This Week in Startups - E1094: Thrasio Co-CEO Josh Silberstein acquires & operates 60+ Amazon brands, shares insights on mastering the marketplace, competing with AmazonBasics & more

Episode Date: August 11, 2020

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Hey, everybody. Welcome to this week in startups. I'm your host, Jason Calacanis. And as you probably have all experienced, Amazon has a massive collection of amazing products when you search for a spatula or an ice cream maker, or even just a cable or a power battery pack, whatever it is, you see all of these amazing products and all of these really niche companies

iterating and competing with each other on Amazon's platform. Amazon made a really strategic decision years ago, which Jeff Bezos spoke about when he was at these congressional hearings on breaking up big tech, or at least that was the pretense for them. And he talked about how that was a very polarizing decision inside of Amazon, but that he unilaterally decided, we're going to do it. We're going to let people on the Amazon platform sell whatever they want and compete with us. That has led to over two million

Amazon third-party sellers. A third-party seller is somebody who's selling on the Amazon platform, but they aren't, you know, Amazon, right? So Amazon gives them room on their platform, just like eBay, allows everybody to sell on it. Well, today on the program, we have a founder who seems to have found a business in that area by buying other Amazon businesses that break out. His name is Josh Soberstein, and he is with a company called Thrasio. T-H-R-A-S-I-O. Josh, you heard my, welcome to the program, and you heard my brief introduction there. Did I get it right? Basically, what you're doing is looking for breakout third-party sellers, buying those companies, and then putting them together in an IAC Internet Corporation format? Yeah, I think, you know, for us, it started with

the realization about two years ago that there were quite a few founders who had built great businesses with a couple of million dollars of revenue who were having a hard time getting an exit. There just wasn't really an established market. And the result was the valuations didn't make sense and the process didn't make sense. And we began to take a closer look at the businesses, the we in this case being myself and my partner, Carlos Cashman. And we kind of discovered two things.

One was that the bigger these businesses got, the more capabilities they needed. But the harder it was to actually have the resources to support it. So you're trying to manage an international supply chain. You're trying to manage PBC. You're trying to manage legal. You're trying to manage creative. You're trying to re-endage all these things. And you're a two or three million dollar business.

It becomes almost impossible. And so what we saw is as these businesses got bigger, they actually began to perform less well. which was counterintuitive. And so we started to realize that as you sort of were in this marketplace as somebody with a $5 million business or an $8 million business, you kind of had a double whammy. On the one hand, you were getting to the point where it was harder and harder to actually execute. And on the other hand, you were looking at an exit market where there weren't very many buyers

and there weren't really a lot of opportunities for you to kind of get the value that you deserve for what you'd built. And so somebody builds a product on the platform, whether it's shampoo or cables or whatever, they source it from China, they package it really well, they start building a brand. What would the margin be on some of these products? When we see somebody who's a product seller on Amazon, are they making 20% on each sale, 30% on each sale on average? And then how big is the footprint of that $8 million company?

If they're doing 20%, and they've got $1.6 million in profits, Is it just a 10-person company with just a modest profit? So if you look at most of these companies, and it depends obviously a little bit on what the product is, but gross margin, you know, before advertising, you tend to see anywhere from 30% on the low end to 45% on the high end. And then, you know, people will be spending 5 to 15% on marketing, and they'll end up sort of in the 20% to 30% range. We've seen businesses with, you know, margins less than zero, but, you know, in the high single digits in certain highly competitive high price point markets. And every once in a while we'll see a business that has contribution margins in the, you know, high 40s. And that's obviously an outlier as well.

How do those businesses get value 10 times their EBITDA, 20 times their EBITA? 20 times their profits or three or four times their top line? How do you value a business like that? These businesses, what's interesting about them is that they're, they're deceptive. If you imagine you're a seller and you've got a business that has a million dollars of even though, you pay the federal government a half a million dollars in taxes, and your business is growing, so maybe you're reinvesting two or three hundred thousand dollars back into inventory. You may actually only end up taking home $200,000 a year in cash,

even though you're sort of notionally making a million dollars. And with those kind of cash flow dynamics, when people are thinking about making decisions on a personal level, they often are comparing what they would have taken home had they continued to run the business with what they're going to get on an after-tax basis if you buy them out. So, you know, the multiples actually are smaller than you think. They're, you know, 2 to 3-X is not abnormal in this market. So if I made a million dollars to $3 million business,

so even though it's 10 million, it's not in sales. If it only had a, if it's $5 million of sales, it had 20% profit. There was a million in EBITA. It might go for $3 million because it's not a highly profitable business. But when you put a bunch of them together and then you share resources, that's the premise of your business. So how many businesses like this have you rolled up so far and would I know any of the names of them? We've bought 60 in about two years. 60.

60. Wow. Yeah, we bought 17 last quarter. Yep. So we went fast. That's kind of one every two weeks. Yeah. Wow, that's extraordinary.

How do you do that? So two questions. One, would I know any of the brands? And then how do you pick them? How do you find them and pick which ones to buy? I mean, so you might know some of the brands. It depends a little bit. I mean, I don't know if you have a pet or not.

If you do, you might know what Angry Orange is, which is a pet deodorizer designed to use to remove the smell when your pet doesn't behave and goes to the bathroom inside. You know, if you're a wide officiato, then you might use a haiku wine cork. corkscrew, I should say, or if you have kids, you might be buying them crafts for all crafts. So, I mean, even the biggest businesses that we have are $40 million businesses at the top, which means by most sort of traditional standards, they're pretty small. So they're definitely, it's funny, we now, you know, I'll see people in a restaurant using the corkscrew or I'll see that somebody has a product that we've sold, you know, in their house.

and, you know, more and more commonly, you know, most people at some point actually, whether they realize it or not have come into it to touch with that other. But they're not, I mean, this isn't tied. It's not at least this point. It's not a household brand. How did you pick those 60? I'm curious. And of what pool did you narrow them down? Because obviously, only one in 10 people is going to let you buy them out, one in five. So you must have had a list. I'm guessing here that was of 6,000 or 3,000 companies that you got down to 60. I don't know. You tell me.

