Company Profile

COMPANY:Reverb.com

2018 INC. 5000 RANK: 382

HEADQUARTERS: Chicago, IL

YEAR FOUNDED: 2012

2017 REVENUE: $23.9 million

3-YEAR GROWTH: 1,287%

David Kalt founded Reverb.com, a Chicago-based online marketplace for musical instruments, after taking an online stock-trading company public. A huge leap? Not really. The two businesses are more similar than you'd think. --As told to Tom Foster

I picked up guitar in high school, in the suburbs of Detroit, and really fell in love, but I realized I'd never be a virtuoso. After college, I went to Chicago, where I got a job in a recording studio. Working with computers in that job led me to software.

In 2000, two partners and I launched OptionsXpress, an online trading platform. We took the company public in 2005. Before that, when we sold some shares to a private equity firm, I felt I needed to treat myself to something. I bought a guitar, a '63 Fender Stratocaster, for $7,500. Maybe it was a sign of what I really wanted to be doing.

In 2009, I bought the domain reverb.com. I wanted to build a site where musicians could buy new instruments. But when I called Gibson and Fender, they said, "You've got to have a store." (They really believe in the showroom model.) I decided to shelve that idea and figure out how to buy and sell instruments. I'd bought my Strat from the Chicago Music Exchange, which has all these rock-star clients like Tom Petty and Jeff Tweedy. I thought the store was so cool. I called the owner, and he agreed to sell for $8 million.

I had no experience running a retail store: having a key and opening up in the morning, dealing with retail staff, dealing with customers from behind a counter. I spent two or three years buying and selling guitars, working in the repair shop--just learning the business.
I realized I had to build a better marketplace than eBay for musical instruments. Not a store--a marketplace.

I funded the launch of Reverb.com. I thought it would be a $50 million or $100 million business--fun. Nine months in, I realized this was a bigger opportunity and raised some family-and-friends money. Rick Nielsen, from Cheap Trick, invested. So did Brad Paisley and Eric Ries. In 2015, we raised about $30 million in venture capital.

There are similarities between stocks and musical instruments. When we started OptionsXpress, stock exchanges were set up primarily for institutional traders, so we did things to get more people to participate. When we started Reverb.com, musicians were getting 50¢ on the dollar when they sold something and paying 100¢ on the dollar when they bought something. By cutting fees and offering more information about comparable sales, we've narrowed that gap--and gotten millions more instruments on sale.

Good stocks retain value over time or go up. So do most musical instruments. This isn't buying and selling doohickeys that lose all their value. New inventory depreciates 10 or 20 percent after you buy it, but its value holds after that. Once it becomes vintage, its value goes up. It's this huge market that gets better with age--there aren't many like that.

Around two years ago, we launched a marketplace for music lessons. It didn't really work. Music lessons weren't in the DNA of our platform: It's not built for things like scheduling, goal setting, or controlling instructor quality. We're launching a subsidiary that sells used vinyl records. That has more in common with what we already do--it's about discovery, making an offer, and customer service.

I still own the Chicago Music Exchange, but I brought in a CEO about a year and a half ago so I could focus all of my energy on Reverb.

Well, most of it. I play guitar at least an hour a day.

FROM THE SEPTEMBER 2017 ISSUE OF INC. MAGAZINE