Summary

Company Overview

History

FOBO is a marketplace for selling used consumer electronics that launched on January 10, 2014. The iPhone application aims to eliminate the hassle of selling by offering quick and simple auctions. The founders, Ed McManus and Ryan Mickle previously published the application Yardsale while participating in Y Combinator during Summer 2011, then pivoted to the new application FOBO under the same company in 2013. FOBO received Seed funding of $1.6 million in October of 2013 and the round included Greylock Partners, Index Ventures, Tim Ferriss, and Kevin Rose, among others. On March 16, 2014 it was reported that FOBO had already hit a million dollar run rate.

How it Works

FOBO provides local, on-demand auctions. Three important processes happen: Selling, buying, and fulfillment.

To sell an item, a user downloads the FOBO app, and then selects the item from a list of eligible technology items. If the item is common, for example an Apple product, details on the configuration and current state of the item are collected. In most cases where the item is of a major make or model, the FOBO system prices the minimum price automatically. In some cases, an item such as a specific model of speaker may not already be in the FOBO database. In that case, information about the item and the item quality are collected, then a FOBO representative manually sets a minimum selling price that a seller may then accept or decline.

The seller uses the app to take photos of the item, then the auction is published. The seller is guaranteed at least the minimum selling price stated in the application, and most auctions start at that minimum amount. Auctions last 97 minutes, and the odd length of the auction appears to be an attempt at quirkiness for the brand. Recently, auctions have been delayed after listing until a time when more sellers are available.

Sellers participate in auctions through the FOBO iPhone app, which shows all local auctions that are upcoming, in progress, or recently completed. Sellers may set push notifications for auctions of interested. For example, a user could “watch” for auctions of Macbooks. Sellers enter credit card information to pay for an item they may win. The app also requires bidders to comment about why they are purchasing the item. This makes the system social.

After 97 minutes, both the seller and the highest-bidding purchaser are notified. The phone numbers of the two are exchanged, and pickup of the item should be arranged in the following 48 hours.

If nobody bids on the item, FOBO becomes the default “buyer” - they act as seller, arrange pickup, and pay for the item as a normal buyer would. In this sense, FOBO guarantees their minimum selling price by buying the item in the absence of a seller.

Fulfillment is arranged via text message between the seller and buyer. Normally the buyer is responsible for picking up the item. To exchange the item, the buyer inspects the item in person, and when they decide that the item and its condition are as expected, both the buyer and the seller note on the FOBO app that the exchange has completed. At this time, the buyer’s credit card is charged, and the seller is credited instantly with 85% of the item’s selling price. 15% of the price is reserved by FOBO as a fee for completing the transaction. The seller may use credit from the sale to make FOBO purchases, or they may “cash out” at any time, where their account balance is deposited to their bank account.

After the exchange is confirmed, the sale is considered “finalized.” In the case of a chargeback, where the buyer’s credit card forcibly withdraws payment to FOBO, the seller could be held responsible for returning funds to FOBO.

Market Overview

FOBO competes in the online classifieds industry and specializes in used electronics. Since its launch two months ago, the service has only been active in the San Francisco Bay area. Their local, ultra-quick auctions with a guarantee for items to sell have caught on quickly and the company has already passed a $1 million run rate.

Size

The entire online classifieds marketplace industry is valued at over $20 billion a year. This figure includes all types of products such as vehicles, electronics, furniture, and many other categories.

Major Participants

Used electronics can be exchanged via many different marketplaces, the largest two being eBay and Craigslist. Items purchased on eBay are paid for online and shipped, but items sold on Craigslist, like FOBO, are purchased locally and require an in-person exchange of both goods and money. There are many other ways that people choose to sell used electronics. Some establish an Amazon seller account, others prefer buyback programs such as those offered by companies like Newegg or RadioShack, while some prefer to sell to their friends and list the items for sale within specific groups on Facebook. The number of used goods exchanges is profuse, and some other exchanges discovered in Google Search include Glyde, Gazelle, Listia, and Yardsellr.

History and Trends

The closest competitor to FOBO is Craigslist. For local selling of items, Craigslist is the most popular service. To understand the history and trends in the online selling market, we analyzed Craigslist.

