Can Compass deliver?

Awash in venture cash and under intense pressure to show big returns, the firm is buying brokerages from coast to coast and targeting $1B in revenue

Robert Reffkin did not want his picture taken. Not in front of an illuminated Compass logo. Not seated. And certainly not with his arms crossed.

Six years after co-founding the residential brokerage industry’s first unicorn with Ori Allon, Reffkin is working hard to cultivate the image of someone who is harnessing nearly $800 million in venture capital to transform the way real estate agents do business.

On a drizzly day in mid-August, Reffkin was dressed in a gray suit and white dress shirt, no tie — his uniform when he’s not clad in Compass swag. “Where’s the Compass T-shirt?” an agent called out as Reffkin strode onto the 11th floor of the company’s headquarters at 90 Fifth Avenue. “That’s the Robert we know and love.”

Reffkin’s demeanor softened as he stopped to make small talk with the broker. Meanwhile, Rory Golod, his chief of staff, used the time to offer a back-channel explanation on his boss’ behalf: “He doesn’t want to appear arrogant or entitled.”

The statement set several sets of nearby eyes rolling. But the reality is that while Allon has the tech chops — he’s sold startups to Google and Twitter — Reffkin is the face of the firm.

An alum of Goldman Sachs and McKinsey & Company, Reffkin is called in to close the deal when a coveted recruit comes in for an interview. For the last eight months, the charismatic CEO, who graduated from Columbia University in two years and served as a White House fellow, has been traveling four or five days a week as Compass ramps up its national expansion.

“Robert’s vision was one that we felt very strongly about,” said Justin Wilson, an operating partner at SoftBank, speaking at an Inman conference in San Francisco in July, several months after its $100 billion Vision Fund — which has backed Uber and WeWork — invested $450 million in Compass.

Awash in funding, Compass’ latest target is $1 billion in revenue this year, a staggering jump from the $370 million it reeled in last year.

But to get there, the New York-based firm is under tremendous pressure to grow faster than ever. In a bid to grab market share, it’s been buying up firms from coast to coast — and sending shock waves through the industry in the process. Last month, for example, it announced a blockbuster deal to acquire Pacific Union International Realty, a San Francisco firm with $14 billion in annual sales.

But Compass is also altering what was previously its singular focus on creating tools to help residential agents. Over the summer, it launched a commercial brokerage division and started licensing its marketing and technology, albeit with mixed results. And by the end of the year, it plans to offer title and escrow services.

“They are mowing down the industry,” said John Campbell, an analyst who covers real estate for financial services firm Stephens Inc.

According to Campbell, Compass is capitalizing on extreme unease among residential brokers, who fear being replaced by technology and think Compass can help them with a more cutting-edge approach.

“Agents are fearful of tech disintermediation,” he said.

But taking SoftBank’s money comes with strings, sources said.

“They expect you to completely dominate the market,” said Zach Aarons, an investor and co-founder of MetaProp, a real estate tech accelerator. “Scorched Earth sounds too negative,” he said. “It’s more like, ‘We’re going to basically stack the deck in your favor in such a way that all you have to do is execute and you’ll take the whole market.’”

Taking all the pawns

There’s no doubt SoftBank’s investment has forced Compass to grow up fast.

At deadline, Compass had 6,400 agents and 150-plus offices, up from just 2,100 agents and 42 offices nine months ago. In less than a year’s time, the company has also quadrupled its nonagent headcount to 1,080 (from 265).

“The investments have allowed us — and let us — accelerate our growth in marketing and support, in technology and [in new geographic] regions,” Reffkin told The Real Deal last month.

Even before the SoftBank funding, Reffkin publicly said Compass was on a quest to control 20 percent market share in 20 major U.S. cities by 2020. Those locations include the markets it entered early, like New York and Los Angeles, but also newer ones like Dallas, Seattle, Philadelphia, Atlanta, Nashville, Houston and Austin.

Until recently, Compass had a reputation for buying agents (often with hefty signing bonuses and stock options) — not companies.

But so far this year, it’s acquired 10 brokerages — including Pacific Union. By comparison, Compass bought just four firms between 2012 and 2018.

On the M&A circuit, there are few firms with Compass’ appetite for growth. But Warren Buffett’s Berkshire Hathaway is one of them.

