Everything you need to know about the Compass IPO

What does Compass do?

Compass' primary offering is a CRM that contains a marketing center (Digital ads! Videos! Email newsletters!), market analysis tools and client rosters. Compass also has an "AI-powered comparative market analysis tool" that lets agents optimize prices, and "Compass Collections," a visual workspace where agents and clients can look at homes and chat within the UI.

The company says it has more than 19,000 agents across the country (19,385 as of Dec. 31, 2020), and has seen a 19% increase in the number of transactions the company's agents close in their second year, compared with their first. Compass reported an 88% increase in agent teams using the platform on a weekly basis. The company also boasts that its agents sell homes in 21% fewer days on average compared to agents at firms with comparable home sales.

Compass’ Financials

Compass takes a fee of around 2.5% to 3% of the sale price of a home. It makes almost all of its revenue from these fees, though the company hopes to grow the share of revenue it makes from adjacent services such as arranging the title and escrow for a home sale and referring new homeowners to relevant services.

Compass revenues have grown more than tenfold since 2017, as the company expanded from operating in 12 to 44 markets. In 2020, Compass generated $3.7 billion in revenue, up from $2.4 billion in 2019, $885 million in 2018 and $370 million in 2017.

The company has yet to turn a profit. It posted a record net loss of $388 million in 2019, and improved slightly in 2020 with $270 million in net losses. Compass' biggest cost by far is "commissions and other transaction-related expenses," which primarily encompasses commissions paid to the real estate agents working on behalf of the company. This expense line has tracked quite closely with overall revenue, representing 81% of total revenue in 2019 and 82% in 2020, for instance. Sales and marketing expenses have swelled eightfold since 2016, but they represented a smaller portion of overall revenue in 2020 than in 2016 — a sign that Compass has managed to achieve more organic growth in recent years.

What could go wrong?

Three themes stick out from Compass' risk section: the macroeconomics of the housing market, their independent contractor labor model and the threat of other self-professed real estate disruptors.

Nobody can forget 2008 and what it did to the housing market. The next crisis will probably look quite different, but it's hard to deny that the U.S. housing market is in a precarious state: Fueled by record-low interest rates, home prices have soared in value and housing supply is hovering near record lows. On the other hand, millions of Americans are still suffering from the economic fallout of the pandemic. Forbearance programs are set to expire in the coming months, at which point U.S. homeowners will owe close to a trillion dollars in backlogged mortgage debt.

These conditions make Compass vulnerable to an economic downturn. This is particularly true since it is operating at a loss, and therefore is reliant on investors for runway. A sharp market downturn could set off a dangerous feedback loop, in which skittish investors close their pocket books to Compass, which would in turn diminish the outlook for the company.

• "Monetary policies of the federal government and its agencies may have a material impact on our business" is not a remarkable piece of insight in a risk factors section, but Compass is sensitive to things like interest rates. Increases in mortgage rates could ding Compass's utility, especially if people are opting to rent rather than paying higher mortgage rates.

Some might be tempted to compare Compass to gig-economy companies, since agents who work with Compass are independent contractors. But that's standard practice in real estate sales, and sales agents appear to prefer it.

• The comparison to ride-hail drivers and meal couriers is weak in part because trade groups like the National Association of Realtors are politically influential and have fought to assure the status of agents as independent contractors.
• Compass is unlikely to face the questions of regulation and conduct that have arisen for companies like Uber and DoorDash. California's AB 5, for example, has a carveout for real estate agents.

Finally, Compass is betting that its service model — based on extracting fees from traditional real estate agents — will prevail in the U.S. real estate market.

• iBuyers such as Zillow, Opendoor and Redfin would likely argue that Compass doesn't go far enough in disrupting the traditional brokerage process. These companies buy homes directly from consumers and then flip them back onto the market, effectively cutting out brokerage fees altogether. Opendoor, Zillow and Redfin only accounted for less than 1% of U.S. residential real estate transactions in 2019, but they have grown fast and achieved multibillion-dollar valuations.
• Even SoftBank, one of Compass's top backers, can't seem to make up its mind as to which model will prevail — the Japanese investment giant has also invested considerably in Opendoor.
• "A significant change in consumer sales that eliminates or minimizes the role of the agent in the real estate transaction process could have an adverse effect on our business, financial condition and results of operations," Compass writes. It goes on to cite iBuyers as one such threat, adding, "consumer preferences regarding buying or selling houses and financing their home purchase will determine if these models reduce or replace the long-standing preference for full-service agents."
• Compass also cites the risk of a competitor undercutting its fee rates within the same service model: "If industry conditions change such that other platforms offer similar technologies to ours at a lower price or for free, we may be forced to reduce the percentage of commissions that we collect from our agents, and our business, financial condition, and results of operations may be adversely impacted."

It's also worth noting that critics have accused Compass of being a traditional real estate brokerage valued and dressed up like a tech company. In 2019, the company's CFO sent an eight-point memo to staff and agents detailing the ways the company was different from WeWork (this came roughly a month after WeWork's IPO plans imploded). Compass wants to be clear, though: Unlike WeWork, the company has no debt.

Who gets rich?

Compass has divided its shares into Class A, Class B and Class C. Each share of Class C receives 20 votes per share; Class A receives one per share; Class B has no voting rights.

• SoftBank's Vision Fund holds slightly more than a third stake in the company with 34.8% of the Class A shares.
• All executive officers and directors as a group have 5.2% of Class A shares.
• Reffkin has 2.4% of the Class A shares and all of the Class C shares.
• Sirosh has 1.2% of Class A shares
• Allon has 5.2% of Class A shares.

Other investors include the Canadian Pension Plan Investment Board, Fidelity, Wellington Management and the Qatar Investment Authority.

What people are saying

• "They're a disruptor by capital, not innovation. It's amazing it's gotten this far. They're a brokerage that doesn't offer anything different; they're just better at selling an idea." —A New York real estate executive told Marker.
• "They say they're a tech company, and they back it up in the sense that they have hired lots of engineers, who are building and releasing technology. They're talking the talk and walking the walk, no question about that. The question is, does it make a difference?" —Mike DelPrete, a real estate strategist, told Bloomberg.
• "What's happening now with the acquisitions and the scrambles is they're attempting to reposition themselves as a tech company. Is the market going to buy that story?" —Real estate tech investor Clelia Peters told Marker.