Passion seemed elusive for Eddy Lu, the founder of shoe reselling marketplace GOAT.

After graduating from UC Berkeley, he pulled stints in consulting and banking in Los Angeles, but never found a spark for his interests and considered himself to not be a great employee.

"My peers were going above and beyond, getting performance bonuses, while I was doing the minimum to skate by," said Lu.

At night, Lu and his roommate, a friend he met at Berkeley, would ruminate and bounce ideas off each other, ideas which led both of them to spontaneously quit their corporate jobs on the same day, no prior notice.

Lu and that same roommate, Daishin Sugano, would go on to build 99-cent apps for the iPhone, which had recently launched, and opened a couple stores to sell cream puffs, honing their technical and business skills along the way.

The pair then moved to Chicago and founded Grubwithus, a platform business focused on making connections through social dining. The company was accepted into the Winter 2011 class at Y Combinator and raised $5 million in a Series A, which prompted Lu and Sugano to move aggressively with marketing and hiring.

Ultimately, Grubwithus failed because its core transaction was too frictional for scale. Dietary concerns mixed with the uncertainty of meeting and liking strangers killed the company's growth. Since joining the community and enjoying was so difficult, the company couldn't leverage network effects and was dead in the water.

Lu realized that building liquidity requires eliminating as much friction as possible, a lesson he applied quite well later.

Maybe It's The Shoes

Lu and his team tried a number of different plays for a year until they only had $1.5 million left in the bank, at which point Sugano noted the untapped potential in collectible sneakers. (Sugano himself is an avid collector.) Young people had long ago stopped collecting items like baseball cards; sneakers were the fastest growing segment in eBay's collectibles category.

Sugano had been burned previously when he tried to purchase a pair on eBay and instead received counterfeits. When he filed a grievance, the arbitration process with PayPal was so difficult, he gave up on the pursuit, sensing that his experience was far from unique.

Thus, GOAT was born.

Above all else, Lu and Sugano prioritized trust and safety, knowing that lacking these traits would break their business effort and render them no different than sites like eBay.

"On eBay, buyers have to spend upwards of five hours to buy a single pair of shoes," lamented Lu. "Checking all of the pictures, comparing to identical listings, sorting through seller reviews and comments, figuring out the sellers' reputations and messaging them. It's a lot of work for just one purchase."

To resolve the problem of fakes, GOAT instituted a ship-to-verify model. When sellers want to list their shoes, they must first be shipped to GOAT's warehouse for verification by a team of experts.

What really differentiates GOAT's approach from everything prior is that it uses a managed marketplace model, as opposed to an open one. In the backend, the business is very much a marketplace, but it looks like a retail site on the frontend in order to achieve a frictionless experience for buyers.

The shopping process is consolidated to a single page, so a buyer will only see one listing for a particular shoe at a time, the one with the lowest price, which forces sellers to be competitive on price. With the ship-to-verify model, everything else is equal.

"With our managed marketplace model, it's like eBay's the Wild West and we're a much tamer version of that," Lu said.

Charging Forward

GOAT recently raised $25 million in a venture round led by Accel Partners as the company aims to grow and bring its model to greater scale. According to Lu, the company already has positive cash flow and hasn't begun to touch the $5 million it raised last year.

At this stage, Lu wants to grow aggressively and, by doing so, deliver better outcomes for buyers and sellers alike. No matter the proximity of GOAT's participants, all shoes sold on the platform must go through one of the company's verification facilities, which are all located in Los Angeles.

"That lag time is friction for our buyers and we expect that the growth this raise enabled will eliminate that," said Lu.

Closer verification warehouses means shorter wait times from purchase to delivery and smaller shipping costs, which serves to enhance the value of the platform and boost its network effects. In other words, less friction means more buyers which means more sellers.

On top of the new facilities, Lu and his team want to create new tools and analytics for the sellers. Within eBay's ecosystem, the so-called "Powersellers" reign supreme; no reputation means no sale, generally.

GOAT's marketplace management, however, makes the selling process much more democratic and enables anyone to participate.

The top seller on GOAT sold over $850,000 worth of shoes last year and Lu expects multiple sellers to top $2 million in 2017.

GOAT makes its money from a 10-20% take rate on the sales, which varies based on the quality of the seller. Bad behavior, like cancelling an order or failing to ship on time, results in penalties against their share of the sale.

As the startup grows, GOAT will be looking for new opportunities for partnerships, be it with shoe makers, celebrity brands, or anyone else who can add value to its network.

"We're excited to grow and are taking the lead because tech is in our DNA," said Lu.

Published on: Mar 8, 2017