Photo-Illustration: by Curbed; Photo Getty Images
Last week, a deeply confused part of the real estate universe was fortunate enough to get an answer to a long-standing mystery: Is Compass a technology platform disrupting the industry, or just a old fashioned brokerage with good branding and lots of cash? The New York-based company debuted on the stock exchange Thursday after an eight-year sprint in which it grew from a few agents in New York to more than 19,000 in 45 cities, becoming the second largest residential brokerage in the country. . SoftBank’s Vision Fund and a few other investors had filled the firm with venture capital to fuel its expansion and make the company feel like the technological future of real estate. Skeptical watchers saw Compass more as a residential analogue of WeWork – a sleek, well-funded start-up with a business model that when you looked at the marketing didn’t seem that different from what was previously deserving such a high rating. . The IPO was an opportunity for disinterested investors to value stocks and would bring clarity. And yet the market verdict, in the hours after the founders of Compass rang the opening bell, has been resounding. We are not sure.
Let’s start with the positive for Compass: Its new market cap of $ 7.4 billion is roughly four times that of Realogy, a holding company that owns Century 21, Coldwell Banker and Corcoran, among others, and generates two times more income than Compass. . This assessment suggests that the mere possibility of disrupting the multibillion-dollar real estate market, at a time when competition for homes couldn’t be hotter, was enough to make investors want a premium piece of Compass.
But $ 7.4 billion is, in many ways, a disappointment. A day before its IPO, Compass and its underwriters, sensing resistance from investors, announced that they were lowering the company’s expected valuation by $ 10 billion – much like a broker raising the price of a brown stone. from Brooklyn on the eve of its open house after hearing that it would not receive any offers at asking price. (About a third of the new shares were to be bought by SoftBank, Compass himself, and the family of one of its co-founders.)
So what to do with Compass? Robert Reffkin co-founded the company in 2012 after running a gauntlet of top American institutions: an undergraduate degree and an MBA from Columbia, followed by stints with McKinsey, Lazard, a brief stint in the George W. Bush, and ultimately Goldman Sachs, where he served as chief of staff to Trump’s future economic adviser Gary Cohn. Worth around $ 500 million after the IPO, he is now one of America’s richest black entrepreneurs and has said he hopes to one day run for mayor of New York. (To eliminate any endlessly lingering concern that Reffkin is an underachiever: He raised over $ 1 million for various charities by running marathons in all 50 states.) From the early days of Compass, he has insisted it was not a real estate company. . Its co-founder, Ori Allon, was an Israeli tech entrepreneur who sold his first startups to Google and Twitter and once posed alongside Reffkin in a t-shirt wearing a t-shirt. his Twitter nickname. Allon said the edge by 2012 he had finished building small businesses to sell to other businesses and wanted to “build something really, really big” instead.
Robert Reffkin, Founder and CEO of Compass.
Photo: Cate Dingley / Bloomberg via Getty Images
The idea, basically, was to design a “human network” (at the time, Adam Neumann referred to WeWork as “a physical social network”) that would change the way people bought homes. Urban Compass, as the company was known in its first iteration, aimed to be a one-stop-shop for finding apartments in New York City, and Reffkin and Allon hired a team of brokers who weren’t called brokers. They were “neighborhood specialists”. Rather than receiving commissions, they received full-time salaries, while Urban Compass promised to take lower fees than a traditional broker.
It did not work. The best agents, especially those who worked on selling homes rather than renting, always wanted to work on commission and didn’t want to join the company. In 2014, the company pivoted: instead of eliminating the need for brokers, the new Compass brand would embrace them, creating a suite of technologies – “AI-Driven Renovation Visualization,” “Driven Customer Development Recommendations by AI ”self-service planning tools – this would make brokers more efficient, allow them to make more sales and ultimately make more money for everyone.
But the real pivot was towards a start-up model that has proven itself in a variety of industries – drowning your less capitalized competitors in cash. Compass has lost over $ 1 billion – numbers that would have been almost unthinkable for a startup ten years ago, but that wouldn’t even make an executive at Uber or WeWork blush. The cash fire was activated by SoftBank and others, who invested more than $ 1.5 billion, much of which was spent on buying market share. To move into new areas, Compass got into the habit of simply buying existing local brokerage houses and subsuming them. He poached top brokers from other agencies by offering equity, a larger share of each commission, a bespoke assistant and logo produced by the company’s marketing team, among other perks. The land tended to work, although rapid expansion could be problematic (image a poster advertising featuring two young, gel-haired white brokers in costume, smiling on a brown stone front porch, above the word ‘HARLEM’) and led to numerous lawsuits from competitors alleging nefarious poaching tactics.
