Like WeWork, Compass touts tech and culture. Are the companies different enough?

The residential brokerage claims it is disrupting the industry. Now its $6.4B valuation is being questioned.

Compass CEO Robert Reffkin and WeWork's Adam Neumann 
Compass CEO Robert Reffkin and WeWork's Adam Neumann

Updated, Oct. 18, 2019, 12:35 p.m.: At 10:26 a.m. on Oct. 9 — nine days after WeWork shelved plans for an IPO — Compass CFO Kristen Ankerbrandt fired off to her staff a set of talking points distancing the brokerage from the fallen unicorn.

“It may seem obvious,” she wrote in response to mounting questions from agents and employees. “But it’s worth stating that it is hard to draw any parallels between our businesses.”

Ankerbrandt cited their divergent customer bases, industries and business models. Her missive — posted on Workplace, the Facebook tool used by Compass — underscores the residential brokerage’s push to re-write a narrative that it’s overhyped and to extinguish other parallels to WeWork. (The full memo is appended.) Days earlier, six of the company’s C-suite executives sat for hours of interviews with The Real Deal to drive that message home.

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Compass CEO Robert Reffkin and Maëlle Gavet
Compass' COO Maëlle Gavet is out

“There’s nothing about what’s happening at WeWork that changes what’s happening at Compass,” CEO Robert Reffkin said during an interview. He added that he hasn’t followed the office-space company’s failed IPO. “I do not have a viewpoint on WeWork as a company.”

But it’s hard to ignore the similarities between the two: Both are backed by SoftBank and were boosted by sky-high valuations despite persistent questions about profitability. And both have traded on pronouncements of changing their industries through tech and culture.

Compass CFO Kristen Ankerbrandt

Compass CFO Kristen Ankerbrandt

Compass has grown at breakneck speed, upending the residential brokerage industry over the past seven years. It has more than 13,000 agents nationwide and is valued at $6.4 billion — more than seven times the market cap of Realogy, the nation’s largest brokerage conglomerate.

With $1.5 billion in backing, Compass spent heavily to grow. Like WeWork, it relies on a low-margin real estate business model but emphasizes its technology to boost its valuation. It has an unclear path to profitability and has lost a slew of high-profile executives, including COO Maelle Gavet last month.

“WeWork has gone through a massive correction because the public markets didn’t believe in how it was valued,” said Travis Putnam, a managing partner of Navitas Capital, which invests in real estate and construction tech startups. “Compass is going to have to answer those same questions.”

“We have enough capital”

This summer, Nasdaq posted a massive billboard in Times Square to congratulate Compass on its latest funding round. It was an attempt to woo the company ahead of its decision about where to list its stock.

But Reffkin told TRD the firm has no plans for an IPO in the next 18 months.

“We have enough capital where we don’t need to go public,” he said, though he wouldn’t say how much unrestricted capital Compass has, or if the WeWork debacle scuttled any plans to go public.

In justifying Compass’ valuation, Reffkin said it is a business-to-business-to-consumer company, and that its customers are agents who generate more revenue per person than WeWork’s members.

Reffkin also said Compass’ most recent valuation was set by multiple investors — including the Canada Pension Plan Investment Board, Dragoneer Investment Group and Glynn Capital Management — in addition to SoftBank, which alone had marked WeWork’s value at $47 billion.

“It’s a number of third-party investors, who are much smarter than I am, that do this for a living,” Reffkin said.

But venture investors in the real estate space are wary of discounting the role of SoftBank, which has provided more than a third of the $1.5 billion Compass has raised. Clelia Warburg Peters, president of Warburg Realty and a venture investor who recently left MetaProp, said both WeWork and Compass were driven by SoftBank to focus on top-line growth that may not be sustainable.

Compass CEO Robert Reffkin

Compass CEO Robert Reffkin

“SoftBank’s kingmaker funding strategy has driven up private-market valuations like they’ve never before been driven up,” she said. Though it’s true that other investors participated in earlier Compass funding rounds, she said, SoftBank is the only one writing such sizable checks. “Many people have argued that it’s inflating the value just prior to going public.”

SoftBank wouldn’t discuss its strategy, but a person familiar with the conglomerate said it values companies based on risk profile and potential cash flow.

Without definitive guidance on profitability, accessing more capital could be challenging for Compass. WeWork’s valuation, which plummeted from $47 billion to below $15 billion, has forced venture capitalists to reassess their approach to startups without foreseeable profits.

