach to deploy capital as quickly as possible to show growth instead of returns.

Given the similarities between the PE and aggregators, what can we learn from the PE industry to estimate the potential penetration of the aggregators in ecommerce?

Out of 9.7 million sellers on Amazon alone, there are 108 thousand sellers with sales above $1 million per year. These sellers are typical acquisition targets for aggregators. Applying the lifecycle of a PE fund to the aggregator business model we can assume that $16 billion of total capital raised could be deployed over at least 3 years. This results in $5.4 billion deployed per year. Assuming $2 million average deal size, the aggregators would be buying 2.7 thousand online businesses per year.

It means that aggregators can acquire only 2.5% of the target sellers per year. Assuming average revenue per acquired seller of $2.5 million, combined revenue of sellers acquired would be $6.7b per year, which is only 1.4% of Amazon GMV.

chart showing penetration of Amazon aggregators

Combined funding of aggregators amounts to 3.3% of just Amazon GMV of $493 billion and only 0.3% of the whole online retail market of $6.3 trillion. Therefore, penetration of aggregators into ecommerce is by 2-20x lower compared to 7.6% penetration of the PE industry into global GDP.

Compared to PE, ecommerce aggregators remain underfunded and have potential to more than double funding to reach $37 billion to cover just Amazon marketplace and raise even more if we account for the whole ecommerce market.

chart showing comparison of aggregator funding vs Amazon GMV and PE assets under management vs global GDP

The funding of aggregators will rise when they fix internal issues and focus more on making high quality acquisitions and delivering on its value creation. Along the road this means that more efficient players will take a larger share of the market, less efficient ones will leave the space and new players with better strategy and capabilities will come.

At the same time, aggregators can learn from the PE industry how to deploy capital patiently, which will allow them to strategically select periods for deal-making and meticulously analyze acquisition targets.

At Quantacap we want to enhance aggregator investment processes by applying PE funds’ thorough approach and Data Science to navigate insights and risks hidden in millions of rows of ecommerce transaction data.

Last updated 10 August 2023

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