The US housing market is a 10.1 trillion dollar market (1) and represents 25% of all US household wealth (2). Given it’s size and importance it’s not surprising we’re seeing a lot of startups try to tackle this market. Venture capital funding will be used as a leading indicator of what’s to come the reason I do this is – 1) for the data, because there’s much more information on fundraising and 2) I assume venture capitalists have a good eye towards the future and their investments are a good indicator of a future large company.

The Catalyst

A rebounding housing market, (3) along with strong showing of Zillow, with 219.6% gains since it’s IPO (4) and it’s 3.5 billion acquisition of Trulia (5) all have given the real estate startups validation and spurred on founders.  Zillow, Trulia and Redfin all were founded around the same time (2005, 2005 and 2004) and finally have emerged nearly a decade later as successful 4 billion, 3.5 billion and half a billion dollar companies. So what does the next decade hold?

Commercial Real Estate

What often is seen with technology is that the consumer market will innovate first and then startups will move more upstream to enterprise. I attribute this to the easier cost of acquisition of consumers and larger diversity including people more willing to be first adopters versus enterprise clients who are usually more conservative. So what Zillow and Trulia did for consumer’s who wanted to easily search for real estate, is happening in the commercial real estate market. In area long controlled by brokers, who haven’t really leveraged technology we’re starting to see innovation creep up in two different areas. The first is that commercial real estate search is being disrupted by companies such as 42Floors, a company that is acts just as Zillow did but for commercial real estate (mostly office spaces). 42Floors was funded by YCombinator, NEA and BVP backed company and raised 12.3MM in January 2013 (6) to disrupt this space. Commercial brokers too have found themselves being forced to leverage technology in their work with a mobile app called Hightower that functioned as mobile way to manage their sales process, recently raising 6.5MM.  (7)

Real Estate Investing

With the market jumping back on real estate, personal investors want to get in on investing in real estate. When the “JOBs act legalized crowding funding” back in 2012, we saw that it became easier to invest individually with an obvious area being real estate. Housing projects are easy to understand where their revenues come from – rentals and are asset backed. This area has quickly been funded by venture capital with Fundrise raised 31MM in May of this year (8), Realty Mogul and Real Crowd have also similarly raised million dollar rounds.

Brokers strike back

Brokers have become aware that if they don’t adapt to the use of technology, the large fees they generate will become a thing of the past. Responding to the threats they face, brokers have started using startups such as Realscout, a company that addresses the imbalance of “real estate agents getting the short end of the stick and are being left behind. Generally speaking, agents are still using outdated search and client management tools”(9) RealScout claims to “put realtors back in the driver’s seat — both by making the search process itself more collaborative and by offering them better tools to engage clients and find new business” (10)

Selling Real Estate

Selling real estate has remained complicated despite the increased options in searching for properties. Two separate startups have recently arisen to solve this problem by letting property owners sell directly online: Allre that was announced at TechCrunch Disrupt 2014 (11) and Keth Rabois of Square fame who recently launched OpenDoor (12) both of these new startups have emphsaized being able to sell online directly without any brokers at all. It makes sense that given the simplicity of information and the rise of ecommerce that more and more things can just be sold directly online.


As technology evolves it continues to changes spaces that were once considered un-modernizable. Real estate information was disrupted nearly a decade ago by easier ways to find information now other aspects of this industry are being innovated upon by a whole new range of startups.



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The Future of Online Real Estate Marketplaces

2014 has been an eventful year for online real estate marketplaces.

In July, Zillow announced its $3.5 billion acquisition of Trulia. This transaction narrowed the competitive landscape to two major players: Zillow and Move.

Checkmate,” bemoaned Brad Inman, the publisher of Inman News, a news and information site for real estate agents and brokers. “This is a race for the hearts and minds of consumers and agents… Zillow’s strategy is a bottoms-up approach — building loyalty with consumers and agents. Historically, that is who wins the revolution.”

Then, in September, News Corp announced its $950 million acquisition of Move. This transaction would leverage News Corp’s robust digital platforms such as the Wall Street Journal to broaden Move’s reach.

Apparently, this changed everything. “Many of us woke up Monday morning with the belief that the Zillow/Trulia juggernaut was unstoppable. But on Tuesday morning, we had to wipe our brain and re-examine the landscape,” Inman soberly reflected.

