How Compass’ Falling Stock Represents a Greater Issue in Today’s Market
Compass is suffering from an identity crisis. Learn from (and avoid) their mistakes in your venture.
Before I dig into this contrarian perspective, it’s important for you to know something: I had my real estate brand at Compass before they IPO’d, and exited that brand when another Compass agent acquired my book of business. My thoughts in this post come from two places: first-hand experience starting, scaling, and exiting endeavors in the real estate industry (some of which were with Compass directly), and neutral perspectives on what today’s market is accepting and denying.
After reading the title of this post, it might come as a surprise to you that I don’t dislike Compass — its mission, its founder, its culture, or its agents. My intention with this post is to call out what others aren’t stating but many recognize:identity crises always reveal themselves in the public markets, and it’s time we stop adding gasoline to the fire — we need to learn from these crises, not repeat them.
Compass is simply an example of today’s unhinged startup culture… beginning with an unquenched thirst for more and typically followed by a shitload of venture capital.
An Identity Crisis on Full Display
Our issue begins with a simple question of identity. Depending on whom you ask or where you look, you will notice Compass being referred to as:
A tech company.
A real estate company.
A tech company that’s revolutionizing the real estate industry through the marriage of traditional brokerage + technology.
A real estate company that’s revolutionizing the real estate industry by empowering agents to work more efficiently through the use of technology.
It seems that Compass has adopted the last two descriptions to articulate their business model … and when I write “last two definitions,” I’m literally referring to two definitions. Just a quick glance on their about page reveals these competing ideals:
So the natural question is, which one is it? According to their S-1 (page 2), “We continuously innovate and enhance our software platform with the goal of digitizing and automating all real estate workflows that empower agents to acquire and serve clients…” According to this statement, one would assume that they’re taking the approach of a traditional real estate brokerage that’s leveraging technology to disrupt the marketplace.
And yet, herein lies the problem. There is nothing wrong with real estate companies using technology to empower agents and add a layer of innovation to a traditionally antiquated industry. Additionally, there is nothing wrong with a tech company building new apps to create a faster, safer, more transparent, and streamlined experience for real estate professionals and their customers.
The issue lies in the incompatibility of these two models. Compass has backed itself into a wall by trying to be both.
If Compass is a tech company, they’re burdened with the incredible resource demands of staffing and maintaining hundreds of offices throughout the US, and they’ve shot themselves in the foot by pigeonholing their expansion strategy due to the presence of their brokerage.
If Compass is a real estate company, they’re missing a significant opportunity to capitalize on incredible market demand and disruption opportunities by isolating agents who are not Compass agents.
What “Radically Changing” the Real Estate Industry Could Have Been
Full disclosure: I don’t know much about football. I’ve never really been into organized sports (climbing + mountaineering for me), but I certainly know one thing: opposing teams don’t like one another.
Sure, some of that friction is in the competitive nature of the game, some is in good fun, and some is genuine disdain for other teams. Just try bringing together the die-hard fans from the University of Texas Longhorns and University of Oklahoma Sooners — I guarantee you things will get rowdy.
Real estate is a lot like football in that way: as an agent, you root for your home team (your broker). You play nicely with other companies, but your allegiance is to the brand you’re building your business with, and others are typically thought of as “less than.”
While it might sound greasy on paper, in all practicality this mindset is just human nature: Apple and Microsoft, FedEx and UPS, Starbucks and Dunkin. If you’re a [brand 1] person, you likely consider your choice to be superior and think [brand 2] lacks in quality, or some other metric important to your decision-making process.
Why does that matter in real estate? Agents don’t typically use tools built by other brokerages.
An agent wants to differentiate herself in the market, and it’s not possible to bring a different value proposition when you and your competition are leveraging the same tools.
Acceptance of [brand 2] systems inherently means [brand 1] isn’t working well, and most agents don’t want to test that reality. (If it ain’t broke, don’t fix it — right?)
To protect brand culture, image, and competitiveness, many brokers disallow or discourage the use of other broker tools by their agents (similar to point 1).
The result? Only Compass agents will use Compass technology.
Ah, the first roadblock to market penetration! According to Dictionary.com, Disruption means “a radical change in an industry, business strategy, etc., especially involving the introduction of a new product or service…” I’m stating the obvious here, but “radically changing” the real estate industry does not mean impacting the industry by becoming a large player built on the same traditional foundation as your counterparts. Radical change is sweeping and significant; overwhelming and irreversible. Radical change looks like the Internet, like Amazon, like Google, like Uber. That company building “a better horse and buggy” in the early 1900s is forgotten in time, dwarfed by the mass production of the automobile.
Small improvements are always overshadowed by radical change.
