#290 – Is The Aggregator Boom a Bust? This Investment Banker Tells All
In episode 290 of the AM/PM Podcast, Tim and Joe discuss:
- 02:15 – Tim Walks Us Through The Aggregator Boom
- 04:15 – Why Joe Is The Best Guest For This Topic?
- 05:15 – When Did Investment Banks Become Aware Of Amazon FBA?
- 09:15 – The Four Players In The Acquisition Space
- 11:35 – The Aggregator Investment Thesis, When Did It Start?
- 12:45 – Aggregator Pioneers Were Focused On Cashflow
- 15:00 – The Pandemic As A Tailwind To The E-commerce Industry
- 21:15 – The Industry May Be Unwinding Or Balancing Soon
- 23:15 – Consumer Spending Has Been Shifting Back To Services
- 26:05 – Factors That Are Affecting The Shift In Consumer Spending
- 28:15 – How Has The Logistics Situation Affected Their Performance?
- 31:35 – Why Are We Asking These Questions?
- 33:15 – Is It Time To Clean Up Bad Positions?
- 37:45 – Is The Aggregator Boom Turning Into A Bust?
- 40:15 – Joe Is Optimistic About The Future
- 42:15 – Will There Be A “Clean Up” Phase?
- 46:05 – How To Read Joe’s Industry Reports
- 47:15 – Joe’s Advice For Amazon FBA Sellers
- 49:35 – How To Get In Touch With Joe
Transcript
Tim Jordan:
The past two years have been massively exciting in the Amazon FBA and e-commerce space because there has been so much money thrown around to buy businesses. Headlines have been ridiculous. Multiples have been ridiculous. And a lot of people, even though I know personally myself have sold businesses that I don’t know, we might not have ever assumed we could sell. It’s been an awesome couple of years, but the question we’re gonna ask today is, has that train started to slow down? It’s gonna be a great episode. Listen to the end. And here we go. Hi, I’m Tim Jordan and in every corner of the world, entrepreneurship is growing. So join me as I explore the stories of successes and failures. Listen in as I chat with the risk takers, the adventurous, and the entrepreneurial veterans, we all have a dream of living a life, fulfilling our passions, and we want a business that doesn’t make us punch a time clock but instead runs around the clock in the AM and the PM. So get motivated, get inspired. You’re listening to the AM/PM Podcast.
Tim Jordan:
Hi everybody welcome to the episode of the AM/PM Podcast. I’m your host, Tim Jordan. And today we are talking about money. I know, usually, I say, we talk about business today. We’re specifically talking about money and big money in the Amazon and I would say broader eCommerce space. Now, when I first started selling on Amazon other marketplaces, I remember everybody saying this isn’t a business, right? It’s not a business, there’s no value in this. At any time you can get suspended. I remember thinking, well, gosh, I’m building something. I don’t know what it is, but I’m building something. And maybe the answer is to get onto a direct-to-consumer website, right? If I can get on a D2C side, a BigCommerce side, or a Shopify site, then I would have an actual value for this e-commerce business. Once I got off Amazon and everything started to change several years ago, there’s a couple before them, but the majority of the landscape started changing just a couple of three years ago.
Tim Jordan:
When aggregators started showing up in big way, bringing large amounts of money and buying up businesses. Now I’ve talked about aggregators before and gimme just a second to preach here for a second. I’ll enter, I’ll introduce our guest who is way smarter at this than I am, but you’ve heard me talk before about how I didn’t actually like when the first aggregators came on the market because they were telling people your business is worthless. We’ll pay you something for it. And I liked was maybe it wasn’t that harsh, but it was close. Now what I have appreciated is so many other aggregators have come to the space that it created this ridiculous competition, and everybody had to start paying more in the past like 12 months. We’ve seen multiples for unbelievable numbers, like unbelievable amounts. It’s crazy how much people are paying for these businesses.
Tim Jordan:
And about 18 months ago, I started telling, but it’s gonna come to a halt. It’s gonna stop. It’s gonna slow down. There has to be a balance because I’m looking at these product lists that some of these large well known aggregators are selling and it’s all crap. It’s like no way in a million years, would I try to sell the supersaturated commoditized stuff that no one’s ever gonna build a brand on and it’s gonna be a dumpster fire. There’s been a lot of headlines lately that we’re positive and we’re starting to see some negative. And in this episode, we’re going to ask the question, is the aggregator boom, now a bust? So I have one of the smartest guys in the space that I know his name is Joe hog from global wired advisors. Welcome to the episode, Joe.
Joe:
Hey Tim, it’s great to be on.
Tim Jordan:
Now, I wanna hear a little bit of background, Joe. Like, don’t give us the whole life story, but talk about basically why you’re an expert in this and I’m gonna let you explain it. And then I might also reexplain why I think that you’re the right guy to have on, but you don’t traditionally come from an eCommerce space, do you?
