(Bloomberg) – Robert Reffkin, Chief Executive Officer of Compass Inc., began his career in the inner sanctuaries of American power, from McKinsey & Co. to the White House to Goldman Sachs Group Inc. But it was a real estate startup that got him into the ranks of the Americans brought ultra-rich.
Compass, the technology-focused broker co-founded by Reffkin in 2012, raised $ 450 million in an initial public offering on Wednesday. The sell was cut in half from the company’s previous target as technology stocks fell this week. The price was at the lower end of a reduced range, with investor enthusiasm for high-flying startups fueled by Covid-related demand waning.
Now Reffkin, whose company has not yet turned a profit, must prove that its investment in technical talent can justify Compass valuation of roughly $ 7 billion.
“It was a very challenging market environment. I am very happy that we were able to successfully achieve our goal,” said Reffkin in an interview. “The goal was never a valuation – the goal was a successful capital raise, and with today’s IPO we raised hundreds of millions of dollars from great investors.”
The New York-based company has grown thanks to funding from SoftBank Group Corp. developed into the second largest real estate agent in the USA. It benefited from a pandemic-induced real estate boom and increasing investor demand for real estate-related technology.
However, skeptics say it hasn’t yet distinguished itself from traditional real estate companies or found a way to make money. Reffkin said the new capital from the IPO will help the company make a profit.
“We have a clear path to profitability,” said Reffkin. “We will still grow fast, but we will grow more efficiently.”
Reffkin’s approximately 6% stake in Compass is valued at USD 472 million at the IPO price. He will receive an additional 14.9 million shares over the coming years, depending on tenure and stock performance, which would add about 50% to his stake.
That makes him one of America’s richest black entrepreneurs, according to Crunchbase, and one of only three black founders to have their venture-backed companies public in the past decade.
Compass posted losses of $ 270 million last year, despite sales increasing 56% to $ 3.7 billion. Realogy Holdings Corp., owner of the Coldwell Banker and Century 21 brands, has nearly double annual sales and a market value of just $ 1.8 billion. The company was valued at $ 6.4 billion in its most recent funding round in 2019.
“There’s no doubt the growth has been exceptional,” said Clelia Warburg Peters, venture partner at Bain Capital Ventures, of Compass. “Is that a sign of innovation or a sign that Rob brought the aggressiveness of investment banking style into a sleepy industry?”
Reffkin, 41, describes Compass as a company aimed at promoting real estate agents who work as independent contractors under its brand. In a letter to prospective investors, he said the group was “remarkably underserved” despite playing a pivotal role in the US $ 2 trillion real estate industry.
He was inspired by his mother, Ruth, a single mother who supported the family through her work as a real estate agent. She “did not have the right tools or support” to build her business, he wrote.
In contrast, Reffkin’s early career was marked by a procession through America’s most famous institutions, including Columbia Business School, the Obama administration, and a time at Goldman serving as chief of staff to Gary Cohn, then president of the bank. He founded a nonprofit called America Needs You to help first-generation college students and ran marathons in all 50 states to raise $ 1 million for charity.
In 2012, when technology emerged as an alternative to Wall Street as a place for young and ambitious people to seek fortune, Reffkin and Ori Allon, a software engineer who had sold his previous startups to Google and Twitter Inc. to start a business together, raising money from the likes of Josh Kushner’s Thrive Capital and former American Express Co. CEO Ken Chenault.
Armed with capital, Reffkin and Allon took a two-pronged approach. Compass hired programmers to create software that would help agents run their businesses more efficiently. Over time, they gathered 650 product and engineering employees and hired a top artificial intelligence manager from Microsoft Corp. a.
Compass also offered ample incentives to recruit agents from competitors, and offered top performers stock options and the opportunity to retain a larger percentage of their commission income. At the same time, the company went on a shopping spree as it expanded its business in San Francisco and other markets.
Critics say Compass has grown without demonstrating the ability to improve margins and that it needs to reduce compensation and take the risk of alienation in order to benefit. The doubts about its strategy became so loud that CFO Kristen Ankerbrandt wrote a company-wide email highlighting eight aspects in which the company was not comparable to SoftBank-backed real estate startup WeWork.
Reffkin’s rise is notable in other ways. Black Americans are conspicuously underrepresented among the ultra-healthy. Of the 156 Americans listed on the Bloomberg Billionaires Index, only one – private equity magnate Robert Smith – is black.
“It’s a long road for any CEO and frankly a lot longer and harder for CEOs of color,” said Tyler Scriven, who heads Saltbox startup. “Robert, who successfully brought such an incredibly ambitious company to market, is one of the best examples we’ve seen in generations.”