Well, so there's a couple of pieces to it. First and foremost, it's about the product. If you are going to buy a company, it doesn't matter what else on Amazon. Well, if the product itself isn't one of the best products of the market, ideally the best, then it's not going to succeed in the long run. So for us, you know, if we're going to enter a category, we will start by ordering the top 300 products in that category and test them all and see which ones we like and think about it that way. Once we've sort of figured that out, then we'll go back to Amazon.

And, you know, Amazon is interesting. It's still very much a search-driven ecosystem. About 70% of all revenue comes from search. And when you think about the way in which search works, Amazon has a very strong preference for doing what the consumer wants, which means that search results are designed to favor products consumers like. So you're saying Amazon has good intent, their search results, as opposed to Googles. I'm saying this not you, but Google lists their content first, things that benefit them

first. You're saying Amazon lists in search results, in your estimation, what benefits the consumer most, correct? Yes, absolutely. I wouldn't just say it's, I mean, we've spent, I don't even know how much time looking at creating data models trying to reverse engineer the way in which Amazon search algorithms work. And, you know, if there's one thing that's absolutely for sure, it's that when consumers are more likely to buy your product, you move up in rankings and when they don't, you move down. And, you know, it is about as egalitarian a search ecosystem as you could hope to find.

All right. When we get back from this quick break, I want to understand what does Amazon think of the business, Thrasio, when we get back on this week in startups. Hey, everybody, I want to tell you about a service I use so that our teams at launch and at inside the two companies I'm the CEO of and I run can be bionic. Well, that service is called Fiverr, F-I-V-E-R-R, there's two R's and Fiverr. But let me tell you, there's so many different ways you can use Fiverr. Maybe you need to find a freelancer. And we all know finding freelancers is so frustrating because you don't know their track record.

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His name is Josh Silberstein. And I got that right, right? Silverstein, that's fine. That's right. Got it. And it's Thrasio, T-H-R-A-S-I-O. They've bought 60 brands in two years, raised a couple of hundred million dollars. And these brands all were either number one or two in their category. You believe, Josh, that they could be. And you must be on Amazon's radar right now. what does Amazon think of you cherry picking the best products and then putting common infrastructure behind them? Do they see you as just a great third-party seller or do they see you as a threat or do they see you as something in between?

From what we've seen, you know, I think their favor of the inclined towards us. I mean, you can have a phenomenal entrepreneur who's 26 who comes up with a great product idea and sources it out of China and sells the hell on it, and everybody loves it, but may never run a UL test and doesn't have the first idea what a UL certification is. What is a UL certification? When you make certain kinds of products in factories that include electronics, you need to get certifications that show that they're not going to catch on fire, things like that. Got it. So a lot of times we'll buy a product that's great, but that hasn't gone through the kind of vetting that it should.

So, you know, we're putting these products through a complete and total kind of compliance check top to bottom. In general, we're giving them a facelist, making them more attracted to the consumer. We're taking into account what the consumer has said in the past in the reviews and upgrading the products. Often we're cutting the prices because we're able to source them less expensively. So when all of the said and done, you know, what we're doing is taking a product that's already doing well on Amazon. and we're making it more affordable, more attractive, safer, and hopefully something that people will enjoy more. And from Amazon's point of view, I can only hope that those are all things that they want for their customers.

I think they are. And the SEO, the search engine optimization for Amazon, what are the variables that drive it? It seems to me that my search process is I put Amazon Prime only on. click that box. I don't want anything that's not Amazon Prime related. And then I just look and I see the number of reviews and I look for what I call the gun, you know, where the five-star reviews and the four-star reviews are like a pistol's barrel and then maybe you have like a couple of threes and then almost no one and two. So when you look at it, it looks like a handgun,

trigger warning for people who are against the Second Amendment. But putting that aside, is it as simple as that? The thing with the most reviews makes it to the top? Or do they use things like returns. Like, hey, this thing may have sold a lot so it looked good, but there were a lot of people doing returns, therefore it moves down. So it's a question of what's caused and what's effect, right? So conversion rate is what matters. If somebody clicks on your product and buys it or if they're more likely to buy it, that's the signal more often than not that tells Amazon. You've got a product that deserves to be higher in rankings. And to your point, if somebody returns it later on, it essentially undoes that signal.

So there's no single signal that is stronger than what does the consumer done? Did they buy the product? They give a review afterwards, et cetera, et cetera. Now, when you think about you and your decision-making process, you're looking at a page of whatever you're looking to buy, and many of the brands are brands you've never heard of. And so you're using the reviews as a quick proxy in your head for reliability, trustworthiness, quality because it's in your mind as in most consumers' minds the sort of clearest indicator of what

products are best. And so what tends to happen is that products that do well get sort of towards the top of search results as they sell more products. They generate more reviews. As they generate more reviews, people are more likely to buy them because they feel safe doing so. And you have this flywheel effect where all of a sudden you are number one and you've got 4,000 reviews and anybody who comes to search for a weight belt or whatever it happens to be. Yeah, they can't. They can't displace you. Those lists become self-propagating, right?

That is the phenomenon of a top 10 list is once you break into it, more users discover you. And if it's a great product, it cements you in that top slot. Is there a way to break into a top slot? And what is your strategy there? If you were deciding you wanted to, let's say nobody accepted your offering, you decided you wanted to compete against somebody with 3,000 reviews, Is that even possible in today's ecosystem where the winners are already cemented?

No, it's definitely possible. I mean, again, the thing about Amazon system is that the consumer votes. And so if you're trying to break into an ecosystem where somebody's got 3,000 reviews, can you do it? Yes. It's going to be fast and cheap? No. But if you've got a product that's materially better than what's out there, you'd be surprised how fast you could move up and usurp somebody. Tell me about the dark arts and the gray arts, because I've been pitched on these as businesses before over the last decade, whether it's people who were doing Fugazi Yelp reviews through PR companies, and I'll get into that.

But I know there are some dark arts, and everybody says, hey, the reviews on Amazon are fake. Hey, the reviews on Yelp or fake, yada, yada. It's impossible in my mind to fake 500 or more reviews. but in the early days, is there like some gray arts going on where people will hire a bucket of 100 Amazon Turkers to buy something, write a great review? And is that commonplace in your mind? Obviously, you wouldn't do that? But do you think that kind of behavior is commonplace?

