Real estate agents understand the importance of a label, constantly redefining neighborhoods to convince homebuyers to pay higher prices.
Agents should be the first, then, to examine marketing materials with a critical eye. Especially when it comes to a technological revolution in their industry.
Most of America by now knows WeWork, the coworking space operator that convinced the world it was a tech company, not a property management firm. Venture capital firm SoftBank pitched WeWork as the next Airbnb, claiming it was worth $47 billion. But Wall Street determined it was a real estate company worth less than $18 billion.
WeWork is not the only real estate startup passing itself off as a tech company. Compass, WeWork’s stablemate in the SoftBank portfolio, also claims to be a technology firm.
“Compass is building the first modern real estate platform, pairing the industry’s top talent with technology to make the search and sell experience intelligent and seamless,” the company claims on its website. “Through our proprietary platform, Compass is changing how agents and clients navigate the process of finding or selling a home.”
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Like WeWork, the company promises to transform one of the largest industries on the planet. Like WeWork, venture capitalists consider the company an industry-disrupting tech play. Like We Work, SoftBank CEO Masayoshi Son is a big fan, investing more than $400 million.
Also, like WeWork, Compass may be less than it claims.
Since 2012, the New York-based company has developed two mobile phone apps, one for agents listing a property, and another for people looking for a new place to live. The apps are intended to help agents maximize profits by analyzing market-specific data.
The apps then connect agents with potential buyers and renters. Compass offers lower brokerage fees, potentially saving sellers money.
The company was founded by Robert Reffkin, a former Goldman Sachs executive, and Ori Allon, a successful software engineer. The mobile apps are useful, intuitive and have some bells and whistles not found elsewhere.
The key to success, though, is convincing agents to use the software. Compass has used cash incentives to sign 13,000 agents in 300 offices across the country. But is the company really a tech startup, or just another real estate brokerage using fancy software?
Despite Compass’ claim to build “the first modern real estate platform,” big firms have spent billions developing software over the last 20 years. And while Compass would prefer to compare itself to firms such as Zillow, Realogy is a more accurate peer based on the business plan.
Realogy owns some of America’s most famous real estate brands, including Century21, Sotheby’s International, Coldwell Banker and Better Homes and Gardens Real Estate. The corporation has 11,000 employees and is publicly traded on the Nasdaq market.
Realogy has revenue of $1.7 billion and a market value of $736 million. Compass has not revealed its financials, but it claims to have increased revenues 250 percent in the second quarter on a year-over-year basis. Venture capitalists valued Compass at $6.4 billion in a July funding round led by SoftBank.
Does Compass’ software really make the company worth so much more than the industry’s leader?
A lawsuit brought in July by Realogy challenges Compass’ claims to uniqueness. The complaint accuses Compass of using its venture capital funding to offer signing bonuses to top-performing real estate agents. Realogy also accuses Compass of inducing its software engineers to divulge Realogy’s trade secrets.
Compass has denied the allegations, as well as similar claims made by other firms in similar suits. But there are other signs of trouble.
Compass’ chief operating officer, chief financial officer, chief marketing officer, chief technology officer, general counsel, head of product and chief people officer have all quit in the last 18 months, according to the Wall Street Journal. That’s not a good sign for a company that was considering going public soon.
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A larger pattern, though, is becoming clear. Messianic engineers at companies like Compass mistakenly believe they can reinvent the wheel with a string of code. They convince investors that they can turn lead to gold. But while they can design a better spoke, they are still making wheels.
Uber and Lyft, for example, are fancy taxi companies, no matter what they claim. Airbnb and HomeAway are clever hotel room search sites. Compass is just a real estate firm with a good app.
Tech can make our lives and businesses easier, but software is a tool not alchemy. Wise investors should focus on the underlying business, not the software, when evaluating the value of the next startup.
Tomlinson writes commentary about business, economics and policy.
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