While Berkshire’s HomeServices of America hasn’t yet made a dent in the New York market, last year it skyrocketed to the No. 2 brokerage nationwide with $125.4 billion in sales, according to Real Trends, a Colorado-based research and consulting firm.

Only NRT — the division of Realogy that includes the Corcoran Group, Sotheby’s International Realty, Citi Habitats and Coldwell Banker — had a higher sales volume, at $178.2 billion.

HomeServices CEO Ron Peltier said the firm, which has been around since 1998 and was bought by Buffett a year later, targets well-established players in premier markets and often waits patiently until the timing is right. That was the case last year when it bought the Virginia-based Long & Foster, which had a massive 11,000 agents and $29 billion in 2016 sales.

HomeServices’ rise (and financial firepower) has put it in direct competition with Compass for acquisitions.

Compass CEO Robert Reffkin

But the two have decidedly different cultures — not to mention strategies for absorbing smaller firms. While Compass rebrands firms under its flashy tech umbrella, HomeServices keeps the company brands (and leadership) intact.

“With HomeServices and Warren Buffett, you have the ultimate long-term investor,” said Chris Meyers, the president of Westchester-based Houlihan Lawrence, whose family sold the firm to HomeServices in 2017.

But each is benefiting from what Rob Lehman, Compass’ chief growth officer, described as “seismic shifts” in real estate, including discount firms and startups looking to eliminate agents.

“Just the fact that consumers are more discerning puts more pressure on real estate agents to demonstrate value,” he said. “A lot of the reasons that Compass has resonated in markets we’ve entered is that we are looking to future-proof the real estate agent against these forces.”

Put another way: With disruptors like online discount brokerage Redfin driving down commission prices and cloud-based brokerage eXp Realty offering lucrative commission payouts, agents at traditional firms want to protect themselves. “It’s like, they’re better off joining forces than individually battling it out,” said Campbell. “Going it alone will be a treacherous route.”

But just as Compass once rattled brokerage chiefs wary of their agents defecting, it is now spooking independent firms facing an existential choice: Get bought out or become obsolete.

“All over the country right now, their big chess move is to take over all the pawns so they can control the board,” said one New York brokerage chief whose firm was pursued by Compass.

Lehman, however, has said M&A is just one part of Compass’ strategy. “Getting market share isn’t something you do by brute force,” he said.

But resistance from some competitors suggests otherwise.

Zephyr Real Estate in San Francisco, which had $2 billion in 2017 sales, was granted a restraining order against Compass after it alleged the firm pursued its managers in the middle of acquisition talks. 

In court documents, Michael Barnacle, a managing broker at Zephyr, said he was contacted by Lehman, Reffkin and multiple recruiters — whom he turned down.

“I believe their persistence in attempting to recruit me demonstrates a desire on their part to disrupt Zephyr’s business,” he said in a complaint that’s reminiscent of lawsuits Compass faced in New York. (In 2014 and 2015, Corcoran and Citi Habitats accused Compass of violating noncompetes and trying to access proprietary data; the suits were ultimately settled. Long Island City-based Modern Spaces also filed an agent-poaching suit this year; that case is ongoing.)

Even the Pacific Union deal suggests that Compass has become too powerful to turn down.

A month before confirming the tie-up, Pacific Union CEO Mark McLaughlin publicly derided Compass for overstating its San Francisco market share. And he belittled the firm’s foray into commercial brokerage.

But in an Aug. 21 voicemail to Pacific Union agents, the firm’s president, Patrick Barber, said that after seeing a demo of Compass’ technology, they realized they couldn’t compete. “Most of these tools we have tried to do ourselves,” he said.

While the terms of the deal were not disclosed, some speculated that Pacific Union’s owners are in line for a major payday.

In July, Reffkin said Compass is paying the brokerages it acquires between four and six times EBITDA (earnings before interest, taxes, depreciation and amortization) — in line with the industry standard. But Steve Murray, founder of Real Trends, speculated that it paid far more for Pacific Union, perhaps as much as $200 million. That may have been too sweet a deal for the firm’s majority owner, the title giant Fidelity National Financial, to turn down.

Bose George, an analyst at investment bank Keefe, Bruyette & Woods who covers Fidelity, said it’s no secret that the brokerage business has been a tough one of late.

