No sooner did the venture capital-backed brokerage Side achieve unicorn status last week than the comparisons to Compass started rolling in.
The firm, which targets “not all agents, just the best agents,” announced a $150 million round led by Coatue Management, putting its valuation around $1 billion. The capital will fund Side’s growth across the U.S., just as Compass moves forward with a long-awaited plan to go public at a $10 billion valuation.
“Side is more of a direct competitor for Compass than a direct competitor to me,” said Michael Nourmand, president of Nourmand & Associates Realtors in Los Angeles.
Neither Compass nor Side pioneered the idea of a VC-backed brokerage, but each one claims to empower agents — particularly top agents — by giving them technology and software that makes them more productive.
Beyond that, however, there are more differences than similarities between the two firms.
Compass, founded in New York City in 2012, has grown aggressively in part by elevating its own brand. Side, a five-year-old firm based in San Francisco, is a white-label platform — meaning agents have their own brand and run their own businesses while Side takes care of the back-end (i.e., administrative) work.
“You don’t join Side to be at Side,” said Clelia Peters, president of Warburg Realty and a venture partner at Bain Capital Ventures, who sits on Side’s board. “It’s an enabling platform.”
Both firms also have limitations.
Compass has been a thorn in the side of industry incumbents, who question whether its valuation is too high since it is not profitable. While rivals credit Side with putting agents front-and-center, they say that focus may backfire since the company lacks brand recognition among homeowners.
“It makes [agents] feel unique,” said Vanessa Bergmark, CEO of Red Oak Realty in Oakland, California. “But I think the consumer, the true end client, can get confused. There’s no name recognition … no established reputation, so that can simultaneously work against the agent.”
Here are the other ways in which the firms are alike — and where they differ.
Their cups runneth over
Both Compass and Side have scaled up using other people’s money.
Compass has raised more than $1.5 billion from investors, including SoftBank, Fidelity and Dragoneer. By comparison, Side has locked in some $200 million from backers Coatue, Trinity Ventures, Sapphire Ventures and others.
Both firms became unicorns after closing their Series D rounds. For Compass, it happened in 2016 when Wellington Management led a $75 million financing. Side’s recent $150 million round valued the firm at north of $1 billion.
“If you want to grow, you have to eat cash,” CEO Guy Gal told The Real Deal. “You can’t partner with the agents first and not be prepared to support them excellently.”
In 2018, Compass CEO Robert Reffkin outlined an ambitious plan to capture 20 percent market share in the top 20 U.S. markets by 2020. That kicked off an acquisition spree of epic proportions: Between 2018 and 2020, Compass shelled out $300 million to buy other firms (such as Pacific Union International in San Francisco) and tech companies (such as Contactually, a popular consumer relationship management software). The result: The brokerage now has 19,000 agents in 46 markets.
With 1,500 agents nationwide, Side has taken a “quality over quantity” approach. Last year, Gal told TRD most real estate agents are “hucksters and charlatans,” and shared his belief that nine out of 10 agents shouldn’t even be licensed. He says the company has a 20-year vision to bring only the best agents onto its platform. Side collects a 10 percent commission on each transaction, and it limits the number of “partner” agents in a given market so they don’t cannibalize each others’ business.
“We’re incentivized to grow by helping those teams grow,” Gal said. “It’s not adding net new people in an indiscriminate way.”
Reffkin frequently cites his mom, an agent, as his motivation for building better tools to help agents be more productive. “We believe that real estate agents are an underserved group of business owners,” he wrote in a founder’s letter included in the company’s S-1. But Compass has also offered agents favorable splits and bonuses. While top agents run their own teams, all of the firm’s agents coexist under the company flag and market themselves with Compass’ elegant, black-and-white branding.
Side’s approach to empowerment is to stay in the background. The emphasis is on its platform, which provides back-end support so that agents run their own brokerage and brand.
“Great agents are not opportunity constrained, they’re capacity constrained,” said Gal. He said Side does not offer signing bonuses or incentives — but it doesn’t have to, because agents using Side’s platform become more productive. “We look for [agents] who will pass the marshmallow test,” he said. “Instead of taking a marshmallow today, they wait six to 12 months to have a whole bag of them.”
The “P” word
Compass’ IPO filing gave an unvarnished look at the company’s financials. Buoyed by this year’s hot housing market, Compass’ sales volume jumped 55 percent in 2020 to $151.7 billion. That led to $3.7 billion in revenue last year, up from $2.4 billion in 2019.
But Compass is not profitable and lost $270 million in 2020, compared to a net loss of $388 million a year prior. Compass said in its S-1 that it expects losses to continue for the “foreseeable future,” although it has invested in ancillary services like title and escrow to drive profits.
As a private company, Side’s finances are not easily accessible, but Gal said the company tripled in size — and, consequently, production — last year. Side reportedly generated between $30 million and $50 million in revenue in 2020, according to TechCrunch. Gal said as of early 2020, Side agents collectively represented $5 billion in 2019 sales volume. Today, they represent $15 billion in annual transaction volume.
“We choose not to be profitable,” he said, noting that Side is profitable on a per transaction basis. “We’ll never have to raise money again,” he added. “This will take us to where we want to grow … If we do [raise money], it’s not because we need it.”