Why Compass is going public now — and the obstacles it faces

SoftBank-backed brokerage looks to go public in 2021

Ori Allon and Robert Reffkin (Getty, iStock)
Ori Allon and Robert Reffkin (Getty, iStock)

Compass stepped closer to an IPO last week by tapping Goldman Sachs and Morgan Stanley as underwriters.

But the brokerage has been quietly laying the groundwork for a public offering for months by bulking up its board, filling holes in its C-suite and rounding out its business by adding title and escrow services to drive profits.

Indeed, as Compass looks to go public, rivals are eager to catch a glimpse of its financials. For years they have questioned its valuation, alleging that Compass lacks groundbreaking technology to justify its unicorn status.

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Since 2012 the New York firm has raised $1.5 billion from investors including SoftBank, Fidelity and Dragoneer. It was valued at $6.4 billion in July 2019, when it raised a $370 million Series G.

An IPO will draw scrutiny, but there are benefits, too. Here are some of the factors at play:

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? The housing market is hot. October home sales rose 4.3 percent to a 14-year high, according to the National Association of Realtors. After projecting a steep revenue drop in March, Compass reported record revenue in June, July and August.

? The IPO market is rocking and rolling. With companies like Palantir and Snowflake leading the way, there have been 244 IPOs this year, up nearly 24 percent year-over-year, according to Renaissance Capital. They firms raised a total of $68.6 billion — up 57.4 percent — and Airbnb and Opendoor will only add to that.

?? Compass is growing fast, but it’s still lagging. Compass logged $91.2 billion in sales last year — double the $45.5 billion in 2018, according to research firm Real Trends. But it still trails Realogy Brokerage Group and Berkshire Hathaway HomeServices of America, which had $176.34 billion and $135.9 billion in sales, respectively.

? The team is in place. Since February, Compass has added four independent board members: media exec Pamela Thomas-Graham, Bridgewater Associates co-CEO Eileen Murray, former Oracle Corp. president Charles Phillips and LinkedIn CFO Steve Sordello. Compass also refined its C-suite, tapping Glassdoor’s Brad Serwin as general counsel and former Amazon exec Greg Hart as chief product officer.

? An IPO will highlight profits … or losses. Like other fast-growing startups, Compass is not profitable. In a 2019 interview with the Wall Street Journal, CEO Robert Reffkin said near-term profitability wasn’t a priority. “Investors now have an incredible long-term view — 20, 30, 40 years,” he said.

? The clock is ticking on 2020. In 2017 Compass said it wanted to have 20 percent market share in the top 20 U.S. markets by 2020. But even with 18,000 agents, the firm’s growth has been uneven. It’s a major player in San Francisco, where it acquired major rivals, but it would be hard-pressed to hit 20 percent in cities like Seattle and Atlanta, according to an analysis this year by The Real Deal.

? Legal road bumps lie ahead. Real estate giant Reology — parent company of the Corcoran Group and Coldwell Banker — filed an explosive suit last year accusing Compass of “predatory” poaching and illicit business practices. Compass tried to force the matter to arbitration, to no avail. Meanwhile, a 2014 lawsuit filed by Avi Dorfman, who claims to be a co-founder of Compass, is reportedly heading to trial.