Wednesday, February 15, 2006

Zillow - Feature, Product or Company?

One of the things that I evaluate when looking at investing time with a company is whether I perceive it to be a feature, product or company. For example, Apple’s iLife is a product made up of several features such as the Speech Enhancer in Garage Band which is a feature. When the totality of a company’s IP consists of a feature is going to have different growth/revenue/exit potential than a company that has a core product with other products in the pipeline. Thus the winning strategy is going to be quite different from one company to another.

In the case of Zillow, there was a lot of hype about the company due to the caliber of its founders (e.g., Rich Barton). Anyone who has had the kind of success Rich has had, has a free pass when it comes to raising money the next go-round. The old adage is bet on the jockey not the horse (side note: interesting to see that it works better in venture capital than horse racing). It will be interesting to see what Zillow does with the $32 million they raised as you’d have to think they’d do much more than a simple home value estimator. Why? As readers of this blog know, I worked on HomeAdvisor Technologies Inc. (HTI) that was to be the next business to spin out of Microsoft after Expedia (unlike Expedia we missed the window to have the public markets fund it to profitability when the market crashed). One of the more popular features of the consumer site was a home value estimator. By virtue of HTI’s loan platform business (later sold to Freddie Mac), we had a relationship with Freddie Mac (as well as Chase and GMAC-RFC which were investors in HTI) so we had access to great data that Zillow is having to acquire. The estimates were accurate enough that in many cases Freddie Mac only required a “drive by appraisal” (i.e., the lender would just have someone drive by the house to ensure there weren’t any glaring issues) for its lending requirements. In other words, it was at least as accurate as what Zillow is doing now.

The advantage Zillow has today vs. what HTI had are significant so they may be able to turn this feature into a company.

  1. The Internet ad market is much more developed so there are better ways to monetize this sort of feature.
  2. HTI was still a part of Microsoft so it was greatly hampered in what it could do (thus one of the major reasons Rich was able to argue why Expedia should be spun out – that’s a whole other topic on how big/established companies have a tough time expanding their reach into new vertical markets).
  3. Consumers have continued to rapidly change their behavior in the last 5 years and are more open to self-directed web services and a la carte home buying/selling services.

That said, I’ll remain dubious of their prospects until I see more. Finding out what your house is worth isn’t a sticky feature (consumers typically buy a new home every 7 years) so it requires a great monetization machine such as what HouseValues has done. My prediction is that traditional advertising alone won’t sustain their model. Rather, they will have to find a way to take a cut of the commission (35% of the commission has been typical of a referral fee that organizations like Cendant Mobility receive from agents/brokers). From that standpoint, Zillow is better off if the commission rate stays high. The other item tech industry people shouldn’t forget is that a real estate purchase is a far more emotional purchase than something like airplane tickets and is particularly daunting for new home buyers. It’s typically the largest purchase they’ll ever make so working with a Realtor is a form of insurance (i.e., it’s only worth it when things go wrong which isn’t rare). I like John Cook’s analogy of Paul Bunyan and Zillow that compares the efficacy of a human-derived value vs. a machine-derived value though Realtors are really doing both since they have lots of data they draw upon combined with their on-the-ground expertise. For more on consumer reaction, you can get Zillow’s spin on their blog written by Lloyd Frink (another high caliber ex Microsoft and Expedia leader).


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