A 1952 Topps Mickey Mantle card, given a perfect 10 by Collectors’ PSA division. The company authenticates and grades the condition of sports cards and other collectibles.
Matt Dirksen/Colorado Rockies/Getty Images
The 1952 Mickey Mantle card moldering in Mom’s attic may soon be authenticated, graded, stored safely and sold at auction by a disruptive force called Collectors.
by Brett Knight
Nat Turner is practically skipping as he winds his way through the labyrinthine California headquarters of Collectors, the company he took private with a group of investors in February 2021. Wearing a blue hoodie and white sneakers, he gestures giddily at some of the most valuable sports cards on earth, sent to the company by dealers and collectors around the world and organized in thousands of small plastic boxes—“three football fields” of them, he says.
They’re everywhere, stacked on desks and on rolling shelving units, in makeshift rooms behind locked chain-link fences and in a secure vault protected by armed guards. Most feature familiar names, many of them sports legends who retired long before the 36-year-old CEO was born—Mickey Mantle, Hank Aaron, even Honus Wagner, perhaps the most iconic card on the planet.
These aren’t cards that have spent time flapping between bicycle spokes. The hobby has changed, and the evolution goes beyond the relative sterility of the Collectors environment, which is a bit of an upgrade from a shoebox in Mom’s attic. It isn’t just the once-unthinkable volume, either, with a backlog of more than five million cards for Collectors’ Professional Sports Authenticator division to certify as authentic and grade and thousands more arriving each day. And it’s not just the value of the cards, with $1.6 billion worth in the building on this recent Tuesday. (“It’s a museum meets Fort Knox,” says chief financial officer Jason Harinstein, only half-joking.)
No, the real tip-off to the transformation is the cameras peppered across the ceiling and mounted on employees’ desks, and the microchips in the card boxes that enable GPS location monitoring. It’s the QR codes on the card holders and the fleet of imaging machines that take high-resolution photos of each incoming and outgoing card. And it’s the computer-vision software helping researchers quickly identify the card’s year, maker and edition. That ’52 Mantle card is being tracked and cataloged from the moment it arrives until the moment it’s sent back to its owner, every step of the way.
Technology is changing the century-old trading-card market, just as it’s changing Collectors. Forbes can reveal that the company, with a recent name change from Collectors Universe, secured $100 million in new funding from its existing investors in January, pushing its valuation to $4.4 billion. That represents a five-fold increase from the roughly $850 million acquisition price last February, and an astounding 30-fold jump from the market cap at the stock’s low point two years ago.
A 1986 Fleer Michael Jordan card in a PSA holder.
VALERIE MACON/AFP/Getty Images
C
ollectors, which is based southeast of Los Angeles in Santa Ana, was created as a holding company in 1999, but its history stretches back to the 1986 founding of Professional Coin Grading Service, more commonly known as PCGS, and the 1991 founding of Professional Sports Authenticator, or PSA. Both divisions are in the business of verifying that collectibles, whether they’re coins or trading cards or other sports memorabilia, are authentic and unaltered. They also judge physical condition, assigning a 1-through-70 score for coins and a 1-through-10 score for cards. Customers pay a fee, which at PSA ranges from $50 to $12,000 per submitted card, based on the item’s estimated value and whether it includes an autograph.
That might sound a bit silly. But prices for high-end collectibles have soared, and counterfeiting has become more sophisticated. Authenticators, including Collectors competitors like Beckett Grading Services and SGC, have become an indispensable part of the market. It’s not all that different from GIA certifications for diamonds, Moody’s credit ratings for corporate borrowers or Nielsen’s TV viewership numbers. The goal is to level the playing field with information.
For card graders, that has included creating reports and registries to allow collectors to see just how rare their prized items are and price them accordingly. With the renewed emphasis on quality over quantity, the industry recovered from the “junk wax” era of the 1980s and ’90s, when massive overproduction by card manufacturers sent prices plummeting. Trading cards spent the last 20 years on a steady upward trajectory—until the pandemic.
“It was really a perfect storm,” Nathan Wolfe, Collectors’ vice president for corporate development, says of the last two years. Inflation fears, low interest rates and uncertainty around the stock and bond markets pushed investors toward alternative and tangible assets, even if they were cardboard rectangles smaller than index cards. Celebrities and influencers like entrepreneur Gary Vaynerchuk, rapper Drake and YouTube star Logan Paul spread the gospel on social media. Cancellations of in-person events forced fans to find other ways to engage with their passions. New categories of collectibles, including sneakers and non-fungible tokens, helped attract a younger demographic.
The card market skyrocketed. A one-of-a-kind Mike Trout rookie card sold for $3.9 million in August 2020, setting a record that was beaten five months later by a $5.2 million Mickey Mantle and then again the following August by a $6.6 million Honus Wagner. EBay, one of the largest marketplaces for trading cards, reported that the category grew 142% in 2020 and then said it sold more cards in the first six months of 2021 than in all of 2020.
Collectors has added new office space next door to its existing headquarters.
