Compass wants investors to believe it’s worth $1.3B

Company confirms it's in early stages of raising Series D funding

Jul.July 12, 2016 01:00 PM

From the New York website: Less than a year after raising $50 million, Compass is seeking a new cash infusion that sources said would value the company above $1 billion, The Real Deal has learned.

To date, the three-year-old startup brokerage has raised $135 million from investors including Joshua Kushner’s Thrive Capital, Founders Fund, .406 Ventures, Salesforce CEO Marc Benioff and Condé Nast parent Advance Publications, all of which made repeat investments in Compass.

“With our last funding round less than 10 months ago, and due to extremely strong H1 results, Compass is exploring another funding round based on inbound interest from investors,” Compass told The Real Deal in a statement, adding that proceeds from the round — expected to close in late 2016 — would fund its international expansion. “While the company has not yet begun formally inviting specific existing investors to participate, every existing investor that was asked if they would be interested in investing in the next round said they would like to.”

Compass declined to comment on exactly how much it may look to raise, but sources speculated the company is seeking around $50 million, for a new valuation of $1.2 billion or $1.3 billion.

That’s in line with the company’s prior financing rounds, including a $25 million Series A that closed in September 2013; a $42 million Series B that closed in July 2014; and a $60 million Series C that closed in September 2015.  Each round saw major jumps in Compass’ valuation, which topped $800 million last fall.

“From a valuation increase standpoint, [investors] are very happy,” said Robin Riddell, an analyst at PitchBook.

In prior rounds, Compass has handed investors nearly 44 percent of its shares, according to data from PitchBook. In 2013, Compass sold more than 5.4 million shares at $10 a share. A year later, it sold 1.8 million shares at $20.77 a share. For its Series C, Compass sold 1.4 million shares at $40.50 a share, PitchBook data shows.

While Compass’ attempt to raise more money is not unexpected – venture capital experts said it’s common for startups that haven’t yet posted profits to raise money on a regular basis – insiders speculated that Compass may have more trouble raising funds this time around.

In addition to lingering skepticism about the firm’s business plan, the market for venture capital has tightened in recent months amid rumblings of a tech bubble.

“VCs are now more concerned with profitability,” Zachary Aarons, a co-founder of MetaProp NYC, a New York City-based real estate tech incubator, told The Real Deal. “Are there ways they could be valued at $1.3 billion? Sure. On very clean terms – unless they absolutely crushed it beyond expectations [in terms of] revenue and margin expansion – I find it hard to believe.”

Meanwhile, even successful startups are raising money in “down rounds,” which give them lower valuations than prior rounds. Since last year, 71 companies have raised down rounds, according to investment database CB Insights, including Square, Foursquare and Jawbone.

“If they raised [its Series C] now, the valuation would be cut in half,” Aarons said.

In a statement to TRD, Compass said it has beat revenue targets for each of the past six quarters, and has $6 billion in annual sales volume. As of the second quarter, the company had 800 agents in 24 offices across eight regions.

But while there’s plenty of evidence of Compass’ expansion to the Hamptons, Los Angeles and Aspen, insiders say the company is still far from profitability because of massive expenditures related to new offices and agents. And those costs quickly eat up potential profits in the notoriously low-margin brokerage business.

Compass, led by CEO Robert Reffkin, pivoted to a more typical brokerage model in 2014 after experimenting with a rental model that employed salaried “neighborhood specialists” instead of brokers.

In the traditional brokerage world, a $1.3 billion valuation is a stretch, according to insiders.

Realogy, the massive, real estate conglomerate that owns national brokerages including Corcoran Group, Sotheby’s International Realty and Citi Habitats, RE/MAX, Century 21 and Coldwell Banker – currently has a market capitalization of $4.35 billion. Its shares closed at $28.64 a share on July 11.

Even Douglas Elliman, the largest residential firm in New York City, has a market cap far below the billion-dollar mark.

Elliman – which generated $637 million in 2015 revenue from its national real estate business – posted earnings of $35.7 million for the full year. Assuming that a brokerage firm trades for approximately three to seven times earnings (as a top executive at a real estate company told TRD), a back-of-the-napkin calculation would suggest a conservative valuation of between $107 million to $250 million.

“How is Compass worth three times what Elliman is worth?” asked one industry insider.

Early on, Compass’ valuation was based on the belief that it was a technology company that would break the brokerage mold. Co-founder Ori Allon sold two prior companies to Twitter and Google.

But skeptics say Compass has yet to prove it’s more than a brokerage – though some investors said they still believe in the capacity of Compass’ founders to make good on their promises.

“‪I like the founders, and I’m impressed with their progress,” Benioff said.

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