Compass Is Vulnerable — Mostly Because Its Tech Is Falling Apart
- Real-estate brokerage Compass laid off over 1,000 people this year as it struggles to turn a profit.
- Recent cost-cutting battered the tech team, which had been a bragged-about centerpiece of the firm.
- Engineers say the drastic downsizing spells the end for Compass’ bold tech ambitions.
Compass’ dramatic cuts to its technology team will deal a heavy blow to the company’s vaunted software platform, four former engineers at the firm told Insider.
The real-estate brokerage gutted 50% of its roughly 1,500-person technology team in a round of cutbacks in September, its second major staff downsizing this year as the residential sales market has slowed.
Compass’ CEO, Robert Reffkin, had for years evangelized the company’s tech tools, claiming that they help its roughly 28,000 real-estate agents more efficiently communicate with clients, advertise the homes they’re selling, and speed through the tedium and logistics of closing sales deals.
The tech, a suite of proprietary software developed by its engineers and product team over the past decade, was a pillar of the $7 billion value the company achieved in its initial public offering in April 2021 — the highest price ever for a residential-real-estate brokerage.
More recently, a raft of setbacks — including its plummeting share price, the departure of a handful of star New York City brokers, and a stalling sales market nationwide — have replaced its once bubbly ambitions to revolutionize the residential brokerage business. Since going public, the company has continued to bleed losses that have threatened to further accelerate amid the colliding factors of rising interest rates and years of home-price appreciation.
As a result, the company’s value has cratered to about $1 billion, and private-equity firms may even be circling with the hope of taking Compass private. In an August earnings call, executives were forced to roll out a plan to cut $320 million in operating expenses over the next year, largely through staff reductions, to try to chart a path to profitability.
The situation leaves Compass in the tenuous position of having to chip away at a tech offering that’s core to its brand or potentially risk the kind of cash crunch that eventually beset WeWork, another company that branded itself as a real-estate-industry disruptor but flirted with insolvency after overspending.
In June, Compass let go of 450 workers across the company, including administrative, marketing, and other support staff. With the September layoff centered on tech employees, four former engineers who had worked intimately on its product offerings for years, said the company’s efforts to establish itself as one of the leading players in the multibillion-dollar intersection between the property and technology industries — known as proptech — had been dashed.
A spokesman for Compass declined to comment on the record for this article.
“If you cut staff by that much, you’re not building new and cool things anymore,” one veteran engineer, who left on his own earlier this year, told Insider. “The firm’s executives have admitted to themselves that there won’t be innovation.”
Tech had been central to Compass’ original mission
For years, Compass executives, including Reffkin, credited the company’s tech with its meteoric rise in the residential-real-estate business.
Reffkin, a 43-year-old former Goldman Sachs executive, had little experience in real estate before cofounding Compass in 2012. He branded his startup as much a tech firm as a brokerage and reaped the higher valuations ascribed to companies in that industry.
Compass, meanwhile, used its prodigious fundraising — it took in $1.6 billion from backers before going public, according to PitchBook — to recruit top brokers with large bonus checks, stock awards, and generous commission splits. It was a practice that rivals called unsustainable in the thin-margin brokerage business.
Grabbing top talent helped the company’s revenue soar from $370 million in 2017 to $6.4 billion in 2021.
But Compass has never turned a profit. The company lost $494 million in 2021, and in the first half of 2022, bled $289 million on $3.4 billion in revenue. Investors have soured on companies that offer only speculative growth, as interest rates have risen and concerns have grown about the impact those higher rates will have on the health of the economy. Compass’ share price has fallen as low as $2.23 in recent weeks — a precipitous decline from a high of $20.15 shortly after it began trading last year.
The company’s cost reductions are being done chiefly through layoffs, which have reduced the number of non-agent employees at the company to roughly 3,600 workers, about 25% less than its head count at the end of 2021.
Though Compass’ tech team still has 700 people, many more than any rival brokerage, the September layoffs seemed to initiate what insiders expect to be continuing cuts to the unit.
Engineers wonder if the Compass tech team is understaffed
A Compass engineer who worked on software that helped manage sales transactions and who was part of the September cut said the company appeared to terminate workers at random.
“Some of my peers who were let go have years of experience and accumulated knowledge,” the engineer said. “It baffled me.”
The engineer, who spent roughly three years at the company, said the cuts left the tech division in disarray.
“At this point it’s unclear to me how the teams will operate,” he said.
The employees who spoke with Insider asked to remain anonymous for fear of violating their severance agreements, which prohibit them from disparaging the company or revealing confidential information.
Compass’ proprietary software includes a customer-relationship-management system, marketing tools to help advertise agents’ listings, and search functions that allow brokers to help their clients screen markets for homes that match their criteria, track new listings as they hit the market, and compare deals and recent sales. The company also dabbled in cutting-edge tools such as software that could predict potential sellers in a market, handing brokers possible client leads.
One programmer who worked on search functions for residential listings and who was also let go in September pointed out that the work of updating and maintaining such a sprawling portfolio would now fall on a substantially smaller staff, potentially overloading them.
“Will there be enough people?” the programmer asked. “It’s a big burden and there will be more attrition as a result, I can tell you that.”
The programmer said that tech staffers at the company were generally expected to be available one week a month to be on call around the clock to service bugs or fix interruptions that snarled Compass’ website or software. Having half the staff could mean double the number of such demanding shifts for remaining employees.
