Online Consignment Stores Grab Venture Capitalists' Interests
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NEW YORK (Dow Jones/AP) -- From cowboy boots to pinball machines, the clutter packing the garages and attics of America holds more than mere sentimental value, as eBay Inc. has proven. Now a crop of new companies is enticing more of these belongings to the online marketplace by offering to sell them for a commission, an idea that has piqued the interest of venture capitalists. The market potential for such consignment stores rides on the back of eBay's $20 billion-plus in annual gross merchandise sales and an exploding online economy on which investors want to capitalize, said Philip Schlein, a partner with US Venture Partners, an early-stage venture firm based in Menlo Park, Calif. ``There is really great potential here,'' said Schlein, whose firm is considering investing in AuctionDrop, an already richly funded consignment store based in San Carlos, Calif. Schlein sits on the company's board of directors. AuctionDrop is a two-year-old company in the midst of raising $8 million to $10 million for growth. This is the second round of financing for the start-up, which previously raised $6 million from Mobius Venture Capital and Draper Associates, an affiliate of Silicon Valley-based Draper Fisher Jurvetson. Heidi Roizen, a managing director at Mobius, said at least a dozen VC firms have expressed an interest in participating in the new financing round. The firms are in part motivated by the thriving sector, she said. ``AuctionDrop could not have functioned five, six years ago,'' Roizen said. ``But with this huge online economy, it's now becoming mainstream.'' AuctionDrop, i Sold it, AuctionWagon, QuikDrop and NuMarkets are among at least 20 such stores nationwide banking on the notion that 95 million people worldwide buy things on eBay, but most of these people are either unwilling or unable to sell their goods. ``A lot of people couldn't be bothered,'' said Grady Vanderhoofven, a partner with the Southern Appalachian Fund, which has invested an undisclosed amount of funding in NuMarkets. The two-year-old company operates two eBay consignment centers in Tennessee. ``If you can give people a turnkey solution on how to make money, they will follow,'' he said. Vanderhoofven sees NuMarkets ``as one of those rare investments that returns the fund.'' The Southern Appalachian Fund manages $12.5 million. Vanderhoofven would not disclose revenue figures, but said the fund would like to see NuMarkets grow to 50 franchise stores in the southeastern United States by the end of 2004 from its current two. The franchise model is preferred by several drop-off stores including i Sold it, AuctionWagon and QuikDrop. AuctionDrop and NuMarket are the only two companies that have received significant venture funding, but they are not the only ones attracting VCs. Joshua MacAdam, chief executive of AuctionWagon, in West Hollywood, Calif., said investors revisited their initial lukewarm reaction to investing in AuctionWagon after the start-up began receiving media attention. ``We went out looking for funding when we were getting the idea together in 2003 and VCs were marginally interested,'' MacAdam said. ``The fact that AuctionDrop got backing from Mobius and Draper gave credibility to the industry.'' Co-founded by MacAdam and Devin Bailey, AuctionWagon is already a profitable company and is now raising $500,000 from VCs in order to grow. It stands out by focusing solely on high-value goods, such as Cartier watches, and by charging lower-than-market average commissions. AuctionDrop skirted the franchise model, opting to operate from a central processing center that posts items on eBay's Web site and monitors their sale. The start-up has stores throughout the San Francisco Bay Area. Since it opened its first store in March of last year, AuctionDrop has sold $2.3 million worth of items and returned $1.4 million to sellers, after conducting 19,000 auctions on eBay. The company charges between 28 percent and 40 percent commission. The market average is between 20 percent and 40 percent. Ebay doesn't have investments or contracts with any drop-off stores, but indirectly benefits from the business the stores generate. The company claims 41.2 million active users and 94.9 million registered users. Most of these are buyers, not sellers. ``Our take on this space is that we are very happy to see it happen,'' said Harni Durzy, a spokesman for eBay. ``We see it as sort of growing organically. Anything that increases the amount and quality of the items and reaches a segment that we haven't been able to touch is good news to us.'' QuikDrop International and i Sold it intentionally chose to launch their businesses without VC backing. ``Our investors are franchise owners,'' said Jack Reynolds, co-founder of QuikDrop, which has drop-off franchises in more than 200 locations in the United States and Australia. Reynolds invested $20,000 of his own money in February of 2003 to get the company off the ground. Quikdrop now has $250,000 in cash on its balance sheet, he said. A QuikDrop franchise costs $15,000 for the name and an additional $3,000 to reserve a franchise space, which Reynolds said is increasingly hard to come by. Pasadena, Calif.-based i Sold it is backed by private investors and is making enough money to ``sustain a professional corporate staff,'' said Elise Wetzel, founder and CEO. Wetzel said the company has responded to almost 1,000 franchise inquiries and is targeting expansion in 10 major markets. The company has one store in Pasadena, with eight more stores poised to open in the next couple of months. Much like QuikDrop, i Sold it charges $15,000 per franchise, but also collects a 4 percent royalty. I Sold it is turning over $1 million in sales, Wetzel said.
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