My fear is that Compass is simply a better horse and buggy. Lots of technology, lots of venture capital, fantastic publicity, and incredible momentum. But, at its core, Compass is still just a traditional real estate brokerage fighting to remain relevant in a new era of consumer demand.
Small improvements, not radical change.
The ironic part of this entire situation is that Compass had the opportunity to create radical change … and missed it. Speaking from experience, I can attest to the fact that Compass technology kicks ass. Like, really kicks ass. It’s smooth, friendly to navigate, looks sexy, is optimized for mobile, and saves a ton of time for both the professional and the consumer. I believe Compass technology is hands-down the market leader for agent-centric apps and software. I so wishCompass would have built this technology for all to adopt and use, and not just for their agents.
Again we’re faced with the first issue: Compass as a real estate company. Because Compass has its own brokerage, its technology cannot be mass-adopted to the marketplace. We know this because they’ve already tried, and it didn’t go well.
Back in 2018, Robert Reffkin (CEO) launched a new initiative, “Powered by Compass,” in which smaller, non-Compass real estate brokerages could license this incredible Compass technology to replace their infrastructure. Bringing powerful technology to the remote corners of the real estate world would be true radical change! Except, it wasn’t. The initiative was pulled in nine days due to agent pushback. The reason? Compass agents didn’t want their “secret sauce” to be used by their competitors, because it would eliminate one of the strongest arguments for using a Compass agent vs. the competition (see point 1 above).
This entire issue would have been avoided if Compass were not a real estate company, but an independent tech company with no broker affiliation.
Brokerage Model = A Glass Ceiling on Market Potential
This 2018 snafu doesn’t just represent a poor product-market fit for the “Powered by Compass” strategy. It also highlights a glass ceiling for the brand: the fact that an inability to “power” brokerages besides Compass in the US automatically pushes Compass into a smaller market potential, hurting future growth projections.
According to the National Association of REALTORS® 2021 Profile of Real Estate Firms, “Eighty-six percent of [US] firms were independent non-franchised firms.” Compass cannot reach 86% of US-based real estate firms because they’re operating as a real estate company that has technology, not a tech company revolutionizing the real estate industry as a whole.
The Larger Market Issue
As I mentioned earlier, Compass is simply an example of an overarching issue that’s running rampant through today’s startup culture: because of demands from venture investors and unicorn or decacorn goalposts, founders are getting distracted.
Distracted, in these terms, is not losing sight of your industry (i.e., real estate), although drifting from a core focus still happens from time to time. When I write “distractions,” I’m referring more to distortions… a warped view of who you are, what you’re about, and what you’re doing. Whether it’s at the beginning of life as a public company, or years later, markets always respond when companies haven’t fully pinned down who they are.
You might recall other dramatic examples such as WeWork, which even aside from Adam Neumann’s horrific management styles and culture, was a company without an identity. At its core, WeWork was an office subleasing company, but from distorting terminology such as SAAS (a tech term for “Software as a Service”) to mean “Space as a Service,” to buying up 21 other companies, many of which had zero connection to their core focus, their identity was in question… and the market responded negatively. The lesson that founders need to take away is incredibly simple: stop trying to be all things to all people. Focus on doing one thing first, and doing it very well.
Companies that revolutionize the world first revolutionize their respective niches, and there are plenty of examples. Reference:
Slack (acquired by Salesforce for $27.7B). Niche: professional communication.
Mailchimp (acquired by Intuit for $12B). Niche: email marketing.
AirBnB (IPO’d with a market cap of $109.245B). Niche: boutique, consumer-friendly travel.
And so many more. Ultimately the “big win” for 99% of founders is felt in becoming the undisputed market leader in [X], not building a company that can solve every issue found in an entire market category.
I implore founders reading this to audit their company vision and focus
As a founder, I adopt the principle to not allow the company to execute on anything that’s more than 1 degree removed from our core mission and market, and I recommend that you do the same. Times are changing, and the days of building “catch-all companies” are over.
My $0.02: founders, don’t drown in water that’s a mile wide and an inch deep. Build depth into your company through solutions in market niches overlooked by your competitors. Do this well, and markets will react favorably … it’s a science, really, as long as you don’t get distracted.
It’s kind of sad, as I so believe in Compass’ ability to transform the real estate industry with their technology. But they would have to experience an incredible upheaval to capture that untapped market potential, and with their history so far, I’m not completely sure it can be done.
Reflecting on my experience with Compass, I remember their mission statement. It was one of the first things I heard in 2018 when I moved my real estate business to their brokerage before my exit. Beautifully and boldly stated, it reads, “to help everyone find their place in the world.”
I agree with this sentiment — wouldn’t you? After all, everyone deserves to be seen. Yet, the irony is not lost on me that the brand helping others “find their place in the world” has yet to find its own.
All in due time, I suppose.