400 potential deals evaluated in 60 days.
All Amazon FBA.
8 businesses put under LOI in the same time period.
93 acquisitions to go.
They say that everything’s bigger in Texas.
It all started innocently enough. After acting as CEO for 5 companies and having a hand in plenty of early-stage startups, RJ Jalichandra just wanted to semi-retire for a couple years and find a 4-hour-work-week-type gig that he could run as a solopreneur.
So how did he end up as the founder of a bold new company based in Austin, Texas – with plans to buy no less than 101 private-label Amazon FBA businesses in 2 years?
In a couple words – operating leverage.
Looking over his options at the time, RJ would bring experience from almost every corner of the online business world to his next venture – Chairman of the Board of ClickBank; CEO at well-known companies like Bodybuilding.com, iSocket, MapMyFitness, and Technorati.
Ecomm, SaaS, lead gen, affiliate, digital content, there wasn’t much he hadn’t done.
And yet he kept coming back to Amazon…
Why would such an experienced and successful veteran of online business start a company that planned to purposely put all its eggs (over $12MM worth so far) in that one basket?
In this post, we’ll take a look at what they’re doing at 101 Commerce, why they’re doing it, and what we can learn from his acquisition strategy.
As RJ sees it, Amazon takes all the hard parts of running a products-based business off your hands (like warehousing and fulfillment) and delivers traffic in the form of 30 million of the highest converting consumers online.
Not to mention a built-in ad platform and done-for-you customer service.
Considering all that outsourcing, it’s possible to run a 7- or even 8-figure business on the platform without even hiring a full-time staff.
Overall, RJ found both the potential for great net margins and the scalability of a portfolio of FBA businesses highly attractive.
At this point, to say Amazon has figured out every aspect of ecommerce seems like an understatement. The brilliance and thoroughness of their model combined with the ability to leverage their system through the marketplace became too tempting to pass up.
And 101 Commerce is taking that leverage a step further by acquiring FBA businesses that have already mastered a product niche in some corner of the vast Amazon ecosystem.
According to RJ, while 101 Commerce may seem a bit of a hybrid model at this point, it’s less Private Equity fund and more operating company.
Or, as he puts it, “a multi-brand platform consumer-goods company.”
The modern portfolio theory has been around a long time in investing and applies equally to Amazon businesses and stocks.
Harry Markowitz first published it in 1952, and then received the Nobel Prize in economics for it almost 40 years later.
Reward will always be directly related to risk, because it almost always necessitates that you bet against the crowd.
But according to the portfolio theory, you can limit that risk by distributing it across multiple and unique brands and products. The more unique, the better.
The key to the strategy is the idea of the “efficient frontier,” that point where you can maximize the return of any given risk level.
In the case of acquiring Amazon FBA businesses, that risk level is pretty high.
And the key to reaching the efficient frontier is to lower the net risk of the portfolio overall by choosing investments that have little correlation to one another.
So for instance, with an Amazon portfolio, you’d mitigate the risk of exposure to the tariffs on goods coming from China into the US by including European brands who won’t be affected.
I’m only guessing at the 101 Commerce strategy, but it stands to reason that they’ll be building a portfolio that takes advantage of operating leverage but still hedges against major loss by optimizing for independence among their brands.
It’s a calculated risk for investors, with the goal of leveraging expertise in both data analytics and marketing to grow revenues across their brands.
Who are those investors so far?
- Next Coast Ventures
- 3L Capital
- HomeAway founder Brian Sharples
- RetailMeNot founder Cotter Cunningham
When asked what he says to those who worry about the risk inherent in brands that depend completely on the whims of Amazon, RJ answers tongue-in-cheek…
“You’re right…Don’t look at Amazon businesses. Leave them all for us.”
Of course, regardless of their strategy, the platform risk at Amazon is real.
And RJ says in all seriousness that they’re taking on that risk with eyes wide open.
Again, going against the grain at least has the potential to pay off big.
The popular narrative lately characterizes Amazon as the new bad guy in ecommerce.
It’s true that the leadership at Amazon has gained a reputation for making decisions strictly based on data, and the effect historically hasn’t been a friendly one.
The $800bn company is not know for its warm and fuzzy relations with brands who sell there, third party or otherwise.
Terms like “strong-armed” and “non-negotiable” often get tossed around in reference to their vendor policies. Some sellers end up feeling like they’ve been pushed around.
In a recent Recode article about pending policy changes to Seller Central and Vendor Central accounts, one seller remarks, “it often does not feel like human beings over there.”
