The $11.5B Startup 100 Investors Turned Down | Term Sheet

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0:26Allie Garfinkle:hey Chicago class it up with Crocs you know back to school is coming in fast so why wait to find your new fave footwear step into a local croc store and step into your new look try it style it make it yours because the right pair doesn't just show up it shows off first day fits handled Walk out ready for whatever's next. Visit your nearest Croc store today. Ow! Ow! Alive! Oh my gosh. Yes, this guy is selling lobsters right now. This is one of over 70 ,000 sellers on Whatnot. A live shopping platform valued at over$11 billion. There's 20 plus items sold every second on Whatnot. Live shopping turns buying into a sport.

1:12Allie Garfinkle:And in China, it's dominated e-commerce for a decade. That's a market 10 times bigger than ours. But in the US, it kept flopping. So originally, nobody bet on a two-person startup. I have a spreadsheet that has the first 100 investor notes. It feels terrible. It's truly awful. But Whatnot has recently reached 1 billion orders, from Pokemon cards to seafood. It's just wild to comprehend. You look to me slightly deliriously. A billion orders is a lot. The vast majority of that has happened in the past six months. Today, it's among the biggest shippers in America. And we've raised about 1 billion in finance.

1:44Allie Garfinkle:I love that you were embarrassed about that. It's a big number to live up to. We'll live up to it for sure. Beanie Babies, LeBuboos, Pokemon. If it's going to be hot, WhatNot CEO Grant LaFontaine sees it first. Welcome to Term Sheet. I'm Ali Garfinkel. So before we dive into the interview, I've been reading your comments. Thank you so much for the comments. I actually want to read some of them now. We got a lot of Josh Wolf love. One person said, I thought Josh was correct on a large number of issues. I would not bet against him. Honestly, I wouldn't either. He's been right about a comical number of things.

2:15Allie Garfinkle:And part of the reason I wanted to have him on the show is I think he's also genuinely an original. So thank you for that. Another commenter pointed out something that I thought was really interesting. And this is only a small section, but this is what the person said. Gen Z and Gen Alpha are actually very anti-AI. I think Gen X is the most AI positive generation. Younger people just look at this stuff in horror. I thought this was really interesting because there's definitely a narrative out in the marketplace that, oh, Gen Z, they're growing up with this. They're going to love it. But I agree, I actually don't know if that's unequivocally true.

2:48Allie Garfinkle:There is also one last thing somebody said that I thought was kind of profound and like it was a section from one of those little books of wisdom that has like one section every day. What the wise do in the beginning, the fools do in the end, which I think is actually true. So thank you for all the comments. Thank you for watching. Keep them coming. I actually really want to know what you think, even if you hated it. Grant, tell me about your first collection. What do you consider your first collection? The first thing I ever got really into collecting was Pokemon cards when I was in fourth or fifth grade.

3:19And I just remember having my blue binder, but it had all the pages in it. Me and my friends, there used to be a lake at the end of my street. We used to go down, hang out at the benches and trade cards and try and get stuff. And then that's actually how I ended up starting to sell online. It was probably the first step to actually getting to where we are with whatnot.

3:37Allie Garfinkle:Well, I was going to say, what was that sort of early selling experience like when you were really young? because it was a different time. I just remember very distinctly was my first card that ever sold, which was a holographic chancy card. The way you would do it, at least back then, is there wasn't even payment processing online. And so you would wait for someone to send you a money order in the mail. And then once I cashed at the post office, I need to go and send it out. How did you transition to selling? Because I too collected Pokemon cards, but I never got to the place where I was like, oh, I can transact with these.

4:06Even when I was a little kid, I was into like stock market and various collectibles and how could I build a business? and how could I make money doing it? And so sort of just like through just that general interest in markets and business, I sort of just learned and kept doing it and kept doing it. And sort of, yeah, here we are today.

4:23Allie Garfinkle:What was your most profitable sale of a Pokemon card? Do you remember? I remember, you know, like a really good condition holographic Charizard that I probably sold for 80 or 90 bucks. And, you know, if you held on to it today, that'd be worth tens of thousands of dollars. But I do remember selling Charizards online. And that was when I had the big bucks. 80 or 90 bucks felt like a real success. In your fourth grade and you have 80 or 90 bucks. Yeah, it was great. What do you consider the beginning of whatnot? Actually, me and my co-founder have this debate. This is contested. Yeah, this is a contested storyline.

4:53There's two origin stories. They're both real. It just sort of depends on which one you want to define. One was we were in Tokyo and we were drinking at a bar really late at night. And we started talking about building businesses and we bought a bunch of domains, like a bunch of random domains.