Strengths

Craigslist ranks as the tenth most popular website in the United States (Alexa), making it is the most popular marketplace for selling goods and services locally. Thus, its most important strength is its brand recognition and ubiquity - the website has a thriving market of sellers and it has a thriving market of buyers. In addition, Craigslist provides listings in a broad range of categories ranging from electronics to apartments to jobs. The interface for listing an item for sale is relatively simple and does not require creating an account.

Weaknesses

While Craigslist accumulates items across a wide variety of fields, the process of searching for and acquiring a desired item is difficult. For example, while there is a search engine, there is not way to set up alerts about a particular type of item.

Upon finding the listings for an item you desire, it is often difficult to gauge the state of the item. For instance, sellers often use an example image instead of the actual image of a product.

In order to acquire an item, a use emails the seller expressing interest. The seller may not always respond in a timely manner, and often listings are not deleted after a sale has been agreed upon.

When users meet to handle the purchase of the item, often the transaction must be in cash. This presents liability issues. In addition, often users may attempt to re-negotiate the sale price of an item.

Opportunities

Craigslist can enter any new market with ease, thus allowing it to basically sell anything anywhere. In addition, they are free to experiment with monetization. For instance, in some markets Craigslist charges for job listings.

The selling experience, though simple, has the opportunity to be improved. For instance, an official mobile application that allows the capture and upload of images with a listing would increase transparency.

Finally, currently Craigslist does not currently collect feedback about sellers after the transaction. Creating a buyer reputation system could make it easier to sell on the website.

Threats

The main threat against Craigslist is that they are entrenched in so many geographic and product markets that the company is unlikely to respond to smaller threats. This means that there is the opportunity for companies to begin eroding the Craigslist market share by targeting a specific vertical in a specific market.

In addition, Craigslist does not allow bidding. This means that inefficiency in selling exists - specifically, that buyers are responsible for determining the price for their item when buyers may be willing to pay more.

Key Factors

Generally, successful marketplaces offer a high level of efficiency, but different marketplaces have become efficient through different fundamental principles. For example, eBay gives sellers access to an enormous population of interested buyers and allows prices to freely fluctuate with demand. Craigslist encourages sellers to post by eliminating listing fees and limits the marketplace to nearby geographic regions. This can facilitate much quicker transactions if needed by a buyer, but prices aren’t always as transparent as eBay. eBay’s audience and time-sensitive auction format make items more likely to sell, but like Craigslist, there is still no guarantee. A seller nervous of an in-person exchange with a stranger may choose to sell through Facebook to their friend group, but loses the large audiences of other marketplaces.

FOBO’s marketplace offers advantages seen in many of the successful predecessors. Auctions are quick, prices can freely fluctuate with demand, and there is a guarantee that each item will be sold at a fair and transparent value. As a tradeoff, FOBO carries an above average listing fee.

Investment Timeline

FOBO started in 2011 under the name Yardsale. The founders entered the Summer 2011 class of Y Combinator. Their original product was an application that made it easier to sell goods on Craigslist. They went on to raise seed funding of $1.6 Million by October 2013. Notable contributors include Tim Ferriss, Digg co-founder Kevin Rose, and Greylock Partners. Approximately one year ago, the team appears to have suspended active development of Yardsale to begin building FOBO under the same legal entity.

Management Team

FOBO was founded as Yardsale by Ed McManus and Ryan Mickle.

Ed McManus

[ Github / LinkedIn / Facebook / Twitter ]

Ed McManus studied Management Information Systems at Boston University. While in school, he founded a company called SciLink that served as a social networking platform for scientists. After founding SciLink, Ed worked at Y Combinator company Scribd as a Lead Engineer for two and a half years. After leaving Scribd, Ed co-founded Yardsale where he assumed a technical role. Ed’s most popular open source project is a Super Nintendo Entertainment System emulator written in flash.

Ryan Mickle

[ Website / LinkedIn / Twitter / Facebook ]

Ryan graduated with a degree in Economics from University of California - Berkeley in 2002. He worked briefly in stock trading before joining Boeing as a business analyst for two years. He then worked in consulting for a year. From 2006 to 2010 he worked on his first startup, Dotherightthing.com, which he co-founded with Rod Ebrahimi. The company sought to measure the social and environmental impact of major corporations. His co-founder Rob went on to found the Y Combinator-backed company ReadyForZero, which provides a system to assist with paying off debt.

In his free time, Ryan is an amateur photographer.

