Bag Borrow or Steal bags $15 million

Venture Capital: Bag Borrow or Steal bags $15 million

By JOHN COOK
P-I REPORTER

Bag Borrow or Steal, which rents high-end
handbags and jewelry to consumers, has bagged a $15 million venture
capital round that it will use to expand into new product categories.

Top of the list are sunglasses, gowns, belts, watches and shoes,
though the company declined to say which is next. A name change also is
imminent in order to reflect the broader array of products that
consumers will be able to rent.

  Michael Smith
  Zoom Joshua Trujillo / P-I
  Michael Smith’s Bag Borrow or Steal, a Netflix-style business, allows customers to borrow bags and jewelry.

Led by former Lands’ End and Nordstrom.com Chief Executive Michael
Smith, the three-year-old Seattle company has been growing fast with a
rental service that many have described as a "Netflix for handbags."

The company charges between $20 and $275 for monthly subscriptions
for handbags, while jewelry subscriptions range from $25 to $795 per
month. Consumers also can rent handbags and jewelry without becoming
monthly members, though those prices are higher.

The company now boasts more than 250,000 customers, up from a few thousand just a year ago.

Total funding in the company, with 30 employees in Seattle and a warehouse operation near Chicago, now stands at $27 million.

Bag Borrow or Steal consumes a lot of capital because of the upfront
costs of adding designer handbags and jewelry to its inventory, some of
which can cost thousands of dollars each. Smith, who claims to have 10
times the inventory of the closest competitor, said that more than half
of the retailer’s costs are tied to inventory purchases.

But unlike a traditional retailer, Bag Borrow or Steal does not make money with a sale.

"For us, we buy something and pay the full price for that item from
the vendor, and then we have to make that up over time," he said. "So
over the next several months we will be paying that off, then we hit a
break-even point, and then essentially we are at 100 percent gross
profit after that."

Smith said the shelf life of rented handbags ranges from three
months to two years, depending on the color or type of material. On the
other hand, Smith added, jewelry can "pretty much look new for years."

In order to protect against fraudulent bags or jewelry being
introduced back into the system, the company has introduced a number of
security measures that it declined to describe.

As the first company to launch in the "borrowed luxury" category,
Smith thinks that the startup is well ahead of the competition. Several
competitors already have fallen by the wayside, including BagHabits,
Bag Steal and Borrow and SecretBoutique.

"We have a huge lead, and it is ours to lose," Smith said. "We want
to make sure that when this channel is huge down the road that we are
the eBay within our space."

Based on the amount of interest that Bag Borrow or Steal received
from venture capital and private-equity firms, Smith realizes that more
competition is coming. He has not picked up on big players such as
Amazon or eBay moving into the arena, but he expects that in the
future.

"My hope is that it takes as long as it took Blockbuster to dive in after Netflix," he said.

Like most luxury retailers, Bag Borrow or Steal runs into challenges
of keeping popular bags — such as the Chanel Vinyl Coco’s Cabas Tote
or the Prada Vernice Gauffre Medium Satchel — in stock. The company
allows consumers to put handbags on hold, but that hasn’t stopped some
from leaving the service because they can’t get the bags they want.

Smith said the company has reduced its "churn" rate by about
one-third since early last year by improving customer service,
increasing inventory and redesigning the Web site. But Smith, who touts
his Nordstrom background, isn’t satisfied.

"We are a company that is three years old, and there are still a lot
of things we are looking to improve upon," he said. "I tell everybody
that we are as bad as we are ever going to be today. We better be
better next week, next month and make those continuous improvements."

Investors in the company include Madrona Venture Group, Steelpoint
Capital, Kuwait Holding Co., Hilltop Investments and individual angel
investors. As a result of the deal, Hilltop Investments’ Robert
Bennett, the former CEO of Liberty Media, is joining the board.

P-I reporter John Cook can be reached at 206-448-8075 or johncook@seattlepi.com. For more information on Seattle-area startups or venture capital firms, visit seattlepi.com/venture.

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