It's an object lesson in spotting opportunity within chaos. August 21, 2019 15+ min read This story appears in the September 2019 issue of Entrepreneu
It’s an object lesson in spotting opportunity within chaos.
August 21, 2019 15+ min read
The legend goes like this: In 1985, Nike made a pair of red-and-black sneakers for Michael Jordan that it called the Air Jordan 1. Then Jordan tried to wear them during a game, but the NBA said no — uniform violation. So Nike promoted the sneakers as “banned,” Jordan wore them during that year’s NBA Slam Dunk Contest, and the combined cool factor blew the shoes off retail shelves so fast, they made skid marks.
Is it true? Online sleuths wonder if the whole “banned” thing was a marketing gimmick from the start. But it doesn’t really matter. These shoes would effectively become Sneaker Zero, the birth of special limited shoe releases, conceived by brands from the get-go not to sell millions of pairs but to create that invaluable, flammable fuel known as hype. And for a generation of sneakerheads, the Air Jordan 1 lodged in their brains. They needed it. And they needed the next version, too.
Chad Jones was like that. He was a kid in a rough Brooklyn neighborhood when the Jordan 1 came out, and by the time he was a teen he understood the captivating potential of sneakers. He knew they had value, that they were art, and that they could literally and figuratively take you places. So when the lines started forming for sneakers in the early aughts, he stood in them — huddling in the rain, sleet, and subzero temperatures, sometimes for as long as five days, all in order to grab the next cool release from Nike or Adidas or Reebok. “I had a friend,” he says. “We pitched actual tents, brought little portable heaters, whatever we had to do to fight to get these shoes.” He began calling himself Sneaker Galactus. His collection grew past 1,000 shoes.
And that’s why, at 4:30 a.m. on a frigid New York morning in 2012, he was out in line waiting for the new Kobe 7s. Sneakers seemed like big business then. They weren’t, really — not compared with what they’d become, an aftermarket worth $1 to $3 billion. Still, even in 2012, there was money to be made. In fact, for most of the people waiting with him on that cold morning, the shoes would never touch their feet; they’d turn around and resell them, fresh in the boxes, to someone they knew or on eBay for twice or three times what they paid.
Mornings like those could be tense. It’s a lot of anticipation, a lot of people, a lot of money at risk, and not that many shoes. Jones had been waiting only a few hours when an argument broke out. He remembers how bitterly cold it was. And he remembers looking down at his feet, where blood was pooling and soaking his Nike Air Zoom Tallac Lite boots. Then he realized the blood was pumping out of an artery in his arm, where he’d been stabbed. “I almost died,” he says, “over sneakers.”
But did it stop his love of them? “Never. Ever,” he says. Loyalty like that is rare. It is also opportunity. And a few visionary entrepreneurs were about to take notice and transform this small world of obsessive shoe resellers into a massive, global sneakerhead industry of unicorns and luxury brands, and VC money flying as high and fast as the athlete who inspired it all.
After the Air Jordan 1, collectible sneakers evolved. Brands began dropping exclusive shoes in ever more creative collaborations — with designers, musicians, influencers. Magazines and websites popped up to report the latest news. A secondary market quickly followed, to the surprise of nobody. That’s what happens with anything cool and limited, be it Rolling Stones tickets or rare Magic: The Gathering cards.
How does an entrepreneur begin to harness something like that? The first step was simple: Open a store.
That’s what Damany Weir did in 2005; he created a consignment store in New York City dedicated to reselling these preowned, often unworn, sneakers. It was called Flight Club, and Jones describes it as “a tiny little nothing” — a space that appealed mainly to hard-core fans. But this satisfied the needs of the moment. It became a mecca for sneakerheads.
In the decade that followed, the sneaker world became chaotic. Brands were releasing new limited collaborations regularly. Resellers were popping up everywhere. Several incidents of violence erupted, like the one Jones was caught in. And counterfeiters were becoming a serious problem on eBay, which had become the resellers’ platform of choice.
But during that same time, a new kind of sneakerhead had also taken interest. They were guys from corporate America who had fallen for sneaker culture — and were now noticing all these pain points in the scene. They wondered if they could solve them.