Growth Outlook

Financial Model

Using information about the launch date of FOBO, the week-on-week growth posted in a job listing, and the announcement that a “million dollar run rate” had been achieved in mid-March, we created a financial model for the revenue and expenses of FOBO.

FOBO launched on January 10, 2014. According to a Techcrunch article, the annual run rate for FOBO had reached $1 million in mid-March. In a recent job posting for a “Growth Engineer”, it was specified that week-on-week growth was 10%.

Using this information about sales, we modeled revenue until the end of the year. FOBO charges a 15% fee for sales. However, included in this 15% fee is processing fees. Specifically, their credit card provider Stripe charges approximately 3% of transactions plus an additional $0.25 per payout to seller bank accounts. Thus, FOBO’s net profit per sale is about 12%.

We modeled employee growth by looking at historical information about the number of employees, then we looked at open job requisitions that imply one hire in the next month. Using that information, we applied an exponential growth estimate to the future number of employees.

One of the things the model highlighted was that FOBO’s strategy of not transferring money to buyer bank accounts until they request a payout has the potential to save significant money. By keeping an “account credit” that can be used for future payments, FOBO gets to keep the 3% fee that would normally go toward credit card processing.

Estimated EBITDA

View the model in Google Drive

To experiment with the values, add it to your own Google Drive:

View file in Google Drive -> File -> Make a copy... 

Future Funding

We did not account for the jump in revenue that would occur when FOBO enters a new market. Instead, we chose to quantify how long it would take to enter the San Francisco Bay market. Based on our model, it will cost FOBO approximately $500,000 to enter the San Francisco Bay market before reaching profitability in September. Thus, the most important conclusion from our model was the cost to enter a new market.

We assumed that this cost after launch to enter the San Francisco Bay market would be approximately equal for future markets. Thus, we predict that FOBO will raise an approximately $2 million Series A funding round before July at an $8 Million valuation. This money will fuel the expansion to four additional markets, which we predict will be Austin, Los Angeles, Chicago, Seattle.

Competitive Landscape

eBay

eBay first began as AuctionWeb in September of 1995 as a personal project by Pierre Omidyar. The site offered timed auctions on any user-listed item, with anyone able to bid to purchase a listed item. The site quickly took off and saw immense growth, recording over 2 million auctions in 1997. The company went public in September 1998 and continued to grow throughout the following ten years. In 2013, the company saw yearly revenues of $16 billion. eBay still offers its traditional consumer-to-consumer auctions, but also offers a broad variety of other services such as online money transfers through PayPal and event ticket trading through Stubhub.

Today eBay is a $70 billion corporation with strong sales. Unlike FOBO, sales on eBay are not limited by geographic region, nor does eBay demand such a high commission fee. eBay does not offer any guarantee that the item will sell, auctions run much longer, and sellers must go through the hassle of shipping the items.

Craigslist

Craigslist is an online classifieds marketplace that was founded in 1995 by Craig Newmark. The site allows anyone to post a classified listing to a specific forum in their city or region. The main categories are community, housing, jobs, personals, for sale, discussion forums, services, gigs, and resumes; within "for sale" are nearly 40 different listings such as appliances, electronics, cell phones, and tickets. The site offers local classified listings across the world and reported having over 700 marketplaces in over 70 countries. Most of the service is free, though there are specific forums that ask for listing fees. The company remains privately held and an exit does not seem to be in the plans anytime soon.

Like FOBO, Craigslist offers a local marketplace for exchanging goods, but without the fees. With its popularity, Craigslist has become known in popular culture for being an undependable service, as there is zero transparency as to who buyers and sellers really are.

Amazon Marketplace

Amazon was founded in 1994 by Jeff Bezos as an online bookstore. The company saw immediate success and went public in 1997. As the company grew, Amazon began adding many different products within e-commerce, and launched the Amazon Marketplace in 2000. Amazon Marketplace enables anyone to sell new and used goods alongside the regular listings by Amazon. Although the service is mostly used by other businesses, anyone can create a seller account and post their used items online. Amazon demands a high level of quality from sellers. Items being sold on the site must be in good condition and match the description of the listing. Sellers who fail to meet these standards will be removed from the service. From a buying perspective, items sold in the Amazon marketplace have a higher quality assurance as opposed to eBay and Craigslist, where such standards are not held.

