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Fidelity Values Compass at $2 Billion in Real-Estate Tech Deal

... system was able to locate dozens more homes in Manhattan than the leading real-estate service, called MLS. In practice, he found that Compass was no better in Washington than MLS, he said. Venditti left last year to join another broker. To contact the ...

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(Bloomberg)—A New York startup called Compass is persuading investors that it can reshape the home-buying process through the use of technologyA dashboard showing neighborhood data and a Pinterest-like app for organizing home listings would make real-estate agents more productive and therefore, more profitable, the company saysThe pitch caught the attention of Fidelity Investments, which made a rare bet on a private company, valuing the business at $1.8 billion, Compass said on Wednesday. To others, though, Compass looks more like a traditional realty brokerIt employs more than 2,000 agents, who take a percentage of the selling price and gives 15 percent to 30 percent to CompassIt lures the industry’s top talent with lavish signing bonuses and specializes in high-margin, luxury homes in upscale, coastal marketsThe much-touted technology is, according to several agents, not that different from what other brokers provide. Vera Nelson, a California real-estate agent of 17 years who joined Compass in 2015 from Coldwell Banker, said Compass recruiters enticed her with the promise of transformative technology and generous commissionsCompass has said agents see a 25 percent increase in earnings during their first yearBut Nelson left dissatisfied less than a year later and returned to Coldwell“The technology was mostly marketing tools,” she said“It was sleek, but I can’t say it was different from anything else out there.” Ori Allon, co-founder and executive chairman of Compass, said the company will use part of the $100 million from the new funding round to invest more in research and developmentAbout a quarter of the company’s 500 employees work in software development and design, he saidAllon brushed off criticism about Compass’s technology and questions about the lofty valuation“I don’t listen to that,” he said. Allon left a gig at Twitter Incto start Compass in 2012His co-founder, Robert Reffkin, was a Goldman Sachs Group Incchief of staff to Gary Cohn, now the chief economic adviser to President Donald TrumpBy 2016, venture capitalists declared Compass a tech unicorn, with a valuation of $1 billionThe company has taken a total of $325 million in fundingInvestors include Wellington Management, IVP, Peter Thiel’s Founders Fund and Joshua Kushner’s Thrive Capital. Compass generated $188 million in revenue last year, and Allon estimated it will hit $400 million this yearThe company is almost certainly unprofitable, but Allon declined to sayRedfin Corp., a real-estate broker that went public in July, is expected to generate $365 million in sales this year, according to analyst estimates compiled by BloombergRedfin’s market value is $1.87 billion, and it has yet to turn a profit“Real-estate brokerages have been in a profitability crisis for 20 years, and it’s become more acute over time,” said Brian Boero, chief executive officer of real-estate consulting firm 1000watt. The vote of confidence from Fidelity is noteworthyLike other mutual fund managers, Fidelity has been reducing the number of investments in late-stage startupsCompass was the 11th for Fidelity this year, half the amount from 2015, according to data from research firm CB Insights. Allon said Compass had $100 million in the bank before the latest investment but took the cash to pursue more aggressive growthCompass plans to double the number of agents to 4,000 in the next 18 months and expand to 40 offices from 30, he said. Todd Chaffee, a general partner at IVP and Compass board member, said he evaluated competing real-estate platforms when his VC firm first invested in 2015 and found they fell short of what Compass had developedHe said the caliber of developers at Compass was more like a tech company’s than a realty firm“The simple reality is that Compass agents can perform key tasks (like generating comps for their clients) in a few seconds when it used to take them a couple of days,” he wrote in an email. Compass software allows agents to see property assessments, school quality and other public data inside the Compass systemAgents can also use the company’s tools to assemble collections of properties to discuss with clients and book appointments with sellersThere are also market analysis and data tools for evaluating home pricesMaëlle Gavet, the chief operating officer, said Compass’s primary focus is “to glue all these tools together” in a Inc.-type systemShe said the first results of this effort will roll out by the end of the year but that it’ll take several years to deliver on the full vision. In the meantime, Compass is shoring up defenses against competing brokerages, several of which have sued the startup or its agentsCompass said it hasn’t been found liable in any case and currently has two outstanding claims against it from other brokeragesThe startup also said it hasn’t been sued in more than a year. Questions linger about Compass’s technologyAlex Venditti, a Washington area realtor, left Sotheby’s to join Compass as a senior vice president in 2015But once he got inside, he said the data Compass showed him was misleadingThe company demonstrated that its system was able to locate dozens more homes in Manhattan than the leading real-estate service, called MLSIn practice, he found that Compass was no better in Washington than MLS, he saidVenditti left last year to join another broker. To contact the author of this story: Lizette Chapman in San Francisco at [email protected] To contact the editor responsible for this story: Mark Milian at [email protected] Reed Stevenson

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