The last set of proptech companies that focused on the residential market, where not true technology platforms, but rather, they were highly inefficient operations companies, which consequently burned many VC investors in those businesses.
Let’s look at 3 case studies: Compass, Side, and Divvy Homes.
Compass initially positioned itself as a tech-driven real estate platform, raising billions of dollars, including $450 million from SoftBank. The company pivoted early from its original hyperlocal social network concept to becoming a traditional real estate brokerage with technology enhancements. Compass focused on controlling the entire value chain, from lead generation to transaction closing, and invested heavily in poaching top agents and acquiring brokerages nationwide.
However, Compass's model proved challenging to sustain. Despite its IPO in 2021 and substantial revenues, its heavy reliance on agent recruitment bonuses, acquisitions, and aggressive market entry led to escalating costs. Its profitability struggled as it operated more like a traditional brokerage than the disruptive tech company it marketed itself to be. By 2022, worsening market conditions forced Compass to lay off 10% of its workforce and restructure operations, exposing the fragility of its capital-intensive approach.
Side differentiated itself as a white-labeled platform for real estate agents, promising tools and back-office support to let agents brand themselves independently. Its pitch resembled a tech-enabled franchise model, collecting a fraction of commissions as a fee. While innovative in branding, its operational model closely paralleled traditional franchise models like Keller Williams, offering minimal differentiation.
The primary issue for Side has been scalability and proving its value proposition to agents. In a competitive market, agents faced growing pressure to justify platform fees, especially as market conditions tightened. The parallels to conventional brokerage models made Side appear less revolutionary than initially advertised, potentially limiting its appeal and growth trajectory.
Divvy Homes aimed to disrupt homeownership by offering a rent-to-own model, targeting aspiring homeowners who struggled with traditional mortgages. The company purchased homes and leased them to clients, allowing a portion of rent payments to go toward eventual ownership.
This model, however, became untenable as interest rates rose sharply in recent years. Higher borrowing costs significantly increased Divvy's expenses, while a cooling housing market reduced the attractiveness of its offerings. The business's sensitivity to macroeconomic factors, especially interest rates, revealed the vulnerabilities of this capital-intensive approach, ultimately slowing its expansion.
Fundamentally, a technology platform should not think about either 1) acquiring agents to do deals or 2) acquiring properties to generate revenue. Both of these methodologies leverage the same north star KPIs as traditional brokerages and investment firms, which make these businesses traditional service businesses.
The only way to win: leverage AI to cut out this middle layer and focus on transactions directly without needing to onboard agents or directly acquire properties!!! This is what Navigate Homes is focused on. More on this soon!