Phil Arnold/Collectors
Turner, Collectors’ CEO and chairman, offers up one more explanation for the surge. Young professionals moving back in with their parents during the pandemic were reintroduced to their childhood obsessions. He should know—he was among them.
Turner is one of the world’s top card collectors, with more than 15,000 graded cards that have collectively been appraised at over $100 million. But over the previous decade, he had begun to treat collecting more like an investment than a hobby.
As the pandemic lockdowns began in March 2020, Turner went back home to his parents’ and ended up staying for about six months. When his mother used the opportunity to tell him to get rid of the old cards he’d been storing there, it rekindled his passion.
He knew he would soon be leaving Flatiron Health, the electronic medical record company that he cofounded in 2012 and sold in 2018 (and the company that landed him on the 2015 Forbes 30 Under 30 list in the Healthcare category). While he planned to continue making venture-capital investments—eventually forming the fund Operator Partners with three friends—he decided that he wanted his next act to be in cards. His attention soon turned to Collectors, which, through PSA, had been his brand of choice. “It was them or bust,” Turner says.
There was just one problem: He could no longer afford the company. Shares had shot up amid sky-high demand for grading services and an activist campaign by Alta Fox Capital. In his search for investors to join him, Turner connected with D1 Capital Partners, which in turn put him in touch with hedge-fund titan (and New York Mets owner) Steve Cohen. “Once those two were in, we had the gunpowder to get aggressive,” Turner says of D1 and Cohen Private Ventures. That November, Collectors’ board approved the group’s bid of roughly $700 million.
Nat Turner took Collectors private with a group of investors in February 2021.
Matt Furrman for Forbes
The stock was so hot that it quickly overtook that price, however, and shareholders overwhelmingly rejected the deal. Seven shareholders then filed lawsuits (later voluntarily dismissed) that accused the board of breaching its fiduciary duty and making misleading projections in its recommendation. In January 2021, Turner’s group raised its offer by about $150 million, narrowly winning over shareholders. Turner admits, though, that he started second-guessing himself as the price climbed. He needed D1 to convince him that the deal still made sense.
Daniel Sundheim, the billionaire chief investment officer at D1, believed that a demographic shift toward younger collectors would keep demand high and that “these ratings businesses tend to have pretty wide moats,” he says. And with its PSA division, Collectors had a bigger lead than most. While competitors have their niches—Beckett with modern cards and SGC in pre-war cards, for instance—“PSA is the gold standard,” says Scott Keeney, who is best known for his entertainment work as DJ Skee but is also a prominent collector and a partner at Mint 10, a trading-card investment fund. For an idea of the respect PSA has among collectors, Rob Gough, an actor and entrepreneur who was the buyer in the record-setting Mickey Mantle sale of January 2021, estimates that PSA-graded cards get a 30% premium on the resale market.
While some collectors were suspicious about the change in PSA’s ownership, Gough and many others were optimistic. Turner was one of their own, and freeing the company from the demands of a dividends-paying public company would allow for long-overdue investments in its operations.
PSA and Collectors had plenty of work to do. Customers were frustrated with the turnaround time on their submissions. The company had never had a general counsel, or a head of human relations, or a financial planning and analysis team, or product managers. “The server for the website was just, like, in a conference room,” says PSA president Kevin Lenane, who joined the company when his machine-learning grading startup, Genamint, was acquired last year.
The issues came into particular focus as demand escalated. After years neglecting technology, the company had few options but to try to hire more graders to deal with the additional submissions. But the labor market was tight, and this was a position that required expertise. The submissions began to pile up.
When the take-private deal closed, PSA had a grading capacity of about 22,000 cards per day. Nearly 100,000 were coming in. The company tried to raise its submission fees to deter demand, but word got out that the change was coming, and that just made things worse as collectors tried to get their cards in before prices increased.
On a single day in late March, the company received 660,000 cards. “We literally broke the USPS in Southern California,” Turner says. “They called us and said they couldn’t manifest the boxes. I think we rented school buses with security guards and drove to USPS to pick them up.”
As the backlog approached 13 million cards, the company had to rent temporary storage space and kick employees out of private offices to make room for the new submissions. Overwhelmed, PSA announced last March 30 that it was suspending service at its lower tiers. That prompted an outcry from collectors, but the company saw the pause as an opportunity not only to catch up but to scale up.
The process picked up speed after Turner, who held the chairman title, added the CEO role in July. Five acquisitions in 2021—including the Goldin auction house and WATA, which grades video games to be sold as collectibles—extended Collectors into new categories. The company is expanding its physical footprint as well, opening a 130,000-square-foot office in Jersey City, converting a card drop-off venue in Tokyo into a full-fledged grading center and adding 38,000 square feet of office space next door to the 145,000-square-foot Santa Ana headquarters, which is itself being reorganized. It’s also building an 11,000-square-foot vault in Delaware where, for a fee, it will store high-value cards on behalf of customers.
Collectors has budgeted for 680 net new positions in 2022, taking its total headcount to nearly 2,000. Turner, who remains based in New York City and travels to the California office every other week, says he’s also worked to fix an “upstairs-downstairs culture” that developed between management and employees, placing his own desk in the grading room.