And what did Zillow think? “Game on,” tweeted Spencer Rascoff, CEO of Zillow.

What’s the big deal?

When Trulia went public in 2012, management touted the massive $24 billion real estate advertising market as a sign that the market was big enough for many fish. Even though online advertising only represented $12 billion of the total pie, no player carried more than a few percentage points of the market, meaning that there was tons of room for everyone to grow.

On the surface, this made a lot of sense. The online real estate advertising market didn’t seem to exhibit winner-take-all characteristics. First, the real estate market is so local and fragmented that it is hard for any one player to be good at everything. For example, StreetEasy is great for apartment hunting in New York, but Craigslist dominates in San Francisco. This is, admittedly, a rental example, but it has close analogues to home buying. You’d rather have an agent from Dallas showing you homes in Dallas rather than an agent from St. Louis doing the job.

Second, consumers don’t really care what they use for their home search as long as they can find what they need. A joint study by Google and the National Association of Realtors (NAR) shows that consumers conduct research across multiple online and offline sources.

And third, agents and brokers aren’t loyal to any one platform either. They put their money on the platforms that can get them leads – which, it turns out, can be all of them. “I currently pay Zillow $50.00 per month just so that leads on my listings don’t get handed to some agent paying for zip code leads. But then again, I have to pay Trulia and each month to keep leads on my listings also. It’s a conspiracy :-),” wrote an agent on Inman News.

So, if the market is truly huge and can support multiple competitors, then there should be enough real estate ad dollars to make everyone happy, right?

Unless there isn’t. This could explain the fierceness of the rivalry we see in this industry.

What exactly is the size of the online real estate advertising market?

According to the Association of Real Estate License Law Officials, there are approximately 2 million active real estate licensees in the U.S. (The Bureau of Labor Statistics, on the other hand, claims that only 422,000 licensees actually practiced in 2012. More on this later.) If we assume that the average agent spends ~$1,270 per year on marketing, which I extrapolated from Active Rain’s 2011 estimate of $1,070/year at a ~9% CAGR of median sales prices of existing homes in the U.S. between 2011 and 2013, then the total market spend by 2 million agents is only $2.5 billion across online and offline channels. This is a far cry from $24 billion. Even if one were to argue that the $24 billion includes spend by folks like home builders, property managers, mortgage brokers, etc., one would need to explain how marketing by real estate agents accounts for such a small portion of total real estate advertising, despite their prominence in the market. If we were to consider instead the spend by the 422,000 active agents in the country, the implied market size for real estate advertising would be a paltry $536 million. To put this in context, the 2013 revenue of Move, Trulia and Zillow combined is $568 million. While these numbers don’t capture all sources of real estate advertising spend, one has got to wonder whether $24 billion (including the $12 billion that is online) is, at the very least, somewhat inflated.

Another way to look at this is to consider how many agents are willing to spend money on marketing homes for sale. Let’s go with the assumption that agents in need of leads that they cannot get from referrals or existing clients spend money on marketing. According to NAR, in 2013, 39% of home sellers found their agent through a trusted referral and 25% used the agent they had before. This implies that 24% of home sellers had to find a new agent to work with for the transaction. If we assume that one broker represents a house for sale (as is usually the case), then ~1.2 million homes for sale require marketing dollars (that is, 24% of the ~5 million homes sold in 2013). If 1.2 million homes received a large majority of total $24 billion of real estate advertising spend, then this could be upwards to $20K of advertising spend per house. This seems like a lot, even if 2 or 3 agents were to spend ad dollars marketing the same house. Of course, this estimate is just some back-of-the-envelope math. But it does put the $24 billion into perspective when one considers how many agents out there may not need advertising help. For instance, my uncle, a real estate agent, doesn’t spend a dime on advertising. All of his business comes from referrals.

So what is the next move in this chess game? To be fair, online real estate marketplaces solve many pain points for both consumers and real estate agents and will remain valuable players in the real estate ecosystem. But the market is getting crowded, partly because, I think, the total addressable market of agent/broker-related advertising spend is actually quite limited. Perhaps Zillow and Trulia foresaw the market saturation when they expanded beyond real estate into mortgages and other adjacencies. Trulia’s acquisition of MarketLeader in 2013 broadened its product set from pure lead gen to lead gen and CRM, a play that helped Trulia accelerate its revenue growth in 2013.

