Opendoor and Social Capital Merger?

Just found out from a VIP reader (thank you!) that Opendoor is supposedly in merger talks (and by merger, it’s really an acquisition) with a specialized investment vehicle named Social Capital. The story from Business Insider:

Opendoor, a property technology company, is in advanced talks to go public via a merger with Social Capital Hedosophia Holdings Corp. II, Bloomberg reported on Thursday.

Social Capital is a “blank check” company, or a SPAC, that has been on the hunt for a technology company to acquire since it began trading in April. The SPAC is led by billionaire investor Chamath Palihapitiya.

Opendoor would be valued at $5 billion in this merger, according to the story, up from the $3.8 billion when it last raised money in the good old Softbank days B.C. (Before Covid).

Since it’s just a media report, who knows whether it’s true or not. But Bloomberg and Business Insider are not random bloggers, so there’s likely some fire with so much smoke.

But the really interesting stuff is, of course, once you dig in. And I kind of specialize in that. So let’s do this.

Whither Opendoor?

First, I do find the $5 billion valuation puzzling. Pleasantly surprising, especially if you’re an Opendoor shareholder, but puzzling.

It isn’t as if Opendoor has had a banging 2020. It got ambushed by the double whammy of WeWork leading to Softbank falling apart, then COVID slamming the brakes on all of its plans. Kudos to the management at Opendoor for navigating the crisis, and finding a marriage with Social Capital (if that’s true)… but….

We know that Opendoor has also pivoted sharply out of necessity. It was once a market maker; it is today a brokerage with some market making operations, kind of like Redfin. And that pivot, while probably necessary from a cashflow and profitability standpoint, brings up all kinds of strategic problems for Opendoor, all of which I wrote about in that post linked above.

If we evaluate Opendoor as a brokerage, it’s not worth $3.8 billion… never mind the $5 billion. I mean, Redfin has trouble justifying its valuation to some investors, and Redfin has the #2 or #3 web portal in real estate and a long track record of double digit organic growth with just a couple of thousand agents. Compared to that, Opendoor is a tiny low-production tech-enabled brokerage with no particular competence in operating a boots-on-the-ground real estate brokerage.

But we all know that Eric Wu and Keith Rabois didn’t start Opendoor to create another Redfin. We can surmise that none of the Opendoor executives were giving each other high fives when they decided to become a broekrage, right? We know that was just a short-term necessity thing.

Could the acquisition by Social Capital, a giant investment vehicle with gobs of cash, bring Opendoor back in line to really compete against Zillow in the market making game?


The New Daddy Warbucks: Social Capital

To understand this possible development, I did a bit (and I mean just a tiny bit) of research into Social Capital. Who are these guys? Are they legit? Because if you’re going to go up against Zillow with its $2 billion in cash and stratospheric stock prices and seemingly unlimited access to capital, you’d best have some deep pockets.

Well, Social Capital has some deep pockets. They are as legit as legit comes.

Social Capital is the investment vehicle of Chamath Palihapitiya, a billionaire Canadian investor with quite a compelling life story. Watch this video for an interview with him on Yahoo Finance, but here’s a very brief intro from Wikipedia:

Palihapitiya was born in Sri Lanka and, at the age of six, moved with his family to Canada as refugees. Throughout his childhood, Palihapitiya’s father was constantly unemployed and his mother was a housekeeper, and later a nurses’ aide. Living on welfare, Palihapitiya recalls sleeping on a mattress in the living room. He attended Lisgar Collegiate Institute while working part time to assist his family, and graduated at the age of 17.

He was an early executive at Facebook, which is how he amassed a fortune with a net worth of $1 billion at 34 years old. So this guy is a baller. In fact, he’s such a baller that he is a co-owner of the Golden State Warriors.

His company, Social Capital, is also quite a baller. TechCrunch says Social Capital made $1.7 billion in cash and cash equivalents in 2019 thanks to investment in Slack and Virgin Galactic. Social Capital’s 2019 Shareholder Letter reveals that it has 997% overall gains.

