“The important thing in investing is to be true to your compass.” John Paulson, American hedge fund manager, spoke these words as a form of guidance to investors. Soon, investors will be able to literally follow his advice by investing in the real-estate brokerage firm Compass’ IPO.
Compass has conducted fundraising rounds most years, and now company leadership is poised to find its way home to a Compass IPO in 2021.
TL;DR
- Compass is a real estate brokerage firm founded in Manhattan in 2012. The company aims to provide a better real-estate buying and selling experience through advanced technology and experienced agents.
- They operate in a similar fashion to Zillow and Redfin, yet work largely in high-priced urban markets.
- Over 19,000 real estate agents work for Compass, helping to connect home buyers and sellers in a tech-savvy and efficient manner.
- The company faced dramatic challenges at the start of the pandemic, resulting in a layoff of 15% of its workforce in March 2020. But they ultimately ended the year with 56% higher revenue than 2019.
- Compass has raised a total of $1.5 billion since its founding, with investors holding an aggregated 60.25% stake. The latest valuation for Compass was $6.4 billion in 2019, and its current value could be much higher.
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A quick history of Compass
Compass, which focuses on merging technology with the best real estate agents, was founded in 2012 by Ori Allon and Robert Reffkin. Originally called Urban Compass, it still has a strong presence in luxury urban realty markets. The company filed paperwork on March 1 for a Compass IPO date sometime in 2021. Reffkin, the company CEO, is Columbia-educated and a former Goldman Sachs executive.
Allon is the Chief Strategist at Compass and his prior technology experience includes a period as the director of engineering at Twitter. He also founded Julpan (eventually acquired by Twitter) and Orion (later acquired by Google).
Part of Reffkin’s vision was to create a real estate platform that would draw the most talented agents from around the country. To that end, he sought to build the best real-estate software tools to assist with scheduling virtual home tours, managing appointments, and creating effective marketing campaigns and content.
Back in Compass’ launch year of 2012, the evolution began in a singleManhattan office. Since then, the brand has expanded to include over 19,000 agents across the United States. They also operate multiple offices in major U.S. city locations such as:
- Seattle
- Chicago
- Houston
- Los Angeles
Co-founder Ori Allon’s prior tech successes have served him well in the venture of Compass. TechCrunch reported in 2019 that “Allon’s vision of using machine learning algorithms to improve decisions that humans make has been tailored to the specific vertical of real estate.”
Compass offers a variety of services, in keeping with co-founder and CEO Reffkin’s vision that Compass would attain the goal of being a “one-stop shop” for the entire home-buying process:
“Everything is in one platform…Mortgage, title, insurance, escrow, inspectors, move-in services, everything in one place creating harmony.”
In 2020, Compass struggled due to the pandemic, laying off about 15% of its employees. But a latter-year resurgence in business brought a 56% revenue increase up to $3.7 billion. Revenue in 2019 was lower at $2.4 billion. Total transactions using the Compass platform rose by 66% from 2019 to 2020, according to their S-1 filing (AKA their SEC registration statement).
Pro tip: Reading a company’s registration statement, especially the prospectus, can help you make informed decisions regarding investments like the Compass IPO.
Net losses during the year 2020 dropped from $388 million to $270.2 million as well. Total transactions increased to 144,784, a 66% increase from 2019.
Although Compass didn’t attain their frequently stated goal of 20% market share in the top 20 markets by 2020, they did bounce back in the second half of 2020. The S-1 filing stated that the company’s technology value is proven by a 19% increase in closed transactions by agents in their second year compared to their first. It claims that Compass agents close on home sales more quickly than those at other firms.
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Compass fundraising to know about
Since the company’s founding in 2012, Compass fundraising rounds have only multiplied. The total of $1.5 billion in capital raised has enabled the company to grow from one office to multiple locations around the U.S. and over 19,000 agents.
- Seed round: Compass held an $8 million seed funding round in 2012. This was led by Kenneth Chenault (longtime chairman of American Express), Joshua Kushner’s Thrive Capital, Founders Fund, Goldman Sachs, and .406 Ventures.