Others are betting on an entirely different game., a real estate auction marketplace, is betting that consumers ultimately care about price realization in the home transaction process, so much so that they can be persuaded to buy and sell houses via live auction. OpenDoor is betting that consumers ultimately care about the speed of the transaction and is developing a solution to shorten the 90-day process to just a few clicks of a mouse. If they are right, then agents are no longer needed in the real estate transaction. The real estate advertising model of selling leads to agents could be over.

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I may have grown up hearing the paramount importance of location as it related to businesses, but when I recently heard someone utter the “location, location, location” phrase I realized that I hadn’t heard it in years. To my ears, it almost seemed backward to hear it as a significant consideration in business. As I thought about my reaction, I realized that this phrase has become alien for some key reasons: the recession and its impact on the availability of real estate, the success of e-commerce and multi-channel shopping, and the way people shop in terms of mixing “high” and “low” brands.

In 2008, with our economy in the throes of a recession, anyone could visibly see the shuttering of businesses and the increased availability of real estate. Real estate properties that ranged across the board be them closed, open-air, or strip malls, 10,000 square foot properties on 5th Avenue, or 1,000 square foot properties on Main Street, businesses that were looking for real estate had their pick. Finding the right location at the right price was no longer a problem for businesses that were still in a position to grow and expand. Even coming out of the recession, because base consumption patterns have arguably been altered, businesses are growing at a more controlled pace and not entering into leases that do not hold a very strong strategic value. Real estate is simply a buyer’s market at the moment and will continue to be in the foreseeable future.

A second reason for why the physical location of a business is no longer of supreme importance is because businesses have proven successful in the online world. Retailers across a variety of products, be it apparel, beauty, or electronics, are quickly seeing that their biggest “store” in terms of revenue can be their online one. Retailers are also learning to harness the power of the multi-channel, understanding that a customer who shops both online and in-store is overall a more profitable, engaged, and educated shopper. Inventory management advancements are now possible as retailers may run out of a product earmarked for the website customer, but can fulfill that online order by pulling inventory from a physical store, and the customer is none the wiser. This inventory productivity increase is an incredible source of profitability. Since customers have become much more comfortable buying online, as well as businesses understanding what makes for a successful online store, investing in the online can pay off dozens of times over rather than opening another physical location.

Lastly, because customers these days are comfortable shopping in a “high” and “low” manner as it relates to various products, businesses are comfortable going into different real estate properties than they previously would have considered. People recognize when it is advantageous to invest in high-end luxury products as well as where and when to purchase products from lower end or budget brands. It is also considered cool to know how to do so well and in a way where one cannot tell the difference. Since customers are comfortable going into Neiman Marcus and Costco in the same day, retailers are becoming increasingly comfortable entering real estate that is not specifically dedicated to a price point. This realization is working its way up the retailer ladder definitely starting at the bottom with non-luxury brands. Luxury brands are slower to act on this consumer insight because of fear of down-grading their brand or that their customers simply aren’t there. I’d argue though that the high/low buying patterns of customers should allay those brand-debasing fears.

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Ga-Zumping the Online Real Estate Market

Many HBS students are not only learning about online businesses, but also hoping to start one in the near future.I sat down with Anthemos Georgiades, founder of one of HBS’s ‘hottest’ startups, Zumper.Anth and the Zumper team won sponsorship from HBS’s Minimal Viable Product (MVP) program last year, have been working on their business for almost a year and are launching their new site next week.Anth, who was asked by interested investors to drop out of HBS this summer to focus full-time on Zumper, seemed relaxed but excited for his first ever interview.

Q: Can you tell us about Zumper? What does the business do?

A: Zumper is a marketplace for rental properties.For potential tenants, it provides absolute price transparency – you can always see who is bidding what for each apartment – no more wondering if you paid too much.It’s also good for brokers and landlords too, through Zumper a landlord can get access to the highest-quality tenants, and we will take care of managing the process too. Obviously it can be hard to get a business that caters to a 2-sided market like this off the ground – you need to show a lot of inventory to attract potential tenants but also need to have access to a lot of good tenants to attract landlords and inventory. Getting Zumper to this tipping point is the key question on my mind.

Q: How did you come up with the idea?

