22 Oct 2020, 8:30 pm
Eric Wu (Photo by Aaron Wojack)
In Opendoor’s early days, employees knew what they were up against. And if they didn’t, Spencer Rascoff spelled it out for them.
iBuying was one of the “stupidest” ideas he had ever heard of, Rascoff, then CEO of Zillow, wrote in an email that went around Opendoor’s San Francisco office and became part of company lore.
Eric Wu had the job of keeping his troops on track, even after Zillow’s hard pivot in 2018, when it benched Rascoff and decided to compete head-on with Opendoor in instant homebuying. “We’re going to focus on our business,” he would say.
Opendoor sold nearly 18,800 homes last year, generating $4.7 billion in revenue. But as it prepares to go public, the startup is battling Zillow for dominance in iBuying, a sector that saw just $8 billion in transactions last year but one that both companies believe is the future of residential dealmaking. And Zillow is catching up: Last year, the Seattle-based listings giant bought and sold 10,000 homes, up from 800 in 2018. That dented Opendoor’s market share, which dropped to 64 percent from 70 percent, according to industry analyst Mike DelPrete. Wu must both establish his company’s dominance in a new sector and prove to investors that the sector itself is viable. “As you start to scale a business, it’s similar to flying a plane and you have to fix the plane while you’re flying,” Wu said in 2018.
Read related story: Can iBuying go the distance?
Opendoor thinks it can standardize how people buy and sell single-family homes. The company was the brainchild of PayPal alum Keith Rabois, who got the idea in 2003 and got Wu to join him a decade later.
Rabois wasn’t dreaming small dreams. “I don’t think Opendoor will have revenue the size of Wal-Mart next year,” he told Forbes in 2016. “But we’ll be in the billions of dollars very fast.”
He was right. By 2019, Opendoor had raised a total of $1.3 billion in equity and $3 billion in debt from investors including SoftBank and Len Blavatnik’s Access Industries. Opendoor’s September deal to go public through a merger with Chamath Palihapitiya’s blank-check company will give it even more firepower: $1 billion in cash.
Wu, an unassuming 37-year-old who sold a prior startup to Trulia and has invested in nearly a dozen more, envisions Opendoor to be a one-stop shop for buying and selling real estate online.
“This is our North Star,” he said in July 2019. “If we continue to deliver a super experience at the lowest cost, I do see a world where we can be a winner-take-most category. The classic example is Amazon.”
Bad employees = good founders
The son of Taiwanese immigrants, Wu grew up outside of Phoenix and was raised by his mother after his father died when Wu was four. He was 19 when he bought his first house for $110,000, using university scholarship money for the down payment. Wu turned the garage into two studios and rented them out.
“I didn’t want to pay rent,” he told CNBC last year.
By 2005, Wu owned 25 homes. He moved to San Francisco and in 2008 co-founded RentAdvisor, a rental review company that raised $7.4 million before being acquired. In 2010, he co-founded geodata real estate site Movity, which Trulia acquired in 2011.
Wu stayed at Trulia two years, long enough to rankle his bosses. “I was a bad employee,” Wu said during a one-on-one session with former Trulia CEO Pete Flint at last year’s Proptech CEO Summit. “I wanted to break through walls — that was the founder mentality.”
“I think you were quite difficult,” Flint said. Wu readily admitted leadership didn’t come naturally to him and credited executive coaches — he had six — with helping him hone his craft.
When pitching Movity at startup incubator Y Combinator, Wu met Rabois. Three minutes into his pitch, Wu recalled, Rabois tried to recruit him to “Project Homerun,” a precursor to Opendoor. Wu turned him down but came around two years later.
Opendoor came out of stealth mode in 2014 with a $10 million Series A led by Khosla Ventures. Silicon Valley elite including PayPal co-founder Max Levchin, former Facebook CFO Gideon Yu, Eventbrite co-founder Kevin Hartz and Y Combinator’s Sam Altman participated in the round.
