SAN FRANCISCO, United States — With its plans for an initial public offering later this year, The RealReal is hoping a gently-worn business adage is still in fashion with investors: you have to spend money to make money.

The luxury resale marketplace on Friday filed to sell shares on the Nasdaq stock exchange. Founded in 2011 by Julie Wainwright, The RealReal has become one of the leading players in the fast-growing online market for secondhand luxury, moving $711 million worth of products from brands like Gucci, Chanel, Hermès and Louis Vuitton (the company takes an average 35 percent cut of each sale). It's opened stores in New York and Los Angeles and counts the Kardashians and Saudi princesses among its clientele.

An IPO would help The RealReal achieve its goal: to become the default choice for consumers looking to buy or sell used luxury goods. Already, the site counts more than 400,000 active users, and says 80 percent of sales are made to repeat buyers. Plans are underway to push harder into categories like menswear, jewellery and home goods.

But all that comes at a cost, and for The RealReal, it’s a steep one: despite more than doubling sales through the site in the last two years, the company is not profitable. Losses topped $75 million last year, a 45 percent increase from 2017. In its IPO filing, it warned potential investors “if our investments do not prove successful or our market does not develop as we expect, we may continue to experience losses over the long term.”

The RealReal joins a wave of tech IPOs over the last year, including luxury fashion marketplace Farfetch in September and rideshare giants Uber and Lyft earlier this year. All three have a long history of losses and today trade below their debut price, indicating investors are losing their appetite for companies that operate in the red.

The RealReal is a company that everyone in the resale space looks up to, and I think they have leverage over anyone else

The key is to offer a plausible path to profitability, though that day may be years away. The RealReal is betting that its story — built around end-to-end service whether a seller is listing a rare Chanel bag for $20,000 or a Seven for all Mankind top for $15 — will be worth the wait.

“The RealReal is a company that everyone in the resale space looks up to, and I think they have leverage over anyone else,” said Avery Faigen, a fashion and retail analyst with retail tech company Edited. “The authentication process is what TheRealReal excels in, and it’s [why] customers are going to them. They might be in the red but they are investing in key core aspects of the business and that will help compete in the long run.”

Resale Is an Expensive Business

The RealReal’s potential market is enormous, and rapidly expanding. Analytics firm GlobalData predicts the resale category will grow from $24 billion last year to $51 billion in 2023.

But competition is fierce, and some of The RealReal's closest rivals have deep pockets. Rebag, which has raised $53 million and Fashionphile, acquired by Neiman Marcus in April, buy product directly from sellers and then sell them on their sites with a markup. Farfetch blast month said it was launching a resale program for handbags. Sites like Tradesy, Poshmark, eBay and ThredUp have thriving resale businesses, though they don't deal exclusively in luxury.

The RealReal has carved out a niche with perks meant to attract sellers: the company will photograph products and store them in its warehouses until they are sold. It offers free shipping or free at-home pickup if a seller has enough merchandise.

The uniform presentation and implied guarantee of authenticity are meant to ease the anxiety of sellers and shoppers wary of the secondhand market, which has a reputation for being ripe with counterfeits and other fraud.

Trust is the cornerstone of our online marketplace

It’s proven popular — The RealReal processed 1.6 million orders in 2018, up 42 percent from 2017. And though market leader eBay adopted authentication for handbags starting in 2017, The RealReal is betting the extra steps it takes are forging a connection with customers that will be hard for rivals to replicate.

“Trust is the cornerstone of our online marketplace,” the company said in its IPO filing. “We believe the trust and personal relationships that we have built with both consignors and buyers over the past eight years cannot be easily replicated.

It’s also expensive. The RealReal has over 1,700 employees, including an authentication team made up of buyers, art curators and jewellery and watch experts, as well as hundreds of sales personnel and workers who pick, pack and ship items in the company’s growing number of warehouses (each a costly investment itself).

“Each luxury item… requires multiple touch points, including inspection, evaluation, authentication, photography, pricing, copywriting, application of a unique individual stock keeping unit… and fulfilment,” the company said in the filing.

The result: total operating expenses rose from $138 million in 2017 to $210 million in 2018.

Marketing expenses are also creeping up. Over the years, the company has grown thanks, in part, to social marketing and TV ads. These efforts have put a dent in its wallet, though: The company spent $42 million on marketing in 2018, a 15 percent increase in 2017, and The RealReal said it intends to increase its spending on these and other paid marketing channels.

The Chanel Threat

Aside from Stella McCartney, which offers consigners credit toward new purchases, no major luxury brand works directly with the platform.

That’s largely the case across the resale space, where high-end labels fear encouraging customers to shop used as it will hurt sales of new products and tarnish their brand.

Chanel has taken its concerns a step further, suing The RealReal in federal court in New York last November. The French fashion house says the resale site is listing counterfeit products as authentic, a charge The RealReal denies.

Should Chanel win, it could complicate, or even prevent, the resale of its bags - currently the second-most commonly listed on The RealReal, behind Louis Vuitton, according to Bernstein. A victory by the brand could also encourage other luxury labels to pursue more aggressive action against resale sites.

The Game Plan

In going public, The RealReal is hoping that scale will render most of these issues irrelevant.

Rapid growth is meant to create a “network effect,” where the sheer number of active buyers and sellers will create a depth of inventory (much like Facebook at one time was the default choice for social media). More listings also generate more data, which can be used to identify trends and future services to offer buyers and sellers.

This is a good way to retain their customers

Growth will be crucial to scaling, which is ultimately what might help The RealReal dominate its space. The race for scale helps explain why The RealReal is intent on expanding beyond its core of women’s clothing and accessories, which make up about 67 percent of the value of goods sold on the site today.

The RealReal also plans to double down on community growth by pushing consignors into becoming buyers, and vice versa. As of March, 54 percent of its consignors were also shopping on The Real Real, while only 13 percent of its buyers were consigning. The move makes sense: encourage the users already on the platform to stay put.

“This is a good way to retain their customers,” said Edited’s Faigen. “By encouraging the customer to become consigners, they are giving them another reason to feel like they are in the fashion stream and can contribute. That’s a reason to return.”

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