You’ve Heard About Amazon Rollups; Pattern Brands’ Shopify Acquisitions Are Built for Lasting Value
The team behind Gin Lane — and the launch of brands like Harry’s, Sweetgreen, and Quip — wanted to create great brands and products for the home. After launching their own brands from scratch, they are now acquiring Shopify stores and building them to be the next generation of great home brands.
When I first began investing in ecommerce companies back in 2010, it was only at single digit percentage penetration of the total retail market. Amazon was at about a $80 billion market cap, and Shopify did only $132 million in GMV that year. Now those two platforms alone make up the majority of online retail GMV in the U.S., and there are no signs of slowing. Investing in the platforms versus the underlying brands themselves was an amazing opportunity. We saw our investments in Jet.com exiting for $3.3 billion just two years after we invested in its first round. Coupang’s recent IPO put its current market cap over $70 billion. Both reflect that opportunity to invest in the ecommerce platforms that were propelling the market.
Over the last decade, we saw the rise of ecommerce brands on Amazon and DTC brands on Shopify. However, the scale of those companies pale in comparison to the platforms. We saw companies like Casper raise a lot of venture dollars but end up with underwhelming IPOs or exits. Although these platforms made it much easier to launch a brand, there were limits to how large these brands can get.
So with that dynamic in the market, we worked closely with our portfolio company, Pattern Brands, on its future path. Where we’ve landed, launching today, is a Shopify rollup play that identifies exceptional home products with modest profitability and transforms them into fully optimized businesses with deep stores of working capital, marketing and supply chain expertise, and an umbrella brand consumers know and love.
The idea builds on Amazon rollup hype and looks great on paper, for reasons I’ll get into below, but also offers a graceful offramp to small business owners who love designing products — not so much the slog of growth marketing and shipping logistics.
The evolution of Gin Lane to Pattern Brands
I’ve gotta say, if there’s any team I trust to roll with changes, Suze Dowling, Nick Ling, and Emmett Shine from Pattern Brands are near the top of my list. For one thing, they’ve done it before. You might have heard of their previous project, Gin Lane; you’ve definitely heard of some of the startups for which they helped create around $15 billion in value: Hims, Harry’s, Sweetgreen, Smile Direct Club, Cadre, and Quip, to name a few.
“With Gin Lane, we loved what we were doing, which is building brands and partnering with entrepreneurs to build brands,” Nick says. “But at some point, we wanted more control over the end-to-end process of how these brands come to life. And alongside that, I think also saw an evolution in the industry of more and more brands being built and skepticism about where some of these brands would go.”
“When you’re running an agency,” Nick says, “you’re just influencing decisions, but now we can make sure that the values that we want to run the business by line up across the product, the marketing, how we treat consumers, how we grow the brand, how we develop and iterate on it. Now we’re at the frontline of that the whole time.”
A decade into working together, the three cofounders feel confident they’ve mastered the skills of brand building — and are interested in finding more dynamic vehicles for doing it. “It takes 24 months to take a brand from zero to something close to launch,” Nick says, “but there are a lot of great products and brands out there that we could just as meaningfully impact if we buy them.”
Amazon rollups: a primer
As this was happening, a hot new business model was emerging. Amazon’s very profitable pandemic translated into even more third-party merchants — about two million now — coming onto the already leading platform. Amazon has created a large number of long-tail brands that are profitable, but selling on Amazon isn’t easy, especially with small brands. The algorithm is constantly changing, cross-marketing is challenging, and access to customer data is limited. So you often find small, tired, cash-strapped Amazon sellers with around $1 million to $4 million in revenue that are profitable but facing not great prospects to continue to grow and always worried that Amazon controls their destiny and the rug can be pulled out from under them at any time.
Amazon had created thousands of these profitable longtail sellers, however there was no liquid market for them to sell their business. Rollups such as Thrasio can come in and buy these businesses at 3x to 5x EBITDA because of the lack of competition and then themselves be valued at potentially 12x to 15x EBITDA because they were a “platform.” That means the core of their business would be to continue to have opportunities to scale, because there will be more and more sellers to buy as Amazon continues to grow, thus giving the parent company a higher valuation multiple.
