This year is all on the roll-ups. No, not those fruity snacks you used to find in your lunchbox; roll-ups are the aggregation of smaller firms into larger firms, creating a potentially attractive path for equity value.
Right now all eyes are on Thrasio, the fastest company to achieve unicorn status, and its group of competitors, such as Heyday, Branded and Perch, all vying to become the modern model of consumer packaged goods (CPG) companies.
To make matters even more interesting, famous investor and operator Keith Rabois recently announced that he working on a roll-up concept called OpenStore with Atomic co-founder Jack Abraham.
Like any investment firm, to be successful a roll-up must have a thesis or two providing it with a consistent strategy across its portfolio.
Thrasio reaped the benefits of the Cambrian e-commerce market explosion in 2020, in which more than $ 1 billion in capital was invested in companies with a mission to acquire independent Amazon sellers and brands.
This catalyst can be attributed to a few key factors, the first and most notable being the pandemic accelerating spending on Amazon and e-commerce more broadly. Then comes the low cost of capital, a reflection of the interest rates that make the markets overflowing with liquidity; this facilitated the raising of equity and debt capital.
The third is about emerging, quantifiable proof of concept: Thrasio is one of many to raise hundreds of millions of dollars, and Anker, a brand primarily from Amazon, has gone public. Both stories provided further validation that a meaningful brand can be built in the Amazon marketplace.
However, the interest in creating value through e-commerce brands is particularly striking. Just a year ago, digital native brands fell out of favor with venture capitalists after so many people failed to create company-wide returns. So what is the hype about?
Roll-ups are another flavor of investing
Roll-ups are not a new concept; they’ve been around for a while. In the offline world, roll-ups often reach much larger output multiples, known as “multiple arbitrationâ, So it’s no surprise that the trend is catching on online.
Historically, however, roll-ups have not been very successful; HBR notes that more than two-thirds of racks fail to create value for investors. While roll-ups are often effective in building larger businesses, they don’t always increase profits or operating cash flow.
Acquirers, i.e. those who combine smaller companies, must discover new operational approaches for their acquired companies in order to increase equity value, and the only way to increase equity value is to increase operating cash flow. There are four ways to do this: reduce overhead, reduce operating costs without sacrificing price or volume, increase prices without sacrificing volume, or increase volume without increasing unit costs.
Ecommerce could present a new and different opportunity, or at least that’s what investors and smart money are betting on. Let’s explore how this new wave of roll-ups addresses both growth and value creation.
Channel your enthusiasm: why every roll-up needs a thesis
Like any investment firm, to be successful, a roll-up must have a thesis or two providing it with a consistent strategy across its portfolio. There are a few that are all the rage in this particular wave.
The first is the main distribution channel on which a business grows. Evaluating companies with a common distribution channel can be useful in creating economies of scale, focusing marketing and growth resources in one specific channel rather than diluting resources over several.
However, these companies become dependent on this distribution strategy and any change could create vulnerabilities for the companies in their portfolio. As a study, let’s take a look at how two companies take different approaches: