This week, many picked up on reports that show venture capital activity slowed significantly in the third quarter of 2008. The week before that, the big story was the shock treatment VC firms were giving their portfolio CEO's.
No surprises here really. But it made me think about the future of the online real estate category, where the flow of new investment capital has been even more dramatically curtailed. If the VC flow trickles for the foreseeable future, we will need other drivers of innovation in our space. More on that below.
But first: What becomes of the money pumped into our most high-profile companies, Zillow, Trulia, and Redfin? New companies may be hard pressed to find funding, but these three seem trapped in a room with no exit door in which oxygen is running low. The opportunity for a successful public offering seems remote. Zillow, the company many saw as the top candidate for such an exit, long ago deferred this possibility.
Exit through successful acquisition seems equally dubious. I can't tell you how many times people ask me "Who will buy Zillow?" or "Will ________ acquire Trulia?" This makes for interesting conversation, but most of the scenarios seem improbable.
And of course, the idea of these companies operating into the future as profitable, dividend-producing firms is pretty far-fetched.
So they will hunker down, manage smart, and attempt to outlast the nastiness. HomeGain and LendingTree made it through the dot-com bust to successful liquidity events. It can be done.
And I hope they make it. Zillow and Trulia have been catalysts for innovation over the past three years and have forced the real estate industry to be more consumer focused. I'd like to see that continue. Redfin has played this part as well, but I have felt from the start that they would follow a tragic arc, a heroic force doomed to ultimate failure.
With what are we left? Well, it's not all that bleak for those of us who believe in the power of the Web to remake the real estate experience. Innovation will continue to come from the dozens of bootstrapped and angel funded companies that have popped up over the past three years and those that follow in their footsteps.
Here's why:
1. Start-up costs are lower than ever. The amount of money it takes to build a web application has never been lower. Coding is faster — and, with the economy tanking, cheaper — than it was in the past. Second, the ethos of Web 2.0 is such that web apps and services are essentially DIY propositions. Think about it: How many customer service reps does Zillow have? Did trulia need to build a call center? And Amazon Web Services alone has dramatically lowered the barriers to entry.
2. The slow burn. A corollary of #1 is the fact that many companies can now run small and lean forever, slow embers waiting for the wind to pick back up. A company like HomeThinking, which has been around for three years, isn't going away, even though they haven't hit the jackpot. They'll ride it out, incrementally pushing innovation (in their case, a new neighborhood comparison app released last week). A lot of smaller real estate Web 2.0 plays that got a lot of adulation in 2005-2006 now operate as space junk, dormant shells floating through the ether, but the gems will remain alive.
3. Better, smarter entrepreneurs. Rich Barton is a rock star. A visionary. Someone with tons of brains and a killer track record. But going forward, I'm not sure that's all that's needed to win. Future online real estate innovation will likely be driven by smart business people with tons of domain knowledge focused on solving a specific problem. We are working with some of these people right now. They know their stuff, nail the use cases, and evidence none of the hubris that has wrecked too many large-scale online real estate plays.
So VC is tough to come by. Fine. It's been that way in our category for a while now. The innovation will continue. And lord knows, there are still plenty of problems to solve in real estate.
– Brian Boero
Local, Mobile, Social and the future of real estate
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Great post. I agree that companies can now stay lean and save money where and when it is needed. This industry will greatly benefit from these innovations and if these companies can survive, it will pay off.
Sean Murphy, http://www.Rofo.com – San Francisco Office Space
Excellent site, added to favorites!
"Second, the ethos of Web 2.0 is such that web apps and services are essentially DIY propositions."
It seems that posting great consumer content is easy, especially if you get it free from Realtors and brokers, like MLS listings and consumer generated content.
Given that ease, why should we expect companies to make money doing so?
Who will pay the bills of posting and managing the content?
The consumer? Nope.
That's the main draw of all this information- its free.
Advertisers? Perhaps part of it if you want to reach a few million consumers poking around looking at homes.But can a company sell enough ads in a year with a few million visits to justify the multi hundred million dollar valuations their VC's expect them to be worth?
Realtors? Probably not.
As you wrote:"Think about it: How many customer service reps does Zillow have? Did trulia need to build a call center" (perhaps they will start buiding one soon….)
You get what you pay for. If you don't provide any service to Realtors other than the ability to post your data you can't charge too much. If you don't charge much, you don't make much.
The Press? Pandering to the fickle press gets you lots of mentions. Last I checked, however, sending money to companies that they cover was not on the to do lists of bloggers and journalists.
