As venture capital constricts across the board, classifieds app OfferUp must turn its popularity into revenue.

The Puget Sound area has a particular flavor of startup. They’re usually enterprise firms, offering a technical service with a fairly narrow customer base. Many consider our entrepreneurs modest; they start companies to help giants such as Microsoft, not companies that aim to unseat such giants.

^ CEO Nick Huzar (top) and CTO Arean van Veelen cofounded offerup after working at konnects, a social media site.

^ CEO Nick Huzar (top) and CTO Arean van Veelen cofounded offerup after working at konnects, a social media site. Images courtesy OfferUp

OfferUp, however, is a bit unusual. The mobile marketplace for locally sold goods is consumer-facing and has grand, global ambitions. Its mission — to reinvent local commerce — has more in common with Silicon Valley’s bravado than with our area’s demure practicality. The same can be said of OfferUp’s lofty venture-capital valuation. In its latest funding round, firms including T. Rowe Price and Andreessen Horowitz gave the Bellevue-based company $73.5 million and valued it at $814.5 million.

OfferUp is similar to many famous Silicon Valley startups in another regard: It’s not making money. The company has embodied the grow-at-all-costs mentality of Silicon Valley. To that end, it has been successful. The OfferUp app had been downloaded more than 18 million times as of March, and it employs about 90 people, up from 30 a year ago. But now, as venture capital constricts, OfferUp is one tech darling that must answer the fundamental question of business: How are we going to make money?

The company was founded in 2011 by CEO Nick Huzar and CTO Arean van Veelen, who previously worked together at Konnects, a social media site that targeted newspapers. OfferUp is best known as a mobile-friendly platform for selling secondhand goods, what Craigslist might be if it gave a damn about user interfaces and smartphones. “When we believed there was something we could do in this space, it really came down to the smartphone, which enabled us to rethink the entire way people buy and sell,” Huzar said.

But OfferUp isn’t just Craigslist with a pretty interface. Though Huzar shies away from direct comparison, the company’s sales pitch is built almost entirely on users’ primary complaints about Craigslist, chief among those are that it is ugly and less than ideal to use on a smartphone. One of OfferUp’s most discussed perks is that a seller can quickly snap a photo of, say, an old coffee table, assign an asking price and description, and post it into an app designed for local commerce. Compared with Craigslist’s multistep, browser-based posting system, OfferUp’s is a smooth process, one designed with the phone in mind.

442The other Craigslist shortcoming OfferUp aims to correct is scams. To combat fraudulent posts (and, less frequently, occasional violent crimes between buyer and seller) Craigslist has had to deal with, OfferUp takes its users through an identity-verification process. Unlike Craigslist users, who can operate in complete anonymity, those who sign up for OfferUp must provide a name, a photo, and their address. The company also encourages users to connect their Facebook accounts and upload a portrait and photo of their driver’s license.

“We want people to put in the time to go through those extra steps,” Huzar said. “By having that information in there, you have a much more trusted experience. People actually want to understand who they’re dealing with.”

The steps are familiar to anybody using apps that claim to bolster community cohesiveness, like Airbnb or Nextdoor. “There’s the extreme of the world of Facebook, and the other extreme of the world of Craigslist,” Huzar said. “We’re more in the middle. People want to know who they’re dealing with to some degree, but on the other hand, I don’t want people knowing where I took my family on vacation last week.”

The result has been popular. When OfferUp began talking to the press in November, it said that $3.9 billion in goods had been sold via the site to that point in 2015. Sales facilitated on the app are expected to swell beyond $14 billion this year.

“The problem we feel like we’re solving is taking underutilized assets and giving them a new life. That could be in the form of unused things … but we think it’s bigger than that,” Huzar said. “We look at what we’re doing as transforming how people buy and sell locally, so it doesn’t have to be a used good. We have small stores that buy and sell locally.”

But OfferUp now finds itself in territory unfamiliar for startups of its ilk: getting someone other than a venture capitalist to pay the bills. In April, the company began testing its first revenue stream, a 9 percent fee on in-app payments, to be paid by the seller. Huzar declined to discuss any metrics related to the fee trial, which is an option only for Seattle-area users, and also chose not to elaborate on other pricing mechanisms OfferUp is considering, though he did say other plans are in the works.

