Deals, whether via funding rounds or acquisitions, say a lot about the state of a startup sector and what investors are thinking about it. Sometimes, though, a lack of deals tells us more.
Bloomberg reported that Victory Park Capital was looking, and struggling, to find a buyer for its stake in Perch, a startup that has raised more than $900 million in debt and equity to acquire and aggregate brands already selling on Amazon. Victory Park Capital couldn’t be reached for comment.
Now, I know I’ve written numerous times before that many of the highly valued companies that are now struggling to raise, or in this case unable to bring in outside investors, are fundamentally good companies that are just bogged down by overinflated valuations or complicated capital tables. And sure, maybe some of that rings true for Perch right now, too, but based on other data points coming out of the Amazon aggregator space, that doesn’t seem to be the root of the issue.
Benitago Group filed for bankruptcy protection earlier this month. The company’s business strategy resembled Perch’s: It bought already successful brands on Amazon and helped them grow and become profitable faster. Also like Perch, it had raised a nice chunk of VC money — $380 million; unlike Perch, it held a round of layoffs earlier this year.
Thrasio — arguably the most notable, and most-funded, player in the space — has also had a challenging year. The startup, valued at $10 billion in 2021, laid off a portion of its staff last year and named a new CEO. It also raised $3.4 billion in equity and debt. Secondary data from Caplight shows that shareholders are looking to sell their stakes at a price that values the company at around $1 billion. One seller even pegged the company’s valuation closer to $300 million.
The fact that the Amazon aggregator market hasn’t been doing well during the current economic conditions is not super surprising. As investors currently favor asset-light companies with low cash burn, these companies couldn’t look more like the opposite.
These companies grow almost exclusively through acquisitions, which are expensive. And while the aggregator startups are buying brands that are already doing well, meaning capital does flow back to the company relatively quickly, the model requires aggregators to take on massive pools of debt to make the purchases.
The fact that these companies have mainly raised debt plays a big role here. Though there are other sectors like biotech, deep tech and space that also require startups to raise large pools of capital really early on, many largely raise equity. Raising equity gives these companies investors who know the process will take time and will need more capital. Meanwhile, loans come with a timeline to be paid back.
Credit lenders aren’t dreamers like VCs. Lenders aren’t going to swoop in and put more money into these companies to save them based on a vision of what they think they could become. Lenders just care about the loan repayment and the bottom line.
It’s also worth remembering just how young these companies are, too. Thrasio was founded in 2018 and proceeded to raise that $3.4 billion over the course of just three years. Perch is only a Series A startup but has raised over $900 million.
Plus, the business model for these aggregator startups is fully at the mercy of an overarching platform — Amazon — which could easily change the rules for these independent sellers with no notice, thus changing growth projections for the aggregators themselves.
So, sure, you could argue that Perch and the other aggregators like it are likely struggling a bit due to factors out of their control, which seems right. But an investor being unable to sell a stake in a startup in a category that seems to be downsizing left and right is the opposite of a vote of confidence. If Victory Park is able to secure a buyer, I’ll be looking into how much of a loss it took to do so.
Disclosure: My uncle, Tom Szkutak, worked as the CFO of Amazon for many years and currently is on the board of directors at Thrasio.