From the New York website: Compass just raised $50 million in a Series C financing round, The Real Deal has learned. The investment, led by Institutional Venture Partners, values the two-year old brokerage at about $800 million, according to sources familiar with the company.
Other investors in the round include Joshua Kushner’s Thrive Capital, Founders Fund, Salesforce CEO Marc Benioff and Condé Nast parent Advance Publications, all of which have made prior investments in Compass. In total, Compass has now raised $123 million.
“This new funding will enable us to accelerate our expansion into additional markets, bringing our best-in-class technology to new agents and clients,” said Ori Allon, Founder and Executive Chairman of Compass. The capital, he added, would also allow Compass to bulk up its engineering, product and design teams.
IVP is a backer of Silicon Valley giants such as Twitter, Snapchat and Dropbox. Todd Chaffee, a general partner at IVP, said in a statement Tuesday that the Menlo Park-based firm was “proud to partner with Compass as it continues its rapid expansion.”
“Compass has developed exceptional technology to improve the real estate experience,” he added.
The funding, the largest ever raised by a residential brokerage and among the most raised by any real estate technology company, highlights Compass’ ability to wow the venture capital world, even as the startup continues to be met with skepticism by traditional brokerage rivals.
“They raised the money originally saying they were a tech company. Now they’re a brick and mortar real estate company. I don’t know how it’s possible for them to succeed,” said one brokerage head, referring to Compass’ early shift from brokers who were salaried “neighborhood specialists” to more conventional independent contractors.
But sources active in the real estate tech space say the valuation is justified because at its core, Compass revolves around a software platform that operates as a high-end brokerage.
“They are a software company that’s pretending to be a brokerage, and succeeding at pretending, by the way,” said Zachary Aarons, an angel investor and co-founder of MetaProp, a New York City-based real estate technology accelerator. He likened Compass to Zillow, which looks and feels like a listings portal but is actually driven by advertising.
According to Aarons, Compass’ software helps brokers price properties better and close deals faster. Investors, he said, are drawn to Compass precisely because its technology is scalable. “If they want to turn on Nashville, Tenn., tomorrow, they could turn it on in a week,” he said.
CEO Robert Reffkin told TRD last year that the average New York City agent spends nearly 90 percent of their time performing administrative tasks. Compass’ technology, he said, allows the agents to spend more time with clients.
Betting on the future
“If you value it on an EBIDTA, they’re not worth $1 billion,” Aarons said. “But investors are pricing on enormous growth potential. They’re doing that because they think the software can scale globally.” It’s common for startups to be valued based on their potential for future earnings rather than on revenues; WeWork, which is now valued at $10 billion, is thought by many to be valued at 100 times earnings.
Overall, venture funding in real estate tech startups topped $605 million last year, more than twice the $241 million invested in 2013, according to CrunchBase. Investors are drawn to the industry, in part, because it has been slow to innovate, leaving it ripe for disruption.
“When we started three-and-a-half years ago, I’d call a VC and they’d say, ‘I’d never touch that space with a 10-foot pole,’” said Nick Romito, CEO of cloud-based leasing management company VTS, which has raised $34 million to date. “Now, our phones don’t stop ringing.”
But investors aren’t blindly writing checks, industry experts said.
“More than ever, the venture community is looking at actual metrics. What’s your recurring revenue? Could you be profitable if you needed to be tomorrow?” said David Eisenberg, founder and CEO of 3D visualization startup Floored, which has raised about $7.5 million from investors.
After its Series B round in July 2014, Compass was valued at about $360 million. At the time, Allon told TRD that the company had yet to spend the bulk of its Series A cash.
“The backbone of their company is their technology – the talent, the tools, the pipeline of tools that are coming,” said David Goldberg, director of venture capital at Corigin Ventures, an early investor in Compass. “They can leverage it in various ways.”
The firm’s hybrid stance as a tech and real estate firm can be confusing, even to some senior employees, said the head of another real estate tech startup. Tech-oriented execs may feel sidelined as Compass increasingly embraces its more traditional brokerage role, the source added. Over the past year, many of Compass’ key executives left the firm, including former head of research Sofia Song, former new development head Roy Kim and former head of expansion and strategic partnerships Andi Bernstein.
Compass’ success hinges on its ability to scale. It acquired Lindsay Reishman Real Estate in Washington, D.C., last year, and recently opened two offices in Brooklyn and one in South Florida. It just inked a deal on office space in the Hamptons and, on its website, is advertising jobs to lead new offices in Atlanta, Boston, Chicago, Dallas, Houston, Los Angeles, Miami, Philadelphia, Phoenix, San Diego, San Francisco and Seattle. Somewhere along the way, it dropped “Urban” from its name and simply became “Compass.”
The brokerage has aggressively recruited top talent from rival firms, including the Corcoran Group, which accused the startup of “brazenly” raiding its talent pool in a lawsuit earlier this year. The firms settled the dispute in August.
But despite recruiting a number of top-shelf brokers, it remains heavily dependent on firm president Leonard Steinberg, whose listings accounted for 51 percent of Compass’ total listings on Aug. 3, according to a TRD analysis.
To attract brokers, it has offered equity and sign-on bonuses. Earlier this month, it sweetened the deal for high-earning agents concerned that by moving to Compass, business would slow down temporarily. The brokerage said for a select group of 25 agents, earning more than $500,000 gross commission income, it would waive its commission split for the first year. It is also implementing a key-agent clause in broker contracts that would allow agents who leave the firm to take their business with them, a change Reffkin said was necessary to increase transparency and fairness in the industry.