Hello, everyone! Hope you had a profitable November.
We’ve been very busy with BFCM and integrating the new acquisition. This was also my highest month ever in terms of revenue since I started doing e-commerce in 2017.
We haven’t included in the November results the Amazon aggregator we bought for $1 on November 1st, which did over $150,000 in revenue last month. We’re still transitioning the operations and deciding which brands we will keep and which brands we will liquidate.
Our CM3/SDE margin is currently at 9.7%. This is normal because we are still in the first 12 months of a turnaround for most brands and have been selling old inventory at breakeven. This quarter is when we finally started reordering with our lower cost of goods. We expected our margin to end at a minimum of 15% for most brands as we optimize them.
Amazon revenues in November are down or flat for most brand owners we have spoken to, ourselves included. This is due to the crazy offers of the TikTok shop and Teemu selling similar products at much lower prices due to rebates with cheaper shipping from China.
This 20-30% decline in revenue was not forecasted, and it does not bode well for the aggregators that have debt facilities coming due in 2024:
We were mentioned in this Financial Times article as one of the possible buyers of these brand portfolios. This is why I created Inversal – to snatch the brands that are not profitable for US/EU operators but are profitable to us.
We have another aggregator under LOI, doing over $5MM in revenue between 3 brands. I have spoken to all the stakeholders, and the SPA has been drafted. We await the debt provider’s approval of the transaction this week. I will need to book a ticket and fly to Europe to sign everything if we move forward, as their board wants to close before Christmas.
Things are accelerating, and we have run out of personal capital to deploy. I will be looking for an institutional investor to support us in our Series A, which we plan to raise in 2 tranches: $2.5MM first, then $10MM once we get more deals under LOI.
Will keep you posted on what happens next Sunday!
Here are some links to stay connected:
If you missed our previous entries, check out our blog at https://inversal.com/blog
Founder & CEO of Inversal
If I have learned something about business, it is that you never say no even if you do not want to do a deal initially. You offer what you believe will be very profitable for you.
In this week’s edition, I’m sharing the story of our acquisition of DG Hill. It’s a fashion brand that offers a range of apparel, such as winter socks and pajamas.
Their initial offer was $2,000,000. We offered $500,000, and they accepted.
Let’s get into it.
A broker contacted us in February 2023 about a semi-distressed deal. The owner had sold another brand a few months before, and his operational team had left.
The business hadn’t ordered its best sellers, and it would run out of stock for the three months left in the winter season.
We had to perform due diligence quickly and discover why the business became distressed.
DG Hill was launched in 2017. In the past five years, it posted these figures:
In this environment after the COVID bump, the trailing years of income have to be discounted.
Aside from historical financials, we also had to consider the competitive landscape. This is a high volume, low margin brand in clothing, with competitors such as Amazon Basics, Hanes, and Fruit of the Loom. We will require lots of capital to scale, and debt is not cheap anymore.
The main reason the business SDE declined was the new way Amazon calculated shipping weight. It was now using volumetric weight and the fees had increased over 50% year on year in 2022. You can read more about it here.
Considering the fierce competition from established brands, it was a deal that we were very cautious about. But if the deal is good enough and we can make our money back in 1 year or less, we will do it.
We managed two possible scenarios for the 2023-2024 season, which runs from April to March, with a low season of 6 months from Q2 to Q3 and a high season in Q4 and Q1.
We closed the deal for a $100,000 down payment and assignment of the $400,000 Amazon loan. This was later paid down in Q3. We acquired $1.5MM worth of inventory from the previous owner on consignment to be paid in 1 year as we sold it.
We sent Jacob, our CMO, to Chicago to check the inventory and the warehouse. We had to send 13 trucks immediately to Minnesota, which was a challenge, but our warehouse managed to onboard everything in just a month.
In the six months following the acquisition, we found new suppliers with a 30% lower cost of goods, raised $500,000 from friends and family to reorder the best sellers, and revamped and reranked the listings in preparation for Q4.
Cheers to our team for the hard work put into this turnaround and to an exciting and profitable Q4 and Q1!
Some points I want to highlight:
These key factors helped us be in a very good position moving forward.