In the same article, Recode reports on involuntary changes to some of the third-party Seller Central accounts that started popping up this Fall:
“Amazon obsesses over the customer experience and your brand has opportunities for improvement that will be possible by transitioning your full business to Vendor Central,” read one email from Amazon to a brand. “As a result, we have made the decision to source your products for sale by Amazon only and your existing Seller Central account will be closed within 30 days of this email.”
According to Recode, many speculate that emails such as that one lay the groundwork for a new system called One Vendor that may combine Seller Central and Vendor Central into one system in the future.
If that were true, it would be a highly unpopular move among Amazon’s sellers, as one major difference with Vendor Central is that Amazon sets the retail cost of a brand’s products.
So is there risk to building a portfolio that depends completely on Amazon? Yes.
Is RJ worried? No.
He points out that at the end of the day platform risk isn’t something you can avoid online.
Google’s algorithm changes have taken down entire companies in one fell swoop, and Facebook and Instagram risks are ever-present too.
Maybe, like Amazon execs, he’s putting his trust in the data…
In just two years, from 2015 to 2017, the number of small- to medium-sized brands selling on Amazon who were earning more than 100k in revenue doubled.
Last year over 20,000 FBA businesses did over $1 million in revenue.
And right now, more than 50% of Amazon’s package volume comes from their marketplace sellers.
It does seem crazy to think of disturbing that momentum.
At the very least, you’d think Amazon would want to strike a balance between satisfying customers and keeping prices low while still creating favorable conditions for their sellers.
Of course, it’s possible that recent changes mark a move towards only dealing with the biggest players, in which case 101 brands will be an advantage.
There are a lot of Amazon businesses on the market right now.
While keeping their strategy close to the vest, RJ lists three main criteria they use to screen the huge volume of deals that cross his desk.
- Healthy gross margins and net margin.
- A Favorable review structure.
- An intriguing business narrative.
Of the three, two of those require a little more investigation.
When it comes to reviews, there are a few items of interest to note:
- Studies show that less than 5% of Amazon shoppers leave reviews.
- Product reviews go with the ASIN, so transferring the ASINs from one seller account to another while maintaining the reviews is possible.
- Product reviews tend to be more important than seller account reviews.
When RJ and his team evaluate the “review structure” of an FBA business, they look at three things:
- Velocity of reviews
- Quality of reviews
- How the reviews were generated
Having some sort of feedback funnel in place to streamline the process and create a steady flow of high-quality reviews would be a major plus for a potential acquisition.
When it comes to business narrative, RJ is quick to remind us that a great story is important no matter what you’re selling.
For him, a compelling story behind the building of your brand is critical and should include your motivation behind starting it to begin with.
He also wants to hear how it became what it is today…in other words, the story of its success.
Any business has had to overcome challenges and take advantage of major opportunities to make it in the competitive landscape of Amazon FBA, and those are often the elements of a good business narrative.
Ultimately, the story of your business speaks volumes about you as a seller and plays a huge role in that all-important know-like-and-trust factor.
Storytelling as a powerful business tool has gained a lot of traction of late.
According to Paul Smith, author of Lead with a Story, business schools are now adding storytelling to their curriculums, and giant corporations like Proctor & Gamble now hire Hollywood directors to teach storytelling techniques in-house.
As a seller, it’s a skill to take seriously.
RJs’ new company isn’t the first to buy up a portfolio of smaller brands, that’s the foundation of most Private Equity funds, and consolidation is nothing new.
But consolidating Amazon FBA businesses at this rate – 101 brands in 24 months – is an attention grabber.
It’s exciting to watch, and at a time when few sellers trust Amazon as far as they can throw them.
But also at a time when the Amazon tide just keeps rushing in.
What 101 Commerce is doing aligns closely with a strategy that our own Walker Deibel in his book, Buy Then Build, calls the platform model of acquisition.
As Walker describes it, it’s an active investment strategy where you take advantage of the existing infrastructures of the small businesses you acquire, build on what’s working, but find and fill the missing pieces – like big data analytics and marketing at scale.
RJ points out that it’s so much more than financial arbitrage. He talks about things like “domain expertise,” and you know there’s a plan unfolding.
101 companies in 24 months. Is it possible?
Somehow it’s all very Friday Night Lights to me…
“Opportunity does not knock.”
“Don’t just stand by and watch it happen.”
Coach Eric Taylor with his steely gaze and Texas accent: “We must carry this in our hearts… that what we have is special. That it can be taken from us, and when it is taken from us, we will be tested.”
Risk. Reward. Guts. Glory.
I for one can’t wait to watch, and I’ll definitely be rooting for this company from the stands over the next 20 months or so.
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