It's quite possible there is no phrase less sexy to an investor than "secondhand clothes." That's the dismal message James Reinhart, Oliver Lubin, and Chris Homer got in 2009, when they pitched venture capitalists their business plan for an online clothes-swapping marketplace for men's shirts--and were rejected by all 27 of them. So the co-founders bootstrapped. Since then, ThredUp--which soon pivoted to kids' and women's apparel--has grabbed a sizable chunk of the multibillion-dollar market of items languishing in people's closets, becoming the largest online thrift store in the country. Today, the San Francisco-based company has 750 employees, most of whom work at its distribution centers. CEO Reinhart tells Inc. how the business works.

-- As told to Liz Welch

Coming out of the closet
ThredUp (co-founded by, from top, James Reinhart, Oliver Lubin, and Chris Homer) has raised $125 million ($131 million, as of June 29) in funding, proving there's lots of money to be made in the sector long dominated by Goodwill, whose 2014 retail revenue was $3.9 billion.
inlineimage
93
The typical number of items in a closet.
73 percent
of which are never worn.
85 percent
of clothing that gets donated ends up in landfills.
$25 billion
Estimated size of the resale market by 2025.
$19 million
ThredUp's revenue in 2014.
From ThredUp's 2016 Resale report.

1. Recognize opportunity.

I woke up one morning to a closet full of clothes that I didn't want to wear. This was the fall of 2008, and I was at Harvard Business School. Previously, I'd been a teacher, so I had no money saved and big tuition bills. I took my clothes to a local consignment store to make some cash, and they said, "Oh, we don't take this stuff." They meant both men's clothes and the brands I owned, which were J.Crew and Brooks Brothers. I thought it had real value. I asked everybody I knew, "What percentage of the clothes in your closet do you wear?" The average was 30 percent. That kicked off the ThredUp journey.

2. Tweak Your pitch.

When we first launched in 2009, the company was for men. We got a ton of press. We were on the Today show and called the "Netflix for shirts." It was a great story but a terrible business. We were targeting the wrong customer. Investors kept saying, "That's a great idea. I wouldn't do that for myself, but I would for my kids." So we started focusing on kids and women. Even then, no one wanted to invest. I'd say, "We're going to make it super easy for people to get stuff out of their closets and build the most modern online thrift store ever." People said, "There's no money in secondhand clothes."

3. Listen to customer gripes.

We started by trying to build a better version of eBay. We had people box and itemize their own clothes and then send them directly to the person who wanted to buy the box. But the peer-to-peer business was not growing as fast as we wanted. So we reached out to customers and asked, "What could we do differently?" Many said, "Can I just send you my things and you deal with them?" At first, I thought, "That's a terrible suggestion." But I've learned that you can't be too much in love with your own ideas. So we bought 100 Uline bags, put return labels inside, and said, "Just fill it with all the stuff you're no longer wearing and send it back." On that first test, we got 70 back. That was 2011, and it changed everything.

4. Ask existential questions.

We had a small corporate office on the second floor of a walkup building in San Francisco. We considered ourselves a technology company, but then the delivery guy brought the first two bags and asked, "What do you want me to do with these?" The next day, he brought 10 more and we realized, "Shit, we're in the  logistics business." We quickly rented a 9,000-square-foot warehouse and prepaid six months of rent. We hadn't even solved who would sort through the bags yet. Back then, it was just my teammates and I wondering, "What did we get ourselves into?"

5. Hire the right talent.

After six months, we moved to a 60,000-square-foot warehouse in San Leandro, California. We hired the former head of operations engineering at Netflix to turn that into our distribution center. He said, "Warehouses are where things go to sit. Distribution centers are profit centers." Today, they are the beating heart of ThredUp. We have a receiving team that scans each bag for processing, after which our merchandising and photography associates shoot the items and enter them into our system. Then they are put online, purchased, and shipped out. We now have four distribution centers nationwide, which total 600,000 square feet. We take a cut of all the items we sell.

6. Redefine the category.

Your local consignment store probably accepts 50 to 100 brands. We take 25,000. We're able to accept more brands, including lower priced ones, because we sell nationwide and our costs are lower than a consignment store's rent. We built a proprietary system to evaluate each item on the basis of brand, category, size, and other details to determine exactly how to price that item. For most items, we pay up front or give credit. For items over $60, we sell on consignment. We basically built a secondhand arbitrage business.

7. Expand your imprint.

Macy's is now distributing co-branded ThredUp bags at stores in the New York City market. When a customer returns one of these bags to us, instead of giving her ThredUp credit, we give her a Macy's gift card. We've done pilot partnerships with Diapers.com and Target. If retailers can provide this extra service by offering people a way to clean out their closets, then that will accrue to the brand.

8. Tap into an unmet hunger.

Now we're focused on scaling all the processes to be able to handle the volume. We've upcycled more than 10 million items and expect to be processing over two million each month by the end of 2016. My biggest aha! has been how strong the repeat behavior is--we've never had to spend a single penny driving the supply. What gets me excited, and investors too, is that we have this unending, relentless flow of supply.

Correction: An earlier version of this article misstated ThreadUp's current funding and the year of ThreadUp's Resale report. It is the 2016 Resale report. The company's funding to date is $131 million.

From the July/August 2016 issue of Inc. magazine