ThredUP is convincing apparel shoppers to think second-hand first; gets an $81M endorsement from Goldman Sachs

There’s a fundamental shift taking place in the way consumers relate to second-hand goods. In the past, people have purchased “used cars,” albeit reluctantly and with lingering uncertainty around quality. Now, “certified pre-owned cars” are helping ease the fears of quality-conscious buyers, while driving greater margins to dealers. The same phenomenon is taking place around consumer electronics. Gone are the days of buyer-beware transactions, with used gadgets sold as-is and often at a steep discount. Rather, the rise of “factory refurbished” electronics mean that gently-used now applies to cosmetic wear only and consumers can buy with confidence knowing that their product will work as advertised.

In early 2014, Upfront made a big bet that the same behavioral shift would play out in the multi-billion dollar second-hand apparel market, backing ThredUP with one of the largest investments in our fourth fund. The underlying belief is that consumers who historically have had reservations about participating in second-hand fashion apparel categories sold through offline consignment, thrift stores, and even eBay, would eagerly shop in an online augmented marketplace that offered a consistent mix of great branded product in verified “like-new” condition at incredible prices. This seemed particularly true in the women’s and kids’ markets.

Today, I’m thrilled to announce that the thesis continues to play out (maybe even better than we had anticipated) and as such, we’re doubling down on our investment in ThredUP as part of an $81 million Series E financing. We are encouraged by the strong vote of confidence signaled by the addition of Goldman Sachs Investment Partners as the lead investor in this round, and the continued participation of our friends at Trinity Ventures, Redpoint Ventures, Highland Capital, and NextView Ventures.

Under the leadership of founder and CEO James Reinhart and his team, ThredUP has grown into a clear and defensible market leader in this category. The company has upcycled over 10 million items to date across the women’s and kids’ apparel and accessory categories, and is listing several hundred thousand additional items each month.

Perhaps this growth shouldn’t be surprising given the supply-side statistics surrounding this category:

• 70 percent of the average woman’s closet goes unworn each year
• The average American generates 60 pounds of apparel to be recycled annually
• Parents will recycle more than 1,800 items on average by the time their kid turns 18

The question, then, is what’s changing demand to make this once maligned category explode into a mass-market phenomenon?

For one, online and mobile commerce is making for a far more liquid marketplace than could ever exist in local, offline second-hand stores. It’s not as if a shopper in a Salvation Army or Savers store who finds an item in the wrong size can check in inventory in other stores around the country in the hopes of finding alternate sizes. But with buyers and sellers now connecting across great distances online and smart search algorithms connecting rare inventory with the exact right buyer, there is almost no item (if still in like-new condition) that can’t find a second chance home. And a vertical focused marketplace can offer a much better user experience than a generalist service like eBay. With an explicit focus on apparel and accessories, ThredUP is able to offer a far more tailored and enjoyable experience than one that must also accommodate consumer electronics, antiques, and automobiles.

But the rise of online and the shift to verticals are far from the whole story here. What has really tipped the scale in drawing the mass market to second-hand apparel is the idea of an augmented marketplace, pioneered in this category by ThredUP. Unlike first generation peer-to-peer marketplaces like eBay or Craigslist which simply offer a platform through which buyers and sellers connect with little to no involvement from the parent company — and which, in the case of eBay, have morphed into the domain of power sellers, rather than individuals — ThredUP has made itself an ally to both buyers and sellers by playing an integral role in all transactions within its community. The company guarantees product quality, establishes fair pricing, and handles processing and fulfillment on both sides of every transaction.

Because consumers buy directly from ThredUP, rather than from disparate individual sellers, they can do so with the confidence that all items will arrive on time and as represented. This hands-on approach has the added benefit of making lives easier for sellers as well. Whereas previously sellers had to sort through unwanted items to decide which were worth selling and which should be donated or discarded, with the ThredUP clean-out bags, consumers can send all their closet extras to the company and let its team of professionals decide which it can sell and for how much, while taking care of related tasks like photography. This reduced friction means that more like-new items will find their way into the market than has ever been the case before.

You can see a similar approach to augmented marketplace design from extremely successful companies like StubHub (verified ticket authenticity), Uber (driver matching and route design), AirBnB (professional photography and recommendations), and Beepi (inspects every car listed on the platform).

As I’ve said before, the keys to success in the ecommerce category, IMHO, are:

1. To have a strong founder/market alignment such that the business is built with the customer at its core;
2. To offer incredibly compelling value proposition to consumers that drives organic growth; and,
3. To develop differentiated and unparalleled back-end fulfillment, operational, and production capabilities.

ThredUP excels across each of these domains. While I could praise the ThredUP team all day, and I think the consumer value proposition is clear (who doesn’t like great brands at 90% below retail prices), it’s ThredUP’s backend where I would like to spend a minute digging deeper. Consider the logistics involved in processing millions of inbound clothing items, inspecting those items for resale, merchandizing and pricing those that make the cut, and managing and fulfilling orders to millions of consumers across the nation after purchase. It’s a challenge that goes far beyond the predictable-by-comparison process of managing wholesale inventorying in a traditional retail environment.

ThredUP executes this carefully choreographed dance daily with some 500 employees in its two state-of-the- art distribution centers. A portion of this latest funding round is earmarked toward doubling that infrastructure over the next year. The company has developed automated picking, packing, and racking systems and relies on proprietary SKU management and QA system to achieve rapid sell-through. The operational efficiency of this system, not to mention the capital efficiency of the business, are truly impressive.

I believe this is a big reason why Goldman Sachs decided to invest, making a growth stage bet in ThredUP much like it did in Pinterest and Uber at similar stages in their maturation. Recall that this is the same firm that recently took Zulily public (and then sold it), a business which targets a similar customer demographic but for sales of new apparel. Put simply, this was an informed bet by one of the most highly respected investment firms in the world. When I look at the untapped market still available to ThredUP and consider the high level at which this team is executing, I’m confident that it can achieve a similar multi-billion dollar outcome enjoyed by Zulily and its backers.

Another thing that makes ThredUP stand out in today’s uncertain times is that it is a mass market business that has inherent resiliency in the face of shifts in the broader economy. Firstly, moms and especially kids, will continue to grow out of and grow tired of their wardrobes, regardless of how the stock market moves. Moreover, when times get tight, the motivation to turn unwanted items into extra cash grows considerably. On the flip side, as consumers spend more during good times, there is a need to create excess closet and storage space to accommodate new purchases. Given these dynamics, we expect there to be no shortage of supply-side inventory in search of a second chance with eager consumers, in good economic times and bad. Likewise, the appeal of like-new items at dramatic discounts to retail prices is an idea that never goes out of style. Few businesses can claim such resilience, but those that can routinely end up being the largest and most successful businesses of all.

Previously, clothing was something that we bought and were, for the most part, stuck with until we threw it away or donated it to charity. Today, clothing has becoming an asset that can be liquidated to, in turn, create more flexibility and choice for consumers. ThredUP has pioneered the concept of “buy, wear, sell, repeat” clothing ownership that keeps both buyers and sellers happy and creates near-infinite opportunity for marketplace growth. I am incredibly proud of what this team has accomplished to date, and could not be more excited for what the future holds.