The sharing economy is making headlines again, this time thanks to Massdrop, a two-year-old group-buying startup that announced Wednesday it has raised a $6.5 million Series A round of financing led by Mayfield Fund. Founded by self-described college dropout Steve El-Hage, the San Francisco-based site lets communities of "enthusiasts" vote on products they want, such as Moleskine notebooks, and then band together to buy them in bulk at a discount.

Massdrop brokers these deals, serving as the middleman between shoppers and retailers. "We explain what's going on, say 500 people love your product and are ready to place an order, and that we'd like you to come on Massdrop and list yourself as a marketplace vendor," El-Hage explains. 

As Inc. has reported before, Massdrop makes money through the small listing fees it charges vendors when their product is listed, not unlike eBay. El-Hage has said in the past that he wants these deals to form "lasting relationships." But a key to Massdrop's success will be pleasing vendors as much as listing products at the right point for users. And that's only the beginning of the potential challenges the startup faces.

Though Massdrop's products aren't indexed by search engines--encouraging users to promote them on social networks--it isn't hard to find good deals elsewhere. It's the same issue Mercata faced before it went under 13 years ago. The group-buying site, which ultimately withdrew a $100 million initial public offering, not only had trouble capturing great discounts, it was hurt by its small selection in various categories.

El-Hage claims he's worked with vendors as small as Kickstarter projects and as large as public headphone companies, but a quick glance at the site proves many of the products are made by unknowns. Another challenge? "The items that people want discounts on are products like the iPhone, which won't work here," says Forrester retail analyst Sucharita Mulpuru. "Its 'tier two' brands that need distribution and are happy to discount while cutting out the middleman, and that last point shuts out a number of the brands that are already distributed but are terrified of channel conflict." 

Another issue facing Massdrop is scale, says James McQuivey, also an analyst at Forrester. "It's a bit like Groupon taking advantage of social media as a tool for consumer interest," he says. The fact that social algorithms are always in flux may present future hurdles for getting the word out. And the more successful Massdrop becomes, the harder it will be to convince smaller retailers to list their products. If Nike suddenly takes off on the platform, what will that mean for largely unknowns like Dayton Boots? 

All issues aside, Masstrop still seems like a fun way to land product deals with like-minded enthusiasts, if the company can keep growing. And it might prove useful for big brands as a testing ground for new products. "It could be interesting to approach companies like Rubbermaid or Procter & Gamble and have them share their new products and let people put a price point on them and commit to buying them," Mulpuru says. 

Published on: Sep 24, 2014