SoftBank-Backed Broker Compass Shuns Comparisons to WeWork

(Bloomberg) -- In the summer of 2012, Goldman Sachs Group Inc. banker Robert Reffkin emailed his network of friends to ask what problems they thought technology could solve.

He tallied the results and started Compass, which quickly became one of America’s largest brokerages -- and the most controversial startup in residential real estate.

Last year, Compass agents closed nearly $46 billion in sales, according to industry data provider Real Trends, making it the third-largest brokerage firm in the U.S. Its $6.4 billion private market valuation dwarfs other brokerages.

But skeptics point to the company’s cash-fueled growth and lack of game-changing technology and question whether Compass can sustain its trajectory. Those voices have grown louder since the implosion of WeWork, the office-sharing company bailed out this week by SoftBank Group Corp., whose king-making Vision Fund has backed both firms.

“Compass made immense plans based on the assumption that it would have easy access to capital,” said Clelia Warburg Peters, president of brokerage Warburg Realty and a former partner at real estate-focused venture firm MetaProp NYC. “If that’s gone, it raises core strategic questions about what is next for the company.”

Comparison Rejected

Compass rejects the WeWork comparison. Compass is debt-free, valued in line with publicly traded real estate tech companies, and practices a culture of frugality that distinguishes it from the co-working company, Chief Financial Officer Kristen Ankerbrandt wrote in an eight-point memo emailed to employees and agents earlier this month. Reffkin highlighted the last point a few days later, using Instagram to post a photograph of himself with a neck pillow and eye mask, preparing for a red-eye flight in coach.

Reffkin, the startup’s chief executive officer, wasn’t available to be interviewed for this article.

Agent Trampoline

Compass says its taking steps to control costs. The company spent heavily to expand into new cities in 2018, but it is currently focused on taking share in existing markets, allowing the company to tap into economies of scale, according to Chief Business Officer Rob Lehman.

While Compass has used financial incentives to lure agents, technology plays an important role in its recruiting efforts. Lehman said Compass, which is on pace to hit $2.2 billion in revenue this year, has built a platform that allows the best agents to “trampoline up in terms of their productivity.”

“The top-producing real estate agents in this country have been neglected,” he said. “No one has ever built anything for them.”

These days, Reffkin is a regular at industry events, where he has talked about running marathons to raise money for charity and his single mother’s career as a real estate agent. He also espouses an ambition to make Compass “the most inspirational company in the history of this country, and then the world.”

Reffkin, 40, started Compass without much direct experience in real estate. The brokerage grew out of his desire to work with his friend Ori Allon, a tech entrepreneur who sold previous companies to Google and Twitter.

The pair decided that better technology and rich incentives would be key to recruiting real estate agents. To lure top performers, Compass let them keep a larger share of commissions than is typical at other firms. It also let agents buy stock options, giving them a way to cash in on Compass’s rapid growth.

Compass raised $450 million from SoftBank’s Vision Fund in December 2017, tapping the investor whose cash allowed Uber Technologies Inc. and WeWork to chase scale first and find a path to profitability later. By then, many in the real estate industry were already sounding the alarm that Compass was more like a traditional brokerage then a tech company.

A representative for Vision Fund declined to comment.

Acquisition Spree

The cash infusion allowed Compass to go on a spree, acquiring 15 brokerages over an 18-month period, including West Coast firms Pacific Union and Alain Pinel Realtors. It also raised another $770 million in two subsequent rounds, raising anticipating it will pursue an IPO. A spokeswoman said the brokerage is not under pressure to go public.

Much of that spending was directed at high-end markets like San Francisco, where the company may control enough of the market to create a virtuous cycle: If Compass can publish enough exclusive listings that its website becomes required viewing for house-hunters, sellers will be more likely to hire Compass agents to market their homes.

That strategy is costly to implement, however, and requires sellers to reject the conventional wisdom that their best chance is putting a listing in front of the largest number of potential buyers.

“Are sellers really going to be OK with their agents promoting and marketing homes on a narrower basis?” said Rob Hahn, an industry consultant. “Not unless there’s something about New York and San Francisco residents that makes them hate money.”

Compass has aimed capital at improving technology for its agents, building a team of more than 450 product and engineering employees. Rory Golod, who oversees 2,000 Compass agents as regional president for New York, said its most popular tools make it easier for agents to search listings, communicate with clients and create marketing materials.

Integration Innovation

Increasingly, artificial intelligence is used to automate tasks and link functions.

“The innovation here is integration,” Golod said.

Competitors aren’t convinced. Compass isn’t the only brokerage to offer agents an integrated set of productivity tools, and building tech products in-house instead of buying them from software companies limits the available choices, said York Baur, CEO of MoxiWorks, which sells agent-facing technology.

“What they’ve done is fine and competent, but it’s not secret sauce,” he said.

What’s left, said Baur, is a brokerage that burns cash like a tech company and pays rich commissions to an army of fickle independent contractors. Agents might defect to other firms if the company is forced to cut commissions to boost profits. If it pares spending on fancy offices and engineering talent, the company might more closely resemble a traditional brokerage firm like Realogy Holdings Corp., whose shares have plummeted more than 70% over the past two years.

“What do you need to believe for this company to be worth $6.4 billion?” asked Mike DelPrete, a real estate tech analyst. “You need to believe it can retain agents after their sweetheart deals are over, and that they can recruit agents without rich uncle SoftBank behind them.”

To contact the reporter on this story: Patrick Clark in New York at pclark55@bloomberg.net

To contact the editors responsible for this story: Craig Giammona at cgiammona@bloomberg.net, Rob Urban, Christine Maurus

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