Business Breakdowns
· Matt Reustle
[00:00:00] S0: This is Matt Reustle and today we are breaking down the real estate broker Compass. We have Geoff Collette, founder of Aeon Capital Partners, back as a guest. You may remember his breakdown on Goosehead, and we thought it was fitting to cover another flavor of a broker. Now, Compass itself is a fascinating business and historically a controversial stock. It was founded in just 2012 by Robert Reffkin, and Compass has scaled in that short period of time to become the largest real estate brokerage in the United States. So Geoff and I cover the history, some of those early pivots, but I'd argue most importantly, we get into the critiques of Compass, whether those are fact or fiction, what has changed since the early days, and whether it's agent commissions, operating leverage in the business, the Zillow suit. There is a ton of interesting stuff around Compass today, and that's before you get into the tech stack, the infrastructure, the idea of controlling such a large percentage of the market with top agents. It's a very fascinating story. It's one I will definitely be watching closely moving forward. And Geoff's insight here, I think is particularly interesting in terms of how he frames this business, the opportunity, and how you could see a broker potentially emerge from being historically a commodity business to maybe something more powerful than that. So please enjoy this breakdown of Compass. All right, Geoff, we have you back to talk about a brokerage again. This time looks a little different than Goosehead. We have Compass, which is in the real estate space. We can get to how different this is and all the nuances of real estate, but I thought a good place to start would just be the simple description of Compass that you would give to someone walking on the street. They understand what a real estate broker does, but what is Compass out to do differently? What was the ethos of what makes Compass a little bit different than the rest of the real estate brokers out there? And if you were to describe the value prop to agents or for the business, how would you best capture that?
· Geoff Collette
[00:00:00] S1: Yes, absolutely. At its core, Compass really has four key advantages that reinforce each other and are advantages for its agents. The first being its proprietary fully integrated software platform. Second, the national scale that it has. Third, a dense network of top agents. And lastly, exclusive listing inventory depth. Just to quickly hit on these. Firstly, starting with the platform. They're the only major brokerage that's built this end-to-end software stack. Everything from CRM to marketing to transaction management integrated together in a mobile-first way that's designed specifically for agents that are very often on the go. They get more done in less time with less support staff. And the brokerage itself that ties into the software runs more efficiently. Importantly, this gives them a very unique edge when it comes to AI because it controls that platform across the different point solutions and the data. It can do things that others can't, like automate not just content creation, but workflows, follow-up and client engagement. They have a major AI initiative that's in beta this summer that will go full release by the end of the year that has voice-activated assistant capabilities that could really bend the curve on the value proposition. The company's invested nearly $2 billion since inception-to-date on technology. And they captured a point in time in raising capital to do this that likely won't present itself again for a competitor to do something similar. The next thing is its national scale. It's got nearly 40,000 agents in virtually every major US metro. This ties into the platform because it gives them a cost advantage. It allows them to amortize this R&D investment across an increasingly broad base of agents and continually reinvest in the technology as well as programs and services that the agents are specifically asking for them to build. So the scale and tech platform really go hand in hand, strengthening each other. And then there's the top agent network. This is important. Compass has more top agents and teams than any other brokerage. About 18% of the top 1,000. And that's 50% more than the next closest competitor. Why this matters is because top producers drive the business. The top 20% of agents do roughly 85% of transactions in the industry. They work with one another and that creates a powerful referral engine.
· Geoff Collette, Matt Reustle
On average, Compass agents generate 18% of their business from referrals within the Compass network. That boosts revenue per agent, retention and recruiting. I believe that's at the high end of the market in terms of referrals. And then lastly is the exclusive listing inventory depth. So Compass has leaned into an inventory strategy and a phased marketing program that helps sellers test pricing and timing before going to MLS, giving them more control and also giving buyers early access. This avoids issues around days on market, price drops and gives Compass agents an edge when competing for listings. At the end of the day, what Compass is aiming to do is not compete on commission splits, but an offering that really enhances the agent's ability to grow their business more profitably and create better client outcomes. And so I think that is not always well understood. [00:00:00] S0: It's the classic technology disruption story in terms of how it was laid out, and it's still a relatively young history. I think there's been a lot of pivots. Can you just bring us back to maybe the earliest chapter, some overview of the founding story? I think what you just mentioned there captures a lot of what they were out to do, but there's the idea of providing technology and all this to agents and then there's the execution of it. So anything that you could touch on just in terms of the early days of Compass - one day we'll look back and still consider this the early days - but just the founding story and the origins here.
· Geoff Collette
[00:00:00] S1: The original business model was focused on rentals in New York City. They quickly pivoted the business early on to focus on traditional home sale brokerage. I think the vision has largely stayed the same. What they needed to do was really effectively attract a lot of high-producing agents and build the technology that supports them alongside one another without really having that foundation in place to begin with. And they did that with an immense amount of venture capital funding and went to market in a manner that was hard for existing brokerage models to compete with in terms of lucrative sign-on bonuses, multi-year contracts that would be very advantageous to the agent. And that was likely necessary because they needed to build up a local market presence in order to attract more agents and then eventually transition the model to be more sustainable. And so I think for a number of years there was a big open question as to the sustainability of the model, whether or not the technology was really going to prove out. And I think that conceptual question mark remained with the company for a long time until it really proved things out much later in its life cycle.
· Matt Reustle
[00:00:00] S0: Yeah, it's interesting when you consider capital-intensive businesses and you think about infrastructure. This might have been capital-intensive in the early days for talent. This is something that we're seeing in some other markets right now, but at least it makes sense to me in terms of bringing people onto the platform - you can build it, but they won't necessarily just come. When do you think things started to shift a little bit? Just around financial hygiene, transitioning a little bit away from just paying the most for agents - I'm oversimplifying, but to give you some context - were there any milestones or things in the history that really led to a change with that mindset?
· Geoff Collette
[00:00:00] S1: Yes, absolutely. So I think that the housing market downturn that began in the early to middle part of 2022 was the true test for the company and its approach. Just for context, mortgage rates quickly spiked from under 3% to over 7%, and home sales precipitously dropped from about 6 million to around 4 million. A level that it's been at for a few years and really the lowest level in 30 years. And so Compass needed to react quickly, and it did. By the middle of 2022, it had paused market expansion, it stopped M&A. It had to execute three rounds of layoffs within a year. It eliminated all agent incentives and as part of this, brought on a CFO, Kalani Realuytz, who played an instrumental role in decreasing the level of OPEX that the company had from a level of $1.5 billion run rate to around $850 million. So nearly cut in half. But the company actually didn't have to stop investing in its platform around the same time. Actually, the full capabilities for an agent to be able to do their entire workflow on the platform actually coincided with this timeframe. By late 2022 that had been rolled out. Both the company and the market could see the validity of the model and perhaps surprising to some, without those incentives. And not just incentives to have agents join, but they were having these multi-year incentives roll off and they were able to maintain organic agent growth and very high levels of retention, around 90% for principal agents. And really the technology-oriented value prop was able to kind of stand on its own. By early 2023, the company had sort of been proving out this new ability and had started to get to a point where it was operating around free cash flow, break even and was really positioning itself to go back on the offense after being really focused on the cost cutting and stabilizing the business in this new environment.