With a few more aggregators going bankrupt in Q1 2024, I am seriously considering an amalgamation of all our businesses into one company, raising a $5MM seed round, with us contributing $3MM worth of assets at 2.5x SDE and raising $1.5MM in cash for inventory, and then raising a $10MM Series A to acquire most of the bankrupt brands at 1x SDE or less.
We would be profitable on Day 1 with a massive upside.
Until next time!
Marc Roca – Founder & CEO
Hello! I’m Marc Roca and I’m the Founder and CEO of Inversal Inc.
Today, I turn 35 years old. I am no longer just a businessman but also a father.
I’d like to take some time today to revisit my journey and think about the events and people that led me here. I think it’s worthwhile to share with you some of the highlights as it would give you plenty of context on why I do what I do.
I’ve broken down the story below into parts. Much will be focused on the ventures we’ve worked on in the past six years with some details about my personal journey. Sometimes, I still wonder how I went from selling trading cards to buying businesses for $1.
As I was preparing this email, Thrasio, one of the biggest Amazon aggregators, announced they would file for bankruptcy. Is it fate that they announce it on my 35th birthday and while we’re preparing to dive deep into e-commerce turnarounds?
Read on to see how my story goes!
My path hasn’t been the usual.
During my teens, I had an e-commerce business selling collectible cards. In 2009, I found out you could play online poker. And I did that professionally up until 2014. Playing poker allowed me to visit and live in 17 countries in a span of 5 years.
In 2017, my business partner wanted to visit the Philippines to find a wife. When I visited some old poker friends in Cebu, they told me about the Amazon FBA business model. FBA really sounded too good to be true, so I decided to drop out of my third year of college and explore it while moving to a new country.
It has now been almost 7 years since I moved to the Philippines. Interestingly, this has been one of the most crucial moves of my life, as you’ll find out in later parts.
In May 2018, I met Joe Magnotti, the CEO of Empire Flippers, and I bought my first business. It was a vape bag brand that cost us $64,000. We had success just by managing it better and we later sold it for $125,000 in 2019.
The experience gave me the confidence to borrow $100,000 from my mother to buy our cornerstone acquisition brand for what would later become Alpha Rock Capital, the third Amazon aggregator to market.
This idea came from the seller of the second brand, who just casually said over drinks, “Why don’t you buy a few of these brands for 2-3x and sell them to a boring public company at 8x?”
This made a lot of sense to me at the time. Off we went to the races to raise $2MM from friends and family to acquire 10 brands from 2018 to 2019. By early 2020, we had achieved over $1MM TTM SDE and were looking to raise more equity to expand.
But then, we encountered 3 problems:
I wanted to be more aggressive and raise debt, but that was a redline by my partner. The board proposed a partial exit via shares buyback of about 15% of the shares of the company (my partner and I both owned 35% each) in July 2020, which allowed me to recoup all my investment and have some liquidity to try new things.
After that day I was out of operations and David, the COO became our CEO. I remained the second biggest shareholder at around 22%. I wouldn’t get involved in Alpha Rock again until 2023… when I bought control back at an 80% discount from my exit price.
In 2021, I bought 50% of a wooden watch Shopify brand to learn DTC operations as I had only been involved in the Amazon ecosystem. We also kept working and learning more about content websites, with a few acquisitions under our belt in late 2020. My vision was to combine content, Shopify, and Amazon to build brands with stable customer acquisition via both organic and paid traffic.
From a personal standpoint, I got engaged in June 2020 and my fiancée decided to do an INSEAD MBA in 2021. I joined her in this hard undertaking and this allowed me to meet the amazing 21D cohort, have dinners with professors, attend some classes like the turnaround one, learn how to do consulting business cases, and really deepen my knowledge in the space that interests me, which is M&A.
We started in France, went to Singapore, had a month in Wharton, then finished back in France. These were quite the intense 12 months as a couple and as individuals in our early 30s trying to find out what we wanted to do next as professionals.
By the end of 2021, I decided I wanted to really explore turnarounds. It became an obsession. Distressed businesses fascinated me. I focused on learning everything: how to align stakeholders when there is no money, how to make the right hard decisions in a very short amount of time to save the company, or how and why businesses get to that point where they need to file a Chapter 11.
I started speaking to lenders to see if there was any interest in someone like me buying a business that was no longer able to service debt and pay employees in the USA/EU, which would benefit from an outsourcing strategy where staff costs would be 60% lower.