“Companies that fall in that bucket need to ask themselves where their next capital is coming from and at what price,” said Putnam, who has invested in Katerra, another SoftBank-backed firm with a tech bent.

Cloudy metrics

WeWork’s financial position was obscured for years. As it released snippets of information, it became clear that the company generated massive revenues — and losses. To show a more favorable outlook it invented metrics such as “community-adjusted EBITDA.” Once its parent company’s August IPO prospectus was laid bare, investors balked.

WeWork declined to comment.

Compass hasn’t hatched creative calculations for revenue, but its executives are equally reluctant to share key metrics.

Ankerbrandt said the company expects revenue of $2 billion and run-rate revenue of nearly $3 billion this year. But she would not disclose expenses or losses, calling the information “sensitive.” Similarly, the CFO said Compass has several profitable offices and regions but would not identify them.

In an interview with Bloomberg on Oct. 4, Reffkin said, “We’re profitable excluding HQ, in the majority of our markets. We can decide to be profitable entire company wide in any 12 month period.” But during an interview with TRD two days later, Ankerbrandt said “I don’t have a specific date I can give you when we’ll be profitable.”

She disputed the idea of comparing Compass’ valuation to WeWork’s. Though both are valued at about four times their total capital raised, Ankerbrandt said Compass is valued at twice its revenue run rate. WeWork was valued at more than 20 times that metric before its valuation plunged.

But some investors are leery of projected revenue metrics. Dave Eisenberg, a managing partner of Zigg Capital, which has invested in real estate tech startups, said Compass’ future revenue hinges on the health of the homebuying market and how many sales its brokers make. WeWork, on the other hand, can clearly forecast revenue with committed rent from its members.

“Using a run-rate number is not a super-flawed metric if you can forecast the revenue,” Eisenberg said. “If homebuying deteriorates, [Compass’] revenue would be materially lower than the previous quarter.”

Although Compass lacks the hefty expenses of WeWork’s lease commitments, it has a series of capital-intensive offerings including money for staging and bridge loans for sellers to make minor renovations.

The brokerage is also seeking to provide an “end-to-end” platform for consumers and agents that would incorporate listing, marketing, selling and financing homes. For Reffkin, that’s a departure from a traditional brokerage model with razor-thin margins.

WeWork has gone through a massive correction because the public markets didn’t believe in how it was valued. Compass is going to have to answer those same questions. Travis Putnam, Navitas Capital

As it builds its offering, Compass has grown its footprint inorganically. Two years ago Compass laid out a vision to capture 20 percent market share in 20 major U.S. cities by 2020. It then acquired at least 15 brokerages, ranging from mom-and-pops to larger operations such as Pacific Union International, a San Francisco-based firm with $14 billion in annual sales. A third of Compass’ brokers joined the firm through acquisitions.

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It expanded from 37 to 122 markets last year, and spent lavishly to lure brokers with high commission splits and massive sign-on bonuses — some as high as $100,000.

Reffkin said those perks are shrinking as the firm establishes itself in markets. (A company spokesperson said the firm paid sign-on bonuses to less than 5 percent of agents.) And after investing heavily in acquisitions in recent years, he noted, Compass stopped entering new markets in January and is now deepening its presence in existing locations.

“We didn’t try to conquer the world,” he said during this month’s interview, a departure in tone from the bold projections of Compass’ 2020 plan. “We are focused on depth over breadth.”

Tech trials

Technology has been central to Compass’ pitch to investors since its debut in 2012. But from the outset, critics have called its tech smoke and mirrors. It’s been accused of depending on tech developed by third parties, of pilfering trade secrets and of launching buggy apps.

“To be a tech company, you have to prove that you’re able to do more transactions per person with less overhead than a traditional brokerage,” said Eisenberg, who sold his 3-D mapping startup Floored to CBRE before launching Zigg Capital. “That is what [Compass] has to prove.”

Compass CTO Joseph Sirosh

Compass CTO Joseph Sirosh

Compass executives initially declined to comment on whether or not its tech helped brokers become more efficient. But after publication, a spokesperson for the firm said in a statement that its “internal analysis has shown that agents become more productive upon joining Compass.”

In an embarrassing blow last year, Compass cancelled a tech-licensing pilot in Boston after agents believed the firm was giving away its competitive advantage. Joseph Sirosh, Compass’ chief technology officer, said the firm is discussing another attempt to license its technology.

