Real Estate Royalty
A Sit-Down with Spencer Rascoff
Being a successful entrepreneur is not easy. The deck is stacked against you. Whether you are trying to break into an existing industry, disrupt an established industry, or create a new market altogether, there are pitfalls at every stop. There is a reason why according to Investopedia, 90% of startups fail, and that reason is that success is immensely complex. It's not just about having a great idea and a great team; you need impeccable timing, product market fit, funding, crisp execution, and some luck. You also need to build a moat to shield you from lower cost copycats. Many great ideas have floundered because of poor execution, or simply poor timing.
The risks of starting a business are hard to overstate, but the rewards can be life changing. It's not just about the big pay day (even though that is definitely part of it), but it's also about the emotional journey and the pride that you can take in watching your idea literally change entire industries. Some startups can have the ability to change the world by contributing to a healthier planet, increasing communication between different parts of the world, and various other ways. A successful startup also grants you credibility so that you can launch other businesses in the future. I was listening to an interview with an A-List movie director. He said that the benefit of a box office hit was that it allowed him the opportunity to make another movie. I see parallels between that line of work and entrepreneurs.
When is comes to A-List in the PropTech world, there are few people more well known than Spencer Rascoff. Spencer has a unique ability to not only foresee opportunities to change the world through technology, but he also has the tenacity and drive to go out and actually make it happen. Many people have ideas, but very few go out and execute them. And even fewer do it over and over and over again.
Spencer foresaw changes to the travel industry and co-founded Hotwire (which sold to Expedia for $663M). He then foresaw the democratization of real estate data and co-founded Zillow (current market cap $29.36B). Spencer then realized that there was an opening in the second homes market to significantly increase the buyer-pool, and he co-founded Pacaso (Pacaso became the fastest US based company to ever be crowned a Unicorn). With a track record unlike almost anyone, Spencer has a gift for transforming industries. At the young age of 45, it is probable to assume that he is just getting started.
I was extremely fortunate to have the opportunity to sit down with Spencer for an interview.
Your first 2 ventures, Hotwire and Zillow, democratized data and put the consumer in the driver seat with important decisions (Travel and Real Estate). Although the industry villainized these services, do you believe that it is good practice to provide consumers with the information and control they are looking for?
Yes. We are far past the days when information could be kept under wraps — the internet changed that completely. I would argue that today companies like Hotwire and Zillow are important for a different reason. The pendulum of information has swung so far that now we battle to figure out what information is true and reliable. People are searching for credible information now, versus any information. With Zillow, you can trust that the data comes from verified sources, and the same is true with Hotwire.
True innovation today goes beyond helping people access information, though, and moves into helping people make smart decisions. If you look at Robinhood’s evolution, they’ve found that tools without information isn’t necessarily a good thing, and that you need to have one alongside the other.
Pacaso is such an interesting company because it does more than just streamline a business through technology. It opens up a market to an entire new set of customers. Pacaso makes the luxury second home market affordable to the middle class. Are there other examples of industries where the TAM can be increased by infusing technology into a business model?
Uber and Airbnb both created massive TAM by democratizing access to something that was previously hard to access. Some people had drivers before Uber, but it wasn’t broadly available for many reasons, including cost. Uber solved trust and safety with ridesharing, payments and scheduling. That unlocked the potential of ridesharing. Airbnb solved similar issues, and in the process unlocked TAM.
Pacaso is similar. There have always been people who co-own second homes, but before Pacaso aggregating buyer demand, scheduling, financing and taxes were all on them. Pacaso takes care of all of that, and helps with reselling, so in the process we are also unlocking TAM.
You are not only an entrepreneur, but you are also an investor. Although I am sure that every deal is different, what are the key factors that you look at when making a decision to invest? Are there any factors that immediately cause you to pass on an investment?
First, I look for founder grit. I want the founder to be passionate about solving the problem they are focused on, and be ready to run through walls to succeed. Ideally it’s a second-time founder, so they’ve learned from their mistakes on someone else’s investment. And ideally they have not yet struck it rich and still have something to prove.
Second, founder + idea fit. I've learned that there is no such thing as a great idea or a great founder; there are only great founders for specific great ideas. The founder has to be passionate about the specific problem that the startup is trying to solve.
Third, I’m looking for a big TAM (total addressable market). Here’s the most obvious and yet insightful statement you’ll read today: if your TAM is huge, even small market share can create a valuable company.
Fourth, and related, I’m looking for companies that are solving actual problems, not companies in search of a problem to solve. I’ve seen so many pitches over the years for ideas that are really just features in someone else’s product, but aren’t solving a big enough problem to become a company.