Because if these are such coveted slots, paying 100 or paying 500 people, 10 bucks each for a review or 50 bucks each for a review and giving the product for free and doing that on the slide with some gray hat network seems like a no-brae. brainer, and I know people are doing it. So what impact does that gray hat review underbelly have on your business and the Amazon ecosystem? And is it real? Well, so one of the things people don't remember is that before, I can't remember the exact date, sometime in mid-200 or 17 or mid-2018, it was actually okay under Amazon's terms of service to compensate somebody for a review. So once upon a time, five years ago, before we were involved in this business, there were lots of sellers who were paying people to leave reviews in one form or another, and it wasn't a prohibited activity.

Then it became a prohibited activity. So you do have all of these sort of questionable reviews that are the older ones. Today, is there black hat activity? Yes. You know, it's almost impossible to keep up with. The reality is it's a little bit harder than, you know, you're sort of making it out to be just, If you think about it, in order to do this, you need to have 150 or 250 different addresses in the United States with 250 different, you know, credit cards. And you need to have all of those people ordering your products and then giving you reviews.

And believe me, people do it all the time, but it's not, it's something you can just sort of snap your fingers. And when you're doing something surreptitious like that, it leaves fingerprints. You know, there's a bunch of tricks you can use to figure out, you know, if you look at, if you look at any product on Amazon, and you look at their reviews, if you notice that their individual reviewers are giving five or 10 or 15 reviews in a day and then coming back 30 days later and doing the same thing, they're almost certainly somebody who's being paid to give reviews.

So there are things like that where you can tell really quickly who's doing what. You think Amazon's on top of all that in a big way? Is that a priority for them? I think they are on top of it. I think they have a challenge, which is that there's sort of two kinds of mistakes they can. make, right? They can make a mistake where they don't eliminate enough of the reviews, and they can make a mistake where they eliminate too many reviews. And no matter of which one

they make, they're going to have people who are unhappy. And I think that, you know, they have sort of taken the view that you need, you know, really hard evidence that somebody has done something fraudulent or wrong to remove them as opposed to simply saying, hmm, this doesn't look right, so we're going to take it down. So I think that they're aware of it and they're they're trying to figure out what the right line is between those two things. If somebody were to tweet, thanks for these great reviews with a screenshot of two or three reviews of their corkscrew, that does not break anything. You're just thanking people for writing reviews, and obviously that might incense some people or inspire them to go do the same.

That's totally legal, right? Yep, and there's nothing wrong with saying to somebody, would you please leave us a review to tell other people how you thought? Right. What you can't do is say, would you please, leave us a five-star review, or you can't say, if you liked our product, please leave us review. Yeah, that's review shaping, I think they call that, right? Yeah.

And, you know, there's, I mean, look, there's a million games that people play. Most of them catch up with people sooner rather than later. But, you know, it works in reverse, too. You can have somebody, you know, you can pay people to give one-star reviews to your competitors. That happened to me. When my book came out, the number one review is this person who just obviously didn't read the book, but they did buy it, and they got like 400 upfoots. And I was like, oh, my God, this is definitely somebody who's an enemy because I got so many great reviews. But they pinned it to the

top because it's like, is this helpful or not? And they were the, they literally were the first person to review the book the day it came out. So I knew they couldn't have read it. So it was obviously somebody with an axe to grind. Listen, I fired people. I beat people as competitors all the time as an investor. And I'm a loud mouth. And, you know, I've destroyed people on Twitter with, you know, whatever, tweet stream. So I guess I'm going to get a little bit of blowback. But that is a phenomenon, right? Forget about trying to increase your ranking, decreasing competitors' rankings would be actually more effective. I never really even thought about that. How do you defend yourself against that? Because you could have a competitor, have 30 people buy the corkscrew and give it a one-star review

and return it just to try to sabotage you. How do you defend yourself? I mean, the best defense in this case is to, I mean, it sounds stupid, but it's to really read the terms of service. And if you read Amazon's terms of service, which is a document that if you print it out is about an inch thick, you'll discover that there's 17 legitimate ways to remove a review. And if you put together the right documentation and, you know, I mean, like for example, if somebody writes in a review, you know, I hated this product, you know, because it was supposed to arrive in three days and it arrived in 10. Well, we have no control. control over. Yeah, there's nothing to do with the product. So those completely legitimate from

Amazon's point of view, you point that out, they'll remove that review. So there's things like that where you can can sort of manage your way through it. You know, and iTunes did that too. Now iTunes lets app developers reply if somebody has a problem. It's like these people who go to a sushi bar and yell, and they're like, this was the greatest sushi ever. Oh my God, it's such a great deal. One star. They sat us 15 minutes late. And you're like, that's not that. You should not, you're too dumb to be allowed to review stuff. Hey, when we get back from this quick break, I want to know what you thought of Jeff Bezos's performance last week and his defense of the third party selling ecosystem overall when we get back on this week and start it. Oh, you hear that sound. You know what time it is.

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statement talking about his, his birth mother, his adopted father, the father who adopted him, and just his regs to Rich's story. And he talked about how, hey, we have this third-party ecosystem, and people internally didn't want us to create it. What did you think overall, because of his performance, because they are such a small amount of overall commerce. There are a significant amount of e-commerce, but they seem to be the most open and level playing field of any tech giant. So how did you, when you saw his performance, grade it?

So I'm not sure the word performance is the word I'd use. But when I think about Amazon, what I think is, first of all, here's a company that has opened up a platform that has made tens of thousands of people millionaires and have given hundreds of thousands of people their livelihood. And for the most part, it's been a pretty fair shake. It's not perfect, but it's pretty darn good. If you go, you sell a good product, you get a good result. In the last two years, they haven't raised fees. I think they raised shipping fees 2% this year or 3%. They haven't raised their referral fees,

which is a bigger profit center for them. They actually lowered them the year before last. So they've built this ecosystem, which has made a lot of people, has put a lot of people in a position to put themselves through college or pay the rent or whatever it happens to be. And instead of there being sort of discussion

about how what they've created It is perhaps the greatest entrepreneurial wealth platform in history. There's all this talk of, you know, the fact that one percent of sales are Amazon house products or, you know, something might be inequitable in it. And, you know, it honestly makes me angry because, you know, when you think about like, think about, and I don't know what your experience has been like for the last 90 days, but I can tell you, you know, my house is littered with Amazon packages. Oh, my God. It looks like my garage looks like it's a UPS depot. I mean, it's ridiculous. All right.

