Compass is certainly on a roll after locking in $100 million of additional financing via their new funding round, bringing their valuation to $1.8 billion having raised $325 million from investors to date (November 8, 2017). The latest round of funding was provided by Fidelity Investments, IVP and Welling Management. Since being founded in 2013, Compass has grown to over 2,000 agents in 10 different markets. They plan to add an additional 10 markets by 2020. Compass has a reputation of breaking into new markets quite aggressively, poaching top agents from top firms with huge salary and commission split agreements. While many top firms initially and key players including Douglas Elliman's Howard Lorber expected Compass to fold within years, they have continued to grow.
Compass reported $180 million in revenue last year (2016) and expects to generate $350 million this year (2017). Revenue includes all income including what Compass would have to pay out to their agents. While typically a brokerage's valuation is based on off multiples of the brokerage's earnings, Compass holds that they are a tech firm, leading to even higher valuations. Real estate brokerage can be an extremely low margin business. For example, Douglas Elliman reported $190.4 million in revenue by the end of Q3 2017 year-over-year which only produces a profit of $4.2 million. That is down from $184.5 million reported at the end of Q3 2016 which produced $8.7 million in 2016. Reology, which owns Coldwell Banker, Century 21 and Sotheby's International, reports a revenue of $5.81 billion but as a publicly traded company, their entire valuation is merely twice that of Compass' with a total equity of $2.469 billion.
17 Prospect Park West, Park Slope, Brooklyn, NY -
Listed W/ Lindsay Barton Barrett, Cristina Criado, Jessica Hirsch, Daniel Dinko @ Compass
Additionally many have wondered and continue to wonder, what technology does Compass have that no one else has? Compass has produced a new system to produce CMA's and comps as well as a highly-efficient, IDX style a website that allows you to search all public real estate listings across all brokerages and markets that Compass covers. Critics hold that both CMA's and Comps need actual human input and assessment to be accurate. Those in support of Compass claim that the technology is so great that you will not need agents because the internet will take care of everything. How can you run a home inspection of a 30 year old home without being on site then close out a final permit that was left open to make sure that deal closes? What attorneys will be used to hash out each deal? Part of the real estate sales experience is having a trusted broker helping a buyer or seller with what is probably one of the largest financial transactions of their entire life, it cannot easily just be "automized" with VC money. There is so much more that goes into real estate deals than those not in the industry possibly understand. Compass is definitely onto something when it comes to the home search and connection with an agent, but time remains to tell how automated anyone can make the actual buying and selling process.
A statement by Rob Lehman, Compass' Chief Revenue Officer, to the tune of “every company that’s going to succeed in industries in the future is going to have to be a hybrid. We are both a tech company and a brokerage and we let the market ascribe the value,” essentially throws it out there that the company is not a true tech company and a traditional brokerage that claims their technology is worth more than other brokerages, hence the extreme valuations. While investments into technology do not seem to be making waves throughout the industry, Compass' investments into branding and agent poaching are quite visible.
Where Compass has gone, they have gone with success, including Miami, New York City, Los Angeles, San Francisco, Fort Lauderdale, Palm Beach, the Hamptons, Aspen, Boston, and Washington D.C. They have expanded into 10 different markets and recruited over 2,000 agents who all are backed by some of the industries' cleanest and best branding. In the markets they have expanded to, Compass has acquired some of the finest listings and top agents including Leonard Steinberg, Rick Teed and Butch Haze. For more and more millennials and younger real estate buyers and renters, Compass is becoming a powerhouse go-to name amongst brokerages and websites to browse real estate.
Additionally, that would lead one to wonder, when will the investors require Compass to show a profit? Will they need to raise more money in the future, if so will they be able to justify an even larger valuation? Compass claims that it is backed by "patient capital," and the firm is expected to go IPO at one point, but how long will Compass test their patience before investors start asking to see a return? Will it even be possible? Bigger companies that are already successful in all the markets Compass is gunning for are valued at less than Compass. Everyone is focusing on will Compass fail, but maybe the question that should be asked, is did Compass fail or mislead their investors, or have they just perfected and modernized the hyper-competitive real estate brokerage industry?
535 Dean Street, Unit PH101, Prospect Heights, Brooklyn, NY - Listed W/
The Wesoky Team @ Compass