NYU Professor, Scott Galloway, recently released a fascinating six-minute video about Compass Real Estate.
Galloway was the one who recently illuminated WeWork’s glaring weaknesses, so he looked into other SoftBank investments to see if they had similar issues, and he focused on Compass.
Because I have been utterly fascinated by Compass’ fast expansion, and because I have always wondered what Compass’ endgame is, I found the video particularly interesting.
CAVEAT: We work with hundreds of Compass agents, we subscribe to Leonard Steinberg’s excellent Compass blog, and we love Compass in general. This blog is only repeating Galloway’s comments, and it does not reflect the opinion of anyone at JVM Lending.
Compass was founded in 2012 and is now the third-largest brokerage in the U.S., thanks largely to over $1 billion in VC funding; $600 million of that came from SoftBank alone.
Galloway asks three primary questions: (1) Is Compass using its massive capital infusions just to create the illusion of growth (through acquisitions)? (2) Is Compass using technology to effectively streamline the efforts of buyers, sellers, and agents? And/or (3) is Compass just a real estate brokerage pretending to be a tech company to garner a massive multi-billion dollar valuation?
Galloway says the answer to all three questions is “yes.” So, Galloway implies they probably are here to stay, but they may not be the breakout success that many expect.
WHAT GALLOWAY LIKES ABOUT COMPASS
Galloway likes that Compass is trying to create technology to truly enhance people, as opposed to using software to REPLACE people. I loved this comment because I think firms go wrong whenever they try to eliminate too many people along the way (buyers, sellers, and borrowers want people to help them).
Galloway also likes the fact that the Compass co-founder and its CTO have extraordinarily strong tech backgrounds. And he likes that a complete 5% of Compass non-agent workforce is devoted solely to tech.
Growth: Over 50% of Compass’ growth in recent years has been “inorganic,” meaning that it has been coming from acquisitions and not from superior sales, marketing, and tech. Further, Compass has been offering large signing bonuses or 100% commission structures to lure top agents, and that, of course, can’t last forever.
Tech Gravitas: Yes, Compass devotes 5% of its non-agent workforce to tech, but Realogy (its larger competitor) devotes 6% of its non-agent workforce to tech. In addition, Redfin devotes 14% of its workforce to tech, while Zillow devotes 24%. So, Compass may not be the tech powerhouse that everyone thinks it is.
Productivity: Compass’ “transactions per agent” number is only on par with industry averages, as is its “revenue per employee.” So far, Compass’s tech does not appear to be enhancing productivity.
WHAT A TOP COMPASS AGENT HAS TO SAY
I shared the above-referenced video with a top Compass agent for his input. He enjoyed the video and understands the concerns, but he thinks Galloway is missing many of Compass’ enhancements because Galloway is not in the trenches selling real estate (today’s data does not reflect all the benefits that top agents enjoy). He also said that Galloway completely missed Compass’ “Concierge” services, which is proving to be a real game-changer with its free financing of seller-improvements, among other things.
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