Joe:
No, no, I don’t. My background is really capital markets, banking, investment banking, you know, I traded, derivatives, foreign exchange, you know, Ran funding at large bulge bracket institution. So, so my experience is very different than eCommerce. It is it’s really more market centric, more I suppose, M&A capital markets heavy.
Tim Jordan:
Joe, I’m being honest. I don’t know what half the words are that you just said. You said bulge bracket. I’m thinking about like a rusted out gate hinge or something. I have no idea what that means.
Joe:
Big bang, what that means,
Tim Jordan:
Big bang, right? But this is good. And this is why I want you on. And this is why I love hanging out with you guys over there because you bring a different perspective to the space. I’m a blue-collar firefighter. I don’t know crap about anything. Well, I shouldn’t say that I’m getting a little bit better, but that you traditional and, and typical listener of this podcast, a smaller online seller, a solopreneur, they come from usually different background. Most of ’em aren’t coming from investment banking, but investment banking is now impacting our livelihoods. It’s impacting our industry because investment banking is reaching out and touching this industry. So we need to be familiar with it. So when did you first become aware of this Amazon FBA business model from your banking background?
Joe:
Sure. So I guess I should give you a little bit more context with respect to how we started Global Wired Advisors. So we actually originally started in the lower middle market space, the small business space as premedium advisors and, you know, premedium advisors was really just the brainchild of four actually three investment bankers and one CPG specialist to take a traditional middle market investment banking model down market into the lower middle market space where we believed there was just, you know, a lack of expertise, you know, middle, most, most middle market investment banks really don’t wanna work with companies that are smaller. They prefer to work with companies that have enterprise values of a hundred million or higher. And at the low end, there are a lot of business brokers that can act as intermediaries, but just not really provide the same level of structured finance expertise. So that was the thesis of premedium advisors and it turned out we got a lot of deal flow. There were a lot of smaller companies that really needed the expertise that we could bring down market. Well, after about a year or two of providing that to more traditional businesses, we noticed that just a lot of companies were coming to us.
Tim Jordan:
Oh, wait time out you said traditional businesses, are you talking about brick-and-mortar businesses? You talking about service based businesses?
Joe:
Non eCommerce, non eCommerce,
Tim Jordan:
Non eCommerce. Okay.
Joe:
Got it. Yeah. So they were coming to us that you just that needed you know, again, advisement with respect to deal making. So, the consumer focused eCommerce deal flow, we found that was coming to the promedium advisors platform really needed to be handled differently. It needed to be separated out in it required a different level of focus. So in doing that, we created Global Wired Advisors, basically in global wide advisors is focused in, into highly on the eCommerce consumer vertical.
Tim Jordan:
So you came from larger business support in the investment banking world. The way you described it, you came down market into smaller businesses that were traditional businesses. And then you see this crazy world of eCommerce. What did your buddies in the middle tier of banking, think about new vertical that you’re getting to in these smaller imaginary e-commerce businesses?
Joe:
Well, I think that it was so new that people really didn’t have an idea about what it was gonna be. I think it was really quite novel. I think that you know, e-commerce was at the time, again, this is going back three years ago at the time was, you know, very fragmented. It was, you know, very say mom and pop, like it had not really been professionalized. It was very entrepreneurial, you know, it was quite small, you know? So, so, so pushing an investment banking model, a sell side model down into this environment at the time felt to many people like overkill. It honestly did a lot. A lot of people were like, wow. I just, I think that the expertise that you’re bringing down market probably isn’t needed. And then of course we know the history of the space quickly professionalized as, you know, a ton of money move into the space via the aggregator model. So I think you know, again, we were timely with respect to how we were viewing the market, how we were approaching the market.
Tim Jordan:
So it sounds like you got into the right time because you brought a professional background, professional knowledge, and really professional team into an I don’t know, a business community that wasn’t necessarily professional at the time that professional money showed up.
Joe:
That’s correct. Right.
Tim Jordan:
And for those of you that are listening, we’re about to get into some, some cool stuff here. And we are gonna ask that question if things are slowing down, but I wanna share my opinion of the acquisition space, the main four players in the acquisition space. Now everybody knows the term aggregators. And if not, I’ll tell you, everybody knows what a broker is. How many people know what an investment bank is. When you look at the especially smaller e-commerce business acquisition lineup, I see four components. The first one’s a broker. And I sometimes have used the term like brokers, like Craigslist. They basically can take your business and they can show it to people, right? Might not be a whole lot of polishing might not be a lot of other support there, but it’s being advertised. Then you have your aggregators. And these are these large roll up companies that take a lot of money in debt and equity.
Tim Jordan:
And they buy your business with the intent of making it more operationally efficient, adding more money into it as an investment for advertising, whatever it is, and then creating a return on their investment, right? Because they’re rolling up these businesses. And they’re the ones that typically are trying to reach out to seller by directly. Then I have what your, what I call your broker pluses. This is not an official term. This is what I call it. These are your brokers that may have some legalese, right? They may have a little bit of experience. They may have a law firm embedded in them where they can do some I dunno, deals and documentation in legal way. And then I have what I consider true investment banks, and I used to not know the difference. Global Wired, I like because these guys are true investment bankers, but it’s hard for them to be understood in this space because it’s so unique.