5:08Allie Garfinkle:What did you buy? What are you buying? about like always legit and some electronics name site we knew we wanted to do like something with marketplaces so like all these like adjacent market placing none of them good i'd have to go look through my email and that was uh maybe like january 2019 and then we're like oh we got to start something we should do it and then we went back and like we had jobs and we had stuff to do and so we didn't do anything that's one origin story and then the the origin story that I generally tell is sort of the beginning of summer 2019, getting fed up with not being able to build stuff at work and, you know, various hurdles.

5:45And I go, hey, remember when we talked about this? I really say it was summer 2019. We basically made the firm commitment that we're going to build a business. It was going to be a marketplace. And we didn't know what it was going to be exactly. Then in October, we said we're going to do something with collectibles and social commerce. And then December we launched. And then in July of 2020 was when we built the first live experience. And that's really when the business took off.

6:08Allie Garfinkle:The thing that's sort of striking about this is you didn't choose the easy path on anything here. Marketplaces, famously difficult. Collectibles and commerce, live commerce especially, it actually had struggled to gain traction for a long time. Starting a business in general, always tough. You chose none of the easy things. If you're going to go and build a business going, hey, I'm going to choose the easy things is just like the wrong lens. And to me, it's just like, how am I going to build something really great? And actually, the way I think you build something really great is you know your domain, you know your customer, and you can actually go and execute on it.

6:41I've been a collector since I've been in fourth grade. I spent almost all of my career in consumer tech in two-sided businesses or marketplaces. I had started businesses before, so I sort of learned some stuff along the way. And if you look at Logan's background, it was pretty similar, which is build a lot of tech, a lot of marketplaces. And so as opposed to going like, hey, everyone says this is hard, I went and said, where do we think we can just build something great? And so for us, there'd be a bunch of businesses that people might say are easier, but we didn't know anything about, so it'd be much harder for us.

7:07Allie Garfinkle:This seems like as good a time as any to ask you to describe a Funko Pop. For our audience that may not know, what is a Funko Pop? A Funko Pop is a vinyl bobblehead-like doll that are generally built around various IP. So you can get like a Star Wars one or maybe your favorite football player. And so there's basically a Funko Pop for anything that you could be a fan of. Do you have a favorite Funko Pop? So I have a Tom Brady, a Rob Gronkowski, and a Julian Edelman. Oh, you're a really big Patriots fan. You're a really big Patriots fan. So I grew up in Maine, which is basically, you know, Boston sports fan.

7:40Celtics, Red Sox, Patriots. And I played football growing up, so I'm pretty into football. So I'd say probably those are my favorite.

7:48Allie Garfinkle:Funko Pops play a key role in the origin story of whatnot. Can you explain the relationship between the beginnings of Whatnot and the Funko Pop bobbleheads? One of the things that is difficult when you start a new business, in particular a marketplace business, is you need to be able to create a great experience for someone, but you don't have that many people. So the early team of Whatnot was basically three and a half people. Half because one of the guys was part-time, our original designer, John. And if you have three and a half people, if you try and focus on the whole world, you're going to build a poor experience for a bunch of people which means no one's ever going to come and use it and so we wanted to find one set of users that we thought we could provide a really great experience for and at that point in time some of our friends and us had started to buy Funko Pops so we had them and then we looked at the numbers too we're like okay how many are being sold can use big enough opportunity to at least get something started but we thought it was you know there's a couple hundred million dollars worth of sales at least on the secondary market pretty narrow audience and people are really into them.

8:50And so we just thought that was like a good starting place. It was something we knew. A lot of people who were into Funko Pops were really into Funko Pops. They had hundreds. It's like, you know, you can get people and provide a great experience. You can get them to keep on buying. And the market was not too big and not too small. I think we could have probably done it in various other places, but we got the core of what not working and sort of used Funko Pops as the initial starting point.

9:14Allie Garfinkle:And you hosted the first Funko pop live stream i did yes can you walk me through it what was that day like this was you know july of 2020 and um my co-founder logan's the the technical one so he built the the first live experience and he locked himself in his room for about four or five weeks to to build it and he was coding you know 16 hours a day six days a week and so he came out and he's like all right i'm done we gotta test this and he was just really nervous it wasn't gonna work because it just you know when you code for a 16 hours day for five weeks uh straight basically it's like a mentally exhausting can't see straight anymore yeah this is a mentally exhausting thing and so i was like all right well i'll go i'll go and use it and then we grabbed all the funko pops we had in the house how many funko pops did you have i mean hundreds you gathered your hundreds of funko pops at this house in phoenix so we gathered them all up and at that point in time we had a buy it now product feature and an auction product feature we didn't know which one people were going to like more.

