The Swyx Mixtape

Audio source: https://www.youtube.com/watch?v=bOo6XSYW66c

Spencer took on the competitive threat of OpenDoor at Zillow when he didn't need to, taking a tiny competitor startup seriously and pivoting a $5 billion company into a $30 billion one without a crisis.

News at the time:
- https://techcrunch.com/2018/04/14/zillow-surprises-investors-by-buying-up-homes/
- https://www.geekwire.com/2018/zillow-group-will-start-buying-selling-homes-taking-open-door-expanding-real-estate-footprint/


Transcript

swyx: [00:00:00] Normally, I try to make these clips under five minutes, but for today I absolutely could not because this is one of the most fascinating business stories and business moments that you can encounter. And this is the best explanation of a recent pivot that was very, very high profile and very successful. So I want to give you the story of Spencer Rascoff pivoting, Zillow as a successful company, not against the wall, and succeeding. Despite having an incumbent startup where the classic disruption theory would tell you that he had an innovator's dilemma. He got past that, and it was just nearly a train wreck, as he will tell you towards the end. But he had enough friends to give them good advice and he took it and he paused at the right time and he went for it at the right time. And it was just an amazing, amazing, real life story.  

Spencer Rascoff: [00:00:51] And then I guess the second takeaway from Zillow would be the importance of disrupting yourself. And this is all about Zillow's move into ibuying and the business of buying and selling homes directly, which was a very controversial, difficult decision that I made. And it was very much the right one.

It's what moved Zillow's market cap from 5 billion. A couple of years, post IPO to 30 billion today was deciding to put at risk the core business. Of selling ads to real estate agents by launching a new business of buying homes from people, renovating them and selling them to other people. And pulling off that business transition or business extension was a lot of sleepless nights, but it was very much the right move.

Do you mind 

James Besheara: [00:01:37] walking me through almost the specifics of one of those sleepless nights and what that internal dialogue was like and where that internal for use uncertainty lied? 

Spencer Rascoff: [00:01:47] Sure. Let me paint a picture. So as Zillow goes public in 2006, We do 16 acquisitions. We buy Trulia, we buy StreetEasy in New York.

We buy hot pads at the top rental site. And now here we are in 2000, like 12 ish, and it's about a $5 billion market cap. We've got like a thousand employees top of the world. We won, online, real estate and we consolidated the category. Victory is ours. Okay, we're done. But then we see this startup Opendoor.

And open doors, buying homes for people sight unseen. And we're like that's crazy. That's not going to work. And we have to decide, do we enter that business? And the first, the first thought that I had and the team had was. What about the core, w we have about a billion of revenue selling ads to real estate agents.

And if we start buying houses ourselves, real estate agents, aren't gonna like that very much. Because there might not be agents in those transactions. Now, it just so happens that when we eventually entered a year or two later, we did put real estate agents in those transactions as a way to, to keep the peace.

But after I left Zillow started. Hiring those agents themselves at Zillow and cutting agents, other agents out of the transaction. And so now Zillow's in, in unchartered territory with respect to the, how the industry perceives it and that might or might not, we'll see put a strain on the core business of selling ads.

So it's very similar just to give an analogy that can listeners have experienced as a consumer. Think about the Netflix business with DVD by mail. So Netflix has a great business DVD by mail. It's probably a I dunno, $10 billion market cap company. This was whatever, five, five, 10 years ago.

What about streaming? The idea that you could press a button and start to see the movie right away on your computer was crazy. Like instead you just press a button and the DVD arrives in the mail to, two days later, but Netflix decided to disrupt their core business and shift to streaming and put at risk the whole core business and.

It worked and then they did it again when they decided to create originals. Cause like they had a great business. Now they're a $50 billion market cap, but you know what, all their content comes from the studios. And now they say we're going to create our own shows. How are the studios going to feel about that?

That's crazy. Don't do that. Like why risk it? You're doing great. They have a 300 billion market cap today. Why? Because. They pulled off the pivot to originals. So Netflix is like the rare company I can think of has done this twice. Zillow has basically done it once so far. But anyway, so back to the decision-making first risk is what happens to the industry, the perception of Zillow and the impact on the core business.

Second risk is the investor community reaction, which is to say, we had public market shareholders that are like. Don't do that. That's crazy. You've got a 95% gross margin business selling digital advertising. Why would you move into it? The business of buying and selling houses, which is cyclical, risky, complex, operationally intensive.

It's a real estate flipping business. Rather than a digital media business, you're going to trade at a lower multiple, I didn't sign up for that. I'm an internet hedge fund. I'm an internet mutual fund. Like I buy tech stocks, not real estate stocks. And so there were a lot of naysayers from that community.