A: When I was at Oxford in 2003, I moved out of college accommodation and had to find an apartment.The broker we used was a bit of a lad – he told us there were 5 other offers on the table when there clearly weren’t, that we should bid $400 more etc.I realized then that this was crazy, and that there must be a more transparent way to do this, perhaps something more like the stock market, where prices are visible.I don’t think the world was ready for that then, but given where the internet is now, I think that we’re much more likely to succeed with the idea now than we were 7-8 years ago.

Q: How did you come up with the name ‘Zumper’?

A: <chuckles> I spent a good couple of months just playing around with names.‘Zumper’ is a bizarre name but it had a few advantages. Firstly it was available – I was able to buy it from someone very cheaply, secondly it’s short and easy to remember – only six letters, and thirdly it’s a play on the word ‘Gazump’, which in Britain means to grab a property at the last minute.Unfortunately it means nothing in the US so people always look at me like I’m crazy!

As well as finding a name for his business, Anth spent the first few months building a basic product, using the MVP sponsorship from HBS to get a website going.The experiment helped him test and refine his business idea and only a few weeks customer feedback had pushed the business model to evolve from its initial description.

Anth is the first to admit that he is not your typical “cool” tech guy.He majored in Classics and Philosophy at Oxford and struggles to work his Blackberry!However he was quick to seek out specialized tech help:

“Tech resources come at a premium – there aren’t any unemployed software engineers in the US.A section-mate at HBS, oversaw the tech side of Zumper for the first few months before starting his internship.Now I outsource the technological requirements to a guy in Europe who came recommended from a VC, who does our code and also gives strategic advice.We use the money we received from the HBS MVP award to pay him, so we’re very grateful to HBS.”

Q: You spent the summer working on Zumper.How did you come to this decision and how did it go?

A: I decided not to apply to any jobs at all for the summer, which was really scary.Instead I applied to a bunch of VC incubators, which sponsor startups, give you food, coffee and a desk and basically let you get on with your idea.The one I worked at, DogPatch Labs by the VC Polaris, was in San Francisco and New York.The best thing is that you hang around with Tech entrepreneurs, many of whom are a lot further down the line in their business, having already raised millions of dollars.It was a great experience to go out with them and hear their advice about how to raise money.So although it was scary to see my friends go off to ‘real’ internships, the reality was that it was a pretty cool experience and I got some amazing input for Zumper.We are a country mile ahead of where we were three months ago – the summer was huge for us.

Q: What are the challenges of going down the Minimal Viable Product (MVP) route?

A: My initial response to the MVP concept was ‘Can you really intellectualize entrepreneurship’?The only difficulty with the MVP is your ego, because you’re going to market without a fully-baked product.At first there were bugs, we were short of inventory, people would email us saying they couldn’t find any properties.It was very tempting to take the site down, wait a bit, and then only put the site back up when we were more ready.But actually committing to having a site up, even when it had no properties on it, was a constant reminder that we needed to work harder.

Q: What advice would you give to someone who has an idea but is unsure whether to spend any time on it?

A: If you’re comfortable spending $3,000 to build a basic site to test your idea then you should definitely go for it! To me the opportunity cost is so low that it’s a no brainer.It’s also possibly self-fulfilling – I think that once you’ve created a site, you end up feeling very maternal towards it and it’s hard to go back after that.In the worst case, nothing happens and it’s something you’ll laugh about one day.

Anth plans to continue working on Zumper after graduating from HBS.The next milestone is to try and raise a seed round in the spring get 12-18 months of runway.In terms of his team, Anth received invaluable help from his classmates Ken Sim and Tom Dye.Looking forward, he has already hired two real estate brokers to help with Business Development and is in the process of hiring a CTO:

“After a year of running a company,you realize that if you can get the best people, you’ll do what you have to do to bring them on board.Initially I was very protective of equity, but now I’m much more in the camp of ‘give them what they deserve’ as I really believe that net net you’ll build a better business with the right people”

Anth is excited about the Zumper opportunity, but remains characteristically modest:

“I think this is how Facebook started isn’t it? Oh wait, that sounds absurd. Please don’t put that in! You know what I mean though right?”

If anyone can do it, I think Anth and the Zumper team can… Just don’t forget your first ever interview when you make it big!

Good luck!

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