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A start-up taking on Amazon and eBay is set to rake in $300 million in sales

Tophatter’s brain trust: Chris Estreich, CTO (left) and CEO Ashvin Kumar | Source: Hagop Istanboulian

Tophatter is an e-commerce retailer that sees itself as the anti-Amazon. While that gigantic online marketplace is where shoppers turn to buy what they need, Tophatter focuses more on what consumers didn't know they wanted.

Pulling up the app is like stepping into the world's busiest discount mall. Act now! Deals won't last! Users compete in 90-second "flash" auctions where sellers are hawking everything from teeth-whitening kits to rare coins. It's as if QVC appeared on your smartphone as a video game. That "gorgeous 18K white-gold-filled faux-diamond ring" has 55 bids and is going, going ..." Bam! You bought it!

"We're all about discovery shopping," says Andrew Blachman, Tophatter's chief operations officer. "You come to us without a particular purchase in mind but leave with, say, a great refurbished laptop or a new watch that's 80 percent off retail value." Most customer purchases are between $10 and $20.

For many the experience is addictive. The company has 12 million registered users, mostly in the United States, and 2 million items are sold each month. Blachman anticipates 2017 sales will range between $300 million and $350 million on transactions of roughly $1 million each day. The company estimates it will make $100 million in revenue this year, up from around $40 million in 2016. The phone app, where most users interact with the platform, has more than 10 million downloads. All that makes investors the happiest auction winners of all.

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"It's going to the bazaar or market, like we've been doing for hundreds of years, but bringing it to a mobile app in a super-compelling way," says Eric Kim, managing partner of Goodwater Capital, a major Tophatter backer, along with August Capital and CRV. The company has raised $35 million since launching in 2011. "At a time when people say retail is dying and the mall is dead, these guys have figured out a way to get customers shopping again."

Offering the personal touch

Although nonstop lightning deals can feel overwhelming at first, the platform restrains how much merchandise is up for bids. "We don't sell everything all the time," says Blachman. "Rather, we only list a certain number of sellers, and we're strict about who we let post and sell." As on sites like Amazon and eBay, the review and report system (mostly) weeds out sellers who don't deliver as promised. If an item doesn't arrive or isn't as described, Tophatter will issue a refund.

Tophatter also uses an algorithm to personalize recommendations. Buyers who bid on designer shoes will see more fashion items on the landing page the next time they sign in. The company takes a piece of each sale — and a high one; it is in the double-digit range for every purchase.

Not that it's easy profiting on all those discount drones, makeup kits and curling irons. Auction sites struggle to compete with established names, like Amazon and eBay. One of the largest online auction start-ups, Auctionata, went out of business earlier this year after having raised $97 million.

Source: TopHatter

"As Amazon grows, there's less and less room for broad e-commerce sites that act as middlemen between buyers and sellers," says Zoe Leavitt, senior intelligence analyst at CB Insights. One area of growth appears to be niche auction sites, Leavitt says, pointing to recent funding deals for car auction sites, including Mychebao.com in China, with $233 million in total funding, and TradeRev in Canada, with $45 million.

"It's going to the bazaar or market, like we've been doing for hundreds of years, but bringing it to a mobile app in a super-compelling way." -Eric Kim, managing partner, Goodwater Capital

Playing in such a competitive market tends to be a losing proposition for start-ups, but Tophatter continues to draw investors, in part because of a leadership team with experience in the auction and e-commerce battle zones. Blachman was a Stanford engineer who ran Get Me In, a European online ticket marketplace acquired by Ticketmaster in 2008. Co-founder Ashvin Kumar was an intern at Amazon before helping to launch Blippy, also backed by Charles River Ventures, in 2009. The online service, which allowed selected friends to see and comment on one's credit card purchases, went belly up in 2011, though it was valued at $46 million at one point. "These guys bring maniacal focus to finding the next great experience for retail online," Kim says.

Tophatter's plan is to push its international profile. Blachman says the site is working on adapting languages and currencies and fixing kinks on delivery systems to make sure inventory ships quickly and cheaply to customers around the world — "a difficult challenge," he says.

Tophatter's other goal is to develop and grow the site less as a sales vehicle than as entertainment. "We're not competing so much with Amazon and eBay as we are with whatever game or social media you play with on your phone," Blachman says.

"We want to be the thing you do when you've got two minutes standing in line at the grocery store or 10 minutes waiting for your kids to finish soccer practice. "The idea is to bring back the concept that it's actually fun to shop."

— By David Hochman, special to CNBC.com