Zillow shocks insiders with StreetEasy strategy

An inside look at Zillow’s controversial decisions like replacing StreetEasy CEO and shutting its non-New York sites

Zillow CEO Spencer Rascoff (left) and Michael Smith, StreetEasy’s cofounder
Zillow CEO Spencer Rascoff (left) and Michael Smith, StreetEasy’s cofounder

On Sunday night, August 18, most of the 34 employees and executives of listings website StreetEasy gathered in the company kitchen for a game-changing announcement by CEO Michael Smith: Zillow, the $3 billion Seattle-based residential listings website, was acquiring the firm for $50 million.

While the acquisition was not a surprise — employees had seen well-dressed strangers holed up with StreetEasy executives in hush-hush meetings for weeks — the buyer was.

Since launching in 2005, StreetEasy has developed what’s widely considered the most accurate listing system for consumers in New York and one of the most, if not the most, comprehensive local website of its kind in the country. Meanwhile, Zillow, with 64 million unique visitors a month and counting, is the most widely used listings website nationally. But before its acquisition of StreetEasy it was considered something of a joke in New York, with inaccurate property information and low market penetration.

Zillow CEO Spencer Rascoff acknowledged as much in an interview with The Real Deal shortly after the acquisition was announced: “Zillow had left something to be desired, and StreetEasy clearly remedied that,” he said.

But the even bigger surprises didn’t come until after that first announcement.

Six weeks later, on Monday, September 30, the employees again assembled in the kitchen, but this time the news was somber. Smith — described as a leader who aggressively pushed his staff while still managing to foster a relaxed work atmosphere — announced that he was out as CEO. Instead, he’d be taking the far less hands-on role of chairman. In addition, the firm’s recently hired chief operating officer, Robin Allstadt, would leave the company. (It’s unclear whether Smith negotiated his change in position as part of the purchase agreement.)

In their place, a married couple with a tech start-up background — Susan and Matt Daimler —was installed to run the show. (Susan is now the general manager of Zillow New York, which includes StreetEasy; Matt is general manager of Zillow Pro Tools, a suite of online applications such as website AgentFolio, for the business world, as well as head of product for StreetEasy.)

Days after the leadership announcement was made, news broke that StreetEasy would shutter its nascent sites in South Florida, Washington, D.C., and Philadelphia, throwing into question what strategy Zillow would be using to profit from StreetEasy’s successful model.

To shed light on that, TRD spoke with more than two dozen people in the New York, Florida and Washington real estate communities to piece together an inside look at the sale and Zillow’s endgame. Several of those sources declined to be named because they were not authorized to speak publicly on the matter. In addition, company officials said all employees signed a confidentiality agreement when the acquisition went through.

In the short term, local insiders told TRD that consumers in Miami and D.C. will be worse off, because StreetEasy had access to 100 percent of the listings in both markets, while Zillow has about 80 percent, despite being the most-used site in those locations.

“StreetEasy was regarded as a much better source of information, much more accurate,” said Alicia Cervera, managing partner at the large residential brokerage Cervera Real Estate in Miami. “I think Zillow has some challenges that create problems for the consumer and realtors alike.”

While some had been hopeful that Zillow’s purchase would lead to greater transparency in urban markets around the country, the company has said it will not replicate StreetEasy’s model in other cities.

“StreetEasy is our New York City brand, and Zillow is our national brand,” the company said in a statement to TRD. “We’re very excited about the massive opportunity to grow StreetEasy in New York City. StreetEasy has the number-one online real estate brand in New York City, while Zillow has the top online and mobile brand in every other major U.S. city.”

The news came as a surprise to some who’ve been closely following StreetEasy since it launched.

“I think they are leaving acquired technology on the table,” said Jonathan Miller, a top residential data-cruncher in the city, who prepares quarterly market reports for Douglas Elliman covering New York and South Florida.

“Zillow is a national model whose strength is single-family properties, and it would benefit from the [StreetEasy] interface for high-rise properties in major urban markets,” he said.

Following the money

Before StreetEasy launched in New York, there was no dependable, consumer-friendly way to wade through residential listings, much less historical sales data. The go-to site at the time was the New York Times, said Noah Rosenblatt, founder of UrbanDigs, an analytics and consulting firm, and one of the city’s top apartment-tech gurus.

“StreetEasy solved the problem of data transparency and data reliability,” Rosenblatt said. “Never before could you get an accurate listing history.”

For example, he said, if an apartment had lingered on the market for months, the broker might simply resubmit it to the Times as a new listing to make it look fresh to potential homebuyers, he said.