So you've got somebody somewhere managing a nationwide set of distribution centers where people potentially get sick with people who have real families, real causes, real lives. And somehow or other, in the midst of a world in which everybody else is shutting down, you're staying open and you're delivering products to every family in America. Everybody in America is getting some hard, large percentage of what they need from Amazon. Right. And what you don't see on the front pages of the newspapers is thank God for Amazon. You know, what the hell will be done. Right.

What we should be saying. We're sympathetic on this. We are so cynical now that we look at Jeff Bezos's net worth and forget about the net contribution he's made to entrepreneurship. And all of those millionaires you're talking about and all that opportunity, he could at the snap of his fingers turn off the third party program or have never approved it. We should be thanking him and for what he's built. and it drives prices lower, right?

You have the most at stake, and you appreciate him enough to build a giant business on top of his platform. Look, I mean, I'm obviously thankful for what Amazon has done because it's enabled us to do what we've done. But even before that, you know, I was a consumer. You know, you buy something on Amazon, it costs less than it would have cost you else. There was a study somewhere I can't remember. I think it was one of the feds that said that, you know, maybe 100 or 100. 120 basis points of inflation were taken away because of Amazon's pricing. Think about that.

I mean, everybody in the United States pay one percent less for everything they buy, you know, for 10 years. It's huge. It's huge. It's a gift. Well, I mean, and this is why we can't understand why inflation doesn't arrive on American shores. And I think you and I are of similar ages. I mean, in the 80s, you could buy a pair of jeans for 20, 30 bucks. And now here we are in 2020. And you can buy a pair of jeans for 20 bucks. Like what has happened in the world?

I mean, while education and housing and healthcare, all of them highly regulated have gone, you know, up extraordinary percentages to the point of which nobody can afford college, health care, or a home,

then you look at goods and services. They're the only thing that's getting cheaper. I mean, what is a flat panel cost today? Flat panel TV is like $200. And it used to be in 2000. In your pocket, you're carrying a computer in your pocket that's more powerful than anything existed five years ago.

Right, and every computer on the planet in 1990 in all likelihood. And 98% of the people in America have phones. I mean, it's a very good point. No, we should stop on it, Josh. I can see your frustration. I am feeling the frustration as well. We are a bunch of entitled Americans who are too cynical about capitalism. The fact that everybody's standard of living has gone up because prices have come down is something to celebrate.

But let's talk about the cut-throw competition of the Amazon Basics brand, because you mentioned that's like a 1% thing. And people seem to be pretty hung up on this. Yep, they do. When you analyze which company to buy, I don't know if you're hitting an Amazon API, but certainly you're looking at the public-facing data that we can all see, correct? Yep. Is there an API? There's APIs, there's scraping systems. There's a million different ways to get the data.

Great. So people scrape all the data, third parties do this all the time. They figure out what the best products are. They figure out what the keywords are in the reviews that people like. They do a bunch of analysis. Amazon sometimes chooses to do that as well and make a lightning cable as an example. USBC to lightning. Like, ooh, that's the hot one, right?

Like, that's great. And prices then go down. And the only person who could complain about that is Apple charging 40 or 50 bucks at the Apple store for the same exact goddamn thing. that they're charging $6 for or anchor is charging $7 for. This is a net good for society, but are they too sharp elbowed? Is there any information that you can't get on the public facing site that they could even use? Not really. I mean, there was an article that I think started this whole hullabaloo that, you know,

it referenced something which had happened like two and a half years ago. The reality is, at least from my perspective, Amazon has one person. percent of revenue, the average, you know, average retailers, private label business is 10 or 12. But I got to tell you, between you and me, Amazon's really, really good at running a marketplace. They're really good at running AWS. I don't think that they're the best merchants in the world. I mean, making products is not like, it's not as if you see an Amazon's basics product and you say, oh my God, we can't possibly compete in this market. I mean, it's just, one, there's plenty of room for lots of people to compete. And two, at the end of the day, part of it is, to be fair, that

Amazon holds its internal teams to extremely high standards. So things that, you know, many external marketers might do, Amazon's internal teams can't, but that's kind of contrary to the whole point to begin with, right? If the whole idea is that Amazon is somehow seizing an unfair advantage by, you know, being able to peek at consumer data from your competitors, then why are they turning around to their internal teams and hamstringing them and not letting them engage in the same marketing tactics that everybody else does? Right. It doesn't make any sense.

It would be to their detriment to kill the third-party system at this point. It's a significant portion of their revenue, right? Not only is that, but, you know, Amazon has effectively won e-commerce in the United States. But they haven't won in the UK or Canada or Germany. They're competitors, certainly, or India, right? And the reason why they won in the U.S. is because a dominant selection is an extraordinarily strong value proposition to the consumer. What do you mean by that dominant selection, having everything?

Having a massive amount of choice at a massive range of prices so that you can get exactly what you want, right? Makes sense. So for Amazon to be in the UK and in Germany, one of the things that they need is, a robust third-party seller program where people are offering the same kind of breadth of selection inside of their marketplace. They've got thousands of people out there who are effectively doing their merchandising for them. So the notion that they would somehow or other say, we're going to take the advantage that has driven our biggest success and we're going to discard it because we suddenly, after not worrying about profit for the first 15 years of our life,

because we always took a long-term view, we're going to suddenly figure out. how to scrape a few margin points off of somebody that it just doesn't make any sense. That was the stupidity of the whole hearings when I was watching it. I was like, if I was Bezos, here's what I would say. That's a great question. Thank you, Senator, Congressman, whatever. Would you like me to shut down the third-party system and get those two million merchants and put them out of business?

