Worry about FakeFakes Makes RealReal a Bad Bet

The Equity Dispatch #43

Product authentication and legitimacy are paramount for The RealReal (NASDAQ: REAL), which sells used luxury items. But our research indicates that REAL’s authentication lets through many counterfeits, and that has enraged both buyers and sellers, undermining the sense of trust. REAL has applied AI to the authentication problem to speed things up, but we see no evidence of effectiveness.

The business model simply may not work: REAL covers such a wide range of products that it is hard to imagine how authenticators could be properly trained. Quotas for the number of things to be authenticated each day are reportedly too high. Time pressure is intense, and monetary incentives appear to encourage excessively high valuations quoted to sellers, when the product may actually sell for a low price, such that consignors—who are not informed when the price is dropped—feel burned. At the scale required for REAL to be profitable, we think it is inevitable that fake products will slip through.

Overall, this model may not work at scale.