Several former Compass executives told TRD on the condition of anonymity that the brokerage faces a formidable road. It has developed “one-off” features that are “nice to have, not need to have,” one former executive said. Said another, “So much of what they’re doing is nibbling around the edges.” The company said it won’t build a tailored tech platform for its year-old commercial division, which has 30 agents.

In a mea culpa of sorts late last year, Reffkin sent a company-wide letter acknowledging missteps. “We launched some technology without testing it thoroughly with agents and learned we can move too fast,” he wrote.

Since a $400 million investment from SoftBank and Qatar’s sovereign wealth fund in September 2018, Compass has tried to steady the course. It opened a product and engineering campus in Seattle last month and recruited Sirosh, Microsoft’s former CTO of artificial intelligence.

And since the end of last year, a new 20-person AI team has launched four tools, including a predictive search feature that suggests properties to customers based on their browsing history. Compass now employs 400 people in its tech engineering department — nearly 20 percent of its total staff.

Rory Golod, regional president of the New York region, walked TRD through a demonstration of its internally built products. One tool, a sleek feature known as Compass Collections, serves as a kind of Pinterest for property showings. Agents are encouraged to provide feedback on an online forum on how to improve products.

But, under pressure to produce, Compass opted to buy  a consumer relationship manager, a mainstay of brokerages. Although Compass launched a proprietary CRM in 2018, the firm announced in February that it acquired Contactually, a CRM used by major brokerages.

Its competitors have alleged Compass went a step further and stole from them. In July it settled two suits brought by Zillow, which alleged the firm poached three tech executives and tried to gain access to information to help it build out its own tech platform. That same month, Realogy sued Compass for “predatory” poaching and took aim at its technology, among other things.

“There is nothing innovative about its technology or its growth strategy,” Realogy wrote in the complaint. “There is nothing inventive about plain, old-fashioned theft.”

Compass filed a motion to dismiss Realogy’s complaint, which it called an act of “desperation” by the struggling holding company.

Collateral culture

Unlike WeWork, Compass has not been accused of egregious self-dealing and abuses of corporate governance. The brokerage touts a culture of frugality: In Ankerbrandt’s October memo she noted that she signs off on any expense above $1,000.

“Everybody flies coach here,” Ankerbrandt told TRD. “That’s in the DNA of the organization because we’re really here to deliver value for our agents first and foremost.”

A focus on company culture extends beyond thrift, the Compass executives said. Its website states that Compass’ mission is “to help everyone find their place in the world.”

“I understand very intimately how important culture is,” Reffkin said. “People don’t just work for money. They work for impact.”

For all of its talk about culture, Compass has weathered its share of high-level departures. The 10 executives who quit or were forced out over the past 19 months included the company’s COO, CFO, CMO, CTO and general counsel. Asked if he saw that as a sign of internal turmoil, Reffkin said simply, “I do not.”

Nick Romito, the CEO of real estate data firm VTS, said the volume of Compass’ departures “doesn’t surprise” him, considering the firm quadrupled its market footprint in 2018. “Growth like that is not for everybody,” he said.

SoftBank’s king-maker funding strategy has driven up private-market valuations like they’ve never before been driven up. Clelia Peters, Warburg Realty

Nonetheless, Compass reorganized its C-suite in June to streamline roles and, current and former staffers said, to minimize friction between Reffkin and former COO Gavet. In one instance, a source recalled, Reffkin hashed out a deal in 2018 to buy Boston-based Bushari Real Estate but only told Gavet after the fact. After publication, Compass said this was not the case.

Some former colleagues expressed surprise Gavet lasted as long as she did, describing the little latitude Reffkin allowed her. “She was not the Sheryl to his Mark,” one source said, referring to the relationship of Facebook’s two top leaders.

Broadly speaking, company executives have been split on strategic priorities. Executives who disagree with Reffkin haven’t lasted.

“I can do it the right way, or I can do it Robert’s way,” one executive recalled thinking. “Neither feels good.”

Of the departures, Reffkin said he is “rooting for every single one of those people.” But as Compass has evolved, its management needs also changed. “We may have mutually agreed that at this point in time… it’s better to go on and do something else.”

Although Reffkin said SoftBank has not set goals or benchmarks for Compass, the Japanese conglomerate has occasionally waded into management decisions, according to people familiar with the matter. That is a contrast to WeWork, where Adam Neumann had unchecked authority until SoftBank pushed him out and sent in its own executive to turn the company around.