This is a freakin’ genius leading a very serious company with enormous access to capital.

The Importance of Progressive Vision

It’s 2020; I really, really don’t want to talk about politics. But in this case, it’s an important factor so let’s at least touch on it.

If you read that Shareholder Letter, it becomes very clear that Social Capital has a definite point of view. It isn’t just an investment fund looking to generate as much return as possible. It is after social change (hence the name) through investing in certain companies that are trying to change the world.

And Palihapitiya is very comfortable with controversy as a result. In the TechCrunch story on Palihapitiya and Social Capital, we get this passage:

The investor tells TechCrunch that he has acquired Hustle,  a startup backed by Insight Venture Partners, Google’s GV and Salesforce Ventures. Hustle co-founder Roddy Lindsay worked on Palihapitiya’s team on Facebook for over a decade, where they got to know each other closely. But it wasn’t their shared time at Facebook that sealed the deal. It was their shared vision of a world where text-messaging would kill e-mail.

The company is one of many startups that think e-mail will no longer be a reality in a few decades. If that’s the case, then businesses will need new ways to convert users into customers. So, Hustle lets businesses communicate with users in a personalized one-on-one way with, ideally, higher conversion rates.

But the startup’s real differentiator lies in its unabashed strategy to not sell to Republican parties or Republican candidates. Steven Pease, the CEO of Hustle, said that “many non-partisan customers use our platform, but we do apply a filter when considering organizations that are at odds with the Company’s values.”

I point this out because that willingness to be controversial and to back companies that are trying to create social change is extremely important when it comes to Opendoor, market making, and the real estate industry.

The Only Way to Compete Against Zillow

I have long said that Rich Barton came back to Zillow because of iBuying. Barton was already a billionaire, already had proven himself in the world of business with two major unicorns (Expedia and Zillow). Why come back as CEO of Zillow?

I thought the only reason why was because Barton wanted to change the world. He’s like Elon Musk in that sense. He saw a way to fundamentally alter the way that we all buy and sell houses with market making, something that Opendoor pioneered, and I think that motivated him in a way that selling leads and ads to real estate agents simply did not.

As a result, Zillow is more than comfortable losing money for years on its market making business. Barton has consistently said the goal is plus or minus 200 bps in its Homes business. All of the negativity from the industry about how Zillow loses money on each deal, how Zillow is stupid, how iBuying is just a blip in the pan, and so on and so forth falls on deaf ears because making money is not the point. Changing the world is the point.

Softbank never set out to change the world. It had raised a ton of money, and was trying to make more money and real estate just kind of happened to be the sector in which Softbank had invested billions. But those guys were always interested in making money. So when WeWork imploded and the fund ran into problems, Softbank likely cut off the oxygen to its portfolio companies: Compass and Opendoor in real estate. Softbank likely put enormous pressure on both to achieve profitability as quickly as possible and to stop burning cash.

Hence, the slowdown in market making by Opendoor (which started last year, pre-COVID) and the quick pivot to “We’re a brokerage now!” post-COVID.

Social Capital is different. Reading that Shareholder Letter, listening to Palihapitiya’s interviews, learning more about Social Capital, I can’t help but believe that Opendoor can’t possibly find a better Daddy Warbucks than these guys. They’re not about making money; they’re not about maximizing returns. They’re about changing the world, and they have the money to back that up.

It’s the only way to compete against Zillow in its quest to change the world.

And if you think about it, are the two visions actually in competition? Or in partnership and alliance?

Is Social Capital’s quest to drive social and political change because we are living through a new Gilded Age and a new Progressive Era is around the corner all that different from Rich Barton’s quest to fundamentally change the way we all buy and sell houses? Perhaps Zillow and Barton’s point of view is driven by an industry insider’s frustration with the broken transaction process, rather than by an explicitly socio-political point of view, but both are out to change the world.

