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How To Make A $1 Billion Industry
How To Make A $1 Billion Industry

How did a handful of founders create a $1 billion aftermarket for shoes that no one wears? It’s a tale of hoops, hype, head-spinning colorways—and an object lesson in how entrepreneurs can spot opportunity in the chaos.

Liz Brody

The legend goes like this: In 1985, Nike made a pair of red-and-black sneakers for Michael Jordan that it called the Air Jordan 1. Then Jordan tried to wear them during a game, but the NBA said no—uniform violation. So Nike promoted the sneakers as “banned,” Jordan wore them during that year’s NBA Slam Dunk Contest, and the combined cool factor blew the shoes off retail shelves so fast, they made skid marks.

Is it true? Online sleuths wonder if the whole “banned” thing was a marketing gimmick from the start. But it doesn’t really matter. These shoes would effectively become Sneaker Zero, the birth of special limited shoe releases, conceived by brands from the get-go not to sell millions of pairs but to create that invaluable, flammable fuel known as hype. And for a generation of sneakerheads, the Air Jordan 1 lodged in their brains. They needed it. And they needed the next version, too.

Chad Jones was like that. He was a kid in a rough Brooklyn neighborhood when the Jordan 1 came out, and by the time he was a teen he understood the captivating potential of sneakers. He knew they had value, that they were art, and that they could literally and figuratively take you places. So when the lines started forming for sneakers in the early aughts, he stood in them—huddling in the rain, sleet, and subzero temperatures, sometimes for as long as five days, all in order to grab the next cool release from Nike or Adidas or Reebok. “I had a friend,” he says. “We pitched actual tents, brought little portable heaters, whatever we had to do to fight to get these shoes.” He began calling himself Sneaker Galactus. His collection grew past 1,000 shoes.

And that’s why, at 4:30 a.m. on a frigid New York morning in 2012, he was out in line waiting for the new Kobe 7s. Sneakers seemed like big business then. They weren’t, really—not compared with what they’d become, an aftermarket worth $1 to $3 billion. Still, even in 2012, there was money to be made. In fact, for most of the people waiting with him on that cold morning, the shoes would never touch their feet; they’d turn around and resell them, fresh in the boxes, to someone they knew or on eBay for twice or three times what they paid.

Mornings like those could be tense. It’s a lot of anticipation, a lot of people, a lot of money at risk, and not that many shoes. Jones had been waiting only a few hours when an argument broke out. He remembers how bitterly cold it was. And he remembers looking down at his feet, where blood was pooling and soaking his Nike Air Zoom Tallac Lite boots. Then he realized the blood was pumping out of an artery in his arm, where he’d been stabbed. “I almost died,” he says, “over sneakers.”

But did it stop his love of them? “Never. Ever,” he says. Loyalty like that is rare. It is also opportunity. And a few visionary entrepreneurs were about to take notice and transform this small world of obsessive shoe resellers into a massive, global sneakerhead industry of unicorns and luxury brands, and VC money flying as high and fast as the athlete who inspired it all.

AFTER THE AIR JORDAN 1, collectible sneakers evolved. Brands began dropping exclusive shoes in ever more creative collaborations—with designers, musicians, influencers. Magazines and websites popped up to report the latest news. A secondary market quickly followed, to the surprise of nobody. That’s what happens with anything cool and limited, be it Rolling Stones tickets or rare Magic: The Gathering cards.

How does an entrepreneur begin to harness something like that? The first step was simple: Open a store.

That’s what Damany Weir did in 2005; he created a consignment store in New York City dedicated to reselling these preowned, often unworn, sneakers. It was called Flight Club, and Jones describes it as “a tiny little nothing”—a space that appealed mainly to hard-core fans. But this satisfied the needs of the moment. It became a mecca for sneakerheads.

In the decade that followed, the sneaker world became chaotic. Brands were releasing new limited collaborations regularly. Resellers were popping up everywhere. Several incidents of violence erupted, like the one Jones was caught in. And counterfeiters were becoming a serious problem on eBay, which had become the resellers’ platform of choice.

But during that same time, a new kind of sneakerhead had also taken interest. They were guys from corporate America who had fallen for sneaker culture—and were now noticing all these pain points in the scene. They wondered if they could solve them.

Two of these sneaker guys were Eddy Lu and Daishin Sugano, roommates and startup cofounders in Los Angeles. They’d met at college in Berkeley and decided to leave high-paying corporate gigs on the same day in 2007 to start…something. They weren’t exactly sure what. They managed to raise $7 million for an app called GrubWithUs (it helped people meet over food at restaurants), but they struggled to scale it. And then, one day, Sugano paid $300 on eBay for a pair of Air Jordan 5 Grapes that, upon arrival, were clearly fakes. “I was like, How come in this day and age you spend that much money on something online and still have to worry if it’s real?” Lu says. “That was the lightbulb moment: We can build a marketplace where we authenticate every product, so the buyer never has to get duped.”

Flight Club, that store in New York City, had done this from the start. But it was working at a small scale. Lu and Sugano went bigger. They built an app and called it GOAT (Greatest of All Time). Just like on eBay, a seller can post a shoe on GOAT and ask for a price. But when a purchase is made, the seller first ships the sneakers to GOAT headquarters to be authenticated. If they’re real, the sale goes through and GOAT takes 9.5 percent plus a $5 seller’s fee.

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September 2019