10:14So we're like, all right, we put half of them in Buy It Now. So they said half of them for auctions. And then we sent an email to a few people we knew in the community and then put the live live. And I went in front of the camera and like, all right, here's what I got, everyone. This is the live experience. We're just testing it. I'm going to run the show. Here's all the stuff we have. Let's see what happens. So what happened? We sold it at every Funko Pop we had. When we started, we didn't like, I don't know, we'll run it until it feels right. And so about two and a half hours and we were just tired.

10:41It was like 11 o 'clock at night at that point. and then we were very excited obviously you know that would have been more funko pops and i would have been able to sell on ebay in a year and so you're like well i don't know what i have here but i feel like i have we might have made something really special i mean you could feel it uh and so you know we closed out like this is amazing and then the next day logan went live and we're like okay let's see if we can do it again and happened again and then the third day um maybe maybe the fourth day after but the third person to go live was guy curtis who was one of the original sellers on whatnot.

11:13And he's one of our first employees. He ended up joining afterwards, one of our first employees. He went live. And then we just kept adding more and more sellers in the community. And there's obviously a lot of stuff in between. But fast forward to today, and there's 20 plus items sold every second on whatnot.

11:32Allie Garfinkle:How do you think about niche marketplaces versus broad marketplaces because it does strike me that um the world is maybe moving towards some of these niche marketplaces it does seem like you're even a little surprised even now as you tell the story though that it worked as well as it did so part of the reason we started niche so i've spent almost 20 years in consumer internet at this point i'm getting old and we all are yeah the the formative part of my career was i was at youtube around 2010 and actually if you looked at youtube in 2010 what you would see it was largely an aggregation of niches.

12:07It's like very niche pockets of the internet. And so if you looked at the evolution of a consumer internet, at least in the US, it almost always started on the fringes. Because the fringes are the pockets of the market that are not well served. You know, mainstream stuff, there's always a lot of people who are in that market. They're serving customers really well. And if you're going to build a great business, you have to serve some subset of customers really well. and so always inherently believed that the way you build a great consumer internet business is figure out an underserved set of users provide a really great experience and if you can do that well and consistently through time then you can continue to improve the product experience and start to compete in more of the mainstream areas you know so we focused on collectibles for the first couple years of the business now we're in you know 100 to 200 categories fashion categories is actually our biggest buy orders.

13:01We still deeply care about every original category we're in and investing in it, and there's tons of potential to improve that product experience. But if you start with underserved customers, you can then keep on building and building and serve more and more customers through time.

13:15Allie Garfinkle:This seems like as good a time as any to bring up that we have some news to break. What not has crossed a billion orders. You're laughing, you're laughing. You're like, can you? Yeah, it's just wild to comprehend. You look to me slightly deliriously. Yeah, I mean, a billion orders is a lot of orders. And with the way the business is compounding today, the vast majority of that billion orders has happened in the past six months. In the past six months? Oh, the vast majority of it, yeah. Once you have a marketplace business and the experience is really good, it just gets better faster. so you know one of the things in the past year for instance because we add more and more categories it means more and more people have things to go and purchase and have better experiences with and more and more sellers have more audience they can potentially sell things to the number of buyers who have purchased in more than one category has grown 170 so just outpacing you know general buyer growth anywhere else in the business but it is still a a mind-boggling stat I'll go on a slight tangent.

14:25One of the things I do when every new hire class comes to Whatnot is I sort of do the story of where Whatnot came from and then back into the mission, vision, culture of Whatnot. We spend a lot of time trying to build a really good culture that's really customer oriented. So I like to make sure when new people come in, we hit them over the top with it and we show this picture from um you know january of of 2020 and it's a we were renting a house in mountain view because we're going through y combinator startup accelerator uh in the bay area and a big day of orders for us was like 30 orders and so we have the living rooms at that point we were fulfilling our own inventory so the living room's just full of our boxes.

15:08And I was like, okay, this is a big day. And the average day on whatnot now we do a couple million orders.

15:19Allie Garfinkle:How do you scale logistics at that level? Especially when it's happening that quickly. The way we have it built today is, the way whatnot works is fundamentally there are a bunch of small and medium-sized businesses who build businesses off of whatnot. And we help support those businesses and that's how whatnot's business succeeds. And so they'll do the fulfillment because they own the inventory. Now, what we do to make it easier is we do direct contract negotiations with logistics carriers. So USPS, for instance, in the US, we're one of the biggest shippers in the US with them. And because of our volume, we're able to get really, really good pricing.