In the last several months, Thrasio has raised hundreds of millions in fast succession, at a valuation possibly around $4 billion. It’s also inspired a hoard of competitors: Branded, Heroes, SellerX, Perch, Berlin Brands Group , Benitago, Latin America’s Valoreo, and Rainforest and Una Brands in Asia.
This strategy is about acquiring assets and doing financial arbitrage. Amazon plays don’t have that many levers of growth as you roll them up. You don’t get the customer lists when you buy these businesses, so there’s not much opportunity to cross-promote a family of products. Nevertheless, Amazon rollups are “an economy on the verge of institutionalization,” Sebastian Rymarz, CEO of aggregator Heyday, told Axios.
But what about platforms beyond Amazon? And what about brand value beyond simple aggregation? Those were our questions as we started exploring the idea of Shopify rollups. Shopify has become now the second-largest ecommerce platform in the U.S., as it did over $37 billion in GMV in Q1 alone, growing over 117 percent year over year. Would we see a similar opportunity among DTC brands?
Pulling the rollup thread with Pattern Brands
The idea of applying a rollup model made a lot of sense for Pattern Brands. They’re world-class marketers whose time and capital is frankly wasted on product R&D — for many DTC businesses, every million in sales costs at least as much in investment to get to that scale. So to get to $20 million in sales often takes $20 million of equity capital raised. It takes a lot of iteration to find product market fit when launching a new brand. The idea of doing it through Shopify stood out as particularly viable, too. Shopify is generally more friendly to small businesses than Amazon — it’s not going to launch a competitive product, for example — but it also is a platform that requires you to do more things off the platform to be good at it. DTC brands need to become experts in email marketing, conversion, retargeting, SEO, paid digital acquisition, affiliate, fulfillment and logistics, supply chain, inventory planning, customer service, and much, much more. This is in stark contrast to Amazon, where a lot of these needs are handled by Amazon and are self contained.
So in the Shopify ecosystem, you find brands who have built wonderful products but have not scaled because they aren’t experts in all these different facets. So unlike Amazon rollups, where there may not be as many levers for value creation, we found that not to be the case for DTC brands on Shopify. We felt that if you can build a company that brought that expertise — and especially acquired brands that targeted a similar customer and shared ethos — you can build a company that was not just based on financial arbitrage but based on real value creation, which we think is more sustainable over time. Markets are efficient and financial arbitrage quickly goes away. If you want to build more of a “platform” business, you need to demonstrate that you can scale the brands that you acquire in a way that others can not easily replicate. But this was just a thesis and we needed to figure out how to prove that out.
The first step was quietly putting the word out, about a year ago, that the company was looking for great Shopify product businesses making home goods, doing $1 million to $10 million in sales, with a healthy profit margin. To prepare for a rollup strategy, we reupped Primary’s initial investment and Victory Park Capital provided $50 million in debt for acquisitions. The relative weight of debt versus equity in their $60 million fundraise demonstrates their plans to grow the product lines they acquire thoughtfully, yet also under a brand platform that becomes more than the sum of its parts.
The first of those acquisitions, announced this week, is GIR, short for “Get It Right,” a company that sells silicone spatulas, ladles, and sets. Pattern Brands is excited about taking it on because 1) the baseline products are of a high quality 2) it’s only up from here as Pattern Brands brings in their own know-how on marketing, tech, supply chain, and working capital for purchases like inventory and advertising. GIR’s products have been noted as best in class by third parties such as Wirecutter and have a loyal following of customers. The founders of GIR — without raising capital — built a profitable, high-quality business, but knew there were constraints on them trying to scale it further. They also wanted their business to be in the hands of those who share that same belief in great products and deep appreciation of the customer. As creators of two home brands themselves, Emmett, Nick, and Suze are exactly the kind of team GIR’s founders can feel comfortable handing the keys.
The Primary team is thrilled to support this next chapter. For more on what that will look like, see how the Pattern team described the move in their own words and visit the new Pattern site.