Or would you like me to expand it and invest in it? Because we're open to either. Which would you prefer I do? And what would the response be? because what Amazon has done is the equivalent of what Apple, it would be like Apple saying you could have a third party app store on iPhones, which is what people believe should happen. Well, Amazon's done that since almost day one. My question to you, why hasn't Walmart or Target or someone like that copied Amazon's third party seller system? Answer that question when we get back on this week and startups. Okay, everybody, you know Masterclass and you know when you get a masterclass subscription. you are going to learn from the world's greatest, most skilled athletes, authors, scientists, poker players, artists. It's amazing who they get to teach on this platform.

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Masterclass.com slash startups. Get in there, start learning, start enjoying. Great job, Masterclass. All right, we're talking about perhaps the greatest company in the history of enterprise and business. It's called Amazon. And Josh Silberstein is the CEO. of Thrasio, T-H-R-A-S-I-O, and they have bought 60 different Amazon sellers and combine them into one

giant entity where they can use a common platform for things like marketing and, you know, managing their reviews, doing SEO, doing fulfillment, customer support, all those things. It's a brilliant idea for a business. You raise a couple hundred millions of dollars to do it. And you're focused on the Amazon platform. Have you gone to Walmart or Target and said, hey, why don't you take our collection? of 60 and put them on your platform. And why isn't Walmart or Target or somebody like that ambitious enough to say,

let's just copy the third-party seller program? It's so obvious. I mean, Walmart has. They have, yeah. I mean, they have. And, you know, part of the Jet.com acquisition was designed to accelerate that effort. You know, I think, you know, there's a bit of a network effect. It's harder to attract sellers when you don't have as many buyers.

It's harder to attract buyers when you don't have as many sellers. And, you know, it's back to the fact. that Amazon has the huge network of selection on the seller side and the huge number of buyers, if you're Amazon and Walmart, by most counts, is 5 to 10 percent the size of Amazon online. And, you know, the incentive to go and build a business on Walmart isn't as big on that's Amazon. Now, we do have sales on it on Walmart. I think Walmart's a great platform. We're happy to work with them.

but the velocity that we've been able to get so far on Walmart, it's not the same. What if Walmart said to you, what is the percentage that Amazon takes from third-party sellers? I don't even know. It's 15% on average. 15 on average. So, and what is Walmart charge? Is it the same? You know, I actually don't know.

I wonder. If Walmart just said, hey, you know, we're going to do this, anybody who's on the platform in 2020, 2020, anybody who joins by the end of 2020, we're going to give you the first three years, 1% or 0% just for joining the platform. Then people might direct some of their traffic there, right? They might invest more heavily. I wonder why they don't do that.

You know, the funny thing is that people aren't always rational and people like to do things the way they've been doing them. And it usually takes something big to get people to change behavior. So I think you're right. I think that if Amazon, excuse me, if Walmart, offered bigger incentives. Could they attract more sellers? Sure.

I mean, Walmart still is bigger than Amazon in aggregate. They still have plenty of advantages. But, you know, if you ask, you know, stop somebody on the street and shake them and say, hey, I need to buy a product. Where do I go online? 98% of them are going to tell you Amazon. At some point, you know, maybe when you hit 100 or 600 or 6,000 products in your collection, That's where we are, actually.

It's about 6,000. 6,000 products across 60 companies. So there's a point at time where you could sell direct and or open like retail outlets or even, you know, create your own products based on your learnings. Have you considered or done any of those? Is that the roadmap here is to get so big and have so many products that you could actually be some overarching brand and Thrasio might mean something to people like Target does? So one, I don't.

think Thrasio will ever mean anything to people. Thrasio was a name that was ticked out of a hat for all intents and purposes. Because my partner and I like Greek mythology. It's not exactly a good face. It sounds like a Greek name. It's one of the Amazonian warriors is Thraso. But we do have a brand called Zaba that, you know, we think of it as a bottom of the funnel brand because it's going to apply to everything from corkscrews to, you know, fishing gear or whatever it happens. to be. And the idea is that unlike old school brands that embodied particular product attributes, in the world you live in now, the brands aren't big enough to be able to capitalize on that scale and send that message out. So what you really need is trust, you need quality, you need to have the ability to have an interaction with somebody over and over again, where each and every time you get what you want, you get when you want it, it's a great experience. And so the way way we think about it is that, you know, all of the different products that we have are from different categories, but they all have one thing in common, which is, you know, our

commitment that they're a great product, that we're going to do everything we can to make sure the customer is happy, all the things that, you know, every boring retail business in the history of times built on. And to the degree to which we can succeed at that, we can build a brand that I think stands, whether it's inside Amazon or outside Amazon, for a good customer experience and for trust. And in a world in which the the brands are going to become less familiar, that's going to mean something. Are you starting to do your own brand creation? I mean, I would think that your team is getting so good at understanding what people want.

You could start to become like, what's the company, OXO? I get a lot of their products. You know, or Anchor is the other one I like. So when I actually will go to the anchor page and click on new releases and just kind of window shop on Amazon. I know that is uncovering myself as a gadget. addict, but do you start seeing yourself doing that? We do. I mean, look.

Have you made any yet? Have you done any like in the laboratory? We have 20 or 30 in the laboratory. None that have been really publicly released. A lot of times it's taking an existing product and making it better. It's not something where you're coming up with something all the other different. But there are times when you'll look at a marketplace and you'll see that the things that are being offered either aren't great for the construction.

or the prices aren't right. And if you've got a sourcing superstar like we have on our team who can come back to me in three seconds, yeah, we can buy that for $3.8 a unit. We can look at these opportunities and we could say, let's be selective and smart and enter these marketplaces. But so much of, you know, you made a point earlier in this dialogue about how the sort of top 10 lists are set, how the reviews and the leadership sort of, how it's difficult. to break in, and that's still true.

And so if you're going to release a new product, it not only has to be great by any metric, but it also has to be fundamentally different. There has to be something about it, which is going to make it more valuable to the consumer. And so, you know, we've got an initiative coming up that we're not quite ready to announce, but which, you know, when it comes out, I think we'll make some noise. that's all about how do you take an everyday product and make it something which someone is going to love to own in a way that's different than just it being the best product. Yeah, I mean, if you look at what Kickstarter and Indie Yogo represented in terms of the entrepreneurial ecosystem, it was these inventor types saying, I can make something 10 or 20% better or I can make something 10 to 20% better in five different aspects, which means I can make something overall 50% or even 100% better. And there was a really interesting company called Quirky that raised far too much money.