Comparable Exits

eBay IPO

In September 1998, eBay went public and saw its share price surge from $18 to $47.37 giving it a market capitalization of $1.9 billion. Today eBay’s share price is around $55, but in the last 15 years it has grown tremendously to achieve a market capitalization of $71.41 billion. eBay revolutionized commerce on the Internet, enabling any individual to sell any item at a high level of efficiency.

Bay Acquisitions

eBay has acquired many different classified and consumer-to-consumer marketplace websites. Important to note, all of them are located in strategic international markets. Baazee was acquired for $50 million in 2004 and at the time was the largest marketplace in India. Den Bla Avis, the largest marketplace in Denmark, was acquired for $380 million in 2008. Some other notable companies and marketplaces include EachNet for China, Tradera for Sweden, Gittigidiyor for Turkey, and Marktplaats.nl for the Netherlands. Most of these acquisitions were for cash.

Technology

The FOBO iPhone app is written in Objective-C. It uses the phone’s built-in GPS to determine the local marketplace in which the user may participate. The system uses the Facebook API for authentication. The domain is hosted on Rackspace, but the marketing site is hosted on Amazon Web Services. The prior GetYardsale.com website remains online, where it is hosted on a Rackspace virtual private server.

Packet analysis of the FOBO API shows that it relies on both PubNub and Parse, which each provide application interfaces as a service. Some of the API calls to getyardsale.pubnub.com appear unauthenticated even though a valid SSL certificate is present, which may present a security vulnerability. Packet analysis shows that Stripe is used for collecting credit card information, and this likely means that Stripe is used for dispersing payments to sellers.

No Android app is currently available.

Opinions

Andrew

There are some aspects to FOBO that I really like. It takes minimal effort, is very fast to complete a transaction, and items are guaranteed to sell. Blog posts and reviews indicate that the marketplace is really starting to take off in San Francisco, but I am cautious in thinking they will be able to repeat the same level of success (10% week over week growth) in other markets. FOBO charges a very high premium compared to their competitors, and I’m wondering if that will be a turnoff for participants in other regions of the country

Compared to other marketplace companies, FOBO will also expect higher human related costs. Every item that doesn’t sell in their auction has to be purchased, picked up, stored, sold, and shipped. Even with many participants, it seems very possible that a fair amount of items will not be sold and require FOBO to handle; more capital will be needed to maintain a dedicated workforce in all markets.

I am also wary of possible exit strategies. After reviewing similar marketplace companies, I found there to be very few exits. Aside from the eBay IPO, there haven’t been any IPOs and all acquisitions have been by eBay for various foreign marketplaces. Other marketplaces for electronics such as Glyde and Gazelle are over eight years old and still seem distant from any type of exit. Amazon did not add any type of people to people marketplace until 2000, well after their IPO. Given FOBO’s rapid growth in San Francisco, I think that a Series A is definitely justifiable to help the company expand and try out a few other markets.

Philip

Selling electronics is a pain. While many marketplaces exist, each has their own form of friction that acts as a barrier to easy selling. Whether it is an online auction where you have to ship an item, classifieds where items are commonly misrepresented, or smaller groups where selling the item requires cash. FOBO capitalizes on the high price of electronic goods to make an easy-to-use market for selling luxury goods.

To sell an item on FOBO, you forfeit 15% of the item’s sale price. When I sold my laptop through their marketplace, this turned out to be a significant amount of money. However, every other step of the process is superior to existing secondhand markets. Listing the item was straightforward - I used actual photos, I was presented with a selling price, and I did not have to write a long marketing description.

Buying is equally smooth on FOBO. Buyers can set up alerts for items they want. They know that sellers are near them. The exchange of money happens in the background so that no last-minute haggling can take place. Sellers have a rating.

Every month a new “craigslist killer” enters the market, but few will gain any traction. The two factors that will help FOBO to succeed against Craigslist are its focus on luxury items and its sale fee. When buyers purchase luxury items, they desire a reliable selling process and thus are less risk-averse. In order to provide this experience FOBO’s 15% fee, though high, provides them with the revenue to continue building the product. By having strong monetization built in early, traction fuels growth.

With bad interfaces, unreliable selling processes, and difficult fulfillment, the used good market has been ripe for change - but quite resistant to it. FOBO’s strategy of catering to tech-savvy buyers of electronic goods has given them a strong niche. To grow from a niche business to an accessible selling tool, they must continue to expand geographically while expanding the products users may sell on their application.