Within a year, Opendoor was buying a home a day in Phoenix, its first market. Employees sounded a bell each time they put one into contract.
“It was like chasing a boulder downhill,” an early employee recalled. “It felt like the whole world thought we were crazy.”
In a 2018 conversation with Opendoor investor GGV, Wu suggested he was OK with that.
“If you’re not comfortable with being misunderstood for long periods of time,” he said, “you probably shouldn’t do anything new or interesting.”
Haters gonna hate
Agents responded to iBuying with a mix of fear and loathing.
At its core, the business is “fairly risky,” said Bill Raveis, chairman of William Raveis Real Estate. Hoby Hanna, president of Howard Hanna Real Estate, said iBuyers haven’t been able to move the needle despite their heavy investments. “Some of us are making profits,” he said.
“I guess it’s good to be hated,” Wu told tech journalist Kara Swisher last year. “Realtors will have to evolve to be advisers.”
Steve Murray, founder of research firm Real Trends, said current dynamics favor the open market.
“If I’m a listing agent going out to a $400,000 to $500,000 home in Denver,” he said, “it won’t last two days. And you’ll get full price.”
Agents aren’t the only skeptics. Critics say Opendoor’s model requires it to lowball sellers to maintain margins, a claim that its executives deny.
“If we undervalue, we undermine customer trust,” Opendoor CTO Ian Wong told Forbes in August. “And if we overvalue, obviously, that’s bad for business.”
The firm doesn’t deny that its offers are slightly below the open-market price and target sellers who want the certainty of an immediate deal.
It’s not clear, however, if enough sellers fit that bill to make Opendoor profitable.
“The one-click [home sale], while it sounds amazing, is unlikely for the vast majority of folks,” said Sean Black, a co-founder of Trulia and now the CEO of home trade-in startup Knock. “The home is the biggest savings account.”
Observers noted that low housing stock coupled with high demand could make iBuying unsustainable.
Even in Phoenix — iBuying’s current epicenter — iBuyers have a mere 1.5 percent of the market, down from 6 percent in the third quarter of 2019, according to local economist Mike Orr. Opendoor, which bought 300 to 400 homes a month at its peak, is now buying just 60 to 80.
“The supply of homes in their price range is extremely low,” Orr wrote in an email. “I am not sure if it is deliberate or if circumstances forced their hand.”
Fat yet frugal
Over the past decade, investors desperate to put capital to work and anxious to discover the next Facebook or Google have thrown billions of dollars at tech startups — sometimes more money than was good for them. In 2017, the New York Times listed Opendoor among its list of what it described as “fat startups.”
The company raised $320 million in its first three years in business, earning unicorn status in late 2016. The cash powered its rapid growth: By late 2017, Opendoor was spending $100 million a month to purchase homes. Opendoor raised $400 million from SoftBank in 2018 and $300 million from General Atlantic last year. Rabois objected, citing SoftBank’s ties to Saudi Arabia and telling The Information that the size of its checks was breeding indiscipline.
But inside Opendoor, executives closely watched costs.
“You’d hear, ‘We eat basis points for breakfast’ around the office for years,” co-founder JD Ross said in a Sept. 21 tweet. (Ross left Opendoor in late 2018.)
In the spring of 2019, Opendoor asked several hundred staffers to relocate to Phoenix and, under a new “culture of frugality,” it stopped offering free lunch.
“We had a salary cap at Opendoor. No employee made more than $120,000 for two years,” Wu said at Proptech CEO Summit. “That’s really hard when your engineering team is saying, ‘Eric, no one can live in San Francisco on $120,000.’ There’s no reason to spend your hard-earned dollars, or your hard-raised dollars from VCs, in a sloppy way.”
Although the company lost $339 million in 2019, it was making money on each transaction in most markets, its IPO filing shows. Still, its cash needs were massive and complex, even before Covid.
