August 15th, 2022: Instacart’s 2022 IPO, Amazon acquires Roomba, the latest on American Eagle Outfitters, and Avalara going private with Vista Equity
It’s August 15, 2022 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Instacart Planning IPO for the End of 2022
Amazon Makes Another Billion Dollar Acquisition with Robotic Vacuum Maker Roomba
American Eagle Outfitters’ Quiet Platforms Launches a Nationwide "Asset-Light" Logistics Network
Tax Software Provider Avalara is Going Private in $8.4 Billion Vista Equity Acquisition
- and finally, The Investor Minute, which contains 5 items this week from the world of venture capital, acquisitions, and IPOs.
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To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.
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BUT FIRST in our shopping cart full of news….
Instacart Planning IPO for the End of 2022
Despite what I am sure is an extremely challenging market, Instacart has decided that going public by the end of the year is the best of the bad options available to the company.
The Wall Street Journal reports a few things:
Instacart is in the middle of the process of responding to the SEC on its IPO documents.
In the past year the company has been marking down the value of its shares so that it is in a much more palatable range.
The company was profitable in Q2 on a GAAP basis, which, I’ll be honest, I find extremely difficult to believe.
Company-watchers may have seen that Founder Apoorva Mehta recently stepped down from the Board, leaving Fidji Simon as Chairwoman of the Board.
Over the next 3-4 months it will start to test the waters with bankers that will help Instacart gauge the demand for its IPO.
First of all, name a great venture-backed eCommerce IPO in the last few years? Go ahead, I’ll wait.
Second of all, I predict investors will not be very happy with what they see from Instacart. The company doesn’t have a tremendous amount of direct assets other than its advertiser relationships — the rest of the business I presume to be extremely unprofitable.
Finally, did I mention that 2022 is currently on track to be the worst IPO year since 2009? It’s rough out there, folks; keep your head down and your inventory levels low.
[References:]
Our Second Story
Amazon Makes Another Billion-dollar Acquisition with Robotic Vacuum Maker Roomba
Right on the heels of Amazon’s continued expansion into healthcare with its almost $4 billion acquisition of OneMedical, Amazon has acquired iRobot for $1.7 billion.
That is about a onetimes revenue multiple on the business.
You might recall that Amazon has been rolling out its Astro and Echo robots, which are relatively unsophisticated and more or less function as Alexa on wheels with a camera. Amazon needed to level up its skills to move to the next phase.
What does Amazon get with this acquisition of iRobot?
First, Colin Angle will remain the CEO of iRobot, which is amazing for Amazon since he is one of the greatest roboticists of our generation.
It might come as news to you that I spent my graduate school training at Vanderbilt University at the Intelligent Robotics Lab back in the 1996 timeframe.
At that time, the leader of the lab was a friend of mine, Robert Pack, who already had a few robotics patents. Robert went on to several robotics companies, including iRobot, and landed at Amazon several years ago.
Shout out to Robert, who now gets to reunite with his old friends!
Second, iRobot has a portfolio of about 1,500 patents related to robotics. This is a huge asset for the company.
A lot is being made about how Amazon gets maps to your home or something, but I think this is being a little overplayed for media effect.
It’s very easy for Amazon to get leverage from this acquisition because it has more facilities and parcel volume than anyone else – 532 million square feet, according to MWPVL International Inc. Amazon can easily leverage this talent across the widest network, not just within the home.
Amazon needs a group working on basic research that can be applied across the entire company; I would think of it as robotic microservices.
But why did Amazon buy a robot company right now? One obvious reason is that before last year, Amazon didn’t seem to be serious about consumer robotics. I think iRobot also had a reason, just looking at the last few years of its annual reports.
iRobot was growing at around 9% year over year with gross margins of around 45% at a 10% operating income. The problem is that gross margins declined last year to 35%, which forced the company to lose a little bit of money in 2021. Perhaps Amazon-level scale will help iRobot improve its gross margins.
One last thing? This deal still needs to pass a federal antitrust review from Lina Khan, who is no friend of Amazon. Stay tuned on this!
Does Amazon want to map your home? Sure. They do. But it's not the only reason by a long shot.
[References:]
https://www.theverge.com/2022/8/5/23293349/amazon-acquires-irobot-roomba-robot-vacuums
https://www.bloomberg.com/news/articles/2022-08-05/amazon-s-irobot-deal-seen-facing-tough-ftc-antitrust-review
Our Third Story
American Eagle Outfitters’ Quiet Platforms Launches a Nationwide "Asset-Light" Logistics Network
After only a year in operations, American Eagle Outfitters’ Quiet Logistics Platforms has launched a nationwide delivery network. This is extremely fast timing and a little surprising.
While Quiet Logistics did have fulfillment centers, the only way to build a nationwide network in a year and not spend $500 billion to do it is to make an asset-light network. And I think that is what the company is doing here.
Here are a few details about the service.
This is an interesting offering to watch because it has a lot of former Amazon talent running the service, among other experienced providers.
First, Quiet Platforms offers a universal label. This is important because it allows all the sub-partners in the service to not only scan the same barcode throughout the journey, it also means that as a consumer you never see different tracking numbers along the way.
Just to give you some idea how hard this is, even Amazon has not solved the universal label problem. I will return to this.
The second interesting feature is that the service is truly nationwide. All zip codes are covered. Since USPS is the only carrier which legitimately serves all zip codes, this service must be tied into USPS for the last-mile mix at a minimum.
Third, the company mentions that it has redundancy in major markets to route around carrier issues. This is also something tricky to manage and of course the devil is in the details here. As an example, if your parcel is the one that’s delayed by a particular regional carrier, that parcel could be the one that alerts other parcels about the issue, but that doesn’t save the parcel in transit.
