After his J. Crew clothes were rejected by his local thrift store, James Reinhart vowed to create a market for clothes in the uncanny valley between discount and luxury.
10 Minute Read
In 2009, long before the “resale market” had picked up steam, thredUP incorporated. Now, 10 years later, they’ve raised over $300m in funding, including a new $175m round announced in August. They also introduced a new platform powering apparel resale for retailers and brands.
But it took Reinhart awhile to understand thredUP’s unique advantage. How’d he do it? By constantly talking to his customers––and asking a few key questions. We talked to Reinhart about how thredUP found its footing, and how he created demand for a product that, at the time, no one was talking about.
- Want to find out who your main competition is? Ask your customers what they would use if your company didn’t exist
- To win at a secondhand marketplace, make it as frictionless as possible for sellers
- In an early-stage market, competitors are your friend: The more players, the bigger the pie
What inspired you to get into the resale industry?
The business started with me trying to solve a personal problem. I was in school at the time, and I opened up my closet to a closet full of clothes that I wasn’t going to wear. And I went to try and sell them at a local consignment store, and they wouldn’t take them because they weren’t luxury brands. The stuff I had was J. Crew, Brooks Brothers, Banana Republic. And I thought––this is the type of stuff that every guy who’s had a job has in his closet. This stuff has some real value, and I don’t understand why there isn’t a better market for it.
When I did some research, I learned that there really hadn’t been any innovation in secondhand since eBay and Craigslist, and they launched in the mid-1990s. I went and talked to all sorts of men, women, and parents, and said, “What percent of the clothes in your closet do you wear?” Nobody ever said more than half.
What did the resale market look like when ThredUP started?
Well, they didn’t call it the resale market; that’s changed. It was something nobody was talking about. We were just starting to see the shift in consumption: Uber was just about to launch. Airbnb had launched. TaskRabbit had launched. So you had these platforms where people were thinking more about this shared economy. We were kind of looped into that ecosystem. Before thredUP existed, it was really just eBay and Craigslist, and nobody paid any attention.
thredUP co-founders Oliver Lubin, James Reinhart, and Chris Homer, in their San Francisco office in 2011.
How did you go about launching the company?
Me and my co-founder put in a few dollars to run the company for about six to nine months and then we did a very small family round––we raised about $70k, and ran the company in a truly bootstrap fashion for another six months.
Can you walk me through what that $70k went to?
We rented an office, we had some server costs, we had some marketing supplier costs. And we had a few thousand dollars in legal costs, and getting the company off the ground. Then we had some basic hiring expenses––and travel. We were in Boston at the time, going back and forth to New York, and then off to Syracuse. So we were pretty lean. If you think about it, $70k over the course of a year, it’s really not a lot of money.
At that point, what was the product?
It was a peer-to-peer platform for men’s shirts. Which turned out not to be a very good idea, because men really don’t participate in the resale market the way women do. But we got started with men, and then we evolved to focus on kids and women.
It was also peer-to-peer, so we were not touching any inventory. There wasn’t really a social component, it was very transactional. Our features were still all about convenience and we weren’t looking for people to engage on a platform, Poshmark-style.
What did you learn that made you change course?
What we learned in the process was that for sellers, there’s a lot of friction on the sell side. It’s frankly something that Poshmark struggles with today: Sellers sell for a little while, but eventually it becomes a lot of work, and people churn out of that model. What we learned early on was that the best way to grow this market and really win secondhand on the internet, was to take all the friction out of the sell side.
So, we evolved the model: We would send you a bag that looks like a laundry bag with a prepaid label on it, and then you would fill it up with all the stuff you’re no longer wearing. We would take it into one of our facilities, and we would do all the work. We would do the inspection, photography, lift the stains off, the whole bit.
That fundamentally changed the game for us. We went from a world where it was tough to get supply, tough to get sellers onto the platform, to a world where we couldn’t get people to stop sending us stuff. And that really launched the business.
thredUP’s current user experience.
When did you first realize that this idea had traction?
