The Real Deal New York

Next stop IPO? After $400M raise, Compass eyes hypergrowth

Resi brokerage could go public within 24 months: sources
By E.B. Solomont | September 28, 2018 07:00AM

From left: Masayoshi Son and Robert Reffkin (Credit: Getty Images and iStock)

A war chest of $1.2 billion gets you one step closer to that opening bell.

Following the news of Compass’ $400 million funding round led by SoftBank and Qatar Investment Authority, sources close to the company said it is looking to go public within 24 months. Such a move would represent a payoff for investors who’ve bet $1.2 billion on the residential brokerage since it was founded six years ago. But to get that coveted stock ticker, experts said, Compass needs to see serious revenue growth, fast.

“Their [investors’] only exit option now is IPO or bust,” added Zach Aarons, co-founder of MetaProp, a real estate tech accelerator.

Over the last 12 months, Compass has raised nearly $900 million, from the likes of SoftBank and QIA, for a total of $1.2 billion. That’s the most venture capital any brokerage has ever raised — by a great distance — and values the firm at $4.4 billion, well more than the publicly traded Realogy ($2.5 billion), parent company to Coldwell Banker and the Corcoran Group.

“On the one hand, traditionally this round would suggest an IPO is imminent,” said one investor active in the proptech space. “On the flip side, I don’t know what their revenues look like. If they’re not high enough, how could they justify it?”

On Thursday, Compass said the new round would accelerate its plan to reach a 20 percent market share in 20 U.S. cities by 2020. The firm also plans to open its first international office within the year.

In an interview with Techcrunch Thursday, Compass co-founder and chairman Ori Allon did not specify whether the firm was profitable.

“We are in a strong financial position and continue to heavily invest in growth,” he said.

If Compass does end up going public soon, it stands to benefit from a booming IPO market.

During the first half of the year, 120 U.S. companies raised $35.2 billion by going public, the highest level since 2004, according to Dealogic, a financial markets platform. And companies that went public this year are trading, on average, 22 percent higher than their IPO price.

But older real estate stocks — including Realogy, RE/MAX Holdings and even Redfin, which went public last year — have seen stock prices stutter since the beginning of the year. That’s bolstered critics of Compass, who for years have said its valuation is not in line with brokerage valuations (which are typically a multiple of EBIDTA).

“There is nothing I’m aware of — at all — that justifies that [valuation],” said Steve Murray, founder of data and research firm Real Trends. “They’re saying Compass will one day become a giant in the business and produce substantial returns. As I sit here today, I question whether they can ever produce results that would justify a $4.4 billion market valuation.”

He pointed out that Realogy — which has a $2.5 billion market cap — sold 1.5 million homes in 2017 valued at $508 billion. That generated $6.1 billion in annual revenue, with a net income of $431 million. According to Compass, it is on track to generate $1 billion in revenue this year, on $35 billion in sales.

Compass has calculatedly avoided defining itself as a residential brokerage — though brokering real estate is still its main source of revenue — and says it is a technology company that’s building a brokerage platform and tools to improve a friction-filled business.

“The foundation of Compass today is technology and will only continue to be more so in the future,” Robert Reffkin, the company’s CEO, said Thursday on NBC’s Squawk Box.

Until now, Compass hasn’t been in a rush to go public. Wall Street can be far less forgiving than private investors, particularly on metrics such as profitability. And being public means you’re judged far more on real-time performance, not on projections, run rate and half a dozen other metrics that startups like to quote.

In a blog post earlier this year, Redfin CEO Glenn Kelman described a harrowing, two-week roadshow to drum up investor support last summer.

“The whole IPO process has historically been a coronation, but several recently turned into a beheading,” he wrote. “The world has begun to wonder if any Internet company can compete with Facebook, Google and Amazon, and if this new generation of companies can surpass the billion-dollar price-tags put on them in a private sale.”

For Compass, SoftBank’s initial investment in December 2017 set tough expectations for how quickly the firm could grow.

“They expect you to completely dominate the market,” Aarons said this summer of the Japanese investment firm. SoftBank, he added, stacks the deck in favor of its portfolio companies, but in return expects that they take the whole market.

Compass has been racing to do just that, gobbling up firms across the country, notably Pacific Union International, a $14 billion firm that is a big player in California. It’s planning to launch 13 tech tools this year, including a new customer relationship management system, and it has announced new forays into commercial brokerage, title and escrow, and tech licensing.

On Thursday, one brokerage chief anxiously predicted that the new funds would mean Compass will become even more of a recruiting force — it’s been able to hurt competitors by bringing over their top talent.

“This is going to be a killer for us,” the CEO said.

Although Compass as a whole isn’t yet profitable, sources said Redfin’s IPO proved that is not a prerequisite for going public. But showing enough growth is, and that’s where Compass’ 20:20:2020 plan comes in.

To get a sense of just how quickly it’s moving, consider this: The brokerage had 4,765 agents nationwide one month ago. Today, the number is 7,000.

Justin Wilson, the SoftBank executive who sits on Compass’ board has said previously that the Japanese conglomerate has patient capital — though it will ultimately seek a return.

“It’s not that we’re going to invest and hold forever,” he said. “But we are very aligned in our vision and mission to support entrepreneurs and [back] what they think the right outcome is for the business.”

That sentiment apparently drove the latest round, which was led by SoftBank and QIA, along with Wellington, IVP and Fidelity.

“Real estate is the largest asset class on the planet — and an enormous white space for investment opportunities,” said Jeffrey Berman of venture-capital firm Camber Creek. “I think this latest round reflects that perspective.”