The Bowery Capital team is continuing our blog series covering B2B Marketplaces. We are doing deep dives on various companies, interviewing founders and investors, and learning what it takes to build success in the B2B Marketplace arena. This week, Reza Bundy, Founder & Former CEO of IronPlanet, answers some of our questions. You can read all of the posts in our series by going here.
Most of the folks reading this blog know IronPlanet as one of the early success stories in the B2B marketplace landscape. What first inspired you to start the company?
To be honest, what really inspired me to launch IronPlanet was eBay. I looked at eBay and I thought - how are they going to get into big ticket items; how are they going to get into international sales; and how are they going to get into payments? I felt that those were the three big growth opportunities at that time. As for payments, I had no background in it and PayPal and others were already launching and it seemed to require a lot of money and sophisticated banking licenses to stand up a new business. The international approach was also a bit outside of my purview because I did not want to move abroad, and carbon copy an eBay model like many people did. The idea of getting into bigger ticket B2B sales I liked because my background was international development, and I thought the concept of selling business and industrial items made sense using the internet because they are fairly expensive and just so heavy to move.
When we started out, the cost of moving a piece of construction equipment from Florida to Nigeria was cheaper than moving it from Florida to Louisiana because of on-ship vs. on-trailer costs. I felt like there was an international angle there, and if you were to sell this equipment far afield, you could take advantage and arbitrage the economic depression in a certain area that made the equipment much less valuable or less expensive compared with areas that were booming. In Dubai at the time, there was a lot of construction happening, whereas, in Florida in 2008 construction firms were going bankrupt, and I saw a real opportunity if you could ship this stuff in a cost-effective way. The international aspect of IronPlanet really intrigued me and there were many other facets of IronPlanet which made sense to me given where eBay's starting base was - and where I felt they should be going - which was B2B.
On the logistics angle, did you try to own shipping from the start? Or did you decide to just put that on the buyside and have them be responsible for figuring out the post-transaction shipping side of things.
At IronPlanet, we handled logistics soup-to-nuts and managed all of the post-sale transportation needs. We actually had our own call center which was ISO certified, and we just did exactly what distribution companies do, which is refer our customers to shippers and then get a fee for that. Over time, we were able to digitize this process. As bids for equipment came in, since we knew the zip code between the buyers and the sellers, the transit routes, and the rough mileage costs, we could offer bidders an estimate of the shipping cost upfront; by then, we had enough relationships with local, regional, and international freight carriers to send out an RFP to get the transit staffed and this allowed buyers to go far field and acquire equipment in geographies where they did not have any prior relationships or experience.
When you were trying to kickstart liquidity on IronPlanet, what were some of the methods that were effective for onboarding supply and demand, and how did your approach to those two sides of the market differ?
In the auction space there are guaranteed sales, so you can take one of three paths to try to get things going. One option is that you can buy the equipment, take the risk, and arbitrage it - this is expensive to do, and then if you do not make a sale you are stuck with depreciating inventory. You can also guarantee the price on your auctions and then take a loss if the bids do not materialize on the marketplace. And the third option is that you just run the auction and then hope for the best – that someone will bid above the asking price and that the final bid will go high enough to make it worthwhile. For our first auction, we guaranteed the price and we literally bought $2MM worth of equipment. We had just raised $37MM and we thought, let’s kickstart this. We spent $2MM and we lost about $300K. But it was worth it, we had just run the first online auction ever of heavy equipment, the inspection reports were valid, and the customer feedback was great. The way that we sold the equipment was five months faster than the physical auction alternative and the fees were half the fees of traditional routes.
This led to us going out and doing hybrid transactions where we would buy some equipment, and then we would also guarantee the price on certain equipment being listed by third parties. This gave us a core amount of supply, and then the rest of the equipment would come along in a reserve format, but we would not guarantee or do anything on those transactions. The goal was to get good high-quality equipment as a core and then attract other suppliers around it. We also knew that if we had quality supply, this would attract bidders online.
Another thing we would do to drive marketplace activity, which was actually pretty clever, was we would search Uniform Commercial Code (UCC) records for user leads. In the US, whenever you buy a piece of equipment using financing, which is ~70% of all new/used purchases, you need to file a UCC record with the local Secretary of State. And combing UCC records can be a great tool for lead generation. For example, if someone bought a D9 bulldozer two years ago, we would know how many hours it had on it, how much was paid for it, every time it was sold, its serial number, etc. We could go back in UCC databases and see how often that kind of machine trades hands, and say it was every three years on average, we would reach out to these folks at year 2.5 and we know by then that they will likely be in the market to sell a piece of equipment and maybe even to buy a replacement. This took a lot of direct marketing and sales calls, but it was well worth it. The UCC data was really our secret sauce - we bought the UCC database we used from an auction company in North Carolina, and we even gave them some stock in IronPlanet because this information was so valuable.
