Hit by ‘double whammy,’ proptech companies pivot to profitability

Profitability has been a sore spot for Robert Reffkin and his brokerage, Compass. In media interviews and on earnings calls, Reffkin is compelled to defend Compass’s mounting losses and the underlying power of its enterprise – in 2022, Compass recorded a internet lack of $601 million regardless of raking in income – up 6% to $6.02 billion. 

Reffkin doesn’t shrink back from the truth that the brokerage has acquired billions in enterprise capital and debt. The funding has allowed the agency to develop exponentially, de-throning residential actual property’s two largest brokerages—Wherever Actual Property and Berkshire Hathaway Homeservices—in simply over a decade. He’s grateful for it, but additionally is aware of the times of purple ink should finish.

“We grew sooner than another firm, and that’s the reason we have been capable of elevate $2 billion to spend money on our brokers,” Reffkin told attendees on the Inman Join convention in late January. “If we determined to not develop and as an alternative mentioned, ‘Hey, we’re going to be worthwhile in yr two,’ I couldn’t have raised $2 billion. However this final yr, the world flipped on a dime and moved from development to profitability. And similar to our brokers have needed to adapt with the market, I’ve needed to adapt to this shift, and we are actually specializing in revenue.”

​​Reffkin has set the formidable aim for Compass, the biggest brokerage in America by sales volume, to be money move–constructive by the top of June, even amid the largest housing market slowdown in years. 

Proptech corporations, a lot of which have relied closely on enterprise capital funding, have struggled mightily over the past 12 months.

“As everyone knows, when the Federal Reserve started elevating charges final yr, the housing market cooled considerably,” Spencer Rascoff, the co-founder and chair of Pacaso and co-founder and former CEO of Zillow, informed RealTrends. “This meant slowing development or contraction at quite a lot of beforehand high-flying proptech corporations. On the similar time, enterprise capital funding slowed throughout all sectors. That meant that proptech obtained hit with the double whammy of a harder underlying enterprise local weather and fewer entry to capital.”

This double whammy resulted in large-scale layoffs and tough monetary outcomes.

As of March 2023, Offerpad had minimize roughly 50% of its workforce from its peak in August 2022, whereas Opendoor introduced in November 2022 that it had laid off 550 workers. Knock laid off 46% of its employees final March and  Ribbon minimize its employees by 85% in late November. In the meantime Flyhomes laid off roughly 200 employees in mid-July and the Austin-based agency Homeward, which achieved a valuation of over $800 million in Could 2021, additionally made cuts, decreasing its employees by 20% in early August. 

As well as, Opendoor and Offerpad, the 2 publicly traded proptech companies, misplaced $1.4 billion and $148.6 million, respectively, in 2022, and have been caught with lots of of properties on its books.

“Many proptech startups have needed to fully rethink their companies, and plenty of pivoted solely,” Rascoff mentioned. “With each housing transaction quantity down significantly and entry to capital turning into scarce, corporations are actually rising slower and specializing in profitability. This led to broad value reducing measures throughout the board. Firms are getting lean to outlive the following 18-24 months with the belief they gained’t be capable of elevate new capital on favorable phrases.”

Product pivots as VC cash disappears

At Flyhomes, CEO Tushar Garg mentioned the housing market slowdown and shift from development to profitability has resulted in his agency increasing its product choices and investing sources into shopper training initiatives.

Affordability has turn into the primary drawback. It was once, ‘how can I compete with all-cash presents to win the house?’ And that also is a problem in some markets, however the largest problem for many patrons has modified,” Garg mentioned. “The play that we did in that route to make extra strong choices for these shoppers was to get Loftium to join forces with us. However what we do in the intervening time, foremost is buyer training. Giving them the knowledge they should determine if they need to purchase or promote proper now or not and what companies our merchandise can present to assist them.”

Flyhomes additionally lately launched a “buy now-refi later” product.

“The most important factor proper now could be that we don’t know when charges are going to go up or down and there’s a lot of friction in folks’s determination making on whether or not or not they need to purchase now,” Garg mentioned.

The brand new providing allows homebuyers utilizing the product to refinance the acquisition of their house any variety of years down the street, when mortgage charges attain a degree they’re glad with.

Divvy, a proptech agency that gives homebuyers with an all-cash supply after which permits them to lease the property till they’re prepared to purchase, performed its most up-to-date funding spherical in October 2021, however executives have been maintaining an in depth eye on the enterprise capital market.

“We raised in a preemptive spherical in 2021 from Tiger and the timing was ideally suited, and almost the whole lot has modified within the fundraising market since then,” Adena Hefets, Divvy’s CEO, wrote in an e-mail. “Layer within the instability within the banking ecosystem proper now, and it’s much more difficult. Proptech corporations are actually struggling within the present market, and never everybody will make it although. You’re nonetheless seeing robust corporations saying large rounds, but it surely’s rare and nothing like we noticed in 2021-2022. Very similar to the actual property market, it seems like most individuals are sitting on the sidelines and taking a wait-and-see strategy.”

Fundraising struggles and considerations have been compounded in latest weeks by the failures of each Signature Financial institution and Silicon Valley Financial institution, the latter of which held funds for companies like Opendoor, OJO Labs, and Homeward.

“The scenario at Silicon Valley Financial institution was a particularly unlucky one. Plenty of work will should be performed by corporations who banked with SVB, and rapidly, as they rebuild elements of their finance operations,” mentioned John Berkowitz, the founder and CEO of OJO Labs.

According to an SEC filing, SVB held lower than 1% of Opendoor’s complete money, money equivalents and restricted money. As well as, as of March 13, 2023, Opendoor mentioned that roughly 98% of its complete money, money equivalents and restricted money is held on the nation’s 4 largest banks.

Though Divvy was not impacted by the 2 financial institution failures, Hefets famous that her agency was taking motion to “diversify its money throughout a number of banks.”

The three Ps of proptech: Profitability, profitability, profitability

With restricted funding alternatives within the close to future, proptech companies are having to maintain shut watch on their steadiness sheets. 

At Offerpad, the smaller of the 2 publicly traded iBuyers, working bills got here in at $309.74 million in 2022 and liabilities totaled $703.19 million. As of December 31, 2022, the agency had $825.1 million in complete property, $97.24 million of which was in money. Though the agency has undergone vital staffing cuts, extra work should be performed to make sure profitability over each the quick and medium time period.

Over at Opendoor, the scenario is much more difficult. At the end of 2022, the agency’s working bills totaled $1.59 billion and it had $1.5 billion in liabilities on its steadiness sheet. Though it had $6.6 billion in property, solely $1.13 billion of it’s money or money equivalents. 

Nonetheless, Opendoor executives stay optimistic, banking on the agency’s partnership with Zillow, and it being near promoting off all of the inventory it acquired at the height of the market. 

 “As for proper now, we’re extremely centered on stabilizing our core enterprise and finally returning to constructive free money move,” Carrie Wheeler, Opendoor’s CEO, informed traders on the agency’s fourth-quarter earnings name.

Trade consultants say that proptech companies might be laser-focused on profitability for the close to time period.

 “This can be a interval of reducing and consolidation throughout the proptech panorama. Firms are doing something they will to outlive and make it to the opposite facet,” Rascoff wrote. “The excellent news for those who do is that the majority of their competitors will possible have been worn out within the interim, so the survivors could have room to run when instances are good once more. Firms are reducing prices wherever they will with the belief that they gained’t be capable of elevate capital on favorable phrases anytime quickly. Precedence 1 has gone from development in any respect prices to profitability in any respect prices.”

Flyhomes’ Garg echoed the sentiment.

“We noticed the market change final yr and we turned laser centered on with the ability to hit profitability,” Garg mentioned. “We’re centered on fundamentals of the enterprise and the issues that we are able to management on this surroundings.”

In Zach Aarons’ view, this shift to profitability might lead many of those companies to go the IPO route within the subsequent few years.

“You’re successfully seeing no IPOs, however any IPO you will note sooner or later, of us are saying that the businesses will should be worthwhile to execute profitable IPOs,” Aarons, the co-founder and common companion at New York-based VC agency Metaprop, mentioned. “Within the prior increase, there have been many corporations doing IPOs both conventional ones or direct listings that weren’t even EBITDA worthwhile. When the IPO market lastly thaws out, which most prognosticators are suggesting is Q1 of subsequent yr or late This autumn of this yr, I believe we are able to anticipate corporations, that if they don’t seem to be already EBITDA worthwhile, that they’ve plans that present a transparent path to EBITDA profitability in 2024.”

Whereas present situations will pressure a contingent of proptech companies to go belly-up, VC gamers within the area see higher days forward.

“At my enterprise agency, 75 & Sunny Ventures, I’m nonetheless seeing new seed stage proptech corporations pop up every single day,” Rascoff wrote. “The speed of latest firm formation has in all probability gone down because the increase instances, however actual property stays a large market with quite a lot of room for disruption, so I believe we’ll proceed to see new, revolutionary corporations get began in good instances and unhealthy.”

Aarons added: “We’re nonetheless seeing new firm formation. Sadly, on this sector over the previous 18 months now we have seen hundreds of layoffs and a few of them now wish to begin their very own factor.”