Let’s discuss business valuation fundamentals and common sense. 2000 was the year of the Sock Puppet and Pets.com. They dropped Super Bowl ads two weeks before their blockbuster IPO. This was an online play for the $23 billion pet supplies business. That costly growth strategy burned through $200 million, time and investor faith with nothing to show for it except the memorable meme. Economist Stephen Moore’s 2020 article summarizes their brilliant and expensive marketing campaign as assuming “a strong brand name and recognition would mean more people were aware of you, and that would eventually lead to profits.”
Valuing Disruption
No matter the innovation, a logical path to revenue and profit is vital especially with billions in capital chasing real estate PropTech and iBuying enterprises. Brand recognition is no guarantee of success as Zillow Offers (and history) proves.
Using 1990’s content publishing as a model for what’s going on in the real estate industry right now, particularly with regards to iBuying and PropTech, it’s interesting to reflect on successful industry transitions and the time it takes to remake culture. The three legs of the traditional publishing “success stool” are worth review.
1. Relevant content attracts, 2. subscribers, who are valuable to, 3. paying advertisers that seek to win those subscribers as revenue customers, justifying the advertising and closing the publication value loop.
The metrics to getting to that value model are important. The publisher’s cost of promotion to attract subscriber prospects and then converting them to customers was defined as cost of customer acquisition.
Only when revenue was being earned were they considered customers. The next metric was annual customer value. Once a publication subscriber base reached critical mass, the advertising rates could be increased and with careful cost management profitability reached and maintained. This all assumes that the culture that creates and retains customer relationships is present —and that’s a big assumption. How does this model relate to real estate?
Success means profit, not promise
A change to these definitions began to occur in the late 1990s with early internet companies and their growing need for investment capital. Before people quite grasped what an internet-based content or publishing model could do, excitement trumped analysis. PropTech and iBuying are likely revisiting this scenario.
Promise and glowing spreadsheets dismissed tried-and-true subscriber accounting metrics as passe. That was old, this was new. A conversion was redefined as capturing a valid email address from a prospect versus converting a prospect to a customer. Dollars per column inch (print) were suddenly less important than fractions of a penny per impression. Print publications like TIME with loyal paying subscribers were valued at $10 a subscriber while an unproven hosting play sold to a NASCAR subsidiary for $40 per unverified “subscriber.” The inevitable Dotcom downturn occurred and the lack of underlying value in a technology-obsessed model was exposed, while overall the industry and industry services were devalued.
Today’s real estate industry
There is an interesting phenomenon in business planning that always astounds and that is lack of gaming out a customer engagement, conversion, fulfillment and retention cycle. Where in that cycle can disintermediation trip up the process and short stop success? Who influences the destiny of a business plan?
If complex relationships and transactions are key to a process, the people to create and maintain these must be in place, and buy into mission and method. At best, technology is a force multiplier, pushing repetitive task drudgery into the background enhancing staff and customer interaction, not the other way around.
Sadly, people seem to be less important in most technology initiatives driven by technocrats. I would suggest a disconnect between the Zestimate algorithms and field staff compensation may have helped Zillow Offers demise. Experience shows the best laid battle and business plans begin to fall apart once the first shot is fired.
Successful competitive disruption can occur only when better alternatives exist in harmony with staff and culture. Then can this be proven before key participants lose patience? This is the current challenge for the myriad of yet to be profitable real PropTech and iBuyer enterprises. This is also vital for newer generation brokerages and is subject of a future discussion.
