Keith Rabois’ OpenStore bags new funding as valuation soars to $970M • TechCrunch

Many of the e-commerce roll-up companies, also known as aggregators, slowed down this year after a record 2021. However, some younger companies in this space are still thriving.

One of these is OpenStore, a company founded in 2021 as a way for Shopify entrepreneurs looking to move on to sell their businesses in a matter of days with a cash offer and less stressful experience. Over the past 18 months, OpenStore acquired dozens of businesses representing tens of millions in revenue.

The early success of the company may lie in the makeup of its founders: OpenStore is led by some heavy hitters, including Founders Fund general partner Keith Rabois and Jack Abraham, Atomic’s founder and managing partner, who started the company along with Matt Lanter and Jeremy Wood.

“We’ve been disciplined, applying the same principles that I have been doing for the past 23 years,” Rabois told TechCrunch.

Continued growth

While aggregators this year have announced layoffs and even wound down their acquisition divisions, OpenStore “grew substantially, increasing the number of brands and tripling the size of the team,” Rabois said. The company now has more than 100 employees.

In addition, while funding to aggregators has slowed to a comparative trickle — $9 billion of funding went into aggregators by September 2021, compared with $2 billion over the same period in 2022, per the Financial Times — the Miami-based company is among the recipients of some of those recent investment dollars. To wit, OpenStore just closed on $32 million in a round led by Lux Capital that values it at $970 million. The company said this is a 25% increase in the company’s valuation from its previous round of $75 million in funding announced in November 2021.

The new round brings OpenStore’s total equity funding to over $150 million from investors that include Atomic, Founders Fund, General Catalyst and Khosla Ventures.

“The round was preempted,” Rabois said. “We have a fair amount of capital on the balance sheet and were looking to raise next year, but Lux reached out to me. I respect them and their strategy and was receptive to working with them.”

OpenStore’s acquisition “sweet spot” is U.S.-based, direct-to-consumer brands that have between $1 million and $10 million gross merchandise volume, Rabois said.

Josh Wolfe, Lux Capital’s founder and managing director, said via email that the firm “believes OpenStore’s model is the future of online retail,” and that its “focus on accelerating the path to liquidity for Shopify merchants means that OpenStore is especially relevant and valuable in challenging economic times.”

The company is also ramping up its acquisition pace and will use some of that new equity to continue growing the team and acquire brands, he said. Brand acquisitions include apparel brands Jack Archer, Barn Chic Boutique, Yogaste and Wearva.

OpenStore’s longer-term goal, according to the company, is to “bring the experience of spontaneous discovery back online” in a new way of shopping that connects merchants with customers via one shopping experience driven by data, information and capital.

Much of these efforts will be led by David Zhu, a former DoorDash engineer who joined OpenStore in May as head of engineering. He will continue developing the company’s technology, including automating the process of acquiring merchants on Shopify and accelerating the operational efficiencies running these online stores through OpenStore, even going so far as to reduce the acquisition offer from the current 24 hours down to an hour, the company said.

Challenging times

Aggregators in general purchase companies from marketplaces like Amazon and Shopify, with the goal of growing them using technology and logistics expertise. Money poured into these kinds of companies, touched off in part by Thrasio’s seemingly quick rise to the top in 2020.

They apparently overdid it, with funding drying up this year.

There are myriad reasons why this happened. Taliesen Hollywood, director of specialist M&A at London-based Hahnbeck, brokers deals with aggregators and told TechCrunch that it is “not so much that any particular aggregator or brand owner is struggling, it is that online retail as a whole has had a very difficult year.”

“The deceleration or reversal in growth for most of these brands compared to the COVID peak, combined with increased costs, most notably in shipping but also in pay-per-click advertising and others, has made for difficult trading conditions,” he added. “Almost all brand owners are feeling this.”

Hollywood went on to say that the aggregator sector continues to be fragmented, with a small percentage of brands, particularly those who are younger, still growing well and with good margins.

He agreed that the total market in 2022 is “much quieter than 2021,” but attributes that to both buyers and sellers. On the buyer side, the FT report said merchants last year were being bought for sometimes 6x to 7x adjusted earnings before interest, tax, depreciation and amortization, which meant acquisition capital didn’t go as far.

That was good for sellers, but as the e-commerce market slowed down, so did their businesses. They also had to manage logistical issues with products sitting on cargo boats in the middle of the ocean or on docks for the past year. All of that combined is causing sellers to wait until business is good again, Hollywood said.

He went on to say that business “valuations have softened a bit, but have not collapsed,” and that capital continues to flow, citing Cap Hill Brands’ $100 million Series B investment from BlackRock earlier this month as a sign that investors still believe in the aggregator model.

Meanwhile, Rabois is also eyeing valuations. He believes OpenStore “has nothing in common with the other aggregator companies,” which he called “arbitrage businesses on Amazon.” Rather, he said companies aggregating businesses from Amazon aren’t able to make many improvements whereas with Shopify, there is room to grow.

The company continues to buy “multiple companies per week,” and is being “careful about valuation” and disciplined in pricing, Rabois said.

“It was a hot market last year, but we are very strict now about valuation and what a business is worth and making offers that we are comfortable with,” he added.