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Investors Continue to Pour Millions Into Online Resale Startups

Companies like Poshmark, The RealReal and ThredUp have raised hundreds of millions of dollars in venture capital over the past few years. Can they measure up to all the hype?
We're all after a bargain, aren't we? Photo: Carl Court/Getty Images

We're all after a bargain, aren't we? Photo: Carl Court/Getty Images

Sixty-five million. That's how much money venture capitalists poured into just two startups — The RealReal, which raised $40 million in a Series E round, and Poshmark, which raised $25 million in a Series D — last month, a bet that more and more women are going to sell their secondhand clothes and accessories online, and that even more are going to buy them up.

With so few e-commerce companies thriving these days — even Amazon has a tough time eking a profit out of its retail business — why are investors so keen to make a play in the online resale category? The model is not exactly new. eBay, founded in 1995, was the first innovator in this space, building a more than $1 billion/year peer-to-peer marketplace prior to its acquisition of PayPal in 2002. For nearly three decades it has been the go-to destination for women looking to buy and sell gently used designer handbags, shoes and clothes, among other categories. Indeed, when resale sites like Vestiaire Collective, ThredUp and Vaunte began popping up between 2009 and 2012, I didn't think they had a fighting chance against eBay. But collectively, they are posing some tough competition to the company — as well as to brick-and-mortar consignment and thrift shops, off-price outlets and anywhere else designer fashion is sold at a discount.

The sheer number of startups that have emerged — and nabbed tens of millions in funding — in this space is staggering. According to Crunchbase, San Francisco-based ThredUp (founded in 2009) has raised $131 million to date; Paris-based Vestiaire Collective (founded in 2009 and launched Stateside last year) has raised $69 million; Menlo Park, Calif.’s Poshmark (2011) $66 million; San Francisco’s now-defunct Threadflip (2011) $21 million; San Francisco's The RealReal (2011) $123 million; San Francisco's Twice (2012), which was acquired by eBay last year, $23.1 million; Santa Monica, Calif.’s Tradesy (2012) $44.5 million. In addition to those, Portero, Shop-Hers, Vaunte and men's site Grailed have also raised millions in venture capital.

But over the past year, a few clear front-runners have emerged, while others — like Threadflip, Shop-Hers and Vaunte — have been folded into larger competitors or are quietly bumping along as they find themselves unable to raise enough financing to scale.

Investors we've spoken to generally point to three companies that are leading the category: ThredUp, The RealReal and Poshmark. Interestingly, it's not the things that they have in common that have helped them come to the fore, but rather what they don't. "They are all three very different businesses," says Maha Ibrahim, general partner at Canaan Ventures and a member of The RealReal's board of directors. "Businesses that can coexist wonderfully."

Of the three, seven-year-old ThredUp is the oldest, and has raised the largest sum from investors, which include Goldman Sachs, Highland Capital Partners and Redpoint. The site targets women seeking discounts on mid-range — not designer — brands for themselves and their children: Think J.Crew, Anthropologie and Gap Kids, not Gucci and Dior. As such, margins on it sales are lower than resale sites that focus on the higher-end of the market. Users ship the goods they want to sell to ThredUp, and the site takes care of the photography, listing and other logistics. Unlike most of its competitors, which take a flat percentage of every sale, ThredUp's cut is determined on a sliding scale: Sellers only get 10 percent of the sale price on items that sell for $15 or less, for example, but a full 80 percent on goods that sell for more than $300.

Right now, the company is focused on expanding its operations in the U.S., and incorporating a more detailed vetting process for goods sold on its site. There's plenty of potential for it to expand into new categories, including men's and home.

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Poshmark was launched two years later with a focus on mobile and social commerce. While shoppers can browse by brand (like any other e-commerce site), its app and website are designed to make them shop more socially — to view feeds of what individuals are browsing, curating and selling. It's a true peer-to-peer marketplace, a la eBay: Sellers photograph items from their own homes, fill in the listing details and set the prices. They keep 80 percent of the proceeds, and Poshmark sends them a $5.95 prepaid shipping label to mail the product out. Goods that sell for more than $500 are first shipped to Poshmark for authentication, but otherwise, the company is free from handling any inventory, so its costs are not as high as competitors who photograph, list and warehouse their sellers' products.

The startup grew its sales by 150 percent last year and is on track to grow another 100 to 150 percent this year, says cofounder and CEO Manish Chandra. The company plans to add men's and children's to its offerings in the near future, as well as home furnishings. International expansion is also on the docket.

But Poshmark doesn't intend to be solely a resale marketplace: In fact, it recently invited a number of indie clothing brands to set up shop on its platform alongside its individual sellers. And this is where investors see big potential. "What Poshmark has done exceptionally well is build a network of influencers who are both good at selling as well as at curating and offering suggestions," says Hans Tung, managing partner of GGV Capital and the newest addition to Poshmark's board of directors. He says he and his firm had studied the online consignment space years ago, but decided not to invest, believing the opportunity was too limited. But once they saw Poshmark's vision expand beyond resale, with the potential to become a global social commerce platform for brands as well as individual sellers, they opted to become the lead investor in Poshmark's latest round. (Notably, GGV Capital was also an early investor in Alibaba, which operates one of the world’s largest online marketplaces, Tmall. In other words, the firm has some serious cred in the space.)

The RealReal, founded in the same year as Poshmark, focuses on the high-end of the resale spectrum, accepting only a limited number of brands for its site, and fetching a higher margin on its sales than most of its competitors. Sellers can mail in goods for inclusion or, if they have more than 10 pieces, have them picked up from their homes. Items are rigorously vetted for condition and authenticity, and accepted goods are then professionally photographed and listed on the site. The RealReal sets the listing prices, and handles all of the photography, listing and shipping — ideal for sellers who don't have a lot of time on their hands, but less ideal for those who like more control over the process, particularly on the pricing front. The company takes a 40 percent cut of every sale.

Ibrahim and her firm, Canaan Ventures, looked at a number of startups in the online resale space before deciding to back The RealReal. "It is a business that is high-touch, and operationally intense, and [founder and CEO] Julie [Wainwright] understood that it needed to only focus on luxury," says Ibrahim. "She set a minimum bar right away for the types of goods she would take in, and at the same time there was a demand for a site that offered unique, covetable merchandise that was authenticated, a site they could trust... The demand itself is insatiable, people always want luxury and at a low price."

In addition to women's fashion and accessories, The RealReal also sells men's fashion and art. One of its core focuses is recruiting — and developing — its seller base. "It's about having the best stuff, and in order for us to have the best stuff, we have to have the best relationships with the consignors and suppliers. If we can sell things the quickest and for the highest prices, they'll come back to us over and over again," Ibrahim says. Like its competitors, international expansion is also on the roadmap for The RealReal.

While investors have put their faith into these companies, not everyone is convinced of their potential, and so far, there have been no promising exits (i.e., acquisitions or IPOs) — even the startups that have been acquired, like Twice and Shop-Hers, have netted only nominal sums. "These are difficult, complicated and costly logistics businesses," says Lawrence Lenihan, cofounder and co-CEO of fashion-focused venture operating firm Resonance Companies. "Their customers love them for convenience and selection, but I'm not sure that there is a profitable sustainable business at the end of the journey. They seem to be trying to emphasize the high end of the market with watches and jewelry because the margins are the highest and the logistics cost per contribution margin are the lowest. But then they are [facing] a whole host of competition, including the brands themselves who have the credibility of physical presence along with new products."

With hundreds of millions of dollars on the table, it's a high-stakes game we're about to see played out. Grab the popcorn.