Technology

The squeeze on venture capital could hurt real estate startups

Better to be a cockroach than a unicorn in the race for funds
  • Some real estate companies are valued using different standards than others -- top-line revenue instead of net income or vice verse.
  • This leads to sky-high valuations for some companies -- but there could be bumpy roads ahead for tech startups.
  • Deals are still getting done though -- and the goal is to be a "cockroach," a self-sustaining company that doesn't need huge valuations and funding rounds to survive because it is continuously profitable.

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Real estate broker Joe Rand feels envy and frustration when he reads about the financial valuations of companies like Compass and Redfin -- or even ZipRealty when it sold to Realogy for $166 million in 2014. Zip was valued at six times top-line revenue, while the valuation arithmetic for traditional brokerages -- like Rand’s profitable Better Homes and Gardens brokerage -- is only four to five times net income. The difference between the two methods of valuing companies is like the gap between the cost of a Tesla and the price of a skateboard. “Maybe I should start telling people that I am a technology company -- give me $100 million and I can build a kick-ass company,” said Rand. These sorts of “valuations really don’t make sense, considering their business models are the same as mine.” Sky-high valuations Six months ago, when Compass announced it had raised $50 million at a reported valuation of $800 million, many legacy brokers were stupefied. “Are you ki...