This startup makes money from other people’s closets

(L-R) Material Wrld co-founders Rie Yano and Jie Zheng. Photo credit: Glamour.

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This article is part of Tech in Asia’s partnership with Disrupting Japan where we publish the revised transcripts from the show’s podcast interviews with Japanese entrepreneurs. This is heavily revised from the original transcripts. For the full interview, go here.

Online marketplaces are usually designed to be low-risk, low-capital organizations that focus on building a platform where buyers and sellers do as much of the work as possible. Rie Yano, the founder of online marketplace Material Wrld, however, ended up taking a very different approach.

nCould you explain what your company is and how it works?n

Material Wrld is based in New York. We are a service that helps women refresh their closets. [We] focus on the reuse of designer fashion pieces with quality that lasts long. So we connect secondhand clothing by using this trade-in service where a woman can easily mail in their fashion pieces that they’re no longer wearing to us and instantly get an offer to go and shop [for new clothes]. The collected fashion pieces are then resold to our customers.

nHow did you and your co-founder come together to start this company?n

I had another startup when I was in business school that I launched with a few other HBS (Harvard Business School) friends. And when I graduated, I decided to shut that down and stay in the US. The original purpose of me going to business school was to really learn what was out there, outside of Japan. And when I decided to stay, I actually wanted to join a US startup, but realized that no one would sponsor my visa. So I had to quickly figure out what to do.

I decided to join Coach in their digital marketing department as a producer, and the decision that I made there was based on a few things. I definitely wanted to be in the internet space and I wanted to prepare for my next startup. I had a few different industries that I thought I would be interested in, including fashion. So that led to me taking that job at Coach. Jie, my co-founder, has a background in operations and logistics and also took a job in fashion in New York at Ralph Lauren and J. Crew. The two of us were the minorities at HBS. What Harvard grad goes into fashion, right?

I think 80 percent of our classmates are either management consultants or investment bankers. And the reason that we got along from day one was that we were the minorities in school.

nWhat did you want to do when you went to business school?n

Business was not something that I was interested in growing up. But I went to business school because I was in New York with Mitsubishi and I realized how much I took for granted. Life was easy because of the Mitsubishi name, and living in New York, you meet so many talented people who come in from all over the world and they’re all hungry to succeed or create something.

I realized that I’m living in a small bubble that’s so protected. And yet if I was kicked out, what would I do? What could I do? I really think that that moment—when I was in New York when I was 24—was when I realized that I needed to get out of here. I need to actually go out there and survive on my own. I didn’t know what else to do but go and get an MBA, so that was my choice.

nWhen customers send you their clothes, you take that inventory. Do you consider this to be a risk? n

Inventory for us is very different from fashion inventory of typical ecommerce businesses in that we are the ones setting the price point for what we buy and determining what we buy. We do that based on our historical data. It’s real-time data on what items and categories are reselling for in the current market.

We actually have enough data internally from our own resale historics to have confidence in how much we can sell that merchandise for. We also do some comparison analysis for brands and for categories that we may not have accepted enough of in the past. For that, we would look at other resale websites such as Ebay. We then basically take that data to determine the price that we auto-populate when we’re pricing each of the merchandise that comes through our way.

nWas holding used inventory part of your strategy from day one?n

It was not our strategy from day one. We started our service as a peer-to-peer marketplace, and we focused on designer fashions. But what we realized as a challenge when we launched as a peer-to-peer marketplace is that the majority of merchandise that our customers were posting were not designer fashions—they were the H&M, the Zara.

What we learned from the year and a half that we ran the marketplace was that a lot of younger women—aged 18 to early 20—are okay with taking photos of their goods, putting a price on it, interacting with a potential buyer, and having their own closet revealed publicly on the internet. While a lot of the customers who do have designer fashions in their closet felt like they would prefer to use a service that would take care of that.

From the seller’s side, we realized that our service was not convenient enough—not hassle-free enough—to target the right audience. And then on the buyer’s side, what we realized was that when you make it a marketplace, the biggest issue is fake goods with designer fashions. So everyone wants some third-party service with authority to come and authenticate those goods so they can purchase it with the confidence that it’s true.

nDo you have plans to enter other markets?n

Not in the short term.

There are three things that we look at [when entering other markets]. Number one is supply. When you look at countries such as Japan, it is actually one of the top three countries of where you can find the most amount of pre-owned designer handbags. So you will find that a lot of players from all over the world actually procure supply from the Japanese market.

So when we look at countries, we want to make sure, “Where is the supply in the world coming from?”

The second [thing] is “Where is the buyer?” Where is the appetite to purchase pre-owned high-quality merchandise? When you think about that, it tends to skew toward developed countries where consumers are pretty familiar with brands, and they like the fact that they can purchase a high-quality brand for a great value.

The third is all about financial regulations. We have our own debit card that we launched so we essentially have a payment service. What we’ve learned from entering this space is that it is a very highly regulated industry where—being in the US—we have to think about what are state-specific restrictions before we launched any kind of product offering that’s related to our debit card.

nWhat were some of the big changes your company had to go through?n

I can’t even start to describe all the things we did wrong and all the things we changed through the past four years. I think that the biggest change happened two and a half years ago. Our marketplace was not working, and we felt that it was not working because we didn’t have enough users.

We were like, “Wait a minute, where is the supply and where is the demand?” We started testing this website on the side and, essentially, we used one of those free landing pages. We didn’t have anyone really. It was just Jie, myself, and our current CTO who was working for us as a freelancer. We were like, “OK, let’s get creative. We know that these women are too busy. There are items sold on our site that […] they don’t have time to ship.” So we’re like, “OK, let’s figure out if we can see how to create the most easy, do-it-yourself website and see how the world would respond to this.”

We essentially created this landing page, pulled some images from the web and said, “Sell us your stuff. We’ll give you gift cards.” And we started it by driving US$30 worth of Facebook ads to this landing page every single day. And within a month, we had trade-in bags coming in left and right from all over the US. It was such a scrappy execution—we literally had a Google doc where the customer would sign up and we would input the address.

nYoung Japanese are moving to the US to start companies. Is that because of a lack of opportunities in Japan?n

I think Japan is a great place to start a company. There is just so much opportunity here. Not as much competition as in the US, but if you’re going to take the risk and create something from scratch, why not do it in the most impactful way?

For me, if I was going to do this fashion business, I had to do it in New York. I grew up in so many places in the world. If I’m going to build a company and build a team, I’m going to build it in a city where there is amazing talent from all over the world. It wouldn’t have had the same excitement for me to think about building an organization in Japan.

Yes, people will tell you that it will be easier to run a business back home. But I honestly disagree with anyone who tells you to stay somewhere. The more you learn, the more opportunities you find and the more business opportunities you find. You also build this perspective that only you may have because you happen to have different perspectives from living in different places.

nIf I gave you a magic wand and I said you could change one thing about Japan, what would you change?n

I don’t know if this is a good answer, but I think the one thing I would want changed is the mentality of what diversity means in Japan. Everyone follows the same track of what is considered a success or what to do to become happy. There is this social pressure to follow this track that’s already set by society.

For example, work at a big company, get married, buy a house, and travel once a year. As a woman, there’s probably a zillion more things required or expected of you—cook for your husband and take care of your kids.

And I just feel like we live in such a diversified world now where there are different ways to structure your life and your career, whether you want to work at a startup or you want to work at a big company, whether you want to get married or not, or to have children or not. I think just being able to accept diversity will help a lot more people feel comfortable being different and taking that leap to be different.

Read more from this series here.