And then there were naysayers from the employee community, also back to the importance of people in culture that were like, I don't get it. Like they just don't do that. Why would we risk everything for that? What is that even that. I'm compressing about six months, 

James Besheara: [00:05:11] six minutes.

How did it, how did you navigate it? How did you mentally nap? Did you S did you know there, did you almost have like faces in your mind that you were going to piss off by making this decision and you were like, yes. 

Spencer Rascoff: [00:05:24] It, it's very stressful as a executive, especially when you feel like you'd won, like at an earlier stage, a pivot, right?

Especially a pivot driven by your backs and feeling of necessity, right? Yeah. It's okay, COVID happened. I talked to a company today that, that ran an events business and they suck, and then COVID happened and they successfully pivoted to virtual events and it's wow Bravo but you had no other choice, in this case it's Zillow, we HAD another choice just like Netflix had a choice to not move into streaming and not to move into originals. And so the status, when the status quo, it looks attractive. It's even harder to pivot. And so what we did, I'll tell you the two steps that we took to arrive at the decision. The three steps, the first was we tracked competition closely and we started looking carefully at Opendoor data and Opendoor metrics.

How many listings do they have? How quickly are they selling? What do we think their unit- level profitability is? How much are they raising? We kept seeing them raise more and more money and we're like, okay, there must be something here. Cause smart VCs, keep throwing more money into this business. So maybe we're maybe this is a thing that was data.

Point one. Data 0.2 is we went out and did a massive amount of consumer research to sellers to understand what their pain points were on the sale process. And it came back. Crystal clear that sellers hate selling their home the conventional way, and that they prefer selling their home to an institutional buyer for a ton of reasons, the certainty, the speed, the convenience, the lots of reasons.

And so then when I was like, okay, now what and I really didn't want to move into this business of I buying. And so we launched a marketplace model and a test you 

James Besheara: [00:07:03] really want to. 

Spencer Rascoff: [00:07:05] I did not want to, I didn't want to. And so my sort of half measure was to launch a marketplace model where in four cities and it was four, maybe three, you could come to Zillow and you'd say, Hey, Zillow, I want to sell my house.

Go get me an offer. And we would send that home info two to five to 10 buyers in that city, other local flippers or other companies. And then a day later we would go back to the consumer to the homeowner and say, okay this guy is willing to pay 200,000 for your house. This guy's only paid two 10.

This guy is willing to pay one night. This guy says he doesn't want to buy it because it doesn't match his needs, whatever. What do you want to do? And then the seller would pick and we did all this for free just for market research. And then the seller would pick somebody and then we'd connect them and we'd get out of the middle of it.

And so my hope was that this marketplace model would work because it scales so much better than actually buying your house yourself. Us having to take possession and buy the house for 200,000 bucks and renovate it and resell it six weeks later. Anyway. What happened was homeowners loved it.

They loved selling their home in this way. Just like the research predicted it would, they would. But it was a very inconsistent user experience. We'd pass the consumer, the homeowner onto one of these local companies and the local company would retrade. Oh, did I say 200? Now that I come and I see that your roof is old, it's really 190,000, oh. I said, I would close in two weeks. Guess what? It's three weeks because my credit line's not ready or whatever. And the seller just had a really inconsistent experience. And so reluctantly. I decided we had to do it ourselves. And the next step was to go get the relevant expertise. Actually I'll tell this in more detail since you're pushing me for something.

All right. So what we did next 

James Besheara: [00:08:42] and did, and by the way, did you have a coveted voice that you were listening to within or outside the company that gave you a little bit more of. Locking and locking arms were jumping together or was this kind of just one of those isolating CEO 

Spencer Rascoff: [00:08:54] shit. No, I have to.

It's a good question. No, my co-founder, yeah. Are right there with me on this journey. And the three of us all staking out, slightly different positions over this, now we're probably, I think we ran the instant offers, test that marketplace test for at least six months. So we're at least a year, maybe a year and a half into this.

Yeah this decision period that I'm describing and, there'll be times when one of us will be like, yeah, we need to do this ourselves. And the other two would say no, and we're back and forth for more than a year. So what I decided to do next, once I, and the co-founders were like, okay, we need to do this.

And the board was like, okay, we need to do this. I decided to headquarter the initiative outside of headquarters. So there's those based in Seattle. And I decided it would be smart. To take two co-founders of two startups that we had acquired, who one based in San Francisco, one based in Irvine, both of whom were scrappy and had done startups that Zillow bought and had built businesses on their own and were not at headquarters.

Think back to that Expedia offsite with 70 executives talking about six Sigma, everything that, that represented this would be the opposite. My idea was to make these ninjas, Navy seals outside of the core. And so I told them in their teams from the two startups that we had acquired, like figured this out, like we're in launch in three months and we're gonna start buying houses in a couple of cities.

