Ecom aggregators, companies that purchase small profitable ecom brands, collectively raised more than $15B in ‘20/‘21. Now, less than two years after peaking in value, they’re starting to collapse.

Last month, it was reported that Thrasio, the original aggregator which raised over $3.4B, had engaged restructuring advisors, likely indicating a bankruptcy announcement soon. Benitago, which raised $325mm, went bankrupt last month. Many others are teetering.

I’ve been somewhat reluctant to write on this topic because I myself co-founded an ecom aggregator, Agora, in 2021. I’m friends with many in the industry.

But it’s important because aggregators represent an evolution in VC-backed ecom. VC-backed Ecom 1.0 was DTC businesses like Dollar Shave Club and Casper. Unfortunately, most of these brands are still unprofitable and, for that reason among others, are worth a fraction of their peak valuations.

Ecom aggregators, or VC-backed Ecom 2.0, were supposed to be different because they only acquired profitable businesses. What went wrong?

It’s the same problem. It always comes down to profitability. And almost no ecom aggregator is profitable.

How is that possible? How can you buy dozens of profitable businesses but end up in the red? The most important reasons:

  • G&A Expenses - Many small profitable brands added together should lead to one large profitable business. But not if that larger business hires hundreds of people who, at the end of the day, aren’t making the component brands more profitable. At its peak, Thrasio had more than 1,000 employees.

  • Bad Accounting - Many aggregators were willing to use “Seller Discretionary Earnings” as a measure of a brand’s profitability, not net income. Aggregators would often be convinced to remove “one-off” costs like marketing tests. But brands have “one-off” costs like this every year. If you exclude them, you’re artificially inflating true profit.

  • Interest Costs - Aggregators acquired brands with debt, sometimes for up to 85% of the purchase price. In 2020, interest on the debt was lower, around 8-10%. But today, interest rates are closer to 20%. Of course, companies love to report their “EBIT”, or earnings before interest and taxes. But the debt providers certainly aren’t forgetting what they’re owed; interest is a real cost!

  • Post-COVID Demand - Brand valuations were usually based on “trailing 12 month” profitability and ‘20-‘21 was peak COVID, when many ecom brands hit record profitability. Many acquired brands didn’t even exist before 2020. When people returned to stores, however, online brands took a hit and profitability tanked.

There are many more reasons including: overpaying for brands, the impossibility of integrating dozens of brands / month, and management teams with no ecom experience.

But at the end of the day, the aggregators, Ecom 2.0, fell into the same trap as the Ecom 1.0 businesses; they ultimately did not focus on overall, true profitability.