What helped IronPlanet to grow in the early days? Was it partnerships with dealer networks? Was it running your own supply side operation? I am curious what levers were most effective at driving growth once you had a little bit of initial momentum.
I was not there for the whole span of the company, but I can tell you the three milestones that I saw as big turning points. The first was getting Caterpillar, Komatsu, and Volvo to invest. As soon as that happened, we had credibility with everyone. That was extremely helpful. And the other thing was, Caterpillar had a remarketing arm, and they had a guy there who would literally have to buy CAT used equipment around the world at close to retail prices, so that the used equipment would not be cannibalizing new equipment sales. And now IronPlanet was selling this same CAT equipment, but this same remarketing arm would no longer need to send people to Australia or Brazil to buy equipment, they could just sit on the computer and bid on it. This meant we had a Caterpillar VP bidding on all the equipment that we were selling, just to make sure it would not sell at a price that was competitive with new or nearly new equipment that CAT dealers were retailing.
The second big milestone thereafter was when we bought Caterpillar's site. At the time, Caterpillar dealers were trying to compete against us, even though Caterpillar corporate was an investor in our business. As soon as they failed in competing against us, we just came in and picked up their assets, and forced them to sell equipment as part of the transaction and buy equipment through us. That became a fairly lucrative partnership. And the third one - the big one - was the Pentagon. The Pentagon sells all their non-weaponized used equipment through IronPlanet. Nothing offensive, so no tanks, guns, or missiles, but 85% of the Pentagon's equipment is rolling stock - Humvees, trucks, generators, and we sold all of that. That was the spike in usage that got us to the wider acquisition by Ritchie.
IronPlanet raised money from blue-chip investors like Kleiner Perkins and Accel but also brought on several strategics including Caterpillar and Volvo. Was your plan always to have strategics among your investors?
Initially, our goal had been to get the rental companies as investors because the OEMs like Caterpillar that use a dealership model to sell, their dealers are still independent and while the manufacturer can encourage dealers to buy/sell through us - it is still just a suggestion. Our original plan was to get United Rentals, Hertz, and all those big rental companies to just give us all their used equipment. Unfortunately, we could not lock any of those rental companies down as investors, so instead our backup option ended up being going with Caterpillar, Komatsu, and Volvo. But the strategic partnerships we first went after were actually on the rental side.
Would you recommend that today’s founders who are building B2B marketplaces try to get industry strategics on board? Or would you encourage them to stick with more traditional venture firms?
That is a good question - if your strategics are buyers, then definitely get your strategics onboard as investors. One thing to consider is that strategics will never move quickly unless you have a personal relationship with them, whereas venture firms act much faster. When we were getting going, it helped to have Kleiner and Accel onboard - when we flew the Kleiner jet to visit Caterpillar and meet with their CEO, I was only 26 years old, and being backed by these funds gave us credibility.
As a startup, you are going to have a tough time getting a strategic to invest in a pre-revenue business, so it is always helpful to get a venture firm involved to give you that early support. With strategics, you also have to be very careful about how they get along with one another and what they are potentially trying to get out of you. Are they trying to get trade secrets? Are they trying to learn from you in order to better compete with you? There are a lot of nuances there, but we got lucky. We were able to get Komatsu, Volvo, and Caterpillar as investors and they were the majority of the OEMs in the space at that time - this gave us some real validation in the market that was very helpful. But other than providing us with some cash and credibility, it still really took the blood, sweat, and tears of our team to build out the sales pipeline and ultimately the business.
You come from a non-traditional background as a journalist - can you tell us a little bit about what it was like founding a company and some of the strengths and weaknesses you were able to draw upon from your prior experiences?
I had a long conversation with Mike Moritz about this years ago when we were first pitching Sequoia during the fundraising process. He was telling me that he had also started out as a journalist, and I asked him what was the thing you picked up? He said inquisitiveness. This is the ability to build relationships, the ability to ask questions, the ability to go into a situation where you know nothing and then get to the bottom of what is happening, who is in charge, who the decision makers are, and what the reality is. It requires you to get to information very quickly, and most importantly be able to talk to people out of the blue and ask them questions - it is actually advanced salesmanship in some ways.
We have noticed that many mature B2B marketplaces end up selling to PE firms, but IronPlanet actually sold to a competitor in the deal with Ritchie Brothers. How did that transaction come to be, and could you walk us through your decision to sell to them and that whole process?
Ritchie at first just wanted to crush IronPlanet and they seemed intent on destroying us. Every time we got a fleet of equipment consigned to us, they would come in and buy it, and we would lose that capability. And at one point we started faking it - we started pretending we were buying equipment from one guy, when we were actually buying it from someone else. This led to Ritchie buying more equipment than they could afford, and it started hitting their P&L a little bit. We also did some fun things - every time we would see a Ritchie facility, we would buy one or two of those Adopt A Highway signs and then put the Iron Planet logo on it. It was far cheaper than buying a big billboard, which we did do years later.