Fifth, I’m looking for companies with true product differentiation which are therefore not reliant on Google for traffic.
Hotwire, Zillow, and Pacaso all share a common theme: Huge consumer industries, a significant amount of transactions, low-tech, industry guarded data, and high fees. Are there other industries that meet these same requirements and are primed for disruption?
Cars! I just bought one in the traditional way, and the amount of time it took was ridiculous. Hours at the dealership, then because it was a Sunday they couldn’t get the bank to approve the financing and I had to go back the next day. I know a lot of companies are trying to solve this, like Carvana and even automakers. But it’s certainly ripe for disruption.
There are also lots of opportunities in fintech — specifically in the mortgage area. Several companies have come along to make slight changes, but I’m on the lookout for companies — like Tomo or Flyhomes, two of our portfolio companies — that are promising sweeping reductions in friction.
What is the biggest opportunity for disruption today?
First, the penetration of software and fintech into the real estate industry. A great example is Flyhomes - an end-to-end tech enabled brokerage that incorporates new financial products, allowing people to make an all-cash offer.
Second, the democratization of real estate. That’s what Pacaso is all about — allowing people to get into the best second home for them. Arrived is another great one that allows fractional real estate investing into single-family rental properties with as little as $100.
Third, PropTech in emerging markets. I’ve invested in one in Latin America — La Haus — that is facing a whole different set of problems than Zillow was in the early days. We were trying to change a legacy industry. They are trying to change access to homes by addressing the LACK of industry. There is no MLS or brokerage licensing in Latam, but they do have a very real problem with access to homes.
Imagine you are standing in a room in front of a group of really bright entrepreneurs. They are looking for the biggest opportunity to address: A huge problem that exists that technology has not yet solved. What problem should they tackle?
I think there remain many ways to tackle the friction of the transaction here in the US. iBuying does a great job of it and will get much, much bigger. But real estate is a slow boat to turn, and it’ll take time before the individual aspects change.
Internationally, there are still lots of fundamental problems to solve in PropTech. I’ve learned a lot about real estate in emerging markets because of my investment in Mexican- and Colombian-based La Haus. In most countries there, there’s no MLS, no brokerage licensure and very little access to financing. It’s the opposite of what we had in the US when we started Zillow — an entrenched and regulated system. The opportunity in emerging markets to not just reduce friction for buyers and sellers, but to change the way people are able to access properties and capital is enormous.
If you could only share one piece of advice with entrepreneurs, something that you learned the hard way through your journey, what would it be?
Surround yourself with great people with diverse viewpoints. It brings out the best in people and, over time, leads to better outcomes.
I recently saw an announcement about a company that you founded with your 16 year old daughter. As a father myself, I cannot imagine anything more fulfilling than being in a position to share your passion for entrepreneurship with your family. What was the genesis of this new venture and what convinced you that the timing was right to include your family in this project?
The funny thing was, it wasn’t me deciding to include Sophia. It was her deciding to include me. She had the idea for Recon Food one night when she was in her room, trying to unwind and connect with friends by looking at Instagram. Instead of helping her unwind, it had the opposite effect and stressed her out. She and I have been cooking together a lot during the pandemic, and food was top of mind for her as a way to reconnect with family and friends. When she came to me with the idea, I jumped on it — not just because she’s my daughter, but because it has a lot of merit. Today it’s a great product with a growing audience. I’m really proud of her, and excited for Recon Food.
There is so much money pouring into PropTech. I recently interviewed the team at Fifth Wall and I asked them if the industry was getting overheated. They felt that we are only in inning 2, and so much of the money flooding in are catch up dollars for years of underinvestment. Do you agree with this thesis?
There is investment flowing into all industries, but I would agree with Fifth Wall that PropTech has been underinvested. The vast majority of the market still operates in a traditional way, but even the most traditional brokers out there are looking to tech to help streamline operations and transactions. This area will continue to grow.
VCs are investing heavily on iBuyers, Tech-Based Mortgage Companies, and Tech-Based Title Agencies. The grand vision appears to be the ability to purchase homes with a few clicks. You have better foresight than almost anyone in PropTech. Does the industry ever get there? If so, what is the timeline? Conversely, if it doesn’t get there, what is the future of residential brokerage?
The big challenge on the back end is getting all these systems and disparate entities to talk to each other. It’s not bad that the US has a regulated system — it’s designed to protect people in what is the biggest financial transaction of their lives. But that also means it’s that much harder to create a “one-click” transaction. iBuying reduces much of that friction on the sell side. It’ll be interesting to see what others can accomplish on the buy side.