ThredUp’s HBS Founders Master the Art of the Pivot

By Philip Levinson

All Silicon Valley entrepreneurs know about The Pivot, the shift a start-up makes when it changes course with its business. Few recent HBS entrepreneurs have pivoted better or more boldly than James Reinhart and Chris Homer (both MBA, 2009) with their venture-backed company ThredUp, the leading online children’s clothing exchange.

Reinhart, who also received his MPA from Harvard’s Kennedy School, launched the company midway through his 2nd year. The site was originally a peer-to-peer online clothes sharing site for adults. In an article in The Harbus in March 2009, he described ThredUp as being focused on men’s dress shirts. He went on to earn a semi-finalist spot in that year’s HBS Business Plan Contest. CEO Reinhart and his undergraduate classmate from Boston College, Oliver Lublin, then pulled in Homer, his HBS Section D classmate, as CTO.

“We were focused on underutilized assets in adult clothing,” says Reinhart, who previously founded a renowned charter school in the Bay Area. “We launched the first product focused on men’s and women’s clothes in September of 2009. We had a really good launch, getting in the New York Times and on the Today show. It was a great story. And a bad business.”

How bad a business was it? “Customer adoption and use of the product wasn’t nearly what we had hoped,” says Reinhart.

Explains Homer, an engineer who previously worked at Microsoft: “It was the wrong demographic. Men and women will somewhat wear used clothes, but it’s not mainstream enough to be a large Internet business.”

An Opportunity with the Children’s Market

Founders James Reinhart, Oliver Lubin, and Chris Homer

Rather than get too discouraged, Reinhart and Homer changed their focus. “We very quickly realized that the market wasn’t quite right,” says Homer. “The target from the beginning should have been parents trading their kids’ clothes, rather than trading their own clothes.”

ThredUp found a natural market for their swapping focus with children. “We realized there was a huge opportunity in kids because there’s the forced obsolescence of kids’ clothing,” says Reinhart, whose wife was pregnant at the time of ThredUp’s shift toward children. “We launched the kids’ part in April 2010, and we’ve been off ever since.”

ThredUp’s kids’ clothes swapping business allows customers to select a box of clothes for their child and offer up a box of their own, with numerous community aspects and a premium membership available.

Since that first pivot, ThredUp has hit its stride. Says Reinhart: “When we were moving from adults to kids, we had 10-20,000 people, which is nothing. Now we have 300,000 parents.”  ThredUp has now helped parents trade almost 3 million pieces of clothing and is still growing rapidly.  “We’re still adding between 500-1,000 parents a day to the platform.”

Reinhart’s baby girl, now 19 months old, has also been added as a happy customer. She is “dressed head to toe in ThredUp clothing,” the proud father reports.

Patricia Nakache, who led Trinity Ventures’ investment

Market Success Leads to VC Interest

 This type of growth in such a key consumer sector attracted the attention of the VC community. After raising a small friends-and-family round in early 2010, ThredUp raised its first venture funding in a $1.4mm round led by Trinity Ventures that July. Patricia Nakache, who got her A.B. at Harvard, led the round from Trinity and joined ThredUp’s board. “I immediately identified with the problem,” says Nakache, herself a mother of three. “It is a fairly universal problem for all parents–a constant process of culling out the old clothes that don’t fit anymore and repopulating your kids’ drawers with stuff that does fit.”

With Trinity’s and Nakache’s involvement, came another pivot point. ThredUp moved from Boston to San Francisco by that fall and is now located blocks from 2009 MBA classmates Matthew Prince and Michelle Zatlyn and their company Cloudflare. “I think that move has worked out great for them,” says Nakache.

Tim Haley, who led Redpoint Ventures’ investment

The U.S. mothers segment is highly coveted, making ThredUp’s focus and community that much more attractive. In May 2011, ThredUp raised a follow-on round of $7mm led by Redpoint Ventures because of its success with this market. Tim Haley, a venture investor and board member of Netflix, and Tomasz Tunguz handled the investment for Redpoint. They were drawn to the company for its success in reaching the mothers segment.  “ThredUp is working in a market for used children’s goods that is very large, highly inefficient and highly fragmented,” says Haley. “And James is the profile of a young entrepreneur you want to invest in.”

ThredUp and “Collaborative Consumption”

Tomasz Tunguz from Redpoint Ventures

With Netflix founder/CEO Reed Hastings as an advisor and former eBay CEO Brian Swette as an investor, ThredUp is often compared to those companies. ThredUp is also an example of the recent business model trend toward collaborative consumption, mentioned alongside Airbnb and Relay Rides. “I do think it is a broader trend,” says Nakache. “And ThredUp is one of the poster children for it.  Airbnb is kind of another great example. It not only plays on the green reuse trend but also there’s excess capacity in the system. How do we make better use of excess capacity or excess goods?”

Reinhart likes to distinguish ThredUp even further by emphasizing its community aspects. “Collaborative consumption has become a catch-all for a lot of these businesses. In some ways, we think ThredUp is a bit more nuanced.”

ThredUp recently maneuvered through yet another pivot point when it launched its concierge service last month. The new service is a form of consignment, allowing customers to bypass swapping completely and simply send in their quality kids clothes by requesting a free, prepaid recycling bag.

Homer says the goal with the new concierge service is improving ease of use. “We had been testing a number of ways to get the friction down in listing boxes. The online consumer needs things to be really easy, really straightforward.”

“They are Intellectually Honest and Unafraid to Take Risks”

 The founders’ consistent drive to listen to the market and their customers continues to impress their investors. “The fact that the founding team has always been able to evolve the service is very impressive,” says Nakache.  Adds Tunguz: “James, Chris, and the team are fantastic at creating different experiments and testing them. They are intellectually honest and unafraid to take risks.”

Reinhart and Homer credit several HBS teachers who influenced them as they launched and continue to build ThredUp, including Andrei Hagiu (“He was super-helpful in thinking through how two-sided markets get built,” says Reinhart), Clay Christensen, Karim Lakhani and Tom Eisenmann, whose influence is cited by virtually every VC-backed HBS company coming out of his era.

For his part, Eisenmann has been impressed by the team’s determination and ability to shift gears. “I was not optimistic about prospects for that original concept. But to their credit, they persisted and pivoted to an amazing opportunity.”

Reinhart emphasizes the socially responsible aspects of ThredUp, perhaps with a nod to his public service-orientation instilled by his teaching background and his Kennedy School experience. “How do we get longer life and better value out of essentially durable assets?” he asks. “Not treating things like consumables and more like durables will help keep things out of landfills, save everybody some money, and save the planet at the same time. That’s what we’re after.”

That’s another pivot we can look forward to.