Side CEO talks venture capital, iBuyer growth and innovation

Side had a banner 2019. In March, the San Francisco-based brokerage had its public debut, revealed that it had been expanding across California and reported that it raked in tens of millions of dollars in funding.

Then in November, the company announced that it had raised another $35 million in a Series C round. Armed with that substantial war chest, the company and CEO Guy Gal now have big plans for future growth.

Gal will be speaking next week at Inman Connect New York, and recently sat down for a phone conversation with Inman to chat about the future of his company, and the real estate industry generally. What follows is a version of that conversation that has been edited for length and clarity.

Talk to me about what you have going on in 2020. What kinds of things should we see from Side in the future? 

We don’t have a new vision every year; we have a very long-term vision. It’s a 20-year vision. So every year is about making more progress toward that more perfect state, that promised land. That means continuing to identify the very best real estate agents and professionals in any given market and enabling them and powering them. Providing them with the innovation and support engine that they need to be their very best. That’s all we care about.

And in 2020, it means doing that in more markets.

Historically we focused our efforts on Northern California. This past year we made a lot of progress in Southern California. This year, we’ll be doing the same in Texas and Florida.

What do you see your geographic expansion looking like over the next 10 years?

Over a 10 year horizon, we are everywhere there are great agents. It doesn’t matter what the price point is, whether it’s a million dollar average price point, or a $200,000 price point. If there is a great agent in that market doing good work, we want to be there helping them.

In 10 years, that means we will be in virtually all markets across the U.S., and likely even beyond the U.S.

How do you see the real estate transaction evolving over the next decade? 

There are really two big components to the real estate transaction. There is the clerical component, which is the contract to close, management of documents, and disclosures, contingencies, conditions and point of sale requirements.

And then there is the other side, which is the service. The client work. Trading in sentiment, where you as an agent have to understand the motivation and need and aspirations of a human being — and typically more than one — who is involved in the transaction. It’s managing all of those with a great deal of nuance.

Those are very different, disparate, separate functions.

So for us, as a company, we really focus on streamlining and automating all of that clerical, cursory, menial, repeatable work that agents have been burdened with doing — which typically for someone who is high volume is representing half of their time. We are taking that away. We’re saying, that’s not your job anymore. That should be the job of the brokerage. And the brokerage should be able to do that really well.

Software is very good at solving for menial, repeatable work. That’s what Side does. And that means a faster, smoother, more efficient transaction.

But where most companies today are innovating is not there. It’s actually on the other side, which is the client side. They’re trying to kind of interfere, or intermediate, the relationship between the agent and the client. Because for traditional brokerages that’s what really matters. They want to be a brand, they want to have that connection with a client.

From our standpoint, that’s not the place where innovation should be happening. Because when we talk to consumers — which we do all the time — they’re not looking for a better application or some form of software when it comes to supporting their transaction. They’re looking for a better agent. They’re looking for someone who is confident, who will act as the principal in the transaction and just make that experience really effective.

You’ve been successful at raising money. Where do you see venture capital in real estate going in the future? Will we continue to see an influx of cash, or will the whole WeWork and Softbank situation put the brakes on?

There’s very little appetite in [venture capital] today for capital intensive businesses where the only way you’re innovating is if you manage to secure a billion dollars in equity and debt. Those plays have been made and there has already been a fair amount of investment into companies like that. The vast majority of VCs do not want to follow in behind because those businesses aren’t necessarily doing that well, even though they’re really well capitalized.

But there is a great deal of appetite for software businesses — technology businesses that are solving problems not only with money but with actual products, with actual software, some form of application. That’s where the appetite in VC is. But there are very few opportunities today for VCs to invest in those kinds of companies because there are very few of them. That hopefully will change as more entrepreneurs decide to solve problems in this space.

Is it safe to say that in 2020 or 2021 we’re not going to see a new behemoth like Opendoor or Compass or something like that?

Not if it’s cash intensive. Not if it needs a billion dollars to make sense.

In venture capital land, if a company has raised more than $250 million before going public, that’s a giant red flag. Historically it has been. Because it means that that company is really dependent on capital to grow and innovate. And that’s not sustainable over the long run.

Now, there are always exceptions to that rule, and there are always companies that do need that capital to become big and invaluable. But generally speaking, that is not the case.

I believe that you’ll see much less investment in companies that require that kind of capital to make a difference. And yes, we’re likely not going to see another iBuyer emerge and get tons of funding. There are already too many players in that space.

Speaking of iBuyers, how big can that model get?

That’s hard to say. But I think you can look at what has happened to date and reference what will likely be the case tomorrow. If you look at anyone who is in iBuying — whether it’s Opendoor or Zillow or any of the dozen companies in between — they’re expanding geographically in a way that’s very broad. The reason for that is because they can’t get depth in a small number of markets.

So if you look at Phoenix, which is ground zero for iBuying, total penetration for iBuyers is under 10 percent. And they buy every single available billboard and send mailers to every home and address. Which is to say, the market is telling you what the appetite for that model is. And it’s not much more than 10 percent of the total market.

Now, that’s a lot. It is non-trivial. But it’s also not the entire market. It’s a meaningful, but small, fraction.

So if those markets had more demand, more appetite, Opendoor wouldn’t be going into L.A. on an $800,000 average price point. But they have to go there to get more growth. And that’s because there is a natural ceiling on consumer preference and consumer demand for paying more to sell your house, and making less money on it than you otherwise would.

Now, if iBuyers change the equation and give people more money, or even the same so it’s cost neutral compared to an agent-assisted sale, maybe that extends market penetration. But for companies to be able to achieve that would be very challenging. I don’t know if it ever will happen.

You also mentioned that there may be future companies that solve other problems in real estate. We talked about the transaction, but what other problems do you think need to be solved?

Title is not something that works efficiently. You’ve got a few startups innovating there. Escrow is part of the same conversation, but different, and is a big thing. Things like notary, or even vendor management. Or document management — which is today also monopolistic — where you have one or two companies with legacy power there that are not innovating. But they have all these agreements and licenses with all these associations that make it impossible to make any progress.

So there are real barriers to innovation in those spaces, but those are the spaces that could really benefit from more research and development.

Thinking of bringing your team? There are special onsite perks and discounts when you buy tickets together. Contact us to find out more.