Recognizing the opportunity, Smith, along with fellow techies Nataly Kogan and Douglas Chertok, formed NMD Interactive (taken from their initials) in 2005. The following January, the company debuted StreetEasy’s website.

Kogan and Chertok have since left the company.

Investors took to the idea quickly, providing a total of $400,000 to the company in February 2006.

Those early investors included executives at the consulting firm Global Strategy Group —StreetEasy’s original landlord at 895 Broadway — hedge fund Southpaw Capital Management and lender Sig Zises, among others, according to court records. Then, in August 2006, the Boston-based venture capital fund FA Technology Ventures invested $2.5 million, injecting the firm with cash and obtaining control of most of the firm’s preferred stock.

While the exact ownership structure of the company is not public, court documents filed in connection with a lawsuit against Chertok, as well as Zillow’s contract to buy StreetEasy, which is available on the U.S. Securities and Exchange Commission website, offer clues.

According to information from both of those sources, Smith was the largest stakeholder at the time the company launched, with about 64 percent of the company — or 6.45 million of the 10 million shares of common stock. (At the time, Chertok had about a 25 percent stake, a board member, Tony Schmitz, had a 9 percent stake, and Kogan had 2 percent.)

By the time of Zillow’s purchase, there were nearly 10.48 million shares of outstanding common stock, according to the contract filed with the SEC. On top of that, there were nearly 6.7 million shares of preferred stock. The bulk of StreetEasy’s $50 million sale price was divided through an undisclosed formula among the company’s shareholders.

While it’s unclear who all of those shareholders are, as of 2006, FA Technology owned 5.3 million shares of preferred stock, while the other early investors, including those from Global Strategy, owned 1.4 million shares. In addition, several million shares of stock and stock options were set aside for an incentive plan for the company’s employees.

Calls to the investors, along with company board members, were not returned.

The Zillow and StreetEasy teams at NASDAQ ringing the opening bell on Aug. 19, the day their deal was announced

The Zillow and StreetEasy teams at NASDAQ ringing the opening bell on Aug. 19, the day their deal was announced

Parallel tracks

StreetEasy was not alone in trying to corner the “real estate transparency” market at the time of its launch.

Around the same time that Smith and company were getting their ducks in a row, in 2005, Richard Barton, founder of travel site Expedia, and Expedia alum Lloyd Frink founded Zillow.

The site went live in early 2006, just days after StreetEasy.

But the two companies had different business models and slightly different missions.

Zillow, a public company, earns revenue through advertising and by selling brokers the right to place their name and contact information near property listings — often by the zip codes — even if they are not the listing broker. Earlier this year, the company predicted that it would end 2013 with revenue between $186 and $188 million. Meanwhile, its stock price has skyrocketed over the past year, from just over $45 per share in September 2012 to more than $83 per share late last month.

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StreetEasy, on the other hand, was a private firm with 1.2 million unique visitors a month. Its revenue was not disclosed, but according the contract filed with the SEC, it comes from its premier subscribers as well as from advertising.

When the company first launched in Manhattan, which has no central Multiple Listing Service, StreetEasy “scraped” the data from the city’s large brokerage firms — a move initially met with ire. But in time, virtually all the brokerages saw the value of the website, and today more than 1,500 listings feeds provide listing information directly to StreetEasy, the company said.

Firms such as Zillow and competitor Trulia found Manhattan’s confusing matrix of condos and co-ops difficult to navigate, brokers said. As a result, they never figured out how to smoothly integrate the urban landscape into their suburban-centric databases. Today, both firms have incomplete and often inaccurate data for Manhattan, a review by TRD shows.

StreetEasy, on the contrary, “cracked the code,” as Rascoff said upon announcing the acquisition in August.

It’s unclear why StreetEasy chose to sell now — its executives declined to comment — but with a strong stock and a generally improving housing market, market watchers said it seemed like a good time. In addition, FA Technology may have wanted out, considering the length of its investment.

Financial auditor and consultant Kevin Pianko, who had no inside knowledge of the transaction, said investors often expect to close funds within 10 years.

The FA Technology fund was formed in 2001, so was considered “long in the tooth,” said Pianko, a partner at the WeiserMarzars accounting firm.

StreetEasy’s edge, blunted

In 2012, with the real estate market heating up again, StreetEasy began a major hiring push, Smith told TRD in late 2012. He said the firm had grown from 13 to 23 employees in just a few months. By the time of the Zillow acquisition, it had nearly tripled to 34.