I think it was one of these Andresen Harowitz specials where they put too much money into a company and then it blows up because they're overfunded. But I don't know if you remember quirky and they were doing crowdsourced air conditioners and power strips. I had one of their power strips initially, which was like this very cool one that you can like bend like a snake so it could, you know, kind of conform to big power bricks back in the day before we all had USBCs and easy stuff to use like that. What did you think of the quirky idea first? I thought that the fundamental concept was good. The idea that you could come up with the ability to engineer a product that met more consumer needs by understanding what consumers thought and crowdsourcing that. That made a lot of sense.

Now, the challenge in anything is that having a good product is for better or worse only part of what you need for success, right? you need to be able to market it successfully. You need to be able to figure out how to make the cost and so on and so forth. And so, you know, even though I think that they probably were able to develop some cool products, that doesn't necessarily mean it was good business. Yeah, it seemed like it was the margins were too low. Again, back to overfunding of startups, if you give a founder 10, 20, whatever, millions of dollars, and they're going to go put it to use and you're pushing them to grow too fast,

which is what Andreessen Horowitz was kind of their specialty for a while, was pushing people to go too fast from what founders told me. You know, you can kind of basically, it's like hitting the gas on a Ferrari, but you haven't put the steering wheel on yet. Maybe not advisable. What is the chances? Or I've heard that if you don't spend money advertising on Amazon, there is no way to compete anymore.

So when you do a search and you see like, I'll see sponsored results up top and then it will say editor's choice or Amazon's pick or whatever they call that and then I see the Amazon pick under it's almost like redundant. Is that true you have to spend money on advertising on Amazon in order to compete today?

Or is that not true? If you've got an incumbent position and you're already a leader in the marketplace, then you don't. You probably want to though because advertising and return on advertising spend is still great and it's still profitable too. If you're trying to break

into a new market, yeah, it's almost impossible to do without spending money on marketing because at the end of the day, before you're showing up in search results, the only way to start generating sales on Amazon is through that marketing function. But people, it's presented as nefarious, as in it's a pay-to-play system. Whereas, I mean, with one or two exceptions, every product that we advertise, I mean, we spend millions of dollars a month on marketing is generating cross-a-pay, positive contribution margin. It's all profit center for us. The fact that it also happens to help generate more sales, generate more reviews, create a better ecosystem, better search results for us. That's great too, and it's helpful. But it's not as if it's a tax. It's not like we suddenly

have to give up some percentage of our profit in order to do this. That's what people were kind of insinuating, and I didn't buy that. What is it like when one of your products gets that little chicklet on the top, Amazon's choice? I know what a bestseller is. That's obvious. A bestseller is something that sells the best for that keyword. But how does that go down that you wake up one day with either the bestseller chicklet or the Amazon choice chicklet? I'm calling it that. That's a little box on the top you see. And then what does that do to that particular product? Does it 10 exit, 5 exit, 2 exit? It adds 20 to 30 percent sales. Okay. So it adds something for sure, but it's not, it's not life-changing. Yeah, the bestseller

badge, basically Amazon has a whole hierarchy, and at the very, very bottom of its hierarchy are the sub-sub-sub-sub categories. If you are the fastest selling product in your sub-sub-sub-sacategory, then you end up with the best-seller badge. Amazon's choice is more mysterious. It's an algorithm that is run and rerun every hour that takes into account, conversion rate, and et cetera, et cetera. So you can have it at 11 a.m. and lose it by 1 p.m. and have it back at 3 p.m. So the Amazon's choice one is more fluid, but both of them in our experience. It's, you know, it's 20, to 30% it's real, but it's not market changing.

What, what, if you had a hundred thousand dollars to spend marketing, a product on Amazon, let's say you came up with some new product, uh, headphones, whatever, where would you spend that on a percentage basis? Would you put it all into Amazon ads or would you do some Google search ads, some Facebook, Instagram ads? What actually works in terms of driving, you know, reviews and that velocity to become a bestseller? How would you allocate that podcast, TV one?

I mean, it all can work, and it depends a little bit on whether you're talking about early in the life cycle or late. Let's go with early, yeah. Early in the life cycle, you know, you probably are going to end up spending more of it outside of Amazon than inside, because the way in which the Amazon search algorithm works impacts the ad algorithms. Much like Google has a quality score that impacts how much you pay for, you know, CPMs or CPCC, when you're bidding. If Amazon's never heard of you and your product just showed up, it sometimes could be more expensive to advertise there than once you've got a little bit of a track record.

So you might start with Google, actually, or with, you know, even Spotify. I mean, there are a lot of places that you can do it. The reality is that almost everybody who knows what they're doing can make money with Amazon advertising. The system is frothy enough that there's just enough returns there. I'd say less than 10% of the people who are on Amazon are good enough to be able to consistently make Google advertising work for them on Amazon. So 15% isn't a major take, but I do see some brands that will put a selection of products on Amazon, so they're not coming up empty on Amazon, but then they'll reserve some percentage

of their products to sell direct. I'm talking specifically about the D to C brands. You're not direct to consumer brands from what I can tell, but what do you think of that hybrid strategy, hey, I'm going to put six of 10 skews on Amazon, but these four new elite ones, you have to buy direct so I don't have that 15% VIG taken out of a product that has a 30% margin, which means it's 50% of the margin. I mean, I'm a big believer that having a good D to C strategy supplements what you do on Amazon. We have, you know, a half a dozen brands that have D to C sites, and it's been a positive experience. I think the question of segmenting skews,

at the end of the day, Amazon's charging you 15% because they acquired a customer for you. And if you're sitting on your own Shopify site and you spend money on Facebook, it's going to cost you probably a lot more than 15% in order to do it. So the notion that, you know, hey, this 15% fee on Amazon is, you know, a reason why you should reserve your best skews for elsewhere, I don't buy it. I mean, I could imagine there being certain strategies. You could want to try and create a premium, you know, there are a bunch of things that you could try and do where you might decide that this was the right course of action.