15:53We're then able to help them bundle things together to save customers money. And we spend a lot of time on sort of the algorithms to bundle certain types of products together. And then because everything runs through our labels and our systems and our customer support systems, we also monitor very heavily like how fast are people fulfilling? Is the fulfillment experience good? And if maybe you're starting to slack, you'll get warned and maybe some penalties. And eventually if you don't provide a great customer experience, we'll ask you to leave the platform.

16:25Allie Garfinkle:So it sets up accountability. Yes. One of the things I do find really interesting is early live commerce really did have an accountability problem. How did you decide to solve for that? I actually think if you look at live commerce, there's actually much more accountability baked into it than any other format. Because it turns out you're on camera, you can see the item, and you know if someone's doing something relatively shady. And there's a bunch of other people in there who will hold that person on camera accountable. So the community part of it is important. Yeah. Well, I think being able to see the person, be able to see the item, be able to have a set of community who's there all the time, and the fact that you are on camera the entire time.

17:07So like, you know, just -

17:08Allie Garfinkle:And does every whatnot seller need to be on camera? You don't have to have your face on camera, but the items have to be - You have to physically see the item. You're going to physically see the item every time. Yes. There's some counter cases, but almost always it's there. So that just creates a lot of accountability. Now, one of the downsides, of course, though, is that some people will still behave badly and it's on camera. and everyone will see it. And so I think live actually is a much safer format than anything else, but everything's on camera. So if someone does something bad, everyone's going to.

17:33Allie Garfinkle:What is the most concerning incident around trust or fraud you've ever encountered? The things that have probably been the most trust eroding for whatnot have been people opening packs of Pokemon cards and maybe the pack goes off camera for a second. Why is that such a problem? because when you open packs of you know say i buy a pack of pokemon cards i really want the holographic charizard you know that's that's the card that everyone wants that's the card that i want and so if you take it off camera maybe it's like someone's taking that card etc now what we do we require anyone who's opening packs of cards you got to keep it on camera the whole time and so that means everything is that's one of the cases where like actually no the product has to be on camera the entire time and so if someone does um something funny um we'll action them if say you get the Charizard and maybe sometimes it can go missing in the mail.

18:30So like no, there's no perfect shipment system. Sometimes things go missing. We'll make sure we recomp you for the full card. So we'll try and get you the card if we can and just make sure you get exactly what you want. And then of course we have all these other systems in place which is we're monitoring the refund rate for customers. We're monitoring how quickly they're shipping. We're monitoring reviews. And so we just spent a ton of time and energy in making sure sellers provide a great experience. And if things do go wrong, making sure we protect buyers when they do.

19:03Allie Garfinkle:As I think about the scale you're operating at, I imagine you have a pretty interesting view into the direction culture is taking. You mentioned fashion is really big. What are some of the biggest categories on whatnot? I think you can look at this from like two different dimensions. So there's like the biggest stuff on whatnot today. And then there's sort of like emerging things that are just starting to like show high momentum. So on WhatNot today, fashion and collectibles are still the biggest. Like what in fashion? I'm not, I'm actually struggling to visualize it. I mean, a huge range of things.

19:30A lot of like new with tags, mall brands, a lot of jewelry, but a lot like vintage jewelry, antique jewelry, like the lab grown diamonds is like another really popular thing. Obviously bags. And so just a huge range of just about any piece of fashion apparel you could imagine. And then there's a bunch of stuff where you'll see stuff pop. So last year at this time, the thing that was popping was LeBuboos. And you just looked at it and it was just going completely vertical. What was driving LeBuboos demand? I genuinely don't understand it. When I was growing up, it was Beanie Babies. LeBuboos was the big thing last year.

20:12And like, I, you know, I have my niece and, you know, I got her like 15 labooboos for her birthday. And she was felt like the coolest kid in her school. And, you know, the thing that's popping right now are neato. What is a neato? She balls like, and like, I don't even know how to describe them. So that's like the new. Get a visual. Yeah, you just got to go on the app and check it out. So that's sort of like the new emergent one. And I think it just, you know, there's, there's always just these things that sort of hook on to culture. and once they get hooked on to culture it sort of has a way of self-perpetuating because people

20:47Allie Garfinkle:want the thing that other people want within collectibles what's specifically crushing right now probably pokemon cards are are still having like a monster they're just having like such a resilient power so this year i think it's the 30th i think it's the 30th anniversary of pokemon uh so this is like a moment in time where there's more attention they're doing more marketing around The generation that grew up on Pokemon cards now has disposable income. So they're buying it and they're maybe collecting cards with their kids at this point. And so that sort of is fueling it. I think those are a couple of the core drivers.