OfferUpSidebarThe timing of OfferUp’s payment system coincides with a stricter venture capital climate. After years of lofty valuations for zero-revenue companies, the firms that have funded tech’s largest startups are now demanding a semblance of revenue generation, if not profitability.

“A lot of these companies have experienced increased pressure from their VCs to demonstrate paths to profitability,” said Garrett Black, a senior analyst at PitchBook, which tracks venture deals. “Because OfferUp has raised so much money, and even that it’s been around for several years (it was founded in 2012), its VCs are wondering … how are you going to monetize this thing, and what’s your timeline?”

The Wall Street Journal reported that OfferUp is indeed going through a period like this. Citing unnamed sources, the newspaper said Huzar was seeking another funding round in late 2015 that would value the company at $2.5 billion, but investors balked, citing the lack of a coherent path to profitability (Huzar denies he was seeking another round of venture funding).

The importance of which revenue stream OfferUp selects is significant. “Nailing a pricing strategy and that level of trust that buyers and sellers need to have to keep on using the app are the two main components any player in the space needs to work on,” Black said. “Craigslist got to where it is, and continues to report surprisingly good numbers, because it built a really good brand and a reputation for reliability.”

Sellers of secondhand items are particularly sensitive to cost. Craigslist didn’t single-handedly destroy the newspaper-classifieds industry because it was more trustworthy; rather, sellers migrated to the Web because it was free. Today, Craigslist’s revenue comes from fees paid to list vehicles, jobs, and apartments in its largest markets. This means sellers earning the most revenue from Craigslist ads essentially are subsidizing free use for everyone else, keeping consistent with their reasons for migrating away from paid newspaper classifieds.

So OfferUp and the other classifieds startups must be thoughtful when choosing how to monetize. OfferUp’s 9 percent fee could push sellers to Craigslist or a less-costly alternative startup instead. Though it is large, OfferUp can’t afford to lose many customers. Craigslist’s primary advantage over the newest crop of mobile-marketplace startups is that it has liquidity — the constant stream of buyers and sellers that facilitates a marketplace. If OfferUp botches its pricing strategy, it could lose enough users to ruin its shot at being liquid.

Without a sizable user base, a marketplace’s viability relies on finding a certain niche in the marketplace. But OfferUp, in Silicon Valley-startup fashion, doesn’t want a niche — it wants to be big. “We want to be a household name in every local community around the world,” Huzar said.

OfferUp’s defining feature will likely be broad, perhaps that it is the first local- and mobile-oriented service in an area. The generalist approach is one company brass is familiar with. When Konnects, the social media network, first launched, it targeted newspapers and their readers, but changed its approach in 2008 to land somewhere between Facebook and LinkedIn.

“There’s a big opportunity between the social and business space that’s not being met,” Konnects CEO Jim Crabbe told Xconomy in 2008. “Will the social space become a business space? I think no.”

Just as the now-defunct Konnects sought to be the one-stop shop for professional social networking, OfferUp wants to be the dominant player in local commerce, a user’s personal Etsy (seller’s fee: 3.5 percent) and Craigslist (seller’s fee: usually zero).

But the value add must be steep. OfferUp hinges on simplicity and security, but there are myriad threats to those core tenets. Craigslist’s website is now mobile-optimized, and even a basic app would make it far simpler to use. Any breach of the data OfferUp collects from its users would jeopardize its claim to security. Startup competitors like letgo and 5miles could beat OfferUp to a better monetization strategy. Facebook is beta-testing its Marketplace feature that, like OfferUp, is a platform for local sellers whose identities have been verified. Perhaps most daunting is that Facebook’s ubiquity could lead to Marketplace liquidity.

Huzar, though, doesn’t think OfferUp has to top established players like Craigslist and eBay, or other startups such as 5miles and Letgo, in every facet to succeed. “We don’t all shop at Safeway,” he said. “OfferUp won’t be alone in this space.”

This article originally appeared in the July 2016 issue of “425 Business.”