Hit by ‘double whammy,’ proptech firms pivot to profitability

As the housing market has cooled and VC money has dried up, proptech firms have shifted focus from growth to profitability

Profitability has been a sore spot for Robert Reffkin and his brokerage, Compass. In media interviews and on earnings calls, Reffkin is forced to defend Compass’s mounting losses and the underlying strength of its business – in 2022, Compass recorded a net loss of $601 million despite raking in revenue – up 6% to $6.02 billion. 

Reffkin doesn’t shy away from the fact that the brokerage has received billions in venture capital and debt. The funding has allowed the firm to grow exponentially, de-throning residential real estate’s two biggest brokerages—Anywhere Real Estate and Berkshire Hathaway Homeservices—in just over a decade. He’s grateful for it, but also knows the days of red ink must end.

“We grew faster than any other company, and that is why we were able to raise $2 billion to invest in our agents,” Reffkin told attendees at the Inman Connect conference in late January. “If we decided not to grow and instead said, ‘Hey, we are going to be profitable in year two,’ I could not have raised $2 billion. But this last year, the world flipped on a dime and moved from growth to profitability. And just like our agents have had to adapt with the market, I have had to adapt to this shift, and we are now focusing on profit.”

​​Reffkin has set the ambitious goal for Compass, the largest brokerage in America by sales volume, to be cash flow–positive by the end of June, even amid the biggest housing market slowdown in years. 

Proptech companies, many of which have relied heavily on venture capital funding, have struggled mightily over the last 12 months.

“As we all know, when the Federal Reserve began raising rates last year, the housing market cooled significantly,” Spencer Rascoff, the co-founder and chair of Pacaso and co-founder and former CEO of Zillow, told HousingWire. “This meant slowing growth or contraction at a lot of previously high-flying proptech companies. At the same time, venture capital investment slowed across all sectors. That meant that proptech got hit with the double whammy of a tougher underlying business climate and less access to capital.”

This double whammy resulted in large-scale layoffs and rough financial results.

As of March 2023, Offerpad had cut roughly 50% of its workforce from its peak in August 2022, while Opendoor announced in November 2022 that it had laid off 550 employees. Knock laid off 46% of its staff last March and  Ribbon cut its staff by 85% in late November. Meanwhile Flyhomes laid off roughly 200 workers in mid-July and the Austin-based firm Homeward, which achieved a valuation of over $800 million in May 2021, also made cuts, reducing its staff by 20% in early August. 

In addition, Opendoor and Offerpad, the two publicly traded proptech firms, lost $1.4 billion and $148.6 million, respectively, in 2022, and were stuck with hundreds of homes on its books.

“Many proptech startups have had to completely rethink their businesses, and many pivoted entirely,” Rascoff said. “With both housing transaction volume down considerably and access to capital becoming scarce, companies are now growing slower and focusing on profitability. This led to broad cost cutting measures across the board. Companies are getting lean to survive the next 18-24 months with the assumption they won’t be able to raise new capital on favorable terms.”

Product pivots as VC money disappears

At Flyhomes, CEO Tushar Garg said the housing market slowdown and shift from growth to profitability has resulted in his firm expanding its product offerings and investing resources into consumer education initiatives.

Affordability has become the number one problem. It used to be, ‘how can I compete with all-cash offers to win the home?’ And that still is a challenge in some markets, but the biggest challenge for most buyers has changed,” Garg said. “The play that we did in that direction to make more robust offerings for those clients was to get Loftium to join forces with us. But what we do at the moment, foremost is customer education. Giving them the information they need to decide if they should buy or sell right now or not and what services our products can provide to help them.”

Flyhomes also recently launched a “buy now-refi later” product.

“The biggest thing right now is that we don’t know when rates are going to go up or down and there is a lot of friction in people’s decision making on whether or not they should buy now,” Garg said.

The new offering enables homebuyers using the product to refinance the purchase of their home any number of years down the road, when mortgage rates reach a level they are satisfied with.

Divvy, a proptech firm that provides homebuyers with an all-cash offer and then allows them to rent the property until they are ready to buy, conducted its most recent funding round in October 2021, but executives have been keeping a close eye on the venture capital market.