The technology platform was also part of the Compass pitch, and the company says 88% of its agents use its software at least once a week. What is not clear is how good the tools actually do. A young agent, just starting out, might find them useful, but a good broker can walk into an apartment and immediately tell you how much it’s worth without an algorithm. What’s more, what most buyers and sellers want above all else is for someone to hold their hand: The ultimate skill of a broker is to convince people to make one of the biggest financial transactions in the world. their life.
What Compass offered the brokers it recruited, beyond financial promises, was a premium brand. While no one probably ever chose to buy through Coldwell Banker because they liked the logo, Compass’s philosophy was to create the real estate Nike. In some corners of Cobble Hill and Silver Lake, a Compass sign has come to signify the type of house inside: sophisticated, tasteful, architecturally and aesthetically aligned with a sleek sans serif font. (Many other agencies were rebranded after the emergence of Compass: In 2018, Realogy hired Pentagram, the legendary design firm, to modernize both Halstead and Brown Harris Stevens.) The image is more or less everything for high-end brokers, and a well-known agency with a forward-thinking character was at least as practical as code capable of producing “AI-driven renovation visualizations.”
Looking at the S-1 Compass document filed with the SEC, I was taken back to the fall of 2019, when WeWork attempted to go public. In the aftermath of this implosion, Compass’s CFO sent employees an email insisting that their business was different. And yet, Reffkin started S-1 by talking about how he started the business for his mother, a former real estate agent – the kind of personal touch that any good broker adds to a sale. Compass opened the document with a sleek series of photographs showing people smiling in front of laptops at dining tables in well-appointed homes, as if they were about to DocuSign a rental or loan document. This level of storytelling was perhaps necessary given the idiosyncrasies of the underlying business. On paper, Compass looks like a traditional brokerage house, even though it has suffered huge losses, and it has relied heavily on building its bona fide technology – the word “platform” appears in it. S-1,286 times. I couldn’t help but notice that Compass doesn’t have any real estate board members, a blind spot he shared with WeWork. (Compass’s board includes the CEO of a luxury digital media company and the CFO of LinkedIn.) I’ll briefly note that Theranos’s board also didn’t have doctors.
Compass’s IPO was bolstered by two pandemic booms – home sales are on the rise, as is the market for tech-driven startups. Even WeWork is trying again. The global financial system is teeming with cash, and newbie investors are stuffing their stimulus checks into Robinhood accounts rather than putting them in a seemingly unaffordable mortgage. Stocks at the crossroads of real estate and tech (Redfin, Zillow and Opendoor) have had a good pandemic, and multibillion-dollar valuations are looming for Dom, a start-up that is digitizing sales closings of houses; Hippo, which offers insurance; and OfferPad, which attempts to streamline the buying and selling process. Side, a direct competitor to Compass with its own broker-focused platform, just went from a valuation of $ 160 million two years ago to $ 1 billion, despite the company having annual revenue about $ 30 million to $ 50 million.
While all of these companies have promised to disrupt the home buying industry in one way or another, none have dramatically changed the business. Compass is no exception. Unless you’re worried about selling your home through a broker that hands out sleeker-than-average business cards, the process of engaging with consumers with Compass is little different than any other. brokerage. If Compass hopes to achieve profitability, it will face pressure to stop providing incentives to its agents. In a widely circulated investor note, David Trainer, analyst at New Constructs, wrote that “Currently, the company is more like a traditional brokerage house with flashy marketing, the only benefit of which is a virtually unlimited ability to burn. money, ”and added“ SoftBank needs this IPO more than investors. ”Many of the hot real estate stocks have faded as the dark side of the pandemic has emerged and housing foam fears emerge . On Monday, Compass stock plunged and lost more than 10% in value. The lukewarm market response to Compass indicates investors are ready to give it a chance. But now it’s hard to see the company like anything other than the last run of a modern company manual: why disrupt an industry when you can just adhere to it?