Opendoor relies heavily on debt to purchase homes, often financing 80 percent to 90 percent of each deal. Raising debt and equity simultaneously has posed a unique challenge over the years. “Equity investors want massive bets and huge upside,” Wu said in 2018. “Debt investors want downside protection.”
When the pandemic whacked Opendoor’s balance sheet, it challenged an internal belief that the company would thrive in a down market.
“We planned around a U-shaped curve,” said an early employee. “Now here’s an L-shaped curve, and it looked scary.”
As the spread of Covid proliferated by March, Opendoor was forced to suspend iBuying activities, as were its rivals. But unlike Zillow, iBuying was Opendoor’s only source of revenue.
“The effect is akin to an airline losing both engines while in flight,” DelPrete wrote.
Opendoor raced to sell off inventory. By May, it had laid off 600 people, or 35 percent of its staff.
Many were shocked, five months later, when Opendoor said it would go public with Palihapitiya’s Social Capital. Sources speculated that VCs weren’t keen to write another big check.
A former employee cast the move this way: “It feels like a Hail Mary.”
The seeds of Opendoor’s SPAC deal were planted in May, when an Opendoor board member who knew Social Capital director Adam Bain told him Wu was interested in learning about SPACs. Bain, a former COO of Twitter, knew Wu and held a small stake in Opendoor.
Over the next few months, a deal took shape. Ten days before going public with the merger, Bain, Wu and Opendoor CFO Carrie Wheeler finalized an investor presentation with Palihapitiya over dinner at his home, according to regulatory filings.
“This is my next big 10x idea,” Palihapitiya, who took Virgin Galactic public in April and is a part-owner of the Golden State Warriors, tweeted Sept. 15. At press time, the SPAC that’s merging with Opendoor was trading at $22.86 per share, more than twice its June IPO price.
Palihapitiya has been on a SPAC spree, raising nearly $4 billion since April. In general, the public market is binging on SPACs with 139 SPAC IPOs so far this year, compared to 59 in all of 2019, according to SPAC Insider.
Palihapitiya found himself on the defensive after news reports revealed he would receive $60 million in Opendoor founder’s shares. “I just don’t understand why all of a sudden it’s OK for banks to make money, but it’s not OK for other people to make money,” he told the Financial Times. Besides, he said, Wu and Opendoor’s board were comfortable with the deal.
Phoenix from the ashes
In an investor presentation, Opendoor said capturing 4 percent of the U.S. housing market would make it a $50 billion company. It projected turning profitable in 2023 with $9 million in adjusted EBITDA and $9.8 billion in revenue. Since October, Opendoor has made several C-suite hires: Julie Todaro, an executive from Amazon and Airbnb, as president of homes and services; Netflix alum Tom Willerer as chief product officer; and Wheeler, a partner at TPG, as CFO.
Opendoor’s IPO filing shows the company actually had $789 million in working capital as of June 30. “Originally, a SPAC deal wasn’t the route we wanted to take,” Wu said on CNBC. “A couple of things drew us to this path. One was speed to market.”
With proceeds from the deal, Opendoor will expand to 100 markets from 21. The company disclosed it makes an average profit of $5,000 per transaction and estimates it can reel in another $6,600 per home with added services.
“They juice the economics because there’s margin to each of those additional products,” said Fifth Wall’s Vik Chawla, an investor in the firm.
Stuart Miller, CEO of homebuilding giant Lennar, an investor in Opendoor, said the startup could play a key role in its sales funnel.
“Many customers come to Lennar sales centers with homes of their own to sell, and Opendoor can assist them,” Miller said in a 2018 earnings call.
DelPrete said Opendoor’s playbook holds up only if there are 50 other markets like Phoenix.
“Right now, there’s one Phoenix and nobody comes close,” he said. But he said Opendoor has had years to refine their iBuying playbook.
“One of the biggest competitive advantages they have is cash,” he said. “They have a huge amount of capital, and by IPOing, they’re going to have even more.”
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