RealReal Inc – A deep dive on a recent controversial IPO
The global 2019 IPO market has proven a cruel mistress for many start-ups attempting to list and realize their private market valuations. It is evident over the last couple of years that the huge capital inflows into the private markets have seen investors scrambling for stakes in the popular start-ups, or unicorns, driving up their valuations, despite the glaring disconnect between public and private market valuations.
This phenomenon has culminated in many of the larger start-ups calling off or pushing back their IPO’s for fear of poor public market performance, a great example of which was WeWork. One IPO that went ahead as scheduled during 2019 was the IPO of luxury consignment company, The RealReal Inc.
REAL offers an end-to-end service that unlocks supply from consignors and creates a trusted marketplace for buyers to purchase authenticated used luxury goods. Consignors send in their products to REAL’s warehouses where they are authenticated by a team of “highly trained gemologists, horologists, brand experts and art curators.” According to their S1. REAL’s value add to clients lies in their claim that they verify or authenticate EVERY SINGLE ITEM listed on their marketplace, and this value is evident in their 35 per cent fee take-rate from Net Merchandise Value, which dwarfs the take rates of other online marketplaces like eBay, which itself has a take rate between 7-8 per cent.
It’s clear that REAL’s value proposition lies in its authentication service, which I believe we should take a closer look at. According to their S1, REAL sold 1.6 million orders during calendar year 2019 – a mammoth number of orders given they only employ 100 authenticators. Based on these figures and some lax assumptions that employees work 8 hours a day, 365 days a year, we calculate that each expert spends around 11 minutes authenticating each item before they are put onto the platform. Given that, according to the S1, “each consigned item also has up to 50 unique attributes”, you can see why we remain sceptical about the quality of authentication services provided. Furthermore, this analysis has only taken into account the net merchandise value… or the products that made it onto the platform, we haven’t accounted for the other cancelled or returned products that must have been authenticated prior to being rejected, which make up 27 per cent of gross merchandise value.
Given these numbers, we find that trusting REAL’s claims to authenticate to be quite difficult, however as always, we leave it as an exercise for our readers or viewers to determine the validity of REAL’s business model.