In May of 2021, I wrote an article about Compass. I was extremely complimentary of both Compass and their CEO Robert Reffkin, but I called into question their valuation which made absolutely no sense at all to me. To illustrate the point, I drew a comparison between Compass and Realogy. Although there are some differences between both companies (Realogy also operates a huge franchise business), a significant chunk of Realogy’s revenue comes from their company owned brokerage which shares the same traditional model as Compass’s core business (where agents typically work on splits ranging from 50% to 90% - depending on their sales volume). Below are the numbers based on the time of original article:
Compass - Annual Revenue: $3.7B Market Cap: $7.2B
Realogy - Annual Revenue: $6.2B Market Cap: $1.7B
Even though Compass was growing significantly faster than Realogy, I felt that the cost of that growth was unsustainable now that Compass was a public company and no longer was receiving massive cash infusions from the VC community (growth via top producing recruits often requires a significant sign-on bonus, and revenue from new recruits typically takes a minimum of 4 months to show up). I have always been a huge fan of Compass, so my concern had little to do with their actual business, and everything to do with their valuation. There was no logical way that their market cap should have been 4.5X that of Realogy.
And then the public markets did what the public markets are designed to do. They strip away the high gloss shine of beautiful marketing collateral and dynamic presentations, and they focus on the underlying fundamentals of a company. As of the date that I am writing this article, Compass’s market cap has dropped to $1.69B, compared to Realogy’s market cap of $1.17B. Over just one year, Compass’s value has dropped by over $6B (nearly a 73% drop), and now has a delta of approx. $500M over Realogy. That’s a pretty significant change over a very short period of time. I predict that the gap in the market caps of both companies will continue to shrink.
The company's dramatic drop in value shouldn’t take away from the unprecedented accomplishments that Compass has achieved. Agents did not join Compass based on its valuation (although they did promote a program to allow agents to invest in the company, and certain early agents were given stock options as an incentive), they joined the company because they believed that Compass was the best place for them to conduct their business. Many agents that I speak with are still very happy with their decision to affiliate with Compass. Never before had a residential brokerage made such an enormous impact in such a short period of time. Most of their competitors lived in fear that Compass would open an office across the street from them and recruit their top agents. But my concern has nothing to do with their agents. Compass is a good place to hang your license and many of their agents are having their best year yet from a sales volume standpoint. While the drop in value doesn’t affect their agents, the pain is felt on Wall Street and in the living rooms of average stock traders that bought into a mirage.
Compass now has company in the elite world of unicorns. In June of 2021, a startup brokerage closed a $50M round at a valuation of $2.5B. And this company offered something very different than the traditional brokerage model that is found at Compass and Realogy.
Side, which was founded in January 2017, has raised north of $313M from investors including Tiger Global Management, Sapphire Ventures, and Trinity Ventures. Besides their massive war chest of capital, what makes Side such an interesting player is their unique business model. While most companies are focused on recruiting as many agents as possible, Side is only interested in partnering with top agents. Their tag-line spells it out in bold terms: “Not all agents, just the best agents. What we do is not for everyone”. Side’s philosophy is that they do not actually recruit agents, and instead they hand select the agents who best fit their model.
Most agents at most brokerages are independent contractors, and the same holds true at Side. However, agents who partner with Side operate as a truly independent company. They utilize their own customized branding and the leadership team at Side helps them develop a business plan which is centered around building a team. Side provides a series of centralized services including a tech-stack, legal support, marketing and advertising support, transaction management, liability coverage, and assistance with procuring office space. I see a lot of similarities to the way that Side operates and a traditional franchisor, but instead of affiliating established companies, Side affiliates independent agents and teams. According to Side: In 2021, 30% of Side partner teams grew their production volume by over 100% year-over-year, and 20% of Side partner teams transacted over $100 million.
For most brokerages, their company brand is front and center in all marketing collateral. The more agents that promote the company brand, the more recognizable it becomes. As leads are generated, these companies often hand them out via a round-robin. Although this strategy is designed to help all agents, it creates a scenario where the agent who generated the lead often isn’t the one that benefits from it. This has helped companies like Compass, Coldwell Banker, and Sotheby’s become household names, but most home buyers have not heard about Side. And this is by design. Side’s brand is often invisible. Their goal is to help agents promote their own brand, while Side provides back office support to help agents focus on what they do best.
In November 2021, a new company became a unicorn when they announced a $100M Series A with investors that include Goldman Sachs and 3L. This company, PLACE, founded by real estate heavyweights Ben Kinney and Chris Suarez, shares similarities with Side in that they only target the highest producing agents. Additionally, they also provide their agents with leading technology and services to help them continue to grow their business. However, PLACE has a very different spin on their business model. .
Unlike Side (or most other real estate companies), agents do not actually move their license over to PLACE. PLACE is not actually a broker at all. When an agent partners with PLACE, they continue to hang their license with their existing broker. However, in addition to the services their broker provides, they also get access to the suite of services that PLACE provides. PLACE does not perceive themselves to be a competitor to other brokerages companies. Instead they look at themselves as another service for elite agents that aren’t getting everything that they need from their current company.
PLACE promises to deliver industry leading technology and services to the agents that partner with them. While this is a common promise that most real estate companies make to their team, the fact that it was developed by agents, Ben Kinney and Chris Suarez, who have walked in the shoes of agents and understand what it takes to be the best, adds a level of validation that is often missing from many of the other players who have come from Wall Street and have never actually listed or sold a home. Ben has consistently been named the top agent in the US, and owns companies including Brivity and Active Rain. Chris, in addition to co-founding Place, owns 6 brokerages and has been credited with expanding residential brokerages in Costa Rica.
Disruption Without Discounting
New brokerage models launch all of the time, but the majority of them focus on commission cutting. As I have written about in the past, no matter how many times outsiders say that real estate agents make too much money (which I disagree with), almost every company that has tried to scale by offering discounted commissions has ultimately failed or pivoted to a traditional model. It is exciting to see companies like Side and PLACE raise huge sums of money and take on the industry with a fresh model.