Two of these sneaker guys were Eddy Lu and Daishin Sugano, roommates and startup cofounders in Los Angeles. They’d met at college in Berkeley and decided to leave high-paying corporate gigs on the same day in 2007 to start … something. They weren’t exactly sure what. They managed to raise $7 million for an app called GrubWithUs (it helped people meet over food at restaurants), but they struggled to scale it. And then, one day, Sugano paid $300 on eBay for a pair of Air Jordan 5 Grapes that, upon arrival, were clearly fakes. “I was like, How come in this day and age you spend that much money on something online and still have to worry if it’s real?” Lu says. “That was the lightbulb moment: We can build a marketplace where we authenticate every product, so the buyer never has to get duped.”
Flight Club, that store in New York City, had done this from the start. But it was working at a small scale. Lu and Sugano went bigger. They built an app and called it GOAT (Greatest of All Time). Just like on eBay, a seller can post a shoe on GOAT and ask for a price. But when a purchase is made, the seller first ships the sneakers to GOAT headquarters to be authenticated. If they’re real, the sale goes through and GOAT takes 9.5 percent plus a $5 seller’s fee.
To get off the ground, Lu and Sugano used $1 million of VC money they had left over from GrubWithUs. But after launching in July 2015, it was slow going. “There was one time in late September we didn’t sell a shoe that whole entire day,” Lu says. “So at 6:00 p.m., I went in and secretly bought a pair just so I could tell the team we sold something.” Knowing they had to turn things around fast, the team came up with an idea for Black Friday. They’d find a few hot sneakers that were reselling on the app for $600 or $800 and let customers have them for the original $200-ish retail price. They sent emails about this to the sneaker magazines, which wrote about the event, and suddenly 100,000 people were trying to buy the same few sneakers. “Everything melted,” Lu says. “The site crashed, and we got about 4,000 customer service messages saying things like ‘I tried accessing the app for six hours; I skipped work; I skipped school.’ ”
As more messages poured in, Greg Bettinelli, a partner at Upfront Ventures, which was one of their investors, called to see if everything was OK.
“Not really,” Lu told him. He was traumatized.
“Honestly,” Bettinelli said, “at your stage right now, it’s better to be hated than unknown. It means the community cares.”
Lu marvels that, looking back, Bettinelli’s words could not have been truer. “Even though people had a horrible experience,” he says, “they started to understand our value proposition, like, Oh, I get why I would use a service like this.” (He apologized to everyone.)
Now the scene had a safer, customized, digital way to resell sneakers. What would come next?
Image Credit: Courtesy of StockX
Meanwhile, across the country in New York City, another pair of founders had entered the sneaker game and were anxiously managing a business with no customers.
John McPheters and Jed Stiller, like the GOAT founders, had also come from the tech startup world. They’d created an analytic tool called Swarm Mobile, which helped companies connect with customers in stores. When they sold it to Groupon in 2014, they first explored a new venture in diamonds — but then started thinking about the sneaker aftermarket.
McPheters had worked at Flight Club for 10 years, and both he and Stiller saw an opportunity to improve on it. Flight Club still catered to insiders — the people with deep roots in the sneaker scene. GOAT was focusing on making the broader world of reselling safer for the masses. McPheters and Stiller decided to aim for a different market: the high-end customers, who would actually wear the sneakers and flaunt them like diamonds.
They imagined a sneaker store for a new era, turning the consignment model into a mega global, luxury brand. “As entrepreneurs,” McPheters says, “you can make a decision to go out of your comfort zone and create something in an area you know nothing about. Or you can say, ‘Hey, I know this market, and I’m going to make a play.’ ” And so they chose sneakers over carats. “We knew there was a void to be filled,” says Stiller. “It was pretty obvious to us.”
The founders felt strongly that a physical presence was key to anchoring a trusted brand. “Back then, people didn’t understand: Is it a new product? Is it resale? Is it used?” says Stiller. “So to be able to find us was important.” In October 2015, they simultaneously launched an online marketplace and an Apple-esque, boldly spacious store called Stadium Goods in Manhattan’s SoHo neighborhood. People would bring their unworn shoes to the back entrance to be authenticated and priced, while shoppers would enter through the front door. Stadium Goods would take 20 percent of the sale (the same as Flight Club). But their location didn’t have much foot traffic in 2015; there were days with zero sales.