Tim Jordan:
You know, some of the terms Joe, you use, like, I still don’t know what those means. bulge bracket. Why does that mean big bank? I don’t know, but, but now I know, right? I’ll tattoo them on my forearm. So in this space, we have these four components. The aggregators really put a big boost into basically the whole industry, right? People are getting excited. People are selling your businesses. There was a lot more investment in infrastructure and software and logistics from all these other industries. Cause they said money’s being pumped into support these sellers, you know, and support these brands like we have to come into. So it was a fun time. There were some pretty crazy headlines in the past couple years, right. Joe, like explain what happened briefly in the past two years that just got everybody jacked up.
Joe:
It really, I believe all started at prosper. Actually, I think the aggregator thesis began circulating amongst a few people at Prosper and either–
Tim Jordan:
Is this like 2019?
Joe:
Yeah. Either 2018 or 2019. And you know, it was an entrepreneurial idea. It was, you know, basically pulling two or three related brands together, finding an economy of scale, finding brand synergy, generating cash flow, and basically repeating the model, right. Repeating the acquisition model. It was, it was something that was really quite frankly from that those early entrepreneurial ideas pioneered into a legitimate business by thras and thras was the first out of the gate to successfully get a seed round done with this investment thesis and to make acquisitions that in the early days worked well and then to raise extraordinary sums of money to pursue the whole roll up strategy. And I think that in, in the early days prior to the pandemic, the model was thought of correctly. I think that the pioneers in the space were focused on cash flow.
Joe:
They weren’t focused on generating revenue at all costs. They weren’t focused on becoming a unicorn. They weren’t heavily influenced yet by venture thinking. And it was really a disciplined roll up strategy where acquisition multiples were assumed to be reasonable and cash flow was viewed as really kind of the necessary ingredient to make the whole thing work. And as we rolled forward into the pandemic, the thesis was supercharged. The aggregator investment model just exploded because of course we did something that we haven’t done probably ever in the history of the world, as we sent everyone home for a year. And we basically said, you need to live and work from home. Well, people– and then we stuffed them with transfer payments, unemployment benefits, et cetera. And they went crazy on Amazon it’s supercharged the entire investment thesis.
Joe:
And I think that there was a little bit of a disconnect. Were there a few disconnects, actually the venture and an early investment money that flowed into the aggregator investment model flowed in with kind of, I hate to say it, but, you know, eyes wide shut to some extent that I think that the people that were pitching the model pitched it as, Hey, look, we know Amazon, we know how to roll up brands on Amazon. We know how to basically operate the Amazon, be efficiently be efficient operators of the Amazon machine. You need to trust us, keep funding us, we’re killing it. Right. We’re growing like crazy. We’re making a ton of money, we’re killing it. And I think to some extent, a lot of the early investment dollars that were flowing into the space really didn’t understand Amazon. I think that they viewed Amazon still as somewhat of a black box. I think they trusted the, the operators that were executing brand roll up strategies, and they weren’t really deep into these business models. Right. And there was no reason to be at the time while things were working so well. The pandemic was a tremendous tailwind that was providing, you know, all of the validation that you needed, that this was a great investment idea. And–
Tim Jordan:
And that’s when we saw the big headlines come in, right. That’s when aggregators were raising hundreds of millions of dollars. And like everybody was just going crazy. Right?
Joe:
Yeah. They were going crazy. Right. And it was something that quickly turned into a frenzy. It quickly turned into an investment frenzy that became validated through, you know, again, just performance with, you know, many aggregators rolling up company successfully.
Tim Jordan:
And do you think that a lot of that frenzy was based on the growth of e-commerce sales that we were seeing? Or do you think the frenzy was also on the headlines? This person hit unicorn status? This happened like we better get in on this too.
Joe:
Yeah. I think that the new cycle of course added fuel to the fire, but the model began to change when a, a lot of additional investment money began flowing in and the venture mindset entered the space because the original model, as it was contemplated back in 2018 and 2019 was make acquisitions at prudent enterprise value levels and focus on cashflow ensure that, you know, whatever your capital structure looks like, whatever your debt-equity combination looks like, just make sure that you’re generating enough cash flow to continue the acquisition strategy, to basically have a buffer should you hit a bump in the road? Well, when, when we saw this influx of predominantly venture money, the model shifted over to becoming more revenue-focused to acquiring top-line growth at all cost, because the idea was that eventually an aggregator of scale was going get over the wall with respect, to going public with an IPO and was going to really validate the entire investment thesis.
Joe:
We would have an example of a publicly-traded company, and we would have a multiple probably off of revenue initially, but then presumably EBITDA that we could use to value the rest of the space, the space in effect would move from mark to model, to actually mark to market. And in that run up to this assumption that eventually someone was, again, gonna get over the wall was gonna get public. You needed to get as big as you could. You needed to acquire as many companies. You could, you needed to roll up as many brands as you could to get as big of a scale as possible. And again, you were hoping for this public security transaction to validate the entire investment theme.
