Reverb, Marketplace for Musicians, Cranks Up With $25 Million in Funding

Reverb, an online marketplace for musical instruments and equipment, is getting some serious amplification.

The Chicago-based company has secured a fresh $25 million in funding. Led by investment firm Summit Partners, the series B round will help Reverb expand internationally, founder and CEO David Kalt tells Billboard. The new investment will also go toward Reverb's recently launched marketplace for music lessons, as well as buttressing the company's core instrument-trading business.

"We're not doing anything radically different," Kalt says. "We've got a winning formula -- keep making it easy to buy and sell gear." 

Reverb projects it will handle more than $120 million in transactions this year. That's up from $38 million last year and $3.4 million in 2013, the year the site launched. Kalt says the site has around 5 million monthly visitors, conducting about 40,000 transactions a month. To be sure, these numbers were provided by Reverb and could not be independently verified.

Summit Partners joins a list of investors with some star power in the music world. In November 2013, Reverb announced a Series A round of funding that included investments from Rick Nielsen of Cheap Trick along with David Lowery of Cracker and Camper Van Beethoven, in addition to tech-sector venture capitalists such as Eric Ries, author of The New York Times bestseller The Lean Startup. Country music star Brad Paisley is also an investor, according to a current press release.

Reverb takes a 3.5 percent cut of deals made on the site, compared with larger rival eBay's 10 percent. That, combined with the site's specialist approach, have at least some pro musicians singing its praises. Dave Depper, touring guitarist for Death Cab for Cutie, says he has bought and sold about eight to 10 guitars through Reverb, along with a variety of pedals and studio equipment.

"My experience has been 100 percent positive," Depper tells Billboard shortly before a headlining gig at the Chicago Theatre. "You can just tell it's run by people who are musicians or who care about musicians' experience." He describes the collection of users as feeling "a bit like a community" and notes that, with the ability to buy an instrument before a tour and sell it for about the same price afterward, "I feel almost like I'm renting stuff there."

While musicians on Reverb typically go incognito under usernames, the site has more formal relationships with certain sellers. Nielsen, Ben Kweller and Ray LaMontagne have official Reverb "shops," and Kalt says one is on the way for Wilco's Jeff Tweedy, as well. The site also offers editorial content, such as the Soundcheck interview series and a recent tutorial on on how to mic a guitar amp featuring Brian Deck (who has played in Califone and Red Red Meat, plus produced the likes of Modest Mouse).

Tim Thelen, co-owner of custom manufacturer BiLT Guitars, tells Billboard his shop is making an instrument for Reverb to use in its video demos. "We've seen a lot of our stuff go up for sale there," Thelen says. "We think those guys are great."

Kalt also owns the Chicago Music Exchange, a brick-and-mortar store in Chicago's Lakeview neighborhood, which he bought three years before opening Reverb.

Both ventures were a return to music for Kalt, who worked at a Chicago recording studio after graduating in 1989 from the University of Michigan. In the meantime, he'd earned a master's degree in computer science from Depaul University and become a tech entrepreneur. In 1999, Kalt co-founded OptionsXpress Holdings, a financial trading platform. Charles Schwab bought it in 2011 for more than $1 billion. Summit Partners was also an investor in OptionsXpress.

Reverb launched its Reverb Lessons marketplace in September. Lessons are available online or off. They can be sold in multi-lesson packages based on genre or technique.

In June, Reverb said it had teamed up with Affirm, a new lending startup from PayPal co-founder Max Levchin, to provide financing for buyers whose creditworthiness might, like the appeal of a difficult piece of music, be less than immediately apparent on the surface.

The size of the used-instrument marketplace is uncertain. Kalt estimates it at $23 billion in annual sales. After all, trade group the National Association of Music Merchants pegs the global market for new musical instruments and products at $17 billion. Kalt reasons that used instruments -- unlike used cars, for instance -- don't really get much less expensive over time.

Market research firm eMarketer has predicted e-commerce will account for about $1.3 trillion worldwide in 2015, out of a total of more than $22 trillion in global retail sales.

Niche online marketplaces such as Reverb.com are a growing part of online retail, says Gil Luria, a managing director covering financial technology stocks for Wedbush Securities. He points to the examples of Grubhub and Opentable for food, Uber and Lyft for transportation, Etsy for handmade and vintage crafts and Zulily for young mothers.

"The challenge for any new marketplace is that it is difficult to create a network effect in a two-sided market," Luria tells Billboard. "A marketplace needs to get enough consumers to make itself appealing to sellers and enough seller merchandise to make itself interesting to consumers."

Kalt has his eye on both sides of the transaction. "There are a lot of people who drool over musical instruments, and they dream," he says. "We want to be that place where they learn, where they drool."

At the same time, Kalt adds, "if they have something they're not playing, they can easily sell it."