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.

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...