(Bloomberg) -- Yusuke Mitsumoto had a hunch: what if you paid people instantly for their used goods over the internet, with no guarantee that they would hand them over?
The 36 year-old e-commerce entrepreneur launched an app in June to test the idea. It worked better than he imagined; after 16 hours, he was stunned to discover he was on the hook for 3.6 billion yen ($32 million) and shut the service down. A day later, truckloads of clothes and electronics gadgets started to arrive, with his startup’s employees forming a bucket line to move packages into his company’s tiny office in Tokyo.
All told, less than 1 in 10 second-hand-goods sellers didn’t deliver as promised. That was good enough for Mitsumoto, who relaunched the service, called Cash, in August as a new way to gather inventory for an online flea market. Total daily purchases are capped at 10 million yen, and are limited to smartphones, luxury handbags, watches, clothing and other specific items from a list of several thousand. Customers take a photo and are given a non-negotiable offer. Prices are set automatically based on data gleaned from other second-hand marketplaces and Cash makes money by reselling the goods.
“It was a social experiment,” said Mitsumoto, who started selling goods on the web in 1996. He later launched Stores.jp, Japan’s version of Shopify, which he sold and then bought back. “Of course, I believed that good people would outnumber the bad, but the question was by how much. That’s not something you can find out without trying.”
Second-hand sales are a big business in Japan and a market worth 1.6 trillion yen, according to the Reuse Business Journal. Bookoff Corp. has hundreds of stores that buy and sell everything from used books to video games and electronics. Yahoo (NASDAQ:AABA) Japan Corp. operates the country’s biggest online auction site. Mercari Inc. became Japan’s first startup to be valued at more than $1 billion with a smartphone app that made it easy for people to sell unwanted things to each other.
What Mitsumoto discovered was a way to remove the last bit of friction for sellers to get rid of stuff, unlocking value wasting away in people’s closets. He tapped into a market of people who lacked either the time or the patience to take nice pictures, write product descriptions and haggle with buyers.
He also knew that it was only a matter of time before bigger rivals followed with similar offerings. So when Mitsumoto got a Facebook (NASDAQ:FB) message on Oct. 4 at 1:58 a.m., “Hi! This is Kameyama~! Sell Cash to me~! No?” he saw a way to stay ahead of the competition.
Keishi Kameyama is one of Japan’s richest people and the founder of DMM.com, a media and technology empire with $1.6 billion in revenue. Kameyama started with pornography but has grown his company into a vast collection of enterprises that spans a currency trading platform, video games, an online English school and solar farms. Mitsumoto agreed to sell Cash to DMM for 7 billion yen and continue running the business.
“For people doing internet businesses in Japan, DMM is a scary presence,” Mitsumoto said. “You never know when they may launch their own business and become a tough rival. I figured it’s best to at least meet.”
Indeed, a week after the deal was announced, Mercari launched an identical offering.
Kameyama said his team recognized the potential of the market uncovered by Mitsumoto, but admits that the eye-popping valuation for a company of six people that’s not even one year old was also partly an "acquihire" —an acquisition based on hiring.
“Doing business on the internet is not all capital and equipment, you need a certain intuition, a design sense and ability to get a service going, ” Kameyama, 56, said in an interview. “I can also appreciate a bold play. There aren’t that many audacious people in this world.”