Redfin Real-Estate Firm Gets Cold Shoulder in Silicon Valley
How Online Company Is Overcoming Tech VCs 'People Problem'
Updated Dec. 8, 2013 4:47 p.m. ET
"I used to think I was this made man," says entrepreneur
Glenn Kelman.
"That's what they tell you after you take a company public."
In
1996 Mr. Kelman co-founded Plumtree, a business-software firm that went
public in 2002. After that, he assumed that his next idea was as good
as paid for.
"Whatever I thought of, they'd fund it," he says.
Then, in 2006, Mr. Kelman became chief executive of a real-estate startup, Redfin Corp.
Redfin CEO Glenn Kelman, shown in April, believes
improving the real-estate business takes more than just better code.
Billy Higgins/The Wall Street Journal
Redfin sounds like it would be catnip
for technology investors. The company aims to overhaul how people buy
and sell houses, using software and data to improve real-estate agents'
customer service. Real estate is an opaque, expensive insider's
game—exactly the kind of business that is ripe for getting blown up by a
less-expensive, more-convenient Web-powered service.
"We
wanted to change the whole thing in the consumers' favor," Mr. Kelman
says, his voice straining with a revolutionary's passion. "We wanted you
to have an agent who was on your side, who used technology the whole
way through the process and who charged half the price."
But
whenever Mr. Kelman shopped his plan in Silicon Valley, venture
capitalists looked at him funny. He raised millions of dollars, but the
money came fitfully, often at lower valuations than he expected.
Eventually
Mr. Kelman realized the problem. Like Soylent Green, Redfin is made of
people—sales staff and customer-service representatives.
To
tech investors, companies that depend on such people are old-fashioned.
People are unpredictable and hard to manage. They are costly to hire
and train, and their path to success is difficult to set into an
algorithm. People don't scale.
Yet Redfin is one of a handful of
startups showing that people can make a big difference. Mr. Kelman
believes that improving the real-estate business takes more than just
better code. It takes better people, specifically, better real-estate
agents. Consequently, Redfin has hired hundreds of agents on staff,
people to whom it pays salaries, benefits and on whose work the company
depends.
After years of slow growth,
Redfin is poised to hit it big. It's on track to book $100 million in
revenue—and turn a profit—next year.
And
its path suggests that businesses that try to improve workers—and not
just code—can be better for customers and, in the long run, better for
the bottom line.
Like
Zillow Inc.
Z -0.35%
and
Trulia Inc.,
TRLA -1.26%
Redfin is partly a website that helps you find houses for sale.
But unlike those companies, which make money through ads placed by
traditional brokers, Redfin is a full-service brokerage. After you find
your dream house on its site, Redfin makes money when you sign up with
one of its agents to guide you through the home-buying process. (Its
agents sell houses, too.)
Mr. Kelman says Redfin's unusual setup offers several advantages over traditional brokerages.
First,
it improves service. If you're touring a neighborhood and see a house
for sale, you can order up a Redfin agent to drive over to show you the
property quickly. In the company's most-established markets, Seattle,
for instance, the agent can be at your service within an hour. (It takes
longer in Redfin's newer markets, like Dallas). This works thanks to a
blend of technology and management. Just as the Uber online ride service
maps its drivers, Redfin keeps track of its agents' calendars and
real-time locations. Unlike a traditional real-estate brokerage—in which
agents essentially are contractors of a brand, not employees—Redfin's
agents are salaried workers. The company can tell them where to go and
what to do.
Redfin helps soothe other
home-buying frustrations as well. Redfin compiles detailed histories on
competing brokerages' pricing strategies, strengthening Redfin agents'
negotiating prowess. Redfin also conducts most of the home-buying
process online, reducing paperwork. And if you're selling your house,
Redfin can test offer prices on the Web, helping you to home in on the optimal price.
The
biggest opportunity is price. Mr. Kelman says the incentives of
traditional real-estate agents are misaligned with those of customers.
If you're selling your house, your agent, who gets paid on commission,
will prefer that you take a lowball offer over no offer. If you're
buying, your agent will want you to bid higher than you might otherwise
want—or need—to pay. Economists call this the Principal-Agent Problem, and it has proved stubbornly intractable in real estate.
Mr.
Kelman says Redfin has a solution. About half a typical Redfin agent's
pay comes through salary. The rest comes through commissions. But
crucially, commissions are linked to detailed reviews that Redfin
customers complete after sales. The reviews are posted online and affect
each agent's future business. Your agent always has an incentive to
please you. If pushing a client to close a deal will produce a bad
review, the agent would rather not close.
Redfin
is still tiny. In its most-established locations, it has about 3% or 4%
of the market. In bigger, newer markets, it seems nearly nonexistent.
Mr.
Kelman concedes that his people-dependent model has slowed Redfin's
growth. But he sees the prospect of long-term returns. "After we hit a
certain threshold in the market, our share begins to accelerate," he
says. In other words, over time, better service begins to pay off.
Redfin
last month said it raised $50 million from T. Rowe Price Group Inc. and
Tiger Global Management LLC. Compared with tech-focused venture
capitalists, Mr. Kelman says, these investors didn't care that Redfin
might take several more years to realize its mission of revolutionizing
real estate. They were willing to wait, he says.
"Most of Silicon Valley isn't that patient."