Tim Jordan:
Let me make sure that I’m understanding kind of in layman’s terms, what you’re saying, basically what you’re saying is there are a lot of components that came together at the same time, whether it was in influx and sales, influx, and money, this frenzy, the decision making of purchases and acquisitions and money spend, not necessarily being based on profitability, but based on revenue to value these aggregators, to try to raise more money. And as eventually, at least one of ’em gets IPO. So, you know, I love the old term. What is it? Revenue is vanity profit is sanity.
Joe:
Right.
Tim Jordan:
That’s so it’s almost like the KPI success for a lot of these aggregators was just buying revenue and not necessarily buying quality or buying profitability, right? So there’s like five components that all blended together that caused this frenzy of artificial inflation of the market, artificial inflation of values, or valuations for the brands, for the aggregators themselves even trickle down into the talent, the agencies, the logistics industry, like everything was artificially inflated, I believe. Is that a good assumption or a good assessment?
Joe:
It was, again, really what I like to tell people is it’s impossible to understand the last two and a half years exclusive of the pandemic effect. Again, it just can’t be understated just how significant it was sending everyone home for a year and having them adjust their lives. And, you know, we’ve seen quite frankly, structural changes in the economy that might be long lasting that might stay with us for some time. So in understanding eCommerce, and in understanding Amazon in particular over the last two years, it has to be in the context of the pandemic, what the pandemic did to consumer spending and how those shifts basically impacted again, this investment thesis, this aggregator investment thesis, and how it led to really the correction that we’re in. Now, the correction insofar as the post pandemic sales correction, the correction insofar as you know, how aggregators now are gonna navigate capital structures, that probably don’t work. How we’re gonna have to in effect, see a cleanup phase in the space just to clear the bad positions they are in the market that are in predominantly aggregated portfolios.
Joe:
And I think that again, when you sink everything back to the pandemic and you go, wow, this was a generational anomalous event. And we, we saw tremendous investment flows associated with it into an investment theme. And now we basically have to unwind a significant portion of that. Then you kind of understand that there is going to be a little bit more pain. There’s probably gonna be, you know, additional fallout. There’s probably gonna be, you know, more bad news.
Tim Jordan:
We’ve talked about all of these components that were compiled to accelerate valuations, and it worked this market into a frenzy and there was an artificially induced inflation. Now you’re talking about unwinding things. You’re talking about things balancing and leveling back out and having that natural kind of like yin and yang thing going on, but what caused that? Were there components and elements of this industry that stimulated that slowing down? I don’t know if that, does that make sense to say that stimulated the slowing down that increased the slowdown, or was it just a natural balance, to begin with?
Joe:
Well, you know, that’s, that’s actually the right question. I think that again, understanding what happened in the context of the pandemic. If we look at consumer spending patterns, obviously when we sent everyone home, we stuffed ’em with transfer payments. They went nuts on Amazon. We created a shift in consumer spending away from services, which is actually two thirds of the us economy into goods, which is about a third of the US economy. And that’s a tremendous amount of money because again, services were shut down, travel, leisure, going to restaurants, borrow NBA games, et cetera. Couldn’t do that during the pandemic.
Tim Jordan:
Oh, so you reduced the spending ability of some sectors. You gave people more money and now they can funnel all that into the only thing that they can do, which is buy crap and have it delivered to their front porch.
Joe:
Correct. That’s correct. So again, that’s supercharged online purchasing, you know, by us consumers, global consumers, and it also charge the aggregator investment thesis. And that was that you could successfully roll up brands. You could, could successfully grow brands and portfolio them and kind of do that repeatedly. So, so I, I, I think that when the pandemic began to wan and started turning or into an endemic type of status that consumer spending began shifting back towards services, consumer spending and there there’s, there are a few nuances in there. We haven’t really seen services recover fully with respect to goods, but, you know, you have to throw–
Tim Jordan:
But some of the services are well beyond what they ever were. I’m trying to book flights right now. And I get on the phone with like my VIP concierge at American airlines. And they’re going insane because they’re having the highest demand that they’ve had in 28 years. Insanity
Joe:
It is, and, you know, that’s what you’re saying is people have been cooped up for two years, right. So now they, they want to get back to spending money on services and we’re starting to see that, but we haven’t really seen that trend fully normalized, where we get back to the, the ratio where we were in so far as services relative to good spending.
Tim Jordan:
Oh, so it’s not just going back to normal, it’s actually rebounded to the negative.
Joe:
Well, you know, we haven’t quite, we, we actually still have above trend spending on goods and below trend spending on services relative to where we were tracking in 2019. And before the pandemic. And–
Tim Jordan:
Can I ask, how do you know all this? Where do you get all this information? Are you just guessing this, or like? Who knows this?