Janet Liff, an independent commercial broker, represented StreetEasy in its search for more office space at the time. The firm, which had been crammed into Global Strategy’s office as a subtenant, took a five-year lease for a 7,500-square-foot, second-floor space at 13 Crosby Street in Soho.

“Flatiron had gotten too corporate [for Smith],” Liff said, referring to the company’s sublease location. “The culture was very important to him, to create a nice home for his employees.”

The company was growing nationally as well, eyeing other so-called vertical cities that, like Manhattan, had complicated urban homeownership structures.

First in South Florida, and then in D.C., and most recently in Philadelphia, the firm was on a march outward, with eyes on Chicago and then the West Coast, insiders said.

While StreetEasy was entering markets that Zillow and Trulia were already in, the New York firm had an edge: its reputation for accurate information in a dense, urban market.

The advantage played out in StreetEasy’s two-pronged approached to obtaining listings. Like Zillow and Trulia, it used ListHub, a West Virginia-based company that provides listing information nationwide gathered from local MLS databases. But in addition to that, StreetEasy also partnered with the local realtor feeds in the Miami area and D.C. to ensure that its listing coverage was even more comprehensive and up-to-date.

StreetEasy’s reputation helped because some brokers and firms don’t permit their listings to be syndicated on Zillow. Brokers who dislike the site said that was due to a combination of reasons, including the fact that the company’s “Zestimates,” or market value estimates on properties, are often inaccurate.

In D.C., for example, David Charron, CEO of Metropolitan Regional Information Systems, the company that handles the MLS feeds for the Realtor associations in several states and in D.C., told TRD that Zillow has about 80 percent of D.C.’s listings (up from about 70 percent in recent years.) But, he said, StreetEasy had closer to 100 percent at the time it was shuttered, which was after it had signed a contract to get data from MRIS directly this past February, he said.

Charron declined to say how much StreetEasy paid for information from MRIS, but other sources said it was in the thousands of dollars, rather than hundreds of thousands.

“If StreetEasy had enough time and money, it could have given Zillow a run for its money in the urban areas,” Charron said.

Meanwhile, the head of the powerful Miami Association of Realtors, the largest local Realtor group in the nation, had sharper words for Zillow.

Teresa Kinney, the organization’s CEO, told TRD that just before Zillow’s acquisition of StreetEasy was announced, she had inked a deal with StreetEasy to provide it with a direct feed, essentially giving it 100 percent market coverage. By contrast, Zillow — while the dominant firm — had less than 80 percent of the market’s listings, insiders said.

After news of the sale, Kinney asked StreetEasy to guarantee that it would not share information with Zillow. Then the Florida StreetEasy site was shut down, so the request was moot.

She said she won’t extend the same offer to Zillow.

“Of all the major, national websites out there, Zillow is the most inaccurate,” Kinney said.

Brand battles

While Zillow may get knocked in New York, it does have its fans here. Companies including the Corcoran Group, Town Residential, Keller Williams NYC, Halstead Property and Brown Harris Stevens have been sending their listings to Zillow (and advertising on the site) for years.

“They are a great partner,” said Zhann Jochinke, the chief operating officer of Keller Williams NYC. “We have a strong relationship with [Zillow] being [that we are] a national franchise.”

In addition, many brokerage insiders said StreetEasy’s new brain trust, the Daimlers, should not be underestimated.

Frederick Peters, president of Warburg Realty, had kind words to say about both Smith and Susan Daimler.

“I think both Michael and Susan are very smart, very creative, hard-nose business people,” he said, adding, “I was sorry to see that Michael was leaving.”

The Daimlers do have tech chops. They founded a website for airline passengers called SeatGuru in 2001, which they sold to Barton’s Expedia in 2007.

Then in 2009, the duo founded BuyFolio, which connects brokers and agents with their clients. Zillow purchased BuyFolio late last year for an undisclosed sum, then renamed it AgentFolio and kept the pair on. Today it is used by several of the city’s brokerages, including Keller Williams.

Still, Peters is one of many in the residential industry who anticipate that the StreetEasy brand will be dropped at some point and replaced with the Zillow logo.

“I think sooner or later in some way or other this will be the wedge that gets Zillow into New York,” said Peters, noting that it would be hard to keep the two brands going simultaneously.

The company, however, said StreetEasy will continue to be operated as an independent brand — a fact that should provide New York brokers with some comfort.

“Probably we all would have preferred that it remained an independent entity, but that is not what happened,” Peters said.