But to just sort of categorically say, hey, we want to be on Amazon to get people exposed to the brand, but we're going to reserve the premium offering for someplace else. That doesn't make a whole lot of sense to me. I read that Google shopping fees were now going to be like zero or something. Is Google shopping even a thing? Do people use Google shopping? do you engage in that ecosystem? And what is it?

Because I find Google shopping so confusing. I don't even know what I'm looking at when I do it. It's just, it feels like a search result, but then I find out it might be clicked ads and paid. I think consumers are very confused by Google's shopping product. What is Google shopping product? What should it be? Those are different questions.

I mean, what should it be? What it should be is they should figure out a way to surface. the very best products available, regardless of whether or not somebody has paid an ad for it, and make that available to consumers, and then allow advertising around it. So you get a genuine search result that reflects, here's the best based on all of the special magic that we have at Google, right? What it is is, I think it only includes people who have paid for ads. I think it's effectively a paid listing sort of compendium.

So, you know, you go to Google shopping and you see, here are the 40 people who have, bid on this keyword and want to sell a product. But, you know, I can't guess what Google's thinking. Yeah, and that's the reason I ask you is because you're an expert on it and you're confused by it and I'm a neophyte with a lot of experience in startups and I'm totally confused by it. And I've never been able to get an answer from Google. Like what exactly they try and accomplish your, I think they're just trying to get 75 cents a click and they phone it in.

But let's talk about something much more strategic, which is Instagram commerce. which seems to be very well thought out, but I would never, ever buy anything on Instagram. That makes no sense to me. So what do you think about Instagram's efforts? I think within 15, maybe 18 months, Instagram and Facebook stores will be the second biggest distribution channel on the web behind Amazon. What? Ahead of Walmart. What?

Are you seeing that in the numbers with your products? I mean, we're not even live on them yet. They're all in very early stages, but the amount of friction that you reduce from the system when you are able to allow the transaction to occur on your platform, particularly when you consider how much of the traffic that is going to the other platforms is coming from Facebook and Instagram. You know, I've seen some early data. It's other people's data, so I won't repeat it, that suggests, you know, just massive results in very, very short periods of time. But, you know, Facebook and Instagram shopping is going to be the second biggest shopping platform on the web by the end of 2021. Wow. So you'll be on Facebook.

You're not navigating it for looking for, you know, some, you know, a USBC adapter for your laptop. But you may see one come across in an ad. And instead of clicking through to the direct site, it just says buy now. and it fires off Apple pay or, yes, you put a credit card and then you're done. Or you're on your Instagram and, you know, you're going through and you decide, you know, this is the week that you're going to sell golf clubs

and you show pictures of yourself at your golf resort and all of a sudden you've got 40,000 likes and, you know, 2 million people who've looked at pictures of you with your golf clubs and you're selling them right there and all of a sudden you've sold $20 million in golf clubs right in the middle of the stream. That's interesting, yes.

So for the resale stuff like OfferUp does or Craigslist, functions as. That's another one. Is eBay even in the mix these days? What is eBay today in 2020? I don't use eBay. I've never bought stuff on eBay. I found auctions the most annoying thing in the world. I want to click it now, Amazon Prime experience. What is eBay's place in the world in 2020? I mean, eBay is, first off, they're surprisingly large. They represent about 8% of all e-commerce on the web. So they're clearly number two still ahead of Walmart. I admit that the way I think about eBay is biased by my view as a consumer as opposed to necessarily a professional. But when I think about eBay, if I want something fun, you know, if I want to buy my son, you know, an interesting chess set or an interesting coin, etc.

eBay is where I think of to buy products that are not made by mass merchants. Got it. So something more of a spoke. and Etsy would be even further on that spectrum. So it's like very unique inventory. Yeah. Right. But that's the way I think about it is that if it's something where it's not, hey, there's

500 of these, there's three or whatever it happens to be, that's, I go to eBay and I look and see what they have and, you know, that's the experience for me. Now they do sell things. We have one store on eBay, one of our products, which is an automotive product called Drive Auto. And, you know, we sell, you know, trash cans that you can use inside your car and trunk organizers and things that are, you know, very much available. They're not ones and twos.

They're 50s and hundreds and thousands. So we do good business. So it's not as if you cannot sell traditional product there. But it's as a consumer, I agree that the shopping experience isn't built for you to identify a product that sort of serves a utilitarian need. It's built for you to discover something interesting within a broader framework. As we wrap up here, one thing I'm curious about, you know, the Amazon Prime two-day delivery changed everything in commerce. It took things from being sort of second class to going to a store to being much less painful than going to a store. We're now, we saw Amazon, we saw Google do like

this Google Now or, you know, they did Prime Now, this like one, two-hour delivery. Postmates dabbled in it in the early days. When are we going to see the same? standard move from two-day shipping to same-day shipping to two-hour shipping? What years will that happen? Because it seems like there's a lot of space opening up in cities that I understand are being redeployed as cloud kitchens or depots for goods. So when do we hit in major cities in America and even maybe some minor cities, this holy grail of the two-hour delivery window? And is that even a holy grail in your mind? I mean, this is just a giant math problem, right?

At a certain point, it's a question of what the average distance is from particular good to the average human being it has to reach. And if you're talking about identifying the top thousand products or the top 2,000 products and creating enough nodes in that system that, you know, it's possible to deliver to everybody within two hours, that's not easy, but that's not impossible, right? you want to talk about trying to deliver 300,000 products to everybody in two hours. Now all of a sudden you need depots that are, you know, an awful lot bigger. You know, do drones change things?

Maybe. Who knows when, you know, but I think, you know, and everybody remembers Webvan, right? Webvan was going to fulfill all of the dreams of the last mile of distribution fast and inexpensive. and, you know, it didn't do any of that. So, I mean, I think what we will see is we will see trifurcation. We'll see the sort of top 1% of products be available in two hours almost anywhere and the next sort of 5% be available, you know, same day. And then everything else will fall below that and be a day or two out.

