Redfin: The Redux
Redfin initially declared its intention to go public earlier this summer and priced shares at $15 with the goal of raising $100 million at a valuation of approximately $1.2 billion. After officially listing on the NASDAQ this past Friday, the stocked surged on the first day of trading and closed at $21.72, 45% above where the day began, giving the company a valuation of over $1.7 billion.
This marks an important event in the real estate industry. Redfin has been able to build one of the most heavily trafficked websites in the entire real estate industry and have clearly made a commitment to developing powerful technology to grow their business. This will certainly continue to drive attention towards the real estate technology space, which continues to attract more and more investment due to the huge size of the market and the significant gap between the desired agent-brokerage experience, and agent-client experience. However, there are significant differences in the way Redfin and Compass approach the industry - the impact of these are telling in the overall performance of both companies, some of which are highlighted below:
Redfin was founded in 2002, but launched sales in 2004, while Compass was founded in 2012 and launched sales in 2014. Compass is only 3 years into the journey while Redfin has been operating for 13 and has had 10 more years to gain market share and establish their brand.
In the first half of 2017, Redfin generated ~$164M in revenue while Compass did $168M. Compass also grew at almost 3 times the rate of Redfin.
One of the most interesting data points is around market share, where in Redfin’s biggest market, Seattle, they only have 1.7% market share compared with Compass' 14% in Washington D.C., their current biggest market. Because of their inability to penetrate markets they have had to expand to 84 markets in order to grow, while Compass is still only in 10.
The main takeaway from looking at these metrics is that Compass has a superior business model because they empower agents, as opposed to trying to replace them. With regard to business models, hiring the best agents across the country and helping them grow with technology and support is undoubtedly the right approach.
If Redfin's website generates 40 million visits per month (compared to a traditional brokerage with 40K) and their agents go to sellers and say they can provide 1000x the web exposure and charge 50% less to sell the home, how come they are only able to generate 1.7% market share in their biggest market? The answer is that agents matter! No amount of web traffic or cost savings can replace the valuable service and guidance that an agent provides. In any advisory business, whether it’s law, banking or consulting, great advisors provide something that is invaluable -- knowledge, expertise and confidence that as a client you will be guided throughout a challenging process. A company that creates a financial disincentive for great agents by hiring inexperienced agents on salaries will continually be fighting an uphill battle as it looks to grow and provide a fantastic experience to clients.
So while many are trying to find ways to disintermediate agents, Compass continues to firmly believe that agents are the future of this business and is committed to remain the leading company for them.