It wasn’t really until we evolved the model, touching and managing the inventory, that we really saw some of the acceleration in a really authentic way. So it was 2012 when we really started to see the momentum on the supply side. And if you think about any market that exists, it’s typically constrained by supply; Uber’s growth is constrained by the number of drivers; Airbnb’s growth is constrained by the number of people renting out their house or their room; OpenTable’s growth is constrained by the number of restaurants on the platform.
So markets tend to be supply-constrained and it wasn’t really until we unlocked that that we were able to see real acceleration. It felt like there was a breakout opportunity. We have four facilities today. We are processing more than 100k unique items every day and that number is compounding pretty quickly. So we’ll process 100m unique items by 2020.
How did you tackle the huge volume of supply?
We put together what we thought ops should do, which was a set of activities: Take clothing in, inspect it, photograph it. And so, in our first iteration we did everything on the iPhone. So all the pictures, the first half million items that we sold, everything was done on the iPhone. So in 2012, 2013, we were using that to upload items online. And then we got smart.
Chris, one of my co-founders, and I realized that we really didn’t know how to do this. And so we went out and hired a guy named John Voris who helped automate the Netflix DVD business. We brought him on board, and that really changed how we did everything.
Can you elaborate on how the tech works and how it helps the manual side of the operation?
I wouldn’t say it’s any one thing that we do on the technology side, it’s a thousand little things. I’ll give you like the smallest example. [This spring] we changed the orientation of the monitor for the person who is entering the information about the item.
So, I kid you not, imagine you’re working at your desk, and all of a sudden you’re like, “Oh, what if I put my monitor on the left side of my desk versus the right side?” Well, it turns out that if you make a small change with the placement of the touch screen, you actually reduce the amount of times that somebody needs to twist and turn, grabbing items. And that creates a 2% improvement in productivity.
It’s those types of things that have allowed us to get to where we are today. But we use technology and data to test all these things, so we were able to understand that, “Hey, if we make this change, it really will drive productivity.”
One of thredUP’s new, data-backed “Smart Store” popups
Take me through the unit economics of a single bag of clothing. What is the average payout for a bag?
I don’t know what the average is because it, as you can imagine, we sell 35k brands across a hundred categories. So it varies a lot. In general, the more premium the brand is, the more likely we are to obtain more for it. And the less premium the brand is, the less we pay for it.
Just to make it simple, a big full bag typically has about 30 items, and we typically reject half of that. And the primary reason we reject stuff is for quality. Then the person has a choice, so we can either get rid of it and recycle it on their behalf, or they can pay what we have online called return assurance, and you can get all the items back that we reject.
How do you determine the value of an item?
There’s no human appraisal, everything is done algorithmically using our own internal data; it’s proprietary to us. We enter data about the item, we look for data that we’ve processed previously, and then we identify the price. And then we let the seller know what the price is, and then they can adjust the price if they like.
Do you shoot for a certain margin on every piece of clothing?
I wouldn’t say we focus on a margin target per item. It’s a combination of things. We obviously want to delight the buyer, and we want to delight the seller, and we want things to move through the platform quickly. And so we balance a bunch of these variables. And so there are certainly items that we can’t sell online in our model because they’re just too cheap in other competitive dynamics. For example, it’s very hard for us to sell secondhand piece of clothing from a Walmart brand, because it’s so cheap at Walmart already. So we typically don’t sell discount brands like that. But the rest of them, it really does vary. We look at it on an aggregate basis.
What is the No. 1 obstacle to thredUP’s growth?
I think it’s the selection of high-quality secondhand clothing. I think product wins at the end of the day, and the better we get at putting this incredible assortment of stuff online every day at prices you can’t find anywhere else, the more successful the business will be. I think where consumer psychology is going, consumers want value, but they also want unique things. I think they’re more conscious as consumers; they care about doing right by the planet, I think they care about being smart with their wallet. And all those things compound so if we can deliver the customer the right set of goods and we meet their values, then that’s really a recipe for success.
Who do you see as your main competitors right now?