So they worked their connections, turning the store into a story. They knew the host of Complex TV’s Sneaker Shopping show, which follows a celebrity buying shoes, and got them to shoot at Stadium Goods a couple times a month. That jump-started a virtuous cycle. Viewers saw Chris Rock, Whoopi Goldberg, Billie Eilish, and 21 Savage score shoes in Stadium Goods. The attention brought more customers, who brought more attention. Traffic on their website picked up. With its retail presence established, Stadium Goods started selling on other sites, too — entering into Alibaba’s Tmall, a kind of Amazon for China.
By this point, Flight Club, GOAT, and Stadium Goods had captured the three natural layers of the marketplace — the hard-core fans, the everyday reseller, and the high-end flaunter. What could come next? The answer would involve solving a problem that all these customers faced: They had no real idea what a shoe was worth.
Josh Luber has long been a sneakerhead, but he was always bothered by the resale prices. They could be arbitrary — there was just no agreement on how valuable any one sneaker was. So in 2012, while he worked at IBM in New York, he built Campless. It was a sort of Kelley Blue Book for preowned sneakers, which used messy eBay data and any other numbers he could grab. From there, he says, the thought process was like dominoes: “If you knew the value of one pair of sneakers, you could look at someone’s whole sneaker collection the way you look at a stock portfolio. And the logic was, well, if I understood asset pricing and portfolios, then perhaps I could create an actual stock market for sneakers.”
Word of his idea traveled, and soon it reached the very wealthy ears of Dan Gilbert, founder of Quicken Loans and owner of the Cleveland Cavaliers. Gilbert had been watching his kids buy and sell shoes, and had also gotten to wondering about how to track their prices. So in 2015, he invited Luber to a Cavs game, shared what he was thinking, and eventually acquired Campless. Then the two of them, plus a third cofounder, Greg Schwartz, began to work on a new company, called StockX.
Even though funding wasn’t an issue, they decided to raise outside money. Luber had learned a valuable lesson after doing a friends-and-family raise for an earlier venture that failed. “Man, when I have to call up my grandfather or my best friend’s father and tell them, ‘Your money’s not coming back,’ that’s a tough thing,” he says. “It makes you appreciate that this is not Monopoly money, and not to be crazy about how you spend.”
In one way, StockX is similar to GOAT: It also serves as a marketplace, processes sales, authenticates shoes, and takes a 9.5 percent commission. But its differentiation comes in data. For every shoe in a specific color and size, a user can see not only the bids and asks but all the sales ever made, the average price and whether it’s going up and down, and how many pairs have sold. That gives people insight into the value of whatever they’re buying or selling.
Today, StockX’s massive authentication center in Detroit looks like a marketplace of fishmongers gutting shoe boxes with their X-Acto knives (slice, slice, slice), then holding up the entrails–pristine Jordans, Yeezys, Instapump Furys — to begin inspection. This is just one of the company’s four authentication centers, soon to be five. Revenue has more than doubled in the past year, with gross product sales topping $100 million a month. Counting some 800 employees, the company has raised $160 million and is valued at more than $1 billion.
The whole sneaker resale market has exploded — as average people now use both StockX and GOAT to enormous effect. They’re customers like Vernon “Sizzle” Simms, who once bought a pair of new Yeezy Boost 750s in a mall for $350. He clicked a few pictures of the sneakers, uploaded them onto GOAT, and by the time he got down to his car, he’d sold them for $1,500. Profitwise, it was a $1,100 escalator ride, and it “kick-started my brain,” he says. He quit his $80,000-a-year music and D.J. career to resell sneakers full-time, first on GOAT and now on StockX, where he says he’s on track to make $1 million in sales, about 20 to 35 percent of it profit. “I had no idea people would pay this much for sneakers,” he says, shaking his head over a pair of Nike MAG Back to the Future sneakers on sale for $60,000. “It’s crazy. It’s ridiculous. But don’t get me wrong. I’ll go and buy it if I know I can sell it for $70K.”
Image Credit: Courtesy of StockX
The aftermarket sneaker industry may seem new and crazy, but it’s following a well-worn pattern. First there’s consumer attention. Then startups rise up to solve those consumers’ needs. And now the industry enters its more mature phase: mergers and acquisitions.
Stadium Goods was acquired for $250 million by FarFetch, the publicly traded global luxury digital marketplace, in December 2018. “We did not have access to rare sneakers, and we know our customers really want them,” says José Neves, founder and CEO of FarFetch.