Joe:
Right. Well, it’s just macroeconomic stuff. We, we follow it, you know, you should, it’s in our actually it’s in our quarterly house view stuff. We actually have our quarterly house view. That’s coming out with Prosper. We’re gonna be presenting a prosper remix and we’re gonna roll out our quarterly house view. And a lot of this is in there. And you know, I’ll give you a tease for that. We’re actually, introducing something new there, which is gonna be an index for tracking Amazon selling conditions. It’s going to be basically 9 or 10 different components that will give you a feel for what Amazon selling conditions are through time. And I think that’s really, what’s been missing in the community is a map of sorts to–
Tim Jordan:
And that’s what you’re talking about right now. You’re talking about how we probably should have seen this, the climb in product sales online coming, but no one tackled it.
Joe:
No, they didn’t. So, you know, when we, when we, when we roll the index out, it’s gonna be quite clear, cause it’s gonna draw a picture of where we’ve been and where we are now. And then you’re gonna offer some advice on where we think the index is gonna go. And of course we’re gonna release it monthly so that we can track conditions, selling conditions, any data that’s high frequency data that we can track where we are looking at, how people are moving around. Most of that data is showing that we’re back close to, you know, call it 85% to 95% of where we were prior to the pandemic. So that’s a good thing. However, again, going back to the good services split, I think what we’re seeing is because of inflation, we’re seeing a shift again in consumer spending where people are now moving from discretionary to staples.
Joe:
And that I think is keeping good spending a little bit elevated, cuz everything costs more and service spending is a little bit lower because people are still holding back. We’re not back to a hundred percent of where we were prior to the pandemic. And I think we’re probably gonna see more of that as inflation stays with us for a while. I think that, you know, it’s something that, you know, obviously the fed is gonna address your, you know, over the course of the year quite aggressively we believe, but you know, this shift is confusing. A number of people that we’ve spoken to because in looking at aggregate online sales, say for Amazon, you know, they were, you know, based on the last quarterly earning report up like 4%, well people scratch their heads and they go, well, wow. My sales are not up 4%. You know, I’m significantly, you know, worse than that. I’m not tracking that at all. And you know, for a lot of us in the community, we’re focused on discretionary goods. We’re mostly selling goods that are not consumer staples,
Tim Jordan:
We’re selling widgets and home decor and accessories and like crap that we don’t need. We’re not selling toilet paper and oatmeal.
Joe:
Exactly. That’s exactly right.
Tim Jordan:
I wanna pause for a second and just make sure that we’re staying, that everybody’s following what we’re talking about here. And all of you listening understand that we are on track, right? That the question that we’re asking is did this big boom that everybody got excited about, has it turned into a bust? And now what Joe’s explaining to us is some things that are happening that are slowing down. I won’t say slowing down the economy, I won’t say necessarily slowing down sales. I won’t say slowing down the industry, but things that are slowing down the excitement, maybe that the aggregators “success” was writing on. Right? So when we got less spending and a lot of these aggregators, I know they sell stuff. Like they sell stuff. That’s not a staple. So their sales are down because consumer behavior has adjusted. How big of an impact has the logistics situation been on aggregator’s performance as well?
Joe:
It’s been significant because, you know, obviously, just track and container prices, container prices are staying just ridiculously high. I mean, if we go back prior to the pandemic, you could move, you know, a container from Shanghai to LA for 2,500 bucks. You know, it got as high as 55, 60 grand. I think it’s back now, you know, around 45, you know, but it’s still very expensive. Right? So, so the shipping has been an, the bottlenecks that we’ve seen through the supply chain have been something.
Tim Jordan:
And not just shipping costs, but actually getting your products. I mean, I have a friend over at Reuters and her entire job has been to follow the long beach port congestion for two years.
Joe:
Yeah, exactly.
Tim Jordan:
Someone sent me an image right now of the Shanghai port because Shanghai just went through a big lockdown for COVID. Yeah. And there’s like 2000 ships anchored outside outta Shanghai, which is, I think the second busiest port, maybe the third busiest port in mainland China. So even if pricing hadn’t increased, people are just running outta stuff to sell.
Joe:
They are. And you know, what’s happening in Shanghai, definitely everybody’s watching because 20% of all the things that go in and out of China go through the port of Shanghai. So it’s a tremendous manufacturing hub. And right now China is insistent on maintaining what they refer to as a dynamic zero COVID strategy. And that is basically aggressive lockdowns followed by testing, more aggressive lockdowns if needed. And China is the beginning of the supply chain. So if we are looking at Shanghai going through a spike in COVID cases and China maintains a zero COVID strategy, we are going to see shortages of key components. There’s no question about it so much is manufactured in Shanghai and around Shanghai that it is going to create additional shortages. No question.