I think primarily we compete with discount retail, and off-price retail. When we surveyed customers, we said, “Hey, the item that you purchased on thredUP, if thredUP didn’t exist, where would you have purchased it?” It’s like the best question to understand what you’re displacing. And 70% of people said they would have bought at T.J. Maxx or Ross [Dress for Less].
How have you collaborated with established apparel brands?
We power Reformation’s recycling and loyalty programs. Reformation puts thredUP cleanout kits in their outbound orders, or in their stores. And then the Reformation customer sends it back to thredUP, and they earn credit at Reformation. Reformation loves that. I think we will continue to do those types of loyalty recycling partnerships because there’s really no reason for the brands and the retailers not to do it. Their customer’s always going to clean out their closet a couple times a year. And so figuring a way to provide that benefit to their customers makes a lot of sense.
We’re also testing pop-ups in some department stores where we put high quality secondhand products in stores, side by side with new products. Then the third way is we’re creating this feed of secondhand products that can live in an online environment. So many of these retailers––department stores––are trying to build marketplaces that also feed the engine of their online growth.
Traditional retail knows that customers, especially young customers, are shopping resale more than ever before. And the number of items that they’re buying in a resale world is accelerating. They know it’s something they have to figure out, and when it comes to figuring it out, all roads lead back to thredUP. And so, you know whether it’s operations, it’s beta, or it’s separate, everything ends up back in our court. That’s what’s really exciting for us, and I think we will end up working with a lot of large retailers over the next few years.
A thredUP collaboration with Olivia Wilde and brand Conscious Commerce
Do you have any data suggesting that resale programs for brands like the Reformation Upcycle program drives sales or increase brand affinity?
There are three main benefits partners see in working with us. The first is sustainability: It’s no secret that fashion waste has become a problem, and retailers are looking for ways to lighten their impact. From a sustainability perspective, our partners have upcycled hundreds of thousands of items through the program, and thredUP helps retailers communicate that environmental impact, which in turn builds brand love.
Our partners have generated over $1m in sales collectively––whether that’s by adding secondhand product to stores or allowing customers to trade in clothes for brand credit. Consumers across all ages, industries and categories are buying and selling secondhand––so retailers who plug into thredUP’s infrastructure to launch resale for their customers are seeing the benefits.
Retailers who launch resale programs are seeing that a high percentage of participants––upwards of 40%––are completely new to their brand. Adding secondhand product to stores or launching a recycling rewards program will inevitably attract new customers, and likely younger customers who will drive the future of retail.
Are there any big problems or bottlenecks thredUP deals with on a regular basis that are necessary to solve, but not necessarily core to the business model––like, say, washing and drying clothes?
We primarily have built all of our tech, operations, and logistics in-house. Our biggest challenge was essentially “How do you build the backbone of resale on the internet?” In other words, how do you build the infrastructure to process, price, and photograph billions of unique SKUs efficiently? How do you determine the resale value of garments when there is no barcode on your clothing? These are things no retailer has ever done, so we needed to design it from scratch, and have spent the past 10 years building complex yet scalable systems and data sets that can power the resale economy for consumers and the broader retail industry.
Also, just to clarify––we do not wash/dry the clothing. We triple check for quality and reject anything that is unclean. We ask sellers to launder their clothing before sending it to thredUP.
How do you anticipate retail brands will participate in the used apparel market in the future?
Nine out of 10 retail executives want to test resale and embrace circular fashion, but lack the infrastructure. Last month, we launched a platform called Resale-As-A-Service, which powers the buying and selling of secondhand apparel for retailers and brands, helping them join the resale revolution and extend the life of clothes.
I think it’s inevitable that brands will create their own marketplaces. But I don’t think that’s a bad thing, right? I think you can have lots of folks in the resale economy. I mean look, this thing is growing so rapidly, it’ll be worth $50B in the next five years. So by definition there are going to be other entrants. And so, I think the more that traditional retailers try and do this themselves, and build their own platforms, I think the more that educates the customer.
My vision as a founder is that the pie gets a lot bigger, and then we can fight over the spoils later. So I’m excited to have other people involved.