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Whole Foods meets Costco online
Whole Foods meets Costco online

Nick Green went to Harvard and started an educational test prep company called Ivy Insiders while still in college. He sold it to Revolution Prep and started thinking about what to do next.

Gunnar Lovelace dropped out of University of California at Santa Cruz to become a tech entrepreneur, eventually starting a jewelry company called Love Heals, which plants a tree for every piece of jewelry sold.

Both men now run a business they admit they initially knew nothing about: selling natural and organic products at discounts online with free delivery. Oh yeah, and there's a $60-a-year membership fee.

Thrive Market warehouse
Robert Simons | CNBC

"A lot of people compare it to Whole Foods meets Costco online," said Green. "We didn't know exactly how to do this, but we knew it had to be done."

What "it" is, is Thrive Market, an idea both men believed in even though no one believed in them at first. "We were rejected by 20 of the top VC firms when we went out and did the roadshow raising money," said Lovelace.

However, they managed to raise $10 million from celebrities and "influencers" who liked the concept, and Thrive Market launched in November 2014. A year and a half later, the company has 240,000 members and two warehouses, one in California and a larger one in Indiana, where they are averaging 10 new hires a week. Management includes former executives from Whole Foods and Kroger.

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Here's how the business model works. Members sign up, pay the annual fee, and then shop online, buying a variety of healthy products priced 25 to 50 percent less than traditional retail. Shipping is free. "We're able to do that because we buy directly from the brands, and we're able to cut out the middlemen in the traditional supply chain," said Lovelace. "Our main profit center is the annual membership fee."

Thrive Market warehouse
Robert Simons | CNBC

The largest market for Thrive isn't Los Angeles, San Francisco or New York. Instead, it's the Midwest and Southeast, where most people "aren't in driving distance" of stores selling nontoxic laundry detergent or Kind bars. "We're not targeting someone who's been shopping at Whole Foods for the last decade," said Green. "We're going for middle class, middle American, typically a mom, who is just sort of exploring this category," and living on a budget.

There are some limits. Thrive has no fresh or frozen products, which would require a lot more investment in infrastructure. Lovelace said they're in no rush. "We'll build a multibillion dollar business just on our existing catalog of nonperishable products."

Green believes Thrive's biggest competition will eventually be Amazon, so to differentiate itself from the 800-pound online retail gorilla, Thrive streamlines products and information. It can also break down products into 140 categories, like non-GMO foods, vegan or the Paleo Diet. "If you go on Amazon and you look for almond butter, you're going to see dozens of results, and it's your job as a consumer to sift through, look at the pictures, read the labels, figure out what's what," said Green.

At the same time, the founders said Thrive Market is about more than building an empire, it's about expanding a "lifestyle." Members have access to information about healthy eating and recipes. For every new membership purchased, the company gives away a free membership to a lower-income applicant. They've also started a program where existing members can help subsidize the first four purchases by low income newcomers. "Part of what we're trying to do is turn this membership model into more than just a membership and really into a community," said Green.