• Pushkar Singh

Venture Capital vs Thrasio model for D2C brands

Online D2C brands have captured the VC imagination in India. Now we are seeing many Thrasio clones entering the market. Indian D2C founders have never had it so good.


Online D2C brands have been a rage with the Indian VCs for some time. Now we have a new category of investors – Thrasio clones who acquire D2C brands and grow them. Named after the eponymous American startup Thrasio, these companies have raised hundreds of millions of venture capital and debt. Their goal is to acquire profitable D2C brands and grow them through cheap capital and in-house expertise. Since there are several such companies already in India, we are witnessing a seller's market where these Thrasio clones are outbidding one another to acquire good brands.


Source: Nasscom Insights


So what should founders choose – venture capital or brand sale?


One founder contacted us last week to ask whether he should raise venture capital or sell his business. There is no easy answer to this complicated question.


Both approaches have their pros and cons.


1. Profitability – Thrasio companies acquire profitable businesses with healthy EBITDA (profit margin). VCs are fine investing in non-profitable startups as long as the unit-level economics are positive and the growth potential is huge. So if your D2C business is still burning money, sale to a Thrasio company is unlikely.


2. Valuation – VC valuation will always be higher than the Thrasio one. VCs can value D2C brands up to 4x of annual revenue while Thrasio companies won't go over 2x in most cases.


What explains this difference in Valuation?


VCs bet on founders to grow the business. Their capital is for growth. The founders don't get this money but use it to grow the business. Founders retain their skin in the game. Founders will make money, a lot of it, only if the business becomes hugely successful.


Thrasio companies don't care about the founder pedigree. Their goal is to acquire successful brands and grow them. They pay for the brand, not for the founder's skills. Here founders are sellers, and their involvement is limited to 1,2 years so that they can hand over the business to the buyer team.


3. Risk vs Return – Both risk and return are higher under a VC investment. Since the founders don't get any money on day zero, their financial returns are linked to the growth of the business. If everything goes well, they can make a lot more money in a few years. But there is always a risk of failure.


Thrasio sale has an assured return with minimal risk. Since the founders get 70-80% of the company value on day zero, the downside of an eventual failure is limited. But the upside is also capped. Even if the revenue becomes 20x, founders will be left with a 5% stake by that time.


So what should founders choose between the two?


All founders should realise that raising venture capital is much more difficult than selling to Thrasio companies. The competition is intense in the VC industry. And raising capital doesn't mean eventual success. There is still a lot of long-term uncertainty.


If you believe that your brand can grow 10–20x with external capital, seeking VC investment is a good option. But if you think growth is limited and you want to start a new adventure, the Thrasio sale is the way to go.

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