Hungry for cash, Opendoor eyes IPO

iBuying startup’s latest funding was a $300M round in March 2019

Opendoor CEO Eric Wu (iStock)
Opendoor CEO Eric Wu (iStock)

Five months after laying off 800 staffers — or 35 percent of its workforce — iBuying startup Opendoor is eyeing a $5 billion IPO with a blank-check company.

Welcome to 2020, the year of unending surprises.

Founded in 2014, the San Francisco startup is the undisputed market leader in a nascent but burgeoning sector, which accounted for $8 billion worth of home sales in 2019. The general idea behind iBuying is to make a cash offer in exchange for a fee, then resell at a profit after making modest repairs.

But iBuying accounts for just 0.5 percent of U.S. home sales, and it is largely untested. And iBuyers paused home-buying in March due to economic and housing uncertainty. In fact, home-buying by the top four players — including Opendoor, Zillow, Offerpad and Redfin — plunged 88 percent during the second quarter, according to a Redfin analysis.

“It’s not clear these guys are going to survive,” Gilles Duranton, an economist at the University of Pennsylvania’s Wharton School, told The Real Deal in April.

To fully recover, Opendoor needs cash.

“These real estate tech companies with massive valuations and massive amounts of investment raised … need exits; their investors need a return on their investment,” said industry analyst Mike DelPrete. Taking the company public is likely the “most attractive” path forward, he said. “Opendoor needs to raise more capital — it’s losing money.”

To date, Opendoor has raised $1.3 billion in equity from investors including SoftBank, Khosla Ventures, Lennar, General Atlantic and Access Technology Ventures. The company was most recently valued at $3.8 billion — but its last funding round — a $300 million Series E — came in March 2019. Opendoor charges a fee for buying homes, and it froze that revenue line in March. The San Francisco company was the first to resume buying in May.

But Zillow is hot on its trail.

In 2018, Opendoor cornered 70 percent of the iBuying market compared to Zillow’s 3 percent, according to DelPrete. In 2019, Opendoor’s stake dropped to 64 percent compared to Zillow’s 18 percent. (Opendoor sold 19,000 homes in 2019, up from 7,200 in 2018.)

Surprisingly, the housing market has seen a better-than-expected rebound from its low point in March and April. In July, home sales rose 24.7 percent, up 8.7 percent year over year, according to the National Association of Realtors.

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But DelPrete noted that iBuyers have a lot riding on the recovery. In general, it is a low-margin business. Zillow lost $312 million on iBuying last year, according to the company’s financials. “The iBuyers need to prove their model is relevant in an uncertain, post-pandemic world,” DelPrete wrote in a May report.

Against that backdrop, however, the IPO and special-purpose acquisition corporation markets are on fire. A slew of tech startups have gone public, including Lemonade, an insurance tech company, and Vroom, an online used-car seller. Others are on deck, including Airbnb. (The IPO market is on track to reach a six-year high with 170 IPOs raising $50 billion, according to Renaissance Capital.)

Notwithstanding a three-day selloff last week, tech stocks have led the overall economic recovery, with Apple hitting a $2 trillion market cap in August. Shares of real estate “disruptors” like Zillow, Redfin and virtual brokerage eXp Realty have also surged. (Zillow is up 155 percent year-over-year, Redfin is up 168 percent and eXp is up 349.9 percent.)

Tom White, an analyst at D.A. Davidson, surmised that Opendoor may want to “capitalize” on that. “The iBuying market is still relatively nascent but could benefit from [the] pandemic accelerating the trend of digitization,” he said.

Opendoor is also jumping on the SPAC bandwagon.

It is in late-stage talks with Chamaath Palihaapitiya’s Social Capital Hedosophia Holdings Corp. II, Bloomberg reported Thursday. Social Capital is one of 75 SPACs that have raised more than $30 billion, according to SPACInsider.

“You have a situation now where there’s more money than ever,” said Jarred Kessler, who spent a dozen years in finance before launching EasyKnock, a startup that buys homes and rents them back to the seller.

He speculated that some startups may be looking to exploit that dynamic, particularly if they circumvent a public prospectus and roadshow. (WeWork’s S-1 filing disclosed massive losses and raised a host of governance issues.)

“I’d suspect that, coming off an uncertain period of time, Opendoor would want to move into a SPAC to cash out,” Kessler said. “Given what happened with WeWork, it’s a Trojan horse way of going public without having the same scrutiny.”

Yousuf Hafuda, an analyst at Morningstar, said the flood of venture capital into the space hasn’t helped, since it’s fueled competition among iBuyers and pushed up offer prices. “This erodes the major advantage inherent to the model,” he said, “whereby consumers make a tradeoff between increased convenience in exchange for a lower than market offer on their home.”

In recent months, Opendoor’s left a trail of clues as to its next moves. This month it tapped board member Carrie Wheeler as CFO, replacing Gautam Gupta. And it’s been recruiting agents to a nascent brokerage, adding to ancillary services like title and escrow.

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