VCs to recommerce startups: Let’s pop some tags

Recommerce is a concept as old as trade itself. Everyone knows thrift stores or has bought a used product before — it’s not a new concept. Yet, today it’s become one of the hottest topics for consumers, brands and investors alike with a record ~$6 billion of venture capital funding pouring into recommerce companies in 2021 and the market projected to reach $250 billion+ by 2027. That’s 5x faster growth than the overall retail market.

Why the sudden recommerce resurgence?

It’s largely due to the changing cultural and societal value placed on sustainability. We waste a lot of … everything. Within apparel and textiles alone, billions of dollar’s worth of products are destroyed, discarded or warehoused each year because brands overproduced or the item didn’t sell. Industry analysts estimate that the global fashion industry contributes up to 10% of all greenhouse gas emissions each year.  We can do better.

To understand how, look to Gen Z’s deep, generational emphasis toward ethical consumption. Gen Z has approximately $150 billion in spending power in the U.S., forecasted to comprise 40% of global consumers by the early 2020s. As Gen Z enters the workforce, they’re starting to flex their growing purchasing power with value-aligned, sustainability-oriented brands. This is made clear in a recent IBM poll where Gen Z indicated a willingness to pay a ~49% price premium for a basic white cotton T-shirt that was sustainably sourced and made.

Recommerce enters big brand boardrooms

Historically, brands had poor visibility into the secondhand market for their goods. Without being able to measure the impact on top and bottom line, recommerce was never at the forefront of boardroom discussions. However, the proliferation of successful third-party resale marketplaces like PoshMark, The RealReal and StockX have generated hundreds of millions in revenue and billion-plus valuations.

With more visibility into resale economics, coupled with shifting consumer sentiments toward sustainability, recommerce has now become a priority. One of the more progressive consumer companies of our time, Patagonia, has publicly stated they want ~10% of revenue to come from resale in the coming years, representing >$100 million (based on an estimated >$1 billion annual revenue).

This makes sense if you think about what recommerce offers brands: the ability to sell the same item multiple times with costs only related to the repurchase and logistics of the product. Given brands can control the price they pay for a good, it provides a compelling avenue to boost both top-line growth and bottom-line margin at little labor/production cost.

3 areas drawing VC investment

There are three core areas of recommerce getting VCs fired up: (1) managed marketplaces, (2) enabling tools and software and (3) applying recommerce to new consumer-facing industries. We’ll explore each below, along with some food for thought for founders building startups in this (re)emerging space.

Marketplaces

There are two primary forms of recommerce marketplaces: (1) branded (e.g., StockX) or (2) white label where a startup manages the process for a brand (e.g., Trove). Recommerce companies manage the majority (or entirety) of the resale experience — from product intake and authentication to merchandising and shipping. Platforms typically have a small SaaS fee, but most revenue is generated via a take rate on goods sold, ranging from 10%-25%.

The type of marketplace largely depends on vertical. For example, branded marketplaces are well positioned for consumer electronics given the high price and slowing rate of innovation in new phone models — creating less of a cultural zeitgeist around having the latest phone. It also comes with a high level of diligence and a complex logistics process for quality assurance, which is less appetizing for existing device makers who would rather invest in R&D and marketing for the next version. This is one reason we’re seeing consumer electronics recommerce marketplaces like U.S. and Singapore-based Reebelo (an investment made by our firm) and Back Market (valued at $5 billion+) take off.

It’s a different story in fashion. White-label recommerce marketplaces give brands control of secondhand supply, adding unique inventory that attracts new customers and purchases. There’s a strong psychological element as well with C2C marketplaces having long suffered from a need to commoditize trust (whereas established brands benefit from an implicit degree of consumer trust).

How to proceed: