Yet another San Francisco company has gone public. This time, it’s Opendoora real estate business that rakes in assets via as-is cash offers on properties before flipping them for a profit. Here’s what we know about the December 2020 Opendoor IPO, one of the last in a year chock full of hefty initial public offerings. This includes details on the company’s history, Opendoor fundraising that led up to this point, and investors’ concerns of overvaluation.
TL;DR
- Opendoor was founded by four people in 2014. They’ve grown dramatically in the last couple of years, making a name for themselves in the proptech market.
- The Opendoor IPO took a nontraditional route: a special purpose acquisition company (SPAC) called Social Capital. The merger was worth $1 billion.
- Opendoor landed on the Nasdaq Exchange on December 21, using the ticker symbol “OPEN”.
- After the SPAC deal went through, the company’s total valuation ran up 161%.
- Investing in Opendoor does bring notable risksnamely overvaluation, profitability, and market conditionsbut if they do it right, the company could coax high returns for investors in the long-term.
- You can learn more about IPOs here.
A quick company history of Opendoor
Eric Wu serves as the CEO of Opendoor. Wu and three colleagues founded the company in 2014. The other co-founders are Ian Wong (currently chief technology officer), Keith Rabois (currently general partner at Founders Fund), and Justin “JD” Ross (currently general partner at Atomic).
When it comes to Opendoor, there’s one thing they do really well: algorithms.
Opendoor uses an algorithm to help them buy and sell homes. They earn money by taking a 68% fee from each home purchase. For real estate professionals, this niche is called “iBuying” or instant home buying. Others call it proptech, a friendly nickname for property technology.
It’s not all algorithms, though. Someone does have to come in and fix up the home’s cosmetics for the process to be profitable.
For users, the process is simple. Make some clicks on an app and you can figure out your home’s valuation, set up inspections, and get through the closing, title, and escrow processes in a breeze.
It’s easy to imagine why sellers would want to take advantage of this service. In fact, Opendoor’s conversion rate is quite higha whopping 34%. They also boast an esteemed net promoter score (NPS, which rates customer platform experience); they’re at 70, which is right up there with fan faves like Netflix and Apple.
As for where they operate, Opendoor functions in 21 American metropolitan areas from Austin to Los Angeles and beyond. Users can sell to and buy from Opendoor in most of these cities, with home touring and financing options available in select cities.
Opendoor fundraising ahead of the IPO
In early December (just ahead of the IPO deal), Opendoor raised $1.3 billion in a fundraising round that featured investors like General Atlantic, Softbank, and Khosla Ventures. This wasn’t the firstnor the largestfundraising round in Opendoor’s history.
In 2019, they raised an impressive $4.4 billion from investment firms like Norwest Venture Partners, GGV Capital, and Access Technology Ventures.
Overall, the company hasn’t had trouble raising funds. This is likely due to one of the co-founders having a seat at the big kid’s table. Rabois is a former PayPal and Square executive. Wu once founded a real estate startup that he sold to Trulia. The team raised $10 million in angel funding right off the bat, some of which came from Max Levchin of PayPal fame.
Path to the Opendoor IPO
Opendoor elected to take a different route than that of a traditional IPO. They made their public debut via a special purpose acquisition company (SPAC). So what’s a SPAC?
In essence, a SPAC is a shell company. They acquire private companies but raise funds publicly. Once public, SPACs have two years to finalize an acquisition. There are times when SPACs fail, either because they fail to reach the acquisition deadline or encounter issues earlier on. Popular examples of SPACs that failed to merge include a TGI Fridays deal and one with CEC Entertainment (owner of Chuck E. Cheese and Peter Piper Pizza).
However, successful SPACs in 2020 aren’t few and far between. One of the most popular was Skills, which grew 28% on its opening day. Even Jay-Z is herding a SPAC (The Parent Company) to the public market in the new year.