Tim Jordan:
And the reason this question about the aggregators are so important is because the success of the aggregators can somewhat represent the success or potential success of an online, especially marketplace seller because your Amazon, your Walmart, your eBays sellers that were selling their own product, they really started increasing their value. Like people became wealthy very quickly. When the aggregators with this new roll up business model came on scene. So the success of the aggregators, although there’s plenty of ways to sell your business folks, I’m not saying the aggregators of the be all end, all, there’s a million people to sell your business to, but they were like the flagship, they’re the ones that came out and said, all right, everything happening. And frankly, they were typically the easiest to exit your business to, right. Particularly if you had a product that nobody should have bought anyways, in some cases.
Tim Jordan:
So the reason that we’re really, really curious like really want to know if this aggregator thing is a boom or a bust is because it can significantly impact or determine the potential success of Amazon online, private label brands. Right. That’s folks why we’re asking this question.
Joe:
It can, and I think that it’s easy.
Tim Jordan:
And again, not being a Debbie downer, right? Not saying that cause a company that an IPO, your company is an online seller’s toast. Right. But like it does take some wind outta the sales.
Joe:
It does. And you know, again, it’s difficult to understand outside of the context of the pandemic. And what I always tell people is when you have an anomalous situation, and again, we’re all to some extent, guilty of extrapolating through an anomalous situation where you go, wow, sales are take off wow, business valuations shake off. Wow. This is fantastic. We’re reaching, you know, into kind of a, a new operating model where there’s just gonna be a ton more business that’s done online. And it’s really no, it’s really been more of an anomaly. And that extrapolation breaks down. Conversely, as we’re going through the unwind of a lot of this overinvestment in the aggregator thesis, it’s easy to extrapolate downward and say, oh wow, it’s gonna impact, you know, online sellers for years. Oh wow. The aggregator investment idea is something that just didn’t work. Oh, wow. You know, they’re gonna be so many losses and there’s, you know, gonna be, you know, so much hardship. And I think that’s, I think that’s wrong too. I think that you know, there’s probably gonna be more bad news. I think that there’s definitely a need to clean up bad positions through–
Tim Jordan:
When you say that when you say clean up bad positions, are you talking about aggregators that need to scrap their bad ASINs? Are you talking about invest funds that have invested in a lot of aggregators needing to clean up some of the bad aggregators?
Joe:
Yeah. I think that it’s a little bit of everything. So most of the acquisitions that were executed in the space were executed with debt. So say of the 15 billion that was raised probably 13 and a half billion of it was in the form of debt. The rest was in equity. Most of the equity we’ve come to learn was used to support aggregator DNA. And the debt was used to basically pay for acquisitions.
Tim Jordan:
Yeah. So basically folks, what he’s saying is the businesses that people bought were usually buying them on credit. They were borrowing money to buy the businesses.
Joe:
Correct. So whenever are working with venture capital and they’re funding acquisitions through debt. There going to be a lot of debt covenants that are associated with the debt that’s provided. And those debt covenants govern to a large extent how you’re going to operate your portfolio. And a lot of debt covenants are gonna have liquidity provisions and them basically say, okay, well, you know, you have to be cash flowing this much, or have this much in adjusted EBITDA or SDE for us to be comfortable with respect to the existing debt we’ve provided and especially comfortable if we’re gonna provide additional debt. So when we start breaching those covenants, we start running into issue from debt providers, where they are going to be inclined to offer suggestions, to management about how to improve operating results, to ensure that their position as debt holders are not imperiled.
Joe:
Well, that works for only so long before. I think you run into a situation where there really isn’t a lot you can do. Now what a lot of debt providers in the space are doing is they’re strongly suggesting consolidation. They’re saying, Hey, you guys should merge with you guys vice versa. But when you have a management team and equity, that’s basically still in place in an aggregator it’s, it’s, it’s difficult really to, to force those types of combinations. So I think what we’re probably gonna get to is a point where, where debt is gonna be forced to probably execute debt to equity swaps, where they, they blow out a lot of the existing equity and aggregators. They based assume that equity position, I think there are gonna be a number of write-offs that are gonna have to be taken with respect to debt that has been provided. But then you’re, you’re left with, again, kind of going back to the bad position comment you’re left with fewer bad positions basically you’re not over-levered and–
Tim Jordan:
Joe, you’re making this sound so gentle. You’re talking about ride offs and you’re talking about debt to equity swaps. You’re talking about the VC funds coming and saying, Hey bro, you owe me money. You can’t pay it. I’m either going to hostilely, take your business, or we’re going to write you off and you’re done. So a lot of, I won’t make a, a spec on, you know, the aggregators that’ll survive. This, the aggregates will be rolled up, but like a lot of the products and the brands that I think that friends of mine sold to aggregators are going to disappear. Like they’re just gonna be washed out.