“This year has shown that the business has been challenged, just from the competitive environment for agents, especially in the big markets,” he said. “A lot of it points back to Compass.”

Revenue requirements

Although Compass hit unicorn status before December 2017, SoftBank’s backing valued the firm at $2.2 billion overnight — and raised the stakes for how quickly the firm needed to get from point A to point B.

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COO Maëlle Gavet, who joined Compass from discount travel website Priceline, said she was relieved when Reffkin and Allon didn’t waver from their agent-first approach in the wake of the funding windfall.

“The danger is suddenly you lose focus of what matters,” she said. “We are not going to throw big parties. I have seen Robert actually go into expenses and literally go line by line [to see] that we’re not spending money on things that don’t matter for agents.”

But while fast-growing startups often see management churn, Compass has weathered notable turnover in the last 18 months.

It’s brought on executives, including Gavet, who oversaw global operations at Priceline; Eytan Seidman, head of product; Khurrum Malik, chief marketing officer; and Madan Nagaldinne, chief people officer.

(Click to enlarge)

But during the same time, it’s burned through two CFOs. David Snider, who was one of Compass’ first hires and helped orchestrate its fundraising, left in August 2017. And Craig Anderson, former COO and CFO of cycling chain Flywheel, left in March after seven months. (Around the time of Anderson’s departure, Liming Zhao, chief technology officer, also left to start his own firm.)

Meanwhile, sources said, several accountants and finance staffers walked out this spring. “As the leadership in finance fell apart, it affected the team’s morale,” said a former staffer, who described an “enormous, unmanageable” workload that required working around the clock to rerun budgets and projections because of the SoftBank funding. “The team is constantly struggling to keep pace with the modeling.”

More than one former employee also described tension between the finance team and Compass’ top executives over the company’s long-term revenue projections.

“They need to show investors certain revenue growth,” the former staffer said.

In recent months, some have speculated that SoftBank may double down on Compass — just as it’s done with WeWork.

Though Reffkin wouldn’t comment on the rumor, he said Compass isn’t done raising money. “Raising capital is the right thing to do if you want to invest in building a good company,” he said.

Wilson has said publicly that SoftBank has patient capital, but there’s no question it’s looking for a handsome return. “It’s not that we’re going to invest and hold forever,” he said in San Francisco in July. “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” — including whether to go public or stay private for several more years.  

Compass remains tight-lipped about an initial public offering. But scaling the firm is key regardless of its profitability — as Redfin demonstrated last year when it went public despite its annual losses.

“If you can show enough growth, and you can convince the investment bankers during your road show that you have a path to profitability,” said MetaProp’s Aarons, “then you can definitely go public.”

A vast referral economy

In late August, just as the summer was winding down, 800 Compass agents and staffers boarded luxury buses in Manhattan that shuttled them about 90 miles north to Iroquois Springs, a 200-acre campground in Rock Hill, New York. The three-day retreat — dubbed Camp Compass — was billed as a team-bonding event. Think cabins, tents, bonfires, tug-of-war and s’mores.

“We’ve been focused on cultural feedback,” said Gavet, describing her desire to maintain the company’s culture even as it grows. “People need to trust each other. There’s no technology to replace that.”

For Compass’ 200-person product-and-engineering team, the chance to unplug was welcome.

The company is launching 13 tools this year, including an internal communication app for agents and a feedback tool that allows agents to dash off grievances or share ideas with senior management.

The latter has already led to a new initiative: a so-called Agent Betterment Fund, which launched in August and will provide interest-free loans of up to $1 million for agents to invest in their businesses. The fund has $10 million, but Reffkin said he plans to ask Compass’ board to increase the pot to $50 million.

This fall, Reffkin said, Compass also plans to launch a health care initiative. He was short on details but said it would lower the cost of insurance by up to 30 percent for some agents.

One of Compass’ flashiest new branding products is a 21st-century round illuminated sign that includes a QR code.

Decidedly less sexy is a new CRM (customer relationship manager) that will stitch together the firm’s existing suite of tools with software that lets agents toggle between things like the company’s Collections platform, a Pinterest-like app where agents and clients can save and share listings, and its Marketing Center.

It’s the CRM, however, that Gavet says will provide something that agents can’t get at any other firm.