And I will get you a giant checkbook. Now you figure out what to do and. We were, and they worked at it and we were getting ready. We were only probably a week or two away from launching that first in that first market. And now this, Amazon talks about one way doors and two way doors, where a two way doors, a door that you can go through and then go back out.

And so that's a decision you can undo. And a one way door is one that you can't undo for Zillow. Launching Zillow offers that's a one-way door pretty much. Because once they, once we launched this, the real estate industry might freak out and, the investor community might freak out and you can't say, Oh, just kidding.

It's you can't really undo it. So a week or two before launch I. I started having some panic attacks and real ones. Not literally no. So I, no, not literally. We're getting more and more concerned. It does come up 

James Besheara: [00:10:55] on the podcast. 

Spencer Rascoff: [00:10:56] And I called an old friend from TPG who I'd worked with when we started Hotwire, 20 years earlier.

And he had left TPG to start a company called colony America homes, which bought tens of thousands of houses through the recession and turn them into single family rentals. And so he was the guy that I knew best who had bought the most houses. And I called him and I was like, his name is Justin Chang.

And I was like, Justin, we're about to go buy a lot of houses and flip them. What do I need to know? What have I not thought of? And I described our whole business plan and open door and the marketplace test, et cetera. And he's Dude, this is going to be a disaster. This is going to be a total shit show.

Don't what do you, what are you crazy? Because that's the week before two weeks before I described the guy in San Francisco and his team from the startup we bought and the guy in Irvine in LA from his and how I, and he's so you don't have any real estate expertise, like real estate, really?

Like nobody. And I was like it's w we've all kind of thought how he's no, no. Like institutional realtor, licensed producers, and now he's you gotta hit the brakes. You gotta talk to this guy. His name is Eric power. And I was like, Oh, okay who's Eric power.

So Eric was the, was the number two at Colony America homes. So he had also bought tens of thousands of houses. So I call Eric and I had lunch with him the next day and in LA and. I was, I told Eric this whole thing and he's wow, this is going to be a shit show. This is a disaster.

Let me give you some examples, Spencer, cause we bought tens of thousands of houses. Uh, you need to figure out what to pay for these houses and renovate them, within days and turn them so quickly. Are you ready for that? And I'll give you the example in a sec and anyway, 10 minutes in my conversation with Eric, I realized that we needed to hit the brakes.

And I made the very unpopular decision at the time. Cause we had already motivated the whole company to run hard at this opportunity to hit the brakes. And I said, we need to recruit a team and we need to get the right people on board before we can go make this one-way door decision. And so we press pause and we recruited Eric and lost about six months and in, in, in speed because.

Eric's team at Connie America homes was in the process of being bought by invitation homes. And so this whole team in Scottsdale, Arizona outside Phoenix of about 200 people were in the process of getting riffed, getting laid off by invitation homes, including Eric and his whole team. And but it took us a couple months to get through all the non-competes and all the, non poaches and whatever.

And anyway, six months later, we have this whole team that knew how to buy lots and lots of houses. During those six months, open-door continued to separate from us though. So I'm walking the halls in the Scottsdale office, the new Scottsdale office of Zillow a week or two after we launched Zillow offers.

And I'm talking to employees, I'm saying, what do you do? What do you do? And I meet this older woman and I say, what do you do? And she's Spencer, it's so great to meet you. It's an honor, you're the CEO, so cool. I'm 65 years old. I'm the world's leading expert on changing names on utility bills.

And I'm like, w what do you mean? She's I've been doing this my whole career. I know that if you buy a house in this County, in Florida, the way to change the name on that utility bill is to go to this website. I know if you buy a house in this County, in North Carolina, it's you call this lady, and she only answers the phone between 12 and 2:00 PM, two days a week.

And I know that if you buy a house with solar panels on the roof, It takes an extra three weeks because you need the lease to blah, blah, blah, blah, blah. And then the person sitting next to her, had an equal amount of completely esoteric knowledge about how to deal with solar panels and whatever, and how to change the pool maintenance contracts and so on and so forth.

And I was like, Holy cow, we dodged a bullet. Those two startup founders in San Francisco nervine they were tech people and then they were scrappy and startup-y, but boy, they didn't know anything about real estate right in that business. Where you're buying and selling homes. You're putting $200,000 per house out there.

Everyday counts. If you hold the house for just three or four more days, all the profit in the flip goes away. So speed matters. Anyway. So it was It worked is how the story ends. This is why Zillow then went from 5 billion to 30 billion and managed to disrupt itself while still actually maintaining its core business.

To the team's enormous credit, we, they managed to not have the core agent advertising business evaporate on the contrary. It's still doing quite well. And the company is prospering.