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16 Jul, 2019

RealReal

RealReal

If you want to buy a Chanel purse for half its retail value, check out The RealReal. And if you want to buy shares in The RealReal, check out the Nasdaq.

The RealReal, a San Francisco e-commerce company that matches bargain-hungry fashionistas with used designer goods, started trading on Friday on the Nasdaq under the ticker symbol REAL.

Though the ride-hailing companies Lyft and Uber started the 2019 IPO cycle off with ominous sell-offs, the market has shifted to a more optimistic outlook, buoyed in part by strong investor interest in the vegetarian-meat company Beyond Meat, which is up more than 500% from its opening IPO price.

The RealReal is the first big tech IPO since Slack’s direct listing on June 20. Slack is now valued at about $18 billion, up from its last private-funding-round valuation of $7.1 billion. The RealReal set a price range for its upcoming IPO at $17 to $19 per share.

The IPO is led by the underwriters Credit Suisse, Bank of America Merrill Lynch, and UBS.

From Pets.com to VC darling

The luxury-consignment company was founded in 2011 by CEO Julie Wainwright, an experienced tech executive who infamously took Pets.com public in 2000 and then shut it down just months later. The online pet retailer, with a marketing budget that far outstripped its revenue, became a symbol of the dot-com bubble and Silicon Valley’s smoke and mirrors.

The chief financial officer taking The RealReal public is Matt Gustke, who spent nine years in senior roles at eBay before joining the ticketing marketplace StubHub as CFO and head of strategy.

In a video to retail investors, Wainwright said the idea for The RealReal came to her while she was shopping in a luxury-goods store with a friend who didn’t usually buy pre-owned items. The friend ended up buying something from the store’s consignment section because, she told Wainwright, she trusted that the store had thoroughly vetted the authenticity of the items it sold.

After eight years as a private company, The RealReal has sold 9.4 million items and paid out more than $1 billion to sellers on its website on the promise that it authenticates every piece of merchandise sold on its platform.

The RealReal raised a total of $338 million in venture funding, starting with a seed investment from 500 Startups. Among The RealReal’s biggest investors is Michael Kumin with Great Hill Partners, whose stake will equal 12% of the company after its IPO, as well as Maha Ibrahim with Canaan Partners, who will own 10.6%, and Chip Baird with Perella Weinberg Partners, who will own 9%.

Wainwright will own 7.2% of the company after it goes public.

Like most high-growth tech companies going public, including Uber and Lyft, The RealReal is still losing money. The company lost $75.8 million on $207 million in revenue in 2018. In 2017, it lost $52 million on $134 million in revenue.

These losses have added up. As of March 31, the company had an accumulated deficit of $281 million. Still, The RealReal is a high-growth company. Its revenue was up 55% from 2017 to 2018, and its gross profit of $136.9 million was up 56% in the same period.

The company said in its investor pitch that it had a plan for profitability driven by its long-term strategy to grow its EBITDA margins to 25%, though it did not disclose when it planned to reach that goal or profitability.

High-growth retailers are hot

Recently, the luxury retailer Revolve raised $212 million in an IPO that valued the company at $1.3 billion. Similar to many IPOs this year, Revolve priced its IPO at $18 per share, but its first trade valued the stock at $34 per share. Revolve shot to a high of about $47 but now hovers around its $34 opening price.

Investors interested in e-commerce companies also have their eyes on Beyond Meat, the vegetarian-meat retailer, which priced its IPO at $25 per share last month and surged as high as $201 per share in the following weeks. The RealReal said its biggest competition wasn’t other online retailers but brick-and-mortar stores where people resell their stuff. But the company also positioned itself as a marketplace — an online platform that connects buyers to sellers.

The company also told investors that the total addressable luxury-goods market was expected to hit $294 billion in 2018 and that the number is rising. The more people who buy new luxury goods, the more there will be to resell on The RealReal, it said in its pitch.

The company generates revenue from the orders made on its website and its mobile app, as well as in its three retail stores, according to its S-1.

This business model creates some unique risk factors. The RealReal disclosed in its S-1 that it might fail to generate enough «pre-owned luxury goods» and that the luxury market might be hit particularly hard during a market downturn since consumers could spend less money.

The company also listed counterfeit merchandise as a risk to its success. While The RealReal has emphasized its authentication process — unlike the resale platform eBay, The RealReal examines every piece of merchandise, stores it, and handles the delivery — it said in its S-1 that counterfeits could harm its business.

«Our success depends on our ability to accurately and cost-effectively determine whether an item offered for consignment is an authentic product, a genuine gemstone or piece of jewelry or a validated work of art," the company wrote, adding that «while we have invested heavily in our authentication processes and we reject any goods we believe to be counterfeit, we cannot be certain that we will identify every counterfeit item that is consigned to us.»


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