The response was positive and I had my first materials to study during Christmas and had some interviews with some businesses that were looking at turnaround options.
I have to thank two people before I dive into 2022. Mehtab Boghal from Karta Ventures and Fan Bi from Hedgehog. They had been building in public and sharing their thoughts on operations, valuations, and the outlook of e-commerce. This gave me the confidence to push forward.
In early 2022, my fiancée and I still weren’t married. We didn’t know if the borders would open up due to the pandemic. Our wedding date was set for June 12th in Manila. I had no visa, so we flew to New York to process one after the MBA. As I got approved, the Philippines announced it’d open its borders the following week. The wedding was now a go, we only had 4 months to plan.
But before our big day, I was able to get another thing done. On the 27th of April 2022, Inversal Inc. was incorporated. There was no going back in more ways than one.
I worked hard taking care of both the wedding and the new business. During the wedding preparations, I still kept talking to lenders and businesses and we almost had a deal close, but it was already May and I knew it would not be possible until after the wedding.
On the 12th of June 2023, we finally got married. 350 of our family and friends were able to join us and everything went perfectly. From there, it was a matter of balancing work and married life for me.
In September, I flew to New York to perform the due diligence on the first deal, Provengo.com – a private membership club for discounted products for veterans, active military, and first responders with $3MM TTM revenue and $4MM in debt. We will delve into that acquisition in a separate deep dive.
We closed on the deal on October 1st and I gave a talk at the Rhodium Weekend about it. There, I was able to recruit 2 amazing partners, Jacob Erdei and Tim Ginn, who are indispensable for the future of Inversal.
I started my own family aggregation in 2023. Becoming a father has been one of the most rewarding experiences in my life and it has brought me a lot of clarity on my life mission.
In late 2022, I wanted to acquire an SEO team for all the affiliate content websites we owned and to start working on e-commerce SEO for cheaper customer acquisition. So, we got into a deal for Domain Magnate which we closed on January 1st. This proved to be a total disaster as we had a lot of operational issues from Day 1 and it has taken 11 months to clean up. I will write an in-depth newsletter about it on December 31st.
On April 2023, we acquired another brand for 0.5x TTM SDE. It was doing $7MM revenue and $950K SDE. The deal had to happen fast because we needed to move 23 full trucks of inventory from Chicago to Minnesota as the warehousing costs from the previous owner were bankrupting him after he had sold his other business late last year. I will walk you through this acquisition in the next email on the 26th of November.
Things started to heat up in Q3. During 2023. an aggregator tried to sell twice but in the end, no one wanted to take their declining assets. As of November 1st, we are operating and helping the lender liquidate the inventory. This story will be unveiled on January 28th, 2024.
2023 has been the year of foundational work after all the learnings from the past six years. Being based in the Philippines and China allows us to build teams with lower overheads while getting good operational quality output. All the while, we’re able to offer very competitive rates to our workers for high retention.
Our marketing teams are localized to the country (USA, Germany) of the brand and all the brands are operated independently of each other.
This is how the e-commerce aggregator lenders feel going into 2024.
The businesses are not profitable, and there aren’t many operators besides ourselves to be able to run them profitably. We’re confident in our method. For instance, our salaries in the Philippines and China give us an edge over most operations. Our brand manager costs $25,000 a year versus $90,000 in the USA or EU.
Going back to Thrasio. It needs to perform a Chapter 11 bankruptcy to fix its balance sheet. This business model doesn’t work with 12%+ interest rates. And, at the core, it is just not profitable to run brands under $10MM revenue or $1MM EBITDA with USA and EU staff. Their competitors are obsessed with bootstrapped business owners and Chinese manufacturers who are happy with low-profit margins because they want their money outside China.
We are able to operate Amazon brands for $125,000 a year and Shopify brands starting at $250,000 a year with a completely independent operational team. The current valuations are also crashing. An Amazon FBA business with $500,000 SDE will be sold for less than $1MM, which is a great opportunity for investors who want to take the risk until the next bull market comes along if we ever see lower interest rates again.
2024 will be the year of the bankruptcy aggregator. The year of Inversal.
So that’s it! That’s my story and I’m sticking to it.
As promised, I’ll be writing more in-depth about our acquisitions in future newsletters every Sunday. So keep subscribed until then.
Marc Roca – Founder & CEO