In Opendoor’s case, that SPAC is called Social Capital Hedosophia Hldgs II Corp. Social Capital is spearheaded by billionaire Chamath Palipatihiya, who is a former Facebook executive turned venture capitalist. In the past, Palipatihiya has stated that he uses venture capitalism as a way to make positive change in the world.
Another noteworthy merger for Social Capital occurred with Virgin Galactic.
Since Opendoor first announced the SPAC news in September, the company has added numerous executives to the lineup. Key hires include Kushal Chakrabarti (former Amazon executive) as vice president of research and data science as well as Andrew Low Ah Kee (former GoDaddy CEO) as president.
Just ahead of the Opendoor IPO, iBuyer valued the company at a whopping $18 million. This is a massive increase from an earlier valuation of $4.8 billion, which means the closing of the SPAC merger bumped up the company’s total worth by 161%.
Related: What is a SPAC?
When was the Opendoor IPO date?
The Opendoor IPO date occurred on December 21, 2020. When the ticker symbol became available on the public market, Opendoor earned just over $1 billion in cash as agreen upon by their SPAC merger with Social Capital.
This billion was made up of $414 from the SPAC deal and another $600 million from a private investment in public equity (known as PIPE). Reportedly, Palihapitiya included $100 million of his own money in the deal.
What’s next after the Opendoor IPO?
Now that the company is public, Opendoor is trading under the ticker symbol “OPEN” on the Nasdaq Exchange. The ticker changed from the initial nickname, which was “IPOB”.
On Opendoor’s debut date, the stock rose 6% to $31.25 from its starting point of $29.00 by the end of the day. By the following day, it fell 5.76%. This is natural, considering the volatile nature of IPOs (and especially large IPOs seeking to raise $1 billion).
As for what’s to come, Opendoor expects to see $10 billion in revenue by 2023. They’re aiming high in hopes they’ll claim 4% of the US housing market. In the past year, six million homes have been sold in the United States, and Opendoor really just needs a fraction of that to get where they’re trying to go. With the American residential real estate market currently worth $20 trillion, this could be lucrative if the company does it right.
It’s hard to say whether they’ll continue pushing their insurance and financing services. If they want to maintain momentum beyond the Opendoor IPO date, they may want to home in on what they do best. After all, it’s hard to be the best at everything all at once.
What investors should know
In December, Roblox publicized the formerly confidential paperwork for their upcoming IPO. In it, the company announced they were postponing their market debut in 2021, thanks in part to a string of oversized IPOs. It seems like Opendoor is one of those oversized offerings, and investors may want to be wary of potential future volatility.
It’s pretty common for a go-getter company like Opendoor to fail to reach profitability. However, it’s important for investors to understand the extent of the losses. In 2019, Opendoor reported a $339 million net loss. This was well before the COVID-19 pandemic led to shutdowns.
Once restrictions hit, Opendoor halted their home-buying services to comply with varied regulations. As a result, they laid off more than a third of their workforce and sold off a hefty portion of their inventory in bulk.
Unlike companies like Roblox (a 3D digital platform that benefited from shutdowns and will be going public in 2021), Opendoor struggled in the pandemic. However, it’s highly plausible their fate will change course in the coming year.
According to the company, Opendoor likely won’t turn an EBITDA profit until 2023.
Related: What is EBITDA?
Bottom line
Deidre Woollard, a proptech expert, told The Motley Fool, “This is all major companies with a lot of funding trying an idea that is interesting, but still a very, very small part of the real estate market and not really a fully baked idea, in my opinion.”
As for whether or not the market will agree with Woollard, we’ll have to wait and see the response from investors. Opendoor has promised enhanced revenue in the coming year, but there’s only so much you can believe from company executives. Now that the Opendoor IPO has officially gone through, investors can rely on quarter earnings to tell the truth as it comes.
Matt Frankel, CFP, says, “It remains to be seen if you can do this by the thousands while still being efficient and doing it correctly.”