"Better, smarter entrepreneurs."
I would add- "deeply engaged entrepreneurs" who do more than seek the next press or blog mention.
Before parting with their money VC's should seek entrepreneurs that realize that their success is not pre ordained and select leaders that dive deep into business, customer and employee issues.
Enjoyed your post. I have long argued that the focus of many RE Web 2.0 is unlocking the data. While important, it isn't where the value lies.
I recently posted on Bloodhoundblog: http://www.bloodhoundrealty.com/BloodhoundBlog/?p=5126
I believe consumers will recognize and pay for value added services – where a consumer's need meets an agent's core competency. Data is only part of the process.
Loved the post and I do hope visionary real estate portals like Trulia, Zillow, Cyberhomes, and the like continue. They give us real estate WEB 2.0 hopefuls tons of new and killer apps to use on our own website. I see "ease of use" as the main reason these sites are so powerful. The client can get useful information for their specific neighborhood quickly and concisely.
An interesting take, Brian. While I self-servingly agree that the bulk of the innovation will continue to come from the bootstrapped startups, I've been noodling lately a model that considers a _domain_shift_ as the central function of that process.
Starting with a technical foundation to bring innovation to a new market seems to be easier than trying to apply technology to a vertical you already know. Barton's (and Pete Flint's) internet-travel-biz background allowed them to come to real estate with an essential naivete that let them ignore the sacred cows that hamstring innovation by the incumbents in this world. Likewise, Niki at Homethinking is a longtime expert in internet advertising and lead generation and applied that expertise in compelling new ways at homethinking.
Much harder for the real estate incumbents to navigate the technology waters, but that's why they need you guys, I suppose
@Mike — you make a good point … A Zillow or Trulia would likely not have come to be were it not for the perspective of outsiders. But how many "outside" players have built lasting, successful companies in our space? Too few in my opinion.
"And lord knows, there are still plenty of problems to solve in real estate. "
Amen to that, Brian!
Thanks for a great post, Brian. I think the upside is that in times when capital is flowing less freely, the innovators are forced to find ways of doing more with less. In the same way, those selling real estate are finding ways to leverage free or low cost web 2.0 technologies more and more get their work done. Hopefully, on the other side of this slump, we'll all be more efficient and tech savvy because of it.
Brian. Great post! As part of a bootstrapped real estate startup myself; I feel that post is right on point ” especially point #3 "Better, Smarter entrepreneur". With web 2.0, free is the new black. We all have to think of creative and out of the box ways to grow our businesses along with new rev models.
It seems like many of your comments are from fellow entrepreneurs in the RE space. I have a question maybe the community can help me with. Our company is looking to grow our market reach through synergetic partnerships with other RE companies. Are there any sites or services that act as a "Match.com" for companies looking for partnerships?
Very good post.Look forward to reading more on you blog.
I just helped launch a new commercial listings startup called AcreScout.
See: http://www.AcreScout.com
We have a few innovative features in development at the moment. Already, we have launch with free widgets. And we are looking to agents to tell us what tools they most need.
This is a timely post. The importance of local search (based on neighborhood) is increasing and it's always exciting to see new tools being developed to make that search easier/simpler.
"Second, the ethos of Web 2.0 is such that web apps and services are essentially DIY propositions."
It seems that posting great consumer content is easy, especially if you get it free from Realtors and brokers, like MLS listings and consumer generated content.
Given that ease, why should we expect companies to make money doing so?
Who will pay the bills of posting and managing the content?
The consumer? Nope.
That's the main draw of all this information- its free.
Advertisers? Perhaps part of it if you want to reach a few million consumers poking around looking at homes.But can a company sell enough ads in a year with a few million visits to justify the multi hundred million dollar valuations their VC's expect them to be worth?
Realtors? Probably not.
As you wrote:"Think about it: How many customer service reps does Zillow have? Did trulia need to build a call center" (perhaps they will start buiding one soon….)
You get what you pay for. If you don't provide any service to Realtors other than the ability to post your data you can't charge too much. If you don't charge much, you don't make much.
The Press? Pandering to the fickle press gets you lots of mentions. Last I checked, however, sending money to companies that they cover was not on the to do lists of bloggers and journalists.
"Better, smarter entrepreneurs."
I would add- "deeply engaged entrepreneurs" who do more than seek the next press or blog mention.
Before parting with their money VC's should seek entrepreneurs that realize that their success is not pre ordained and select leaders that dive deep into business, customer and employee issues.