Monday, April 18, 2005

Odds against Rich Barton's (Expedia founder) Zillow

I have a hard time saying that the odds are against something that I don't know anything about beyond sketchy details I've read in the Seattle P-I and a real estate trade publication and more importantly when it involves someone the caliber of Rich Barton (founder and ex-CEO of Expedia). That said, I do know a thing or two about the consumer real estate business (I worked on HomeAdvisor and have been an active real estate investor) that leads me to believe the odds are against the strong group that Rich has assembled.

I knew Rich when we worked on sister sites when Expedia was still a part of Microsoft. We both worked for John Neilson -- one of the strongest senior execs at MSFT who unfortunately fell victim to lymphoma which claimed his life (As a side note, I'm convinced MSN would have been a success much earlier had John been around). Rich was a classic Microsoftie from that era -- super smart, driven but also had an entrepreneurial vision. I'm a big believer in betting on people and it's hard to bet against Rich.

The main reason I believe Zillow has a tough road ahead is that real estate is one of the more irrational industries from the standpoint of a tech entrepreneur. Real estate is more like the Healthcare industry than the travel industry or other industries Rich's team has worked on. In my career, I've worked in several industries (telecommunications, financial services, healthcare, entertainment, real estate, etc.). Without a doubt, the toughest nuts to crack were real estate and healthcare. They both share a common attribute of dealing with high dollar and high emotion purchases. Unlike other consumer businesses (travel, financial services, movie rentals, etc.), they aren't commodity products and it's easy for a consumer to become "irrational" from a pure economics perspective (e.g., how much would you spend on your child to keep them alive regardless of your financial situation). While industry fragmentation can sometimes be can an advantage for a startup, it can also bring significant go-to-market challenges. This is the case for real estate.

The other obstacle for Zillow is a lack of understanding of the nuances of the Real Estate industry -- it's not apparent any of his team has real estate experience. As I've stated in a previous post that discussed changes impacting the ad industry, not "getting it" can often be an advantage for a startup when attacking a new market. However, I don't think that advantage will play out based on what I've observed. In both healthcare and real estate, I've seen many "interlopers" come and go. They look at those industries and see massive dollars being spent and huge inefficiencies and see a colossal opportunity. The few that have had success blend a deep understanding of the industry with new way of looking at the market combined with innovative offerings.

If you look beneath the surface of some of those companies, you'll see they employ strategies espoused in James Surowiecki's book. A great example is a company run by my friend Ian Morris -- the CEO of HouseValues. There's much more than meets the eye that drives their success -- out of respect to HouseValues, I'll let you figure out the connections from what you can read about Surowiecki's book and in HouseValue's S-1. When Ian and some of the current HouseValues management team left MSFT a few years back, I can remember Microsofties and other tech entrepreneurs pooh-poohing HouseValues because they didn't understand the dynamics of real estate agents and consumers in the way HouseValues did. As their highly successful IPO has proven, taking an unconventional route is the path that has worked for them.

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