Meanwhile, GOAT grew to more than 600 employees and 14 facilities around the world, and then in February 2018, it merged with the industry’s legendary original store, Flight Club. “They were our competitors,” says Steve Luna, director of consignment at Flight Club, “but we realized that we, too, were going to have to evolve our business to adapt to the times.” Foot Locker, not wanting to be left out, stepped in with a $100 million investment, driving GOAT’s outside funding to almost $200 million.
But even if this is just industry growth as usual, you’ve got to wonder. We’re talking unworn sneakers here. And with all the big money flying around, it’s hard not to see tulip bulbs and Beanie Babies and houses of toppling cards. Essentially, you’ve got this “Row, Row, Row Your Boat” of a musical round going on. The brands are dropping rare product. The GOATs, StockXs, and consignment stores make it easy to resell them. And customers like Simms build independent sneaker businesses that support the other two. But what if the brands stop singing? And how long before these pumped-up shoes lose air–and everyone moves on to hiking boots or loafers?
Matt Powell, vice president and senior industry adviser for the NPD Group, a market research firm, who has been tracking the sneaker phenomenon for decades, sees warning signs. Last year the primary athletic shoe market was $21.2 billion in U.S. retail dollar sales, according to NPD. “But it’s been challenged,” Powell says. “This year, I’m looking for it to be flattish. What I’m seeing is some brands trying to get greater sales out of these limited edition shoes because they need the business, so instead of making a handful of pairs, they’re making millions of pairs.” He points to Jordans and Yeezys, where that strategy not only dimmed retail demand for the sneakers but “collapsed the resale market,” he says. “Scarcity is really the key. The whole resale industry is based on the fact that there will be limited supply.”
Nike and Adidas have stayed pretty silent on the resale industry (and didn’t respond to requests for interviews), but Kelly Hibler, who spent 28 years at Nike and now is general manager of Reebok Classics, a subsidiary of Adidas, told Entrepreneur, “I love the aftermarket. The fact that the products you create sometimes show up [there] for crazy amounts? It’s actually great for the industry.” Reebok, for one, continues to cook up creative collaborations like the Instapump Fury Prototype. “We brought back an actual prototype for the original Instapump Fury,” says Hibler. “Because it was done in 1996, we released 1,996 pairs. We launched in March in Japan. It’s generated all kinds of buzz.”
Part of the magic includes where they release the sneaker — whether it’s in their own stores or via another retailer, Twitter, or an event. Would they ever consider dropping a new shoe on StockX or GOAT? “Yeah!” says Hibler. “For sure. I think there’s all kinds of things you can do creatively today.”
Luber of StockX has been pushing for something just like that, though so far without much success. He’s also exploring other ways to impact the industry, like having the price of a new shoe decided by customers. He tested the concept recently by holding an IPO — initial “product” offering — where StockX released its own limited edition of 800 sandals, a collaboration with jewelry designer Ben Baller. Customers bid via a Dutch auction, a method used in traditional IPOs, and the sandals, depending on size and color, ended up costing around $210 — likely three times the amount they would have sold for at retail, yet less than almost everyone who got a pair bid. Going forward, Luber says, people could buy their new Ben Ballers and resell them immediately on the site, without ever taking possession — in other words, trading pairs of shoes the way you trade shares of stock. “That’s the future of the business,” he says.
But of course, the next great disruptor could always come along. As big companies dominate an industry, the small upstarts always spot the white space. That’s what Chad Jones — a.k.a. Sneaker Galactus, the man once stabbed over a pair of shoes — plans to do. After nearly dying, he went from being a collector to a very focused reseller, building a reputation on his access to the rarest of shoes. Sometimes only 50, 10, or even five pairs are made — “the crazy stuff brands do for celebrities and athletes, their promo departments,” he says. They’re the kind you pay $650 to get and sell for $9,000. And while GOAT and StockX and Stadium Goods go mainstream, he’s working on turning his specialty into a scalable business.
Already, everything that’s happened in this industry has validated what he knew to be true as a boy. “I am from one of the worst parts of Brooklyn, and I now own a home on the Hudson River in Fort Lee, N.J.,” Jones says. “Sneakers have provided an avenue for me to pull myself out of economic distress.” And now, he says, he’s ready to make his move.
This article is from Entrepreneur.com