The reason we sold to them was because we were initially supposed to go public, but a CFO we had hired had not done their job and there were issues with the books. We were planning to go public at a >$1B valuation, and it was ultimately called off. At that point, we had to reset and then started exploring other options - after ~14 years, I think the venture firms really just wanted to have a liquidity event. Then, when Ritchie came in with an all-cash bid, people were comfortable with taking them up on the offer. That is really the story - it ended up being the highest price and the right strategic fit. When COVID hit a few years later, and nobody was going to the physical auctions, Ritchie basically went from being a physical auction company to being a virtual one overnight. And the only way they were able to make that transition was because they had purchased IronPlanet. I have heard from folks at Ritchie that if it were not for IronPlanet and that technology, Ritchie would have been in real trouble during that period.
There have been a lot of attempts at trying to create an IronPlanet 2.0 - why do you think most of them have gone by the wayside and failed to gain the same success you had?
I frequently get unsolicited LinkedIn messages that say, “Hi - my name is so-and-so, and I am starting Iron something .com,” and I am really just not interested in that kind of business at this time. In some ways, used equipment is a small market - maybe $100B total for used capital goods - and it is a market that is very concentrated. At this point, Ritchie has the majority of the market. So, some of these folks can try to take market share from Ritchie but that opportunity is limited. If I were trying to redo this and build IronPlanet 2.0, I would Uber-ize everything and use AI and decentralization to staff the business and be more of a tech platform provider to independent third parties who can execute on various parts of the business (i.e., inspections, logistics, etc.). I think if people are trying to just redo IronPlanet all over again without any real innovation to the model, they are not going to succeed.
You have since moved on from IronPlanet and are currently building Atlas - can you tell us a little bit about what you are working on there?
With Atlas, we are building a dollar that is backed by real assets. We take US dollars - in the form of treasuries - and we pair it with investments in gold and real estate investment trusts that are liquid stocks of portfolios of real estate concerns in North America. We look at areas that are safe haven assets, so areas that will likely benefit from climate change and migration patterns. And we combine those three assets in a liquid construct with an algorithm that we have partnered with Goldman Sachs on. This liquid construct will then get digitized in the form of a digital currency which becomes the backbone of how to make payments through governments, institutions, and commodity traders. We are effectively building an inflation protected US currency that can be used for B2B transactions and will go by the name USG.
Many of today’s heavy equipment marketplaces have tried to bolt on value-added services, like financing, logistics, and quality assurance, similarly to how IronPlanet did as it matured. How did you think about these other potential revenue drivers as you built out the company?
Once you have an inspection report, you can do wonderful things with it; you can use inspections to generate service leads or financing leads which you can sell to the relevant providers. Ideally, you can even eventually own the financing down the road but to get there you need to have volume. The best thing to do is to give the inspection away for free and then monetize it down the line. An inspection costs ~$500, and if you can give it away for free, you can make far more on providing extended warranties, providing parts, shipping, and so on. We did not really do it this way ourselves - but the inspection report really should have been the loss leader to then monetize across the food chain. And without offering an inspection report, it is hard to even get a transaction done - because how do you trust someone that is telling you that their equipment is in great condition when there are 50,000 moving parts on it. The inspection was at the crux of what we did, and we had this algorithm where truth plus trust plus transparency equals a transaction. And so, the truthfulness of the seller, the trust that comes with the inspection report, and the transparency provided by an independent inspection report all lead to the ultimate transaction. Once you create trust between a buyer and seller, you can do all sorts of wonderful things - but if you skip that, you are not going to get the same kind of velocity of trade and price realization and all those other benefits.
What advice would you have for aspiring entrepreneurs out there who are looking to launch their own B2B marketplaces?
You do not really need to know a ton about the market beforehand; I did not know anything about heavy equipment before IronPlanet - I did not know what a backhoe was until I sold my first one. But you need to build relationships. Heavy equipment is not a highly transactional environment; you would go to trade shows, and the same people have been in the business for 20, 30, 40 years. If you just go there and want to make money and skip out of town, it is not going to work. You have to compensate people. You have to cut them in on equity. You have to ask their advice. You have to follow up. You have to take them to dinner. You have to give them a nice bottle of wine. And you have to mean it when you do it. You have to genuinely want to build these industry relationships. If you are in it for the transaction, people will smell you a mile away and they will kick you out. The point is to be humble, be interested, and be engaged. If you want to go into something, especially if you know nothing about it and you do not have the relationships, go in it like a journalist would and ask questions, be inquisitive, and create value for others because nobody wants to feel used at the end of the day.
If you liked “From The Front Lines: Reza Bundy (IronPlanet)” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog. Look out for more content on B2B Marketplaces from us in the coming weeks.