Fourth, and possibly one of the more interesting innovations, is that the carrier decision is delayed until the edge of the network. Which means that the parcel can pass through multiple carriers hands. Of course this creates risk! But there is opportunity here. Quiet says this could shave $1 and one to two days off the delivery time, but this remains to be seen in person.
At its core, however, the technology is not rocket science. It's rate shopping, but at the parcel level and perhaps even along the route (which I have seen in other startups).
An issue with the deferred carrier decision is… how do you get volume pricing if you are rate shopping across carriers and you don’t know what carrier is going to be chosen until after the parcel is shipped?
Finally, I am sure the company probably built a universal label. I am completely certain, however, that this same universal label is NOT being applied to ALL zip codes. What are the odds the USPS with its 50-year-old equipment is accepting someone else's label on its network? Exactly zero. None.
In cases where AEO has leverage with a regional carrier, it’s definitely feasible they were able to get the carrier to adopt their label.
All in all, regardless of whether or not you think this is going to work, it is great to have innovative thinking and competition in what has been a pretty static logistics market until the past five to ten years.
[References:]
And Our Last Story
Tax Software Provider Avalara is Going Private in $8.4 Billion Vista Equity Acquisition
Vista Equity Partners continues taking billion-dollar public SaaS companies private with its latest acquisition of Avalara software.
In case you don’t know Avalara, it is one of the most popular SaaS solutions in eCommerce, providing tax, compliance, and cross-border software for a wide range of categories.
The value placed on the business was about $8.4 billion.
At this point, the founders have already been paid out, so is this a double home-run for the founders? Possibly.
What’s troubling is the storm clouds on the horizon. Let’s talk about something as a baseline. Avalara has always had a sales problem. And that sales problem is most eCommerce businesses don’t care about tax software until it’s too late.
When is it too late? When you are already under regulatory or audit scrutiny for your business. That thinking is something like a homeowner not buying insurance until their home is on fire. Sounds crazy, but it happens all the time.
It’s under this lens that I analyze the financials of Avalara here.
First, the stock hasn’t even been beaten down much like other stocks. Yes, it is down 43% in the last year, but I’m sure a lot of other companies whose stocks have dropped 80% in the last year would take that in a heartbeat.
If you look at the last five years, for example, the stock price is still up 104%.
In terms of the numbers, Avalara had a $209 million Q2 this year at 70% gross margins. A 70% gross margin SaaS business is very common. However, above the line is not where their problem is.
If you look below the line, the Avalara picture starts looking very ugly.
Off that 70% gross margin, here are their other expenses as percentages of revenue:
* Research and Development: 27%
* Sales & Marketing: 48%
* General and Administrative: 21%
If you would think that these last three numbers added up to more than 70, you are correct. Avalara is wildly unprofitable, with a negative 26% net profit margin.
People think retail is not a profitable business, but SaaS is one of the worst offenders out there. For a company founded in 2004, it seems excessive, but it’s actually quite common for SaaS businesses growing over 20% a year.
What’s going to happen next? To my eyes, Sales & Marketing looks about 10% over-funded, R&D about 3-5%, and G&A could likely go down as well. That would put the company in a much better profitability situation without impacting their growth tremendously.
Of course, I did check on Vista Equity Partners’ other public holdings like VividSeats and CVent, and they are not all profitable either, so it will be interesting to see what changes the new owners make.
[References:]
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It’s That Time, Friends, for our Investor Minute. We have 5 items on the menu today.
First
Digital experience platform Contentsquare just raised $600 million.
This is the kind of round you see before a company IPOs. Contentsquare provides customer journey, merchandising, and website analysis software designed to highlight important issues in a brand’s digital experience.
Link: https://contentsquare.com/series-f/
Second
Mushroom-based alternative meat manufacturer Meati Foods raised $150 million to accelerate its sustainable protein.
There is a huge amount of VC investment into synthetic meat products with a huge addressable market as the effects of climate change and other factors continue to become more important to consumers.
Link: https://techcrunch.com/2022/07/21/meati-foods-150m-plant-based-meat/?tpcc=tcplustwitter
Third
Shopify invested in token-gated crypto-commerce startup Single.
Shopify lays off 1,000 people and then invests in a crypto company?
Yeahhh, this checks out.
Link: https://singlemusic.com/blogs/blog/single-secures-strategic-investment-from-shopify
Fourth
Whatnot’s valuation doubled to $3.7 billion as livestream shopping gains popularity.
Whatnot is a livestreaming shopping platform for collectors to buy and sell things like rare Pokémon cards and Funko Pops.
Whatnot’s valuation right now is more about its growth than the widespread adoption of livestream as a segment of eCommerce. The biggest question I have is, does this have staying power given the time commitment required from the consumer?
Link: https://techcrunch.com/2022/07/21/whatnot-valuation-livestream-shopping/
AND FINALLY …
B2B checkout solution Balance raised $56 million to further digitize B2B trade.
This is a great segment to be in if you can avoid the wrath of the eCommerce platforms, however, it’s difficult to introduce standard checkout solutions in a lot of B2B commerce because many of these buying processes are bespoke.
Link: https://www.getbalance.com/post/weve-raised-56m-to-supercharge-the-digitalization-of-b2b-trade
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That’s all for this week! Till next time, Watsonians.....
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Hi, I’m Rick Watson, CEO and Founder of RMW Commerce Consulting and host of the Watson Weekly podcast - your essential eCommerce Digest.
Our production partner for the series is CitizenRacecar. The show is produced by Alex Brouwer; Production Manager, Gabriela Montequin.
To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.