- Series A: In 2013, Compass raised $20 million selling shares for $10 apiece. Leading this round were Advance Publications, parent company of Conde Nast and Discovery Channel, and Marc Benioff, Salesforce CEO. This round gave those investors a 13.21% stake.
- Series B: Advance Publications, Marc Benioff, Kenneth Chenault, and others invested an additional $42 million in the company in 2014.
- Series C: Compass fundraised a new injection of $50 million led by IVP in 2015. Several other previous company backers invested additional capital, resulting in an $810 million valuation for Compass.
- Series D: In 2016, Wellington Management invested $75 million in capital and brought Compass the coveted designation of “unicorn” or a startup exceeding $1 billion in value. Rumors of a potential Compass IPO began swirling around this time.
- Series E: Compass fundraising in November 2017 brought $100 million in funds from Fidelity, IVP, and Wellington Management. Just a month later, SoftBank jumped in with a $450 million round of its own. At that point, Compass had a valuation of $2.2 billion.
- Series F: A 2018 $400 million funding round came from SoftBank and Qatar Investment Authority, literally doubling Compass’s valuation to $4.4 billion.
- Series G: Next in the line of Compass fundraising arrived in July 2019. SoftBank and Dragoneer led that latest in the series of major funding rounds, bringing in $370 million. By this point, the company had an approximate $6.4 billion valuation.
SoftBank’s Vision Fund has also invested in WeWork, OpenDoor, and Katerra. SoftBank owns 35% of Compass’ Class A shares. CEO Reffkin holds 2.4% of its Class A shares and all of its Class C shares.
Path to the Compass IPO
Since Compass first crossed the $1 billion valuation mark in 2016, analysts have speculated on when or if the company would seek the public domain.
The company hired investment banks for a potential underwriting in November 2020. Reffkin, the CEO, also sent out a memo to team members in December of the same year that alluded to a coming IPO. At the time, he noted how an IPO would enable the company to raise capital and continue improving agent tools.
Compass originally filed its S-1 confidentially in January, making the filing public on March 1. Oftentimes, companies will file confidentially to keep their fiscal details under wraps while they get their IPO ducks in a row.
Rather than pursuing a Compass IPO through a merger with a special purpose acquisitions company or a direct listing (both of which are increasingly trendy options), Compass is conducting a traditional IPO. Joint bookrunners on the Compass IPO are Morgan Stanley, Goldman Sachs, and Barclays Plc. The stock is expected to list on the New York Stock Exchange under the symbol COMP.
Size and target price range for the IPO have not yet been announced.
When is the Compass IPO date?
Compass filed its paperwork with the Securities and Exchange Commission on March 1, 2021. Given that the process after the S-1 filing is completed can take several months, the Compass IPO date is likely to be sometime in mid- to late-2021.
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What investors should know
The residential real estate market has experienced a boom recently, in part due to the shift to remote work during the pandemic. A more desirable home base has become more of a priority to many people.
Nationally, home prices shot up by 10.4% by December 2020, compared to prices from December 2019. The increase in demand for houses has made it a seller’s market, with prospective buyers often having to scramble and offer well above asking price in order to stand a chance of getting a home. Some have even signed off to forgo inspections just to get a chance at the contract (which is not advisable in any scenario, but it’s a reality of COVID-era realty).
Stock prices of both Zillow Group Inc. and Redfin Corp. roughly tripled over the past year, which may be a good sign for the Compass IPO to come.
Compass lists quite a few high-end, luxury properties which could set it apart from the competition. Its residential real estate transactions totaled $152 billion in 2020, giving it a 4% U.S. market share, according to the Compass IPO filing.
Realtor companies are competing to score the best agents, which can cut into profits by having to offer stock options and other expensive incentives to bring in talent. (For example, Realogy reported operating losses of $600 million last year, largely due to the cost of commissions for agents.)
Zillow has experienced great growth, but that’s a platform that doesn’t rely so heavily on brokers and agents. Compass, on the other hand, relies heavily on top talent and pays handsome commissions to retain those agents.
Bottom line
Compass has experienced steady growth and continues to emphasize the value in its technology designed to maximize real estate agents’ success rates. If the real estate market continues to thrive, the Compass IPO might finalize at the perfect time. Whether the firm is in it for the long haul remains to be seen beyond the Compass IPO date.