Joe:
Yeah. A number will I think that they’re gonna be a number of brands that are just gonna be allowed to a trite. I think they’re gonna be some circumstances where brands can be effectively old out of aggregator platforms, but, you know, for the most part, the way this is resolved is, you know, the way most over-levered debt crises are generally resolved and that’s blowing out existing equity holders to some extent, mostly a large extent bringing in new equity, writing off bad debt and basically providing fresh management, fresh capital and clearing the decks so to speak. And I think that–
Tim Jordan:
Joe this sounds like a bust. So in the question is the aggregator boom, turning into a bust. This sounds like ominous to me, right? Like you’re the guy with the data. You’re the guy that understands this world better than any of us, less than you do. Probably like to me, this seems scary. So would it be, and I know you’re not gonna shake your crystal ball and make a blanket statement, but would it be safe to say that the big boom, the excitement, the amazingly cool headlines that we’ve experienced for the past 36 months are probably going to disappear for a while and the headlines will probably be consumed by not so good news. Is that safe?
Joe:
I think that’s safe. I think that but again, it’s something that you don’t want to over extrapolate and you know, it exactly, it’s, it’s, it’s something where, you know, again, it’s easy to say, wow, the tide has definitely changed. Things could be getting, you know, a lot rockier over the course of the next quarter or two. It feels bad. It feels terrible. Oh my gosh. Right? No, I, think that it all comes down to your perspective and timing, right? So if you are in the space and you’re basically looking at doing things in the space over the next quarter or two, well, over the next quarter or two, it might be rough. But if you’re looking at being a longer term player in the space over the course of the next year, two, three, and onward, then it’s gonna be great. It’s gonna be great because once we go through again, what I probably would like to refer to as a little bit of a cleanup phase, insofar as the aggregator investment thesis–
Tim Jordan:
Such a diplomatically correct term.
Joe:
We’re, we’re gonna be in a position to grow again. And I, I think that there’s gonna be no shortage, absolutely no shortage of investment dollars that are gonna flow into funding, acquisitions that are indirectly involved in, in Amazon. I, I, I think that it is it’s something that isn’t gonna go away. I think it is something that is absolutely a hundred percent here to stay. I think that a lot of people got carried away with respect to the pandemic effect and it’s supercharging the original aggregator investment thesis. We’re gonna again, have to clean that up. I think once we do it’s gonna be Ford ho. I think that there is long term really gonna be no loss of momentum. I think that you’re going to have a lot more investment dollars flow into the space. I think that you’re gonna have traditional PE that is not necessarily early stage or venture yet a lot more involved in the space and are already kind of seeing that, you know, on the fringe.
Joe:
I think that you’re gonna see more of that. I think that we’ve really taken an investment idea. We’ve ridden it to, to a top, which was an anomalous top based on a once in a lifetime event, the pandemic, and we got carried away. Now we need to unwind a lot of the leverage that was applied to acquiring brands that just were not going to cash flow. And we will, I, think that just like every other, just like every other, you know, over-levered investment idea that we’ve worked through in the past through any number of asset classes, we’re gonna do this in aim here. And I think when we get to the other side of it, we’re gonna go right back to growing e-commerce scores about 15% a year. I think that we’re gonna get right back on-trend, you know, in, you know, probably two or three quarters, we’ll be right back on trend. And I think the operating environment will be stable. Again, we will have gone through this phase of–
Tim Jordan:
We’ve learned a lot.
Joe:
We’ll learn a lot, everybody clean up.
Tim Jordan:
I think that the reason this question is important, Joe, like the reason I really wanted you to have you on talk about this is because, you know, there are rumors about massive aggregators making massive layoffs. I know senior leadership at aggregators that are calling me and saying like, this is this week. Like, Hey Tim, I need a job. Holy crap. Like this is bad. We know that the venture capital funds are squeezing pressure. We know that people aren’t getting payouts and it’s scary because we saw this crazy awesome thing happen where we’re like, we’re all going long for a ride. This e-commerce business thing is legit. We’re all gonna get rich. This is gonna be amazing. And now it’s like, oh my gosh, someone has knocked a hole in our boat. And that’s what I wanted to get to the question. I was like, am I crazy and assuming that, that this thing is slowing down significantly and that the rumors are not necessarily rumors. They are truths. And like, we are going to have to face a tough time, which sounded like you are. So I think that if we had to answer the question from what I’m understanding is the aggregator boom or bust. Maybe the aggregator boom is a bust, but the acquisition and investment boom, small to medium size businesses, and e-commerce is just getting started. That’s is that safe assessment
Joe:
Characterized perfectly characterized perfectly. Yes.
Tim Jordan:
I don’t normally get something right. Especially talking about something complex and folks, this is why it’s important because you know, every big thing in life, you know, has to have a balance. Every big wave has a big trough behind it. And we, I think as e-commerce sellers and entrepreneurs, and so hustlers are so wrapped up in what we do every day and every single dollar counts and every single success and failure hits us with the highest highs and the lowest lows. And we need to recognize that this is the long term play. This is chess, not checkers, and we don’t need to freak out. We don’t need to panic. We don’t need to just completely lose our marbles over the next two or three months. When we see these headlines. And these as Joe likes to call the cleanups happening as big well known brands and companies take a big dump.
