The RealReal could be valued at $1.6 billion when it starts trading on Friday. Here's what you need to know about the used luxury goods startup's IPO.

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The RealReal could be valued at $1.6 billion when it starts trading on Friday. Here's what you need to know about the used luxury goods startup's IPO.

Julie Wainwright, founder and CEO of the RealReal

Andrew Toth/Getty

The RealReal founder and CEO Julie Wainwright will take the company public this week.

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  • The RealReal, a venture-backed e-commerce platform for selling pre-owned luxury goods, is expected to start trading on Nasdaq Friday under the ticker symbol "REAL."
  • The company set a price range of $17 to $19 per share, which at the high-point would value the RealReal at $1.6 billion.
  • Like most high-growth tech companies going public, the RealReal isn't profitable. Though the company did grow its revenue 55% from 2017 to 2018.
  • Click here for more BI Prime stories.

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 Nasdaq.

The RealReal, a San Francisco e-commerce company known for matching bargain-hungry fashionistas with used designer goods, is expected to started trading Friday on Nasdaq under the ticker symbol "REAL."

Though 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 around $18 billion, up from its last private funding round valuation of $7.1 billion.

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In a filing last week, the RealReal set a price range for its upcoming IPO at $17 to $19 per share.

At the mid-point, The RealReal could raise around $246 million, with an initial market cap of $1.5 billion, a slight bump from its last private valuation of $1 billion, which came from a $50 million funding round in March. At its high-point, the company would be worth $1.6 billion.

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

Here's what else you need to know ahead of the RealReal IPO.

From Pet.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 outsized its revenue, became a symbol of the dot-com bubble, and Silicon Valley's smoke and mirrors.

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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 investor, 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.

The RealReal interface

TheRealReal.com

TheRealReal.com lets buyers browse or search for preowned luxury goods.

Now 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, according to PitchBook, 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, an investor with Canaan Partners, who will own 10.6%, and Chip Baird with Perella Weinberg Partners, who will own 9% after the IPO.

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

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Like most high-growth tech IPOs, including Uber and Lyft, the RealReal is still losing money. The company lost $75.8 million on $207 million in revenue in 2018. This is compared to 2017, when the company lost $52 million on $134 million in revenue.

Read more: Investors have seen triple-digit returns on some 2019 IPOs, but UBS think there are 2 key reasons it could cool by midsummer

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 profits of $136.9 million were up 56% in the same period.

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

High-growth retailers are hot

Just three weeks ago, the luxury retailer Revolve raised $212 million in an IPO that valued the company at $1.3 billion. Like 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 up to a high around $47 but now hovers around its $34 opening price.

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Investors interested in e-commerce companies also have their eye on Beyond Meat, the vegetarian-meat retailer, which priced its IPO at $25 per share on May 27 and surged as high as $201 per share in the following weeks.

In its pitch to investors, the RealReal said its biggest competition isn'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.

Read more: Fresh off its IPO, Chewy might be the next company to get crushed by Amazon

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

When Lyft went public in March, its bankers also positioned the ride-hailing platform as a marketplace. Lyft's bankers compared the company to food delivery platform GrubHub, the luxury retailer Farfetch, the creative goods site Etsy, the freelancing platform Upwork, the online travel operator Booking Holdings, and the home-services site ANGI (Angie's List), sources told Business Insider at the time. It's unclear which companies the RealReal was compared to by its bankers.

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As a consignment shop, the RealReal relies on outside resellers to list their inventory on the website. Most of its revenue comes from its "take rate" - the fee it charges to the sellers on its platform. In the first quarter of 2019, it charged 35.3% to resellers on every transaction.

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

This business model creates some unique risk factors. The RealReal disclosed in its S-1 that it may fail to generate enough "pre-owned luxury goods," and that the luxury market may 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. The RealReal emphasizes its authentication process. Unlike the resale platform eBay, the RealReal examines every piece of merchandise, stores it and handles the delivery. However, 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. "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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