A Final Word (Hopefully) on Upstream

As you can imagine, there’s been a ton of chatter about Project Upstream and its “divorce” with Daddy NARbucks. I think I’ve gotten no fewer than three emails from consultants and thought leaders in the industry on the topic. Inman has written not just a news article announcing the split, but an in-depth investigation into why Upstream did not work out as it coulda, woulda, shoulda. A number of you have reached out privately asking what I thought.

The truth is that I haven’t really thought about it. I feel like I’ve already written about, discussed, and even made recommendations on Upstream over the years. Search the tag “Project Upstream” and you’ll see.

In fact, I wrote a three-part series on Project Upstream, why it was a flawed execution of a great idea, and what it ought to become. Check that out here, here, and here if you feel like it.

But I realized there is one more thing to say about Upstream. It’s something I recommended privately to a number of people behind Project Upstream at the very beginning, but it wasn’t client work so I feel comfortable talking about it openly, seeing as how the advice was entirely ignored. I don’t even blame the Upstream folks; given the tribal nature of the industry, I’m sure they think I’m “anti-Upstream” or some such.

So think of this post as free advice, worth the cost, to people who likely don’t want to take advice from me. I still love them all, because they’re mostly really good people, and want to see brokerages survive and thrive. I hope this is my last word on Upstream, short of major changes as recommended herein… though I have a sneaking suspicion it is not.

Fund the Company, or Go Nonprofit

To me, the biggest reason why Upstream 1.0 did not work out is because it was structured neither as a for-profit business nor as a nonprofit organization, but a weird blend of the two borrowed out of the MLS world.

Think about what everyone is focused on with this split (and frankly, before the split as well): the $13 million that NAR spent on Upstream (by way of funding RPR). You see anybody talking about the $13 million that brokerages invested in Upstream?

If Upstream had been paying NAR’s RPR unit $13 million the past few years, the Inman headline would look really different: “NAR Loses $13 million Upstream Contract.” And the commentariat would be abuzz about incompetence at RPR for screwing up such a lucrative piece of business, rather than talking about how NAR wasted member dollars and so on.

But the reality is that if UpstreamRE had been paying RPR $13 million over the past few years, Upstream is up and running two years ago, because after the first missed deadline, Upstream CEO Alex Lange is chewing out the developers, and after the second, the contract is terminated for cause. That’s how businesses who are paying developers handle things.

There is a fundamental problem here, though. A business exists to make money; it was never clear from the start that Upstream existed to make money. Rather, Upstream was created to fulfill a mission objective, or a set of mission objectives, that have nothing to do with making money. Things like single point of entry, compliance to RESO standards, broker data management, immediate “entitlement” (granting developers and vendors access to data), etc. etc. are valuable objectives, but are they money-making opportunities?

Imagine you’re a wealthy brokerage owner with millions in the bank. Two developers come knocking, because you’re a rich guy.

One says, “I think I can make a bunch of money; I see opportunities in low income housing. Give me money, and I’ll return it to you tenfold.”

The other says, “We have a real need for low income housing. I’m not sure how I’ll make any money, because we have to think of the needs of the poor. Give me money, and there’s a chance that I’ll be able to pay it back someday.”

The first developer is a business; the second is a nonprofit charity.

Upstream and its brokerage backers should decide first and foremost why they’re in this thing at all. If it’s to make money, then invest like you’re hoping for a home run; that’s what venture capitalists do. If it’s to meet mission objectives and do good for brokerages, then become a nonprofit.

As a nonprofit, you need to do some fundraising. Your operations likely change. That’s a whole different conversation, but at least everybody donating money knows they’re donating, not investing.

Fix Your Governance Accordingly

Once you’ve made the decision to be a for-profit venture or a nonprofit organization, tailor the governance accordingly.

If it’s a for-profit business, then it’s all about shareholders who elect a tiny Board of Directors to protect their money, who in turn hires a competent CEO, and lets him go to work. Consider this: Facebook’s Board of Directors is nine people; Upstream’s Board of Managers is 20 people. What decisions can Mark Zuckerberg make without taking it to the Board? What decisions can Alex Lange make without taking it to his Board?

Board composition in a for-profit is all about how many shares you own, which is directly related to how much of your money is at stake. Larger shareholders with more money at stake get more votes; smaller shareholders get fewer votes. That’s just how it is, because it’s all about money.

An Upstream properly structured as a for-profit venture would not have ridiculous rules like “Each brokerage is only allowed one unit ($100) so not to create any barriers to entry, and so no member gains an advantage.” If HomeServices of America, with its Warren Buffett money, wanted to invest $100 million into Upstream, because they think that $100 million will turn into $500 million when Upstream goes public, why in the world would any sane entrepreneur say no to that?

If Upstream is a nonprofit, then it’s all about stakeholders, and Board formation takes different issues into account. Just off the top of my head, stakeholders in a nonprofit real estate data management initiative would include brokerages, agents, technology companies (including Zillow and Redfin), the MLS, consumers, Wall Street, academics (who use real estate data in their research) and government entities. The Board then hires an Executive Director whose role is rather different from that of a CEO.

Board composition in a nonprofit is all about the mission, which mean ensuring that everyone that is affected is somehow represented to guide the organization to the goal. Imagine a nonprofit that works on low income housing where the entire Board is comprised of real estate developers; who in the world would be donating money to that? Who would volunteer?

Operations Flow from Governance

Lastly, how Upstream operates going forward flows directly from governance, which directly flows from whether it’s about the money or about the mission.

A for-profit business operates pretty straightforwardly: build a product, try to sell it, change the product if it doesn’t sell, and if it really doesn’t sell after multiple attempts at changing the product, cut your losses because the market doesn’t want whatever it is that you’re offering. I sincerely hope this is one of those products that the market does not want, but… hey, cats!

A for-profit would need to have a strong, capable and accountable CEO. Alex Lange would have to be free to operate the business as he sees fit, and be held accountable for whether the business is making money and growing or not. He has to operate the business; the Board needs to butt out of operations entirely and concern itself solely with strategic issues, one of which is “Do we have the right CEO?”

It really helps, I think, to think of the for-profit operations like one might a college football team. The Athletics Department can hire and fire a coach, but it really shouldn’t be getting involved with whether the team should run a 3-4 defense or a 4-3 defense and what routes receivers should be running.

A nonprofit organization operates differently. First, you have to raise money, which is not easy. Second, you have to keep raising money. Third, you try to figure out how to accomplish your mission however you can seeing as how you usually don’t have much money and aren’t trying to make a profit. Maybe that means building a product; maybe that means trying to convince businesses to donate their time and money to build a product; maybe that means trying to get the government to help with the mission (low income housing, public broadcasting, etc. etc.).

The Executive Director operates the organization, of course, but most of his or her time should be spent on (a) fundraising, and (b) cajoling and convincing others to help with the mission.

Do Whatever You Want, But Do Set Yourself Up for Success

I have no real opinion on which path is better for Upstream. Either could work, and either could fail. But for their sake, and for the sake of the various good objectives and goals of Upstream, I would like to see them set themselves up for success.

Alex Lange is a capable executive and a smart guy. He can run a company, or be an executive director of a nonprofit; if he can’t, then Upstream can find someone else who can. What he can’t do, because no one can do it, is to run a company that acts like a nonprofit or a nonprofit that pretends like it’s a for-profit business.

Just my thoughts, and worth every penny you paid for it.

-rsh