At Compass, chief marketing officer Khurrum Malik was let go in June after persistent disagreements with management, according to people familiar with the matter. In particular, he and Gavet pushed for more direct-to-consumer marketing in a bid to gain market share — something agents had demanded. Investors and board members, which included a representative from SoftBank, balked.

“The board said no,” the person said. “They said, ‘Wait until the tech is better.’”

Update: After publication, Compass disputed information its representatives had provided for this story. TRD has included updated statements from the company and clarified some points. Regarding profitability, the story now says that Compass could be profitable within 12 months, an assertion made by Reffkin on Bloomberg TV on Oct. 4. This contradicted on-the-record commentary from the company’s CFO during an interview with TRD on Oct. 6, and two subsequent conversations with representatives of the company.

A previous version of this article incorrectly stated that Pacific Union did $28 billion in sales; that number has been amended to $14 billion. This story also misstated that Floored was sold to CBRE for $100 million.

The Oct. 9 memo from CFO Kristen Ankerbrandt to Compass staff and agents

Compass Family,

Over the past few weeks we have seen comparisons being drawn between Compass and WeWork simply because we share a single investor. To be clear, our businesses are quite different — in terms of our business model, capital structure, customers, culture and investments. I hope the 8 facts below help make this contrast crystal clear and answer the questions that some people outside of Compass have raised.

  • Compass has no debt: Compass has raised zero dollars of debt while WeWork has over $5B of debt obligations that they have to pay back. Every dollar we have raised is in equity. With debt, companies have to pay back lenders with company money. With equity, companies don’t pay investors, but rather the investors aim to realize their returns in the public market.
  • Compass’ valuation is in line with peers & leaves room for future equity growth: Compass’ last round (Series G) valued the company at $6.4bn, which implies a revenue multiple in line with those of other publicly-traded real estate tech companies at 2-3x 2019E revenue, a fraction of WeWork’s multiple reported by the financial press (20x).
  • Compass has a diverse and sophisticated investor base who collectively set the valuation for each round: Every one of our fundraising rounds has included multiple well-respected investors who have endorsed the valuation. Some of our investors include Wellington, IVP, QIA, Softbank, Fidelity, Dragoneer and others. WeWork’s recent rounds were exclusively with one investor.
  • Compass’ expansion strategy is focused on depth vs. breadth: We have executed a consistent strategy throughout 2019 to drive deeper into our top 20 markets in the U.S. with a focus on profitable growth versus opening hundreds of locations across 29 countries as WeWork did. We intend to be a global company but our near term focus is one of the reasons we feel great about our path to profitability.
  • Compass has a growing % of its employees focused on tech: We have over 425 members of our tech team who make up 19% of our total employee base (not 5%, as some outlets have erroneously reported), creating proprietary technology in partnership with our agents that they use to run their business and that differentiates us in the market.
  • Compass’ acquisition strategy has been focused on assets that strengthen the core business: Every business Compass has acquired has either efficiently grown our agent base or accelerated our technology roadmap (e.g., Contactually), which is very different than investing capital to acquire companies that are not relevant to the core business.
  • Compass has a culture of frugality: Our leadership team books coach tickets and does not fly on private jets and, as you know all too well, I review all company expenses above $1,000. This culture is critical to ensure we responsibly invest our money into building a better future for agents and their clients.
  • Compass’ industry and business model are completely different: It may seem obvious, but it’s worth stating that it is hard to draw any parallels between our businesses given that we have different customers (agents, not enterprises), are in different industries (residential real estate vs. commercial leasing), and have very different business models (an end-to-end tech platform on which to operate vs. an office space solution).

Lastly, you may have heard some concerns about tech IPOs underperforming in recent months, so I’m adding a simple chart at the end of this email put together by a major investment bank to provide additional perspective. It shows the last private market valuation compared to the current public market valuation for tech companies that have gone public since 2018. What you see, with few exceptions, is significant value created for the employees and investors (median increase of 68% in 2019 increasing to 85% when you include 2018). While the headlines might indicate these companies are performing poorly, the numbers show a sizable increase from their last private valuation to current trading levels.

I hope this helps provide you all some clarity and talking points for your clients and colleagues. I am amazed by the Compass team and incredibly proud of what we have all accomplished so far this year. I’ve spent 17 years in tech investing, working both at Carlyle and Goldman Sachs, and I couldn’t be more excited about the future at Compass. Thank you for your continued hard work and your commitment to our mission. We are grateful to you and your dedication to our customers. Stay focused and let’s make the flywheel spin!

All the best,