If the Social Capital acquisition of Opendoor happens, then a future exit via a sale to Zillow is simply not out of the question. There was a time when Zillow acquiring Trulia, its arch-rival and nemesis, would have seemed unthinkable too.

Seen that way, maybe the $5 billion valuation doesn’t seem so crazy after all.

Interesting, Exciting, Game Changing

Personally, if the Opendoor does get married to Social Capital, I would feel much more comfortable with my outstanding bets with friends in the industry about 60% of all transactions going through an iBuyer by 2024.

But more broadly, that transaction opens a new chapter in the competition for the Iron Throne and for who will be the market maker for housing. I expect Opendoor to quickly abandon its pivot to brokerage, with Social Capital and its billions behind them, and go back to what it was created to do: make markets in housing, thereby eliminating much of the pain of the modern transaction process.

And unlike before, Opendoor will be freed up from the need to make money, which puts it on far more even footing with the new Zillow.

Furthermore, Social Capital becoming a major player in real estate brings even more exciting possibilities. Because another company that set out to change the world, with a progressive worldview and vision, that has kind of lost its way in recent months, is Redfin… who has the portal to contend with Zillow. That fills a major competitive gap for Opendoor. I think it makes all sorts of sense in all kinds of ways.

I hope the merger happens. Opendoor could use it, and the industry could use it. For years, the industry has simply been reacting to Zillow, and ever since Rich Barton came back and pushed all the chips into the middle, the story has been one of complete domination by one company. Real estate as an industry is fundamentally risk-averse, and most of its leaders are all about the tried and true and the well-trod path.

In that context, maybe the fact that Chamath Palihapitiya is a pro-level poker player with over $175K on the World Series of Poker tour, including coming in 101 out of more than 7,000 players at the WSOP Main Event in 2011, is also relevant.

We could use another gambler with deep pockets in the industry.


PS: In honor of one of the greats of Country music… RIP Kenny Rogers. You may now count your money. The dealing’s done.

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Rob Hahn

Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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9 thoughts on “Opendoor and Social Capital Merger?”

  1. Great article and insight my friend. However, there is absolutely zero chance that 60% of homes go through an iBuyer by 2024. In fact, I’m willing to alter that bet and make it less than 10% if you want. With the inventory shortage in this country that will continue to persist for years to come, all the market dynamics are against iBuying at this point. That is unless all the iBuyers want to get into bidding wars for properties and try to outbid buyers for already inflated home prices.

      • James would be crazy to take that bet if you include the “buy now sell later” in the iBuyer category. That use case is already 50%+ of all transactions in the US I’d suspect, they just don’t all go through one tech-enabled program like Flyhomes, Orchard, Homeward, etc to facilitate it.

      • I’ve ALWAYS maintained that iBuyer is both the market maker model and the bridge loan model, as they’re both about minimizing consumer pain. 🙂 James can back out if he likes, of course. 🙂

  2. I had never heard of Chamath until your article. I watched him yesterday on CNBC, an impressive individual. The question is not what percent of transactions are via “ibuyers” in 2024, the question is, what role will Opendoor play in the real estate, lending and title/escrow space. Maybe they purchase States Title? What about a venture with Rocket Mortgage? Also, how will Opendoor’s success impact agents? Interesting times.

    • I think the resurrection of Opendoor is supremely interesting. Now Big Title is under pressure from two sides. The mortgage revolution is around the corner, which VIP readers know is what I think market making is really about. States Title is possible, but given the size of the entities involved here, why not First American? Why not Fidelity?

      Venture with Rocket Mortgage is interesting, but why couldn’t Zillow Homes become the dominant mortgage company of the 21st century? Why couldn’t Opendoor compete with that?

      If I’m Chamath, am I not already in talks with Glenn Kelman at Redfin to unite the former partners under one SPAC roof? Am I not already talking to News Corp about their moribund portal property?

      But then again, if I’m Rich Barton, am I not already planning moves to deal with expected competition?

      Oh, it’s going to be a fun and wild ride. 🙂

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