Redfin is in the house

Yesterday, Redfin, a local Seattle-area online real estate brokerage, announced an $8MM round of venture capital financing led by Vulcan Capital with BEV Capital, The Hillman Company, and  Madrona Venture Group also participating.  Press release here.  In the past I've blogged about Redfin here and here.   The Redfin transaction was especially significant for me since it's the first deal I've led on behalf of Vulcan Capital/Paul Allen since I joined the firm last year.  Nothing like your first time in a new place.      

So since the announcement, the question I get the most often from the press and others is:

Why did you invest in Redfin?

I've got a 40-page investment memo that answers that question in dizzying detail, but since I'm not willing to post that document on the web, let me try to summarize:

Reason #1, 2, 3.  Glenn Kelman and the Redfin management team.  It's a VC cliche, but for an early-stage VC deal my first three criteria are people, people and people (to borrow an investment philosophy from Jon Callaghan at True Ventures and many others).  I have confidence that Glenn will always strive to do the right thing for Redfin customers, employees and shareholders.  He has the intellectual aptitude, enthusiastic work ethic, humble confidence and swashbuckling-style that makes Redfin a great place to work for super smart engineers and business people. 

Reason #4.  Clear Value Proposition.   If you use Redfin to buy a house, you save money.  Simple.  The average buyer gets a $11,402 rebate check (cash in pocket or applied to your offer price) when using the Redfin web site to buy a home.  Sellers can save even more.  And as important as the size of the savings, 81% of Redfin customers say that their Redfin customer service experience was equal to, or better than their previous experience with a traditional brokerage. 

Reason #5.  Residential real estate is ripe for disruption.  Yes, I understand that Redfin isn't the first VC-backed entrant that is attempting to fix the inefficiencies of the residential real estate industry.  But that doesn't change the fact that the current residential real estate model is broken and needs fixing.  A recent GAO report to congress on residential real estate competitiveness found that over the past 30 years, "...commission rates for buying & selling a home have remained relatively uniform—regardless of market conditions, home prices or the effort required to sell a home." [my bold].  Let's collectively think about this statement for a second or two and let the economic absurdity sink in.  Or let me put it another way:  if I'm a Seattle or Bay Area real estate agent (or most anywhere else in the US), in the last five years my average commission check per transaction has doubled, while my average workload per transaction (not including marketing costs) has gone down due to broadband penetration, Internet use (in 2005 78% of home buyers used the Internet for research, up from single digits 10 years ago), and proliferation of online tools and services like Redfin and others (buyers who do research on the web close much faster than those who don't).  Does this seem right to anyone?  This equation makes no sense and needs to be fixed.

To be fair, the fat commission gains haven't entirely gone into the traditional brokers pocket because customer acquisition costs have increased to absorb the difference.  Not surprisingly, with our recent robust residential real estate market (and subsequent commission checks), there has been a flood of people entering the residential real estate biz which makes for a hyper-competitive industry; consequently, customer acquisition costs have skyrocketed (to the benefit of online and offline lead generators like HouseValues, Domania, Zillow, etc.).   But from a consumers perspective, I don't really care if I've become more expensive to acquire from a marketing standpoint, all I know is that I've assumed more responsibility for the home buying process by doing more of my own search, discovery and research on the Internet, but haven't seen any of the value passed along to me by the industry.

Why hasn't this glaring inefficiency been fixed before now?  This is a complicated question.  The overly short answer is that the regulatory environment has vastly improved (the DoJ has taken notice of anti-competitive laws in some states that previously prevented online brokerages from fairly competing), broadband is reaching ubiquity in the US, and previously siloed information (MLS data, property tax info, sale history, parcel maps, etc.) is being set free on the web to improve consumer choice and access to information.

Reason #6.  Culture of Innovation.  Redfin was overlaying parcel maps and MLS database listings on satellite maps long before Google bought Keyhole and kicked off the almost faddish uber-fascination with map mash-ups and mixes.  Applying technology in innovative ways for the benefit of consumers is in Redfin's corporate DNA.  The list of future features that will make the home buying and selling process even more transparent and consumer-friendly is long and powerful.      

Reason #7.  Big Market.  In 2004, the residential real estate industry generated over $61B in commissions (not gross sales, commissions), up from $43B in 2000. This is a big sandbox with room for several winners.  We believe Redfin will be one of them.   

Buying or selling a house using Redfin isn't for everyone. The traditional RE agent will always have a big place in the industry for those consumers who need some extra hand-holding (or luxury taxi-service) during the house search and discovery process; however, for customers that are self-sufficient, able to use a web browser, and like to save money, Redfin is an alternative. 

An alternative worth $11,402 on average.

 
      

    

Comments

[Hamed Elbarki]

Great summary, thanks for sharing.