“We raised in a preemptive round in 2021 from Tiger and the timing was ideal, and nearly everything has changed in the fundraising market since then,” Adena Hefets, Divvy’s CEO, wrote in an email. “Layer in the instability in the banking ecosystem right now, and it’s even more challenging. Proptech companies are really struggling in the current market, and not everyone will make it though. You’re still seeing strong companies announcing big rounds, but it’s infrequent and nothing like we saw in 2021-2022. Much like the real estate market, it feels like most people are sitting on the sidelines and taking a wait-and-see approach.”

Fundraising struggles and concerns were compounded in recent weeks by the failures of both Signature Bank and Silicon Valley Bank, the latter of which held funds for firms like Opendoor, OJO Labs, and Homeward.

“The situation at Silicon Valley Bank was an extremely unfortunate one. A lot of work will need to be done by companies who banked with SVB, and quickly, as they rebuild parts of their finance operations,” said John Berkowitz, the founder and CEO of OJO Labs.

According to an SEC filing, SVB held less than 1% of Opendoor’s total cash, cash equivalents and restricted cash. In addition, as of March 13, 2023, Opendoor said that approximately 98% of its total cash, cash equivalents and restricted cash is held at the nation’s four largest banks.

Although Divvy was not impacted by the two bank failures, Hefets noted that her firm was taking action to “diversify its cash across several banks.”

The three Ps of proptech: Profitability, profitability, profitability

With limited funding opportunities in the near future, proptech firms are having to keep close watch on their balance sheets. 

At Offerpad, the smaller of the two publicly traded iBuyers, operating expenses came in at $309.74 million in 2022 and liabilities totaled $703.19 million. As of December 31, 2022, the firm had $825.1 million in total assets, $97.24 million of which was in cash. Although the firm has undergone significant staffing cuts, more work must be done to ensure profitability over both the short and medium term.

Over at Opendoor, the situation is even more challenging. At the end of 2022, the firm’s operating expenses totaled $1.59 billion and it had $1.5 billion in liabilities on its balance sheet. Although it had $6.6 billion in assets, only $1.13 billion of it is cash or cash equivalents. 

However, Opendoor executives remain optimistic, banking on the firm’s partnership with Zillow, and it being close to selling off all the inventory it acquired at the height of the market. 

 “As for right now, we are highly focused on stabilizing our core business and ultimately returning to positive free cash flow,” Carrie Wheeler, Opendoor’s CEO, told investors on the firm’s fourth-quarter earnings call.

Industry experts say that proptech firms will be laser-focused on profitability for the near term.

 “This is a period of cutting and consolidation across the proptech landscape. Companies are doing anything they can to survive and make it to the other side,” Rascoff wrote. “The good news for those that do is that most of their competition will likely have been wiped out in the interim, so the survivors will have room to run when times are good again. Companies are cutting costs wherever they can with the assumption that they won’t be able to raise capital on favorable terms anytime soon. Priority 1 has gone from growth at all costs to profitability at all costs.”

Flyhomes’ Garg echoed the sentiment.

“We saw the market change last year and we became laser focused on being able to hit profitability,” Garg said. “We are focused on fundamentals of the business and the things that we can control in this environment.”

In Zach Aarons’ view, this shift to profitability may lead many of these firms to go the IPO route in the next few years.

“You are effectively seeing no IPOs, but any IPO you will see in the future, folks are saying that the companies will need to be profitable to execute successful IPOs,” Aarons, the co-founder and general partner at New York-based VC firm Metaprop, said. “In the prior boom, there were many companies doing IPOs either traditional ones or direct listings that were not even EBITDA profitable. When the IPO market finally thaws out, which most prognosticators are suggesting is Q1 of next year or late Q4 of this year, I think we can expect companies, that if they are not already EBITDA profitable, that they have plans that show a clear path to EBITDA profitability in 2024.”

While current conditions will force a contingent of proptech firms to go belly-up, VC players in the space see better days ahead.

“At my venture firm, 75 & Sunny Ventures, I’m still seeing new seed stage proptech companies pop up every day,” Rascoff wrote. “The rate of new company formation has probably gone down since the boom times, but real estate remains a massive market with a lot of room for disruption, so I think we’ll continue to see new, innovative companies get started in good times and bad.”

Aarons added: “We are still seeing new company formation. Unfortunately, in this sector over the past 18 months we have seen thousands of layoffs and some of them now want to start their own thing.”

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