This is a guest post by Richard Armstrong who is an early stage investor in many startups in both SE Asia and globally. Plus Richard has cofounded several companies.
Guest Author: Richard Armstrong
I recently met up with the CEO and founder of one of the companies I’m backing called Kaona Brands.
His name is Samkit Mehta, and he founded Kaona Brands, a niche PE mini fund based in Thailand, back in early 2022. Another name folks like to use for this model is a ‘D2C eCommerce Aggregator’, but I’m not a big fan of that name as I think it has a lot of wrong assumptions associated to it.
Prior to starting Kaona Brands, Samkit was at Temasek in New York City.
But Aren’t D2C Aggregators supposed to be almost the worst space to be in these days?
It is true that there have been a number of high profile failures like Thrasio recently, but I think it’s important to not jump to conclusions and examine the situation more closely.
First of all most of these aggregators like Thrasio have struggled because they took on high levels of expensive venture debt back when the things were looking good (eg. 2021).
And so now that the market is struggling they have struggled to pay back this expensive debt…. which triggers either painful restructuring or catastrophe.
But to avoid this is simple… just don’t take on debt that you cannot afford to pay back. It seems oversimplified.. but I really do think it is literally that easy.
The sector still has strong fundamentals
Meaning I think D2C brands in SE Asia still have amazing potential.
You need to ask yourself the following questions:
- Is the market oversaturated in SE Asia for these D2C brands in various niches? My view is absolutely not. Unlike in the US the game here is just beginning.
- Traditionally the market here has been flooded with products from China, which are typically not tailored to the market and are either unbranded or have very weak brands.
- Those products tend to compete mainly on price. Not brand / quality.
- Is eCommerce still growing strong? Absolutely. The market here in SEA is still in its early stages.
- Can it be profitable? This is where I like this region much more than the US. Because the US has a single dominant player, Amazon, who is famous for lots of crazy fees that stifle seller profitability.
- Whereas here in SE Asia it’s a much more fragmented market with Shopee, Lazada, Tiktok, etc. And this keeps the fees relatively low.
So you see.. the tailwinds are still very much behind these D2C players.
It is also a buyer’s market here in SE Asia now
A couple of years ago there was a ton of capital chasing good e-Commerce companies. This drove up valuations.
And so it was a challenge to buy good companies at a reasonable price.
That has changed massively in the past couple of years as the capital has dried up. Kaona is now one of the few companies that it’s target acquisitions are getting an offer from.
And that means it has a lot more control on the price and terms it gives.
It’s also about what you focus on
In the early years of the ‘aggregators’, companies were buying anything that looked profitable.
But that spread them too thin. And they suffered because they never got these synergies. So they were unable to draw much additional profit out of these brands they bought.
Which meant that the multiple they paid to acquire the companies never got justified.
To get synergies in your portfolio you need to go deep into a niche.
You need to be able to leverage your client base, your marketing strategies, your sourcing base, and your retail network across numerous brands.
And that is exactly what Kaona Brands is doing with its focus on the Beauty niche.
I like Kaona Brands’ Acquisition Framework
Kaona is very particular about what brands it is willing to buy. And this for me is one of the keys.
There are a few things I like a lot about their acquisition framework:
Unique value proposition: they want unique products that have a moat around them. Not something that can easily be copied.
Evidence of delighting customers: so much of D2C these days is built around ‘community’. You need long-term customers who care about your brand.
Potential: the longer-term game in D2C relies very much on how much you are able to organically grow these brands. Are there interesting sub-segments you can extend the brand into? How successful is the team as launching new products? etc.
Closing thoughts
Let me wrap up why i’m very bullish on Kaona Brands:
- Strong, dynamic team with proven experience both in operating eCommerce brands as well as in acquiring companies.
- A nascent D2C brand market in SE Asia that is poised for growth. Particularly because the game to this point has been unbranded, cheap imports.
- A fragmented set of eCommerce marketplaces, which will keep fees down for the foreseeable future.
- A deep focus on the Beauty segment with a very clear acquisition framework and a M&A landscape in SEA that is now a buyer’s market.
Interested in learning more about Kaona Brands? DM me and let’s chat.