Tim Jordan:
Like I really think that’s gonna happen if we can live through that. And if we could survive through that, basically what Joe, the smart guy is saying is it’s not over. This is just small dip, but what’s gonna be cool about it. And I had never thought about this, Joe until you said this, a lot of our really aggressive competitions gonna disappear, not just products, but the biggest spenders of very aggressive overpriced PPC right now may not be around too much longer, right? Like the guys that were, that were occupying all of that organic searchers’ whole page with a bunch of bull crap junk that may have sold to big aggregators. And now they’ve wiped that off the slate. Like we that are doing things the right way and, and, and actually building legitimate brands and building legitimate, legitimate sales channels. Like it make it actually really good for us.
Joe:
It may, and, you know, with respect to PPC, my, my hope is that if we are gonna have to go through this cleanup phase, hopefully, you know, PPC goes down some that that would be my hope. I’m not, I’m not convinced of that yet though, because you know, I think that aggregators, believe it or not are still such a small sliver of overall Amazon based business ownership, believe it or not. So when you just look at you, you total GMV owned, they just, they still don’t own enough, which again, gives me hope that there’s a lot further to go for the investment thesis. Once we normalize the economy, once we basically consolidate and clean up the space, I think there’s a lot more to do, but with respect to PPC, I think PPC is just a result of more people getting involved with Amazon. I think the space is, is professionalizing outside of what aggregators are doing as well. So that’s maybe a top.
Tim Jordan:
So you tell me not to get too excited. You’re telling me to hold on. Things are getting good, but don’t like, don’t get too jacked up because the, that swing is actually not as a big of a swing in the overall community, in the overall environment, as it is specifically related to like the Amazon FBA role up aggregator.
Joe:
Correct. That’s what it is.
Tim Jordan:
I know we’re running on time. This is one of the longest episodes we’ve recorded in a while. And I can keep talking to you for six more hours, but I know that all the listeners on Spotify and iTunes are gonna get all hacked off for making us go too long here. But I know that like the reason I have you on the reason I had one of your business partners, Chris Shipling on, I think two years ago or a year and a half ago is because you guys don’t just pull stuff outta your butts and make it up. You actually do a lot of research and you guys have written some of the best white papers and some of the best articles I’ve ever seen in this industry. They’re mind blowing. If anybody listening wants to go in completely nerd out reading these industry reports and these industry predictions and things like that. globalwiredadvisors.com. Is that right, Joe? Correct.
Tim Jordan:
globalwiredadvisors.com. Definitely pick those up. If you ever come to a conference and you’ve walked around and run into some dudes from Carolina in blue jeans and tennis shoes in a polo shirt that don’t look like what you would like higher tier investment bankers looking like, you may run into these guys. And Joe that’s one thing I love about you guys is you saw us little people down in the e-commerce space and you bring your experience, but you actually know Amazon. Like you guys actually have your own Amazon products that you launch now, you guys pretty amazing.
Joe:
Yeah, we do. Yeah. So we are always looking for investment ideas and, you know, trying to build businesses and trying to build brands in the space as well. You know, so it’s, you know, it is–
Tim Jordan:
You get it, you understand it on both sides.
Joe:
We get it. And you know, I’d like to leave you with one, one thought, you know, there through the aggregator investment, boom, there has been really, I would say super increased awareness of what people’s businesses are worth. That was one consequence of, again, the aggregator phenomenon is everyone was focused on where they thought their business could trade what they thought an appropriate multiple for their business was. And that was kind of concurrent with the entire phenomenon on. Well, what I would say is now really the thing to do is to focus on your business, to focus on building your brand, to focus on being a successful seller on Amazon, the, the aggregator takeout or the takeout or the buyout of your company by anyone is not something that should be Val validating the value, your business. It is there to serve you, the aggregator bid for your company or any bid for your company is there to serve you, right?
Joe:
Your company is what you make of it every day. And what I would say is focus on building your company. Don’t focus on what you think a multiple is gonna be in a quarter or two or where it was, you know, a year ago, compared to where it is, you know, today, that multiple, that takeout offer is gonna always be moving around. Again. It is there to serve you. It is not there to validate what you’re doing as a seller on Amazon. So I would encourage people to again, focus on their, focus on their companies, focus on their brands, and focus on doing what they know and not on basically where aggregators are, what’s happening in aggregator space, where the multiple for your company is. I think that that is something that can be focused on in time.
Tim Jordan:
Amen. I love it. Folks, you know that we don’t do sales pitches on this show and Joe, hasn’t given one, but I’m gonna give it for ’em check out globalwiredadvisors.com, check out their data, check out their information. I think it’s the best in the industry. At least from what I’ve seen. And I haven’t really looked that much. No, I’m kidding, Joe. actually, I’ve looked, but thank y’all for being on. If any of you listening have any questions or comments post ’em in the reviews on order podcast platform you’re listening on or in the comment section, if you’re watching this on YouTube, and what a great episode, I don’t really know what else to say, but Joe, thanks for being on. Thank you all for listening and we’ll see you all on next week’s episode.
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