That seems like the likely scenario. And I think there's a counter thing happening now, which is the Amazon power users, which we would be part of, anybody with Prime pretty much is. are getting so inundated with, you know, single items in a box with a bunch of, you know, blow-up plastic balloons that they now have something called Amazon Day. So you can pick for your household. I don't know if you must know about this, but I picked Monday as my Amazon Day. And so if I order five things or six things, well, let's say I order 20 things in a month,

I'm going to get them every Monday, not every two days. So I'm literally on one side paying Amazon for the privilege of having prime two-day delivery. and then on the other side, filling the guilt and the absolute nausea of seeing all those wasted boxes and saying, you know what, I got to cut back and just go to a weekly. What do you think of that trend? I think it's interesting. I mean, not a lot of people know this, but, you know, when Jet.com got started, one of the core things at the center of it was that they had algorithms that were really smart about packaging two and three and four things together. So that once you pick one thing, it would only, or change the prices essentially, so that

items that were in the same distribution center would show less expensively and they could send you only one box, right? Nice. That was, you know, it didn't end up actually, I think, becoming that when it became huge, but that was the original idea. Amazon's logistics system was built on a one-to-one kind of relationship. I'm going to send you this. I'm going to send you this.

I'm going to send you this. And they're all going to be in three different boxes, even if they're from the same company order on the same day, right? And part of what I think they're thinking about now is it's a huge logistical savings for them to be able to actually deliver things on a cycle like that. They may be able to put in place systems where they can co-package things. And one of the things that they're still combating is that they're fulfilling more packages than they ever have. And it doesn't show any sort of sign of slowing down. So I think anything that they can do that will allow them to increase capacity in their fulfillment centers that is, you know, accepted as a positive by the consumer, I think is something that they're going to feel good about it.

It probably, frankly, will increase their margin too, which is, you know, always a plus. Yeah, the free market is amazing when you leave it, when you set good guidelines for the free market and you have a lot of participants, boy, things can work out well. final question for you. China has been in the news, obviously at the time of taping this, TikTok has got a gun to their head. If they sell it to Microsoft, they can continue operating and Trump will put the gun down. And if they don't, Trump's going to whack TikTok. So how do you think about the relationship with China of your 6,000 products? How many actually are built in factories in China? And is that a liability for your business? And what would the next alternative be for you in terms of building? I hear Vietnam, I hear Pakistan, I hear India, are all trying to get factories away from China. Tell us about your relationship and the liability you might have because of this escalating situation with China. It's real. I mean, you know, three quarters of our products are made in China, and we actually have a plan to begin moving and have actually begun moving a fair amount of our production out. Where it goes, you know, what people don't appreciate about China is how hard.

it actually is to replicate it somewhere else. You know, you think it'd be easy, but you imagine making a product that has 15 or 20 subcomponents, and you need factories for those subcomponents to be located within 100 miles of you, right? Now, all of a sudden, you've got a much different problem to solve than just plucking a factory down. You start thinking about the electricity, and you start saying, who's got an electrical grid that can handle 100, 200, 500 of these factories sort of showing up one day. And the answer is not nearly as many countries as you think. So, you know, what ends up happening is certain countries are good for leather, like Pakistan, certain companies, countries are good for other things like Bangladesh. You know, you can move things

to India. You can move things to Taiwan. Some products, you can move easily. Some products can't move without massive pain. And I think what people will find is that in a world in which either tariffs go up or there's some kind of embargo or sort of true horrific kind of trade war, that there are going to be certain products that just cease to exist because they can't be made outside of China without being so expensive as to be prohibited. There happens to be a country just south of us with a lot of people, and many of them are looking for work and they're hardworking and they've had factories before and probably could have unlimited energy if we popped a couple of nuclear power plants there. It's called

Mexico. For some reason, we started a trade war with them and were adversaries with them. Is that not the greatest solution ever to put more factories in Mexico and build a better relationship with them so that the products and services don't have to get on a giant cargo ship to get here? Wouldn't that save money in the short term and long term? Well, I think there's sort of two questions. One is, and I'm no expert on this, but what's the level of political stability in Mexico and what's that going to look like? Yeah. But the broader question is, how patient are we as a country?

Because moving a single factory or, you know, sourcing something someplace else could easily take nine months, right? Building a new factory from the ground, creating new molds and lathes. You're talking about, you know, a year, a year and a half. I mean, these are long term, you know, you need to be committed to, all right, in 2027, we're going to have. have X percentage of our manufacturing in Mexico. So that's a, you know, that's a couple of different presidential terms to sort of have this come across. Like trying to actually build that kind of a commitment and then simultaneously, you know,

you start thinking about the dynamics in the interim. It's not as if China's going to stand still while they see their entire industrial base disappearing. They're going to try and hold the U.S. hostage. So it's like, yes, there are solutions and there are good reasons to be working on them and not being as dependent on China, but it's just like most things in the real world. It's never as simple as we'd like it to be. Yeah, it's definitely a textured and nuanced conversation.

It's possible that we could become less dependent on critical items like pharmaceuticals while being, you know, and also rare earth minerals, which we have here. We just don't dig them up because they can do it cheaper there. And then we could be slightly more dependent when it comes to. I don't know, cables or toys or whatever it is. And if the toys and the power cables don't get over here, boo-hoo, you know, but pharmaceuticals and rare earth metals, we're going to need to have some redundancy for those. It's a pleasure talking with you, Josh.

Continued success with your company. You're based out of New York, or where are you based? New York, Boston, Houston, Philippines, and... Where are you based? I'm in New York. You're in New York. But you're looking at that Texas situation, I bet, now that everybody's remote. I bet you're looking at Austin and Houston and saying, hmm,

great place to live, are you? You know, I grew up around here. I love it here. We've got a great team down there. I'm not sure that they'd be happy if I moved there. I grew up in Philadelphia, actually. Oh, okay, Philly. Got love for Philly.

All right. Well, listen, continued success. And if you want to sell your company to Thrasio, you know what to do. Just reach out to your boy, Josh Soberson, and he'll buy your company if it's at a reasonable price. But don't get too cute with the prices here. We all know it's hard businesses to run. Continued success.

Thanks for coming to the pod. You were a great guest because you were so super honest. And we all got a really great education on the Amazon ecosystem, which is a net benefit to society. And we should be thanking Jeff Bezos for his hard work and allowing this platform to make so many millionaires and small businesses. We'll see you all next time on this week in startups. Bye-bye.