Compass is more like WeWork than it would like to admit

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.

“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 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 no 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.

“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 a timeframe for 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 gawked.

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.

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 $28 billion in annual sales. A third of Compass’ brokers joined the firm through acquisitions.

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 June 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 for $100 million before launching Zigg Capital. “That is what [Compass] has to prove.”

Compass executives didn’t comment on whether or not its tech helped brokers become more efficient.

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, the firm’s head of New York operations, 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 — not build — a consumer relationship manager, a mainstay of brokerages. Although its engineers had spent months working on one, Compass 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.

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, including a representative from SoftBank, balked.

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

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

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