“There’s this idea that good technology is technology you create from scratch,” but in reality, the opposite is true, she said; Google and Facebook used open-source software to build their platforms, she pointed out. “The magic is in the glue, always.”

But not all competitors are buying that.

This past July, MoxiWorks — a cloud-based tech platform for agents — took aim at Compass’ approach to tech innovation.

In a widely circulated open letter to Reffkin, the CEO of the Seattle-based company, York Baur, criticized Compass for using technology from third-party providers like MailChimp for email marketing and Mopro for website design.

“The tech stack you tout is something every other brokerage can quite literally replicate on the open market — many already have,” he wrote.

At the time, Compass dismissed the letter as an attempt by Baur to win business. Last month, Gavet again shrugged off the attack and acknowledged that Compass has used tech from other vendors. But, she said, the firm’s goals are much bigger and include a three-phase tech strategy.

Phase one is boosting agent efficiency — a mailer that may have taken hours in the past can now be done in minutes with the Marketing Center platform, Gavet said. Phase two involves enabling tools like Marketing Center to intuit “best practices” for agents and recommend marketing strategies. And phase three is automation.

“This is where the real impact of technology starts to happen,” Gavet said, describing a scenario in which paperwork is autogenerated or a contract is populated automatically. “You start to change fundamentally the way an agent begins to work, because the task they were doing, they don’t need to do anymore.”

According to Gavet, the goal of automation is to give agents more time with clients — and ultimately create a vast “referral economy” that agents can make money off of. That means giving agents referral fees for everything from title insurance business (which its rivals already offer) to design services (which they do not) to contractors to painters.

In July, Reffkin said he envisions a day when agents only rely on commissions for 20 to 30 percent of their earnings.

He said Compass is spending “billions” to create a single platform that will formalize the slew of referrals agents are already making. “You’re answering them today, you’re just not getting paid for it.”

Prime teen years

Although Compass hasn’t yet hammered out the monetization of referrals, executives are piloting other revenue-generating services.

In July, the firm announced it would license its marketing and tech tools to boutique firms through a program called Powered by Compass. A month later, it announced the launch of a commercial division after acquiring Paragon, a San Francisco-based firm with $2.3 billion in 2017 sales. (In New York, it brought on Eastern Consolidated’s Adelaide Polsinelli, Robin Abrams and a handful of others to join the team.)

“They’re probably trying to create not new revenue streams, but new projection streams, because they raise capital on projections,” said a brokerage industry veteran. “Now that they’re coming to fruition, their investors are starting to see what’s real and not. You can’t double down on projections.”

Douglas Elliman Chairman Howard Lorber said all the residential firms dabble in commercial. Not doing so would be leaving money on the table: “You’re selling a CEO’s big apartment and you find out he’s looking for office space,” he said. “Or you’re working with developers looking for land.”

But Andrew Heiberger, who founded Citi Habitats and the now-defunct Town Residential, said for a residential firm, relying heavily on commercial “is not really something you can model or build a business around” but more like a needle in a haystack.

By the end of the year, Compass will take another cue from traditional firms by launching ancillary title and escrow services — revenue-generating businesses that will boost its top-line performance. Meanwhile, the firm claims its agents sold $14.8 billion in real estate nationally last year, and they are on track to close $35.6 billion in 2018. And it said the “majority” of its offices are profitable.

Rival brokerages heads, however, have long argued that Compass’ overhead is higher than anyone else’s in the industry. And they’ve pointed out that the company will need to turn a profit at some point.

Not to mention that adding new services may be easier said than done.

Days after announcing a licensing agreement with Leading Edge Real Estate, a Massachusetts-based firm, Compass pulled the plug on the deal amid agent backlash. Reffkin characterized the collapse of the deal as evidence that Compass’ technology works. “Our agents didn’t want to have the technology shared with [other] agents,” he said.

The company hasn’t scrapped Powered by Compass, but it will do deals only in markets that Compass is not operating in.

Gavet offered a different take on the fallout, saying Compass is not afraid to experiment — even if it means failing.

“The way I describe Compass to pretty much everyone is to say we survived infancy, [but] we’re not yet in the adult stage,” said Gavet.

That growth spurt can be fun and exciting, she said, but it’s also a formative time: “It’s prime teenage years.”