The e-commerce roll-up model — where firms acquire smaller brands, typically independent online sellers, for growth — is either shifting course or shutting shop in a clear sign of distress.
During the pandemic, a host of startups — GlobalBees, GOAT Brand Labs, 10Club, Upscalio, and others — emulated the model of Thrasio, a US-based e-commerce brand aggregator that was generously funded by eager investors. Founded in 2018, Thrasio had pioneered the art of acquiring and scaling up e-commerce brands, especially those operating in the Amazon marketplace.
As the frenzy spread in India, Mensa Brands, founded by former Myntra CEO Ananth Narayanan, became a unicorn in just six months.
Cut to 2024: the roll-up e-commerce sector has raised $10.9 million across three rounds, in a marked contrast from its peak in 2021 when it raised $778.08 million across 18 rounds, according to market intelligence platform Tracxn.
Capital issue
In 2021, the e-commerce sector saw a major surge in users, driven by the digital explosion during the pandemic, which boosted confidence in the roll-up model.
“The Thrasio model centres on valuation arbitrage: acquiring undervalued brands at low EBITDA multiples, increasing their worth to match higher market multiples, and then selling or operating them on a consolidated basis,” explains Ankur Bansal, co-founder and director of Blacksoil.
In India, however, the sector saw firms splurging money on brands at several multiples of adjusted EBITDA. There was also a huge influx of venture capital money into startups, with roll-ups vying to acquire brands across sectors to consolidate their market position. But as the funding winter set in months later, companies were not only forced to halt acquisitions but also struggled to manage the existing brands in their portfolio. Founders were forced to reset their operations as it dawned on them that they had overpaid for the acquisitions, says Bansal.
“With uncertainty over future capital, the roll-ups now prioritise organic growth and profitability over new acquisitions,” he says. “However, this growth is not easy to come by, and many have not seen the cost benefits or economies of scale kick in, as they claimed at the time of acquisition. Many smaller acquisitions have allegedly been written off or even prone to litigation.”
Roll-up e-commerce firm GOAT, founded in 2021 by Rishi Vasudev and Rameswar Mishra, collaborates with founders of direct-to-commerce firms to scale their brands. Its portfolio of brands includes Chumbak, The Label Life, Pepe Inner Fashion, trueBrowns, Abhishti, Neemli Naturals, Breakbounce, NutriGlow, Voylla, and Imara, among others. The company now requires fresh capital to service its existing debt, according to a source.
“The firm has about a quarter of cash runway left. Talks are on with existing lenders and venture debt firms to arrange for working capital,” says the source.
Likewise, Mensa Brands, which houses 25 brands across fashion, beauty, fast-moving consumer goods, and content segments like Villain, Pebble, Folkulture, and MyFitness, is struggling to raise capital, according to another source.
In FY23, Mensa Brands reported a loss of ₹227 crore, while revenue grew to ₹534.67 crore. GOAT reported revenue of ₹12.99 crore, according to data from PrivateCircle Research.
Lessons learned
Roll-ups are now attempting to balance profitability and reduce debt burden. Some want to cut down on non-scaling brands, while others like 10Club want to abandon the roll-up structure in favour of a D2C route. Financially well positioned companies are optimising operations, cutting costs, consolidating brands with clear synergies, and focusing on categories with high customer returns.
“To succeed, they must build technical expertise in e-commerce and implement cost-efficient supply chains to lower operational costs. We will likely see roll-ups striving for profitability in the next 12 months and become self-sustaining, eventually growing slowly, unlike what their investors had hoped for. We see both new capital and valuations becoming moderated for this model,” says Bansal.
Investors also underscore the need for long-term upfront capital to acquire and build roll-up model companies.
“Fundamentally, the business model makes sense. Many small businesses are trying to sell online and spending individually on critical items like digital marketing, server costs, tech teams, inventory, sourcing, etc. Roll-ups bring complementary ideas under one roof, allowing each business to pursue its markets, while generating cross-selling, and sharing costs for synergies. Of course, the key is execution. It’s not easy to acquire and build,” says Ankur Mittal, co-founder of the VC Inflection Point Ventures.
“At the early stages, strong processes are needed for one-to-100 scale-ups. That is where businesses struggled. (Yet) The idea still has merit, and a few success stories can change the paradigm,” he adds.
The road ahead requires balancing innovation with fiscal discipline, and sustainable growth rather than rapid expansion.