But the top priority remains breaking the bottleneck in the grading. With help from a new internal training program known as Grading U, PSA now has more than 100 graders, up from 44 at the time of the acquisition and the 14 the division had for many years. That has almost tripled PSA’s capacity from a year ago, with 750,000 cards graded last month, according to the data website GemRate—miles ahead of the 82,000 and 64,000 estimated at rivals SGC and Beckett, respectively.
While Turner believes that humans will always have an important role to play in grading, he and his overhauled team of executives, pulled from companies like Microsoft and Netflix, see plenty of opportunities for technology to improve the process.
Collectors’ tech and product teams have been building a software platform they call Card Manager, taking a page from the Patient Manager software at Turner’s former company, Flatiron Health. The idea is that artificial intelligence can supplement the humans in the grading assembly line, quickly identifying cards, pulling up comparison images and running diagnostics—measuring the centering of the image on the card or the card’s dimensions, for instance. The software should even be able to “fingerprint” cards as it looks for unique anomalies in the surface, which will help detect alterations. And it can do that all at once.
Card holders will gain new security features. Future products might include an app that would allow a collector to generate a crude grade of their cards at home so they could figure out whether to spend the time and money on a professional grading service. The Collectors team is also considering NFTs—not necessarily to sell them as digital collectibles but to use them to improve the tracking and transacting of real-world items.
Ultimately, the goal is to reimagine the collecting experience.
“There’s a Henry Ford quote that is potentially not Henry Ford: ‘If I had asked my customers what they wanted, we would have had faster horses,’” chief technology officer Dan Tran says. “I was saying: Don’t even start with cars. Think about rockets.”
The early returns have been strong. Collectors booked $300 million in top-line revenue in 2021 as a combined business—Goldin accounted for more than 20% of that total—with EBITDA close to $150 million. Stack those figures against the $78.9 million and $14.1 million from Collectors’ last full fiscal year as a public company, ending in June 2020.
Turner and his team see more growth ahead as Collectors vertically integrates. Ideally, a customer will submit a card for grading at PSA, store it in the Delaware vault and eventually sell it through the Goldin marketplace, without having to ship it back and forth. They’ll also be able to come to Collectors in other categories—coins, video games and potentially other memorabilia like action figures. “We can be more of a one-stop shop,” says Wolfe, the VP for corporate development.
Challenges remain, starting with the avalanche of demand. PSA still has not been able to reopen its cheapest tiers and has been rationing submissions through a lottery system at the $50-per-card level. Turner says he hopes to return to the normal submission process in the next few months, but all involved concede that the days of $12 service fees for low-end cards are over. On the high end, too, prices might need to increase. With cards now selling for millions of dollars, even a $10,000 fee isn’t worth the risk to Collectors that a card somehow gets damaged while in its possession. And although the company has whittled its backlog to about 5 million cards, there’s no guarantee it won’t start to pile up again.
Collectors is confident that its graders can still catch fakes, but counterfeiters are getting better, especially in places like Taiwan, and PSA has been fooled before. A 2019 scandal exposed corrupt collectors selling altered cards through the marketplace PWCC, many of which carried grades from PSA.
Then there’s the competition. SGC has taken advantage of PSA’s higher prices, particularly on the lower end, and smaller grading services like CSG and HGA are hoping to capitalize as well. New entrants are joining them. A year ago, Dallas Card Investors happily functioned as a bulk submitter, essentially working as a middleman between collectors and PSA. Now, says owner Bradley Crenshaw, it’s pivoting its business to become a grader itself.
The biggest risk, however, is future demand. The wild acceleration in prices has naturally raised worries that this is a bubble, perhaps particularly concerning to Collectors since cards began to outpace coins as a business segment only in the last couple of years. Already, card prices have crept down from the dizzying heights of a year ago.
Most people in the industry brush off those concerns, suggesting that the recent dip has been a natural correction as speculators have moved on and pointing out that prices remain high relative to their track record, even after 20 years of near-constant growth. This is the new normal, they say.
There is reason to believe them. Venture-capital money has poured into collectibles startups like Alt, StarStock and Whatnot, and innovators beyond Collectors are improving the industry infrastructure. Startups like Rally, Otis and Dibbs now offer fractionalization, selling shares of individual cards and opening the market for high-value items to collectors who couldn’t otherwise afford them. In January, Fanatics, the sports retail powerhouse, purchased card manufacturer Topps, and that could improve distribution, which remains lacking. The spread of legal sports gambling may also entice new customers looking for ways to invest in their passion.
The team at Collectors certainly sees big things ahead, even if it means fundamentally rethinking a century-old industry.
“These guys are kind of a little bit unconstrained,” chief operating officer Mike West, who joined the company last year, says of his colleagues. “It’s: What should the hobby be?”
MORE FROM FORBES
Source: https://www.forbes.com/sites/brettknight/2022/03/30/collectors-psa-trading-cards/