“It’s the weekend and you want to go to the beach and you need to have your laptop and make sure you’re in signal range to get online if you have to,” the programmer said. “Things like that affect morale.”
The veteran senior engineer who left the company earlier this year said the company’s now-700 person tech team is still by far the largest such division in the residential-brokerage industry, making it a ripe target, he said, for further cuts.
“Research and development is a major expense, and I’m betting that to get to profitability there will be more layoffs to reduce the team to more of a skeleton crew,” the engineer said.
The layoffs were an unceremonious end to the frantic IPO race
The layoffs were an unceremonious end for workers who had toiled at a relentless pace in recent years to deliver on the company’s promises to upend the staid business of selling residential real estate.
Funded by backers and led by the Japanese technology-investment firm SoftBank, Compass lavished $900 million on its custom software — much of it in the past four years as Compass’ growth accelerated.
Leading up to the pandemic, Joseph Sirosh, the company’s recently departed chief technology officer, stressed that the team’s success in building that offering would determine the company’s future, according to the transaction-software engineer.
During a 2019 company-wide meeting at its Manhattan headquarters, where about 300 tech employees were gathered, the former employee recalled how Sirosh asked half of the room to chant “Compass” while the other yelled “flywheel” — an oft-used term in the tech industry to describe self-perpetuating cycles of success.
“It felt phony and contrived,” the engineer remembered.
Sirosh was terminated by Compass in August in a C-suite reorganization that placed Greg Hart, who was recently promoted from chief product officer to chief operating officer, in charge of its tech operations.
Sirosh and Reffkin often described how technology would allow Compass to reap more profits, giving it the cash to spend more on its software offering, further innovate, and continue to distinguish itself from rivals such as Douglas Elliman, Corcoran, and Keller Williams.
But those competing brokerages and others have tools similar to Compass’, and third-party developers such as Oracle and Salesforce offer software that accomplishes some of the same functions, the former Compass engineers said — though they noted that, in their view, Compass’ tools were more seamless and convenient to use.
Reffkin was an effective salesman but lacked tech vision, employees said
The engineers described a sometimes-chaotic development process behind the scenes plagued by shifting priorities. Reffkin, two of the engineers said, sometimes struggled to articulate what specific software tools would set the firm apart, the former engineers said.
“Robert is like Steve Jobs but without the insight,” the veteran engineer who left Compass earlier this year said. “He’s a good salesman — he can really put up that reality-distortion field that Steve could. But he didn’t know what he wanted to build and he didn’t understand the potential of technology.”
The engineer said that Reffkin had for years prioritized the development of a program called Collections, which created a portal where brokers and their clients could share sales listings that were of interest and communicate with one another. Reffkin likened it internally to a visually intuitive “Pinterest for real estate,” two of the engineers said, and treated it as a key component of his vision. In reality, the software, while nifty, did little to increase the company’s bottom line, the engineers said.
In the lead-up to the firm’s April 2021 IPO, Reffkin was forced to fast-track other applications that had been overlooked but were considered essential to the firm’s business.
One instance was the rushed development of transaction-management software that would help agents more easily steer sales deals through the paperwork-heavy contract and closing processes, the engineer said. That software has only recently been rolled out in the majority of markets where the company operates.
“That was an application that had been suggested six or seven years ago,” the former veteran engineer said.
It was an example, the engineer said, of how Reffkin could focus on “sexier” software, rather than administrative applications that were nonetheless key to monetizing the company’s pipeline of deals.
Reffkin acknowledged his shortcomings, one of the recently laid-off engineers said.
During a town-hall meeting last year, he revealed that acquiring Modus, a title and escrow company that the firm purchased in late 2020 for an undisclosed sum, had been a blunder.
In June, Compass said it would “wind down” Modus’ operations and write off up to $11.5 million in losses related to the investment. Compass has said it will arrange mortgages, title insurance, and loans that allow sellers to renovate their homes in order to net a higher sales price. The effort to branch into these ancillary services, however, has so far failed to reap substantial revenues that the company has suggested in the past could help it become profitable.
Reffkin also made up for his lack of tech experience and expertise with charm.
The engineer who left in 2018 remembered finding a note one day on his desk, handwritten by Reffkin, expressing his appreciation for the engineer’s work.
Compass stock may have plummeted as low as it can go
Compass’ continuing losses stand starkly against recent financial performance of rivals. Anywhere Real Estate Inc., a larger competitor that controls a collection of well-known brokerage brands including Corcoran, Sotheby’s International, and Coldwell Banker, reaped $88 million in net income in the second quarter. Douglas Elliman, which has poached a handful of star brokers from Compass over the past year and a half, according to reports, netted about $10 million in the same period. Meanwhile, Compass lost $101 million in the second quarter.
But Jason Helfstein, an Oppenheimer equities analyst who covers Compass, predicts the company’s cuts will help it close in on profitability and believes its stock will rally modestly by next year as a result.
In September, the Real Deal reported that whales “bought the dip” in Compass stock, believing they were buying shares at their lowest price. In August, Seeking Alpha’s Gary Alexander recommended investors buy despite what he projects will be “months of volatility.”
Helfstein, who assigned a price target of around $6 a share for the firm in 2023, double its current value, was unwilling to call a larger rally that would bring its shares even close to its IPO price.
“Our target is what it is. That’s what we think the stock is worth,” Helfstein said. “Compass went public with an idea it would get a tech valuation based on its growth and innovation. Now the housing market is going through a major correction, and it didn’t get to enough transactions given its fixed costs to become profitable.”