Zillow Zaps Street Easy
http://therealdeal.com/issues_articles/zillow-shocks-insiders-with-streeteasy-strategy/
by: Adam Pincus
On Sunday night, August 18, most of the 34 employees and executives of listings website StreetEasy gathered in the company kitchen for a game-changing announcement by CEO Michael Smith: Zillow, the $3 billion Seattle-based residential listings website, was acquiring the firm for $50 million.
While the acquisition was not a surprise — employees had seen well-dressed strangers holed up with StreetEasy executives in hush-hush meetings for weeks — the buyer was.
Since launching in 2005, StreetEasy has developed what’s widely considered the most accurate listing system for consumers in New York and one of the most, if not the most, comprehensive local website of its kind in the country. Meanwhile, Zillow, with 64 million unique visitors a month and counting, is the most widely used listings website nationally. But before its acquisition of StreetEasy it was considered something of a joke in New York, with inaccurate property information and low market penetration.
Zillow CEO Spencer Rascoff acknowledged as much in an interview with The Real Deal shortly after the acquisition was announced: “Zillow had left something to be desired, and StreetEasy clearly remedied that,” he said.
But the even bigger surprises didn’t come until after that first announcement.
Six weeks later, on Monday, September 30, the employees again assembled in the kitchen, but this time the news was somber. Smith — described as a leader who aggressively pushed his staff while still managing to foster a relaxed work atmosphere — announced that he was out as CEO. Instead, he’d be taking the far less hands-on role of chairman. In addition, the firm’s recently hired chief operating officer, Robin Allstadt, would leave the company. (It’s unclear whether Smith negotiated his change in position as part of the purchase agreement.)
In their place, a married couple with a tech start-up background — Susan and Matt Daimler —was installed to run the show. (Susan is now the general manager of Zillow New York, which includes StreetEasy; Matt is general manager of Zillow Pro Tools, a suite of online applications such as website AgentFolio, for the business world, as well as head of product for StreetEasy.)
Days after the leadership announcement was made, news broke that StreetEasy would shutter its nascent sites in South Florida, Washington, D.C., and Philadelphia, throwing into question what strategy Zillow would be using to profit from StreetEasy’s successful model.
To shed light on that, TRD spoke with more than two dozen people in the New York, Florida and Washington real estate communities to piece together an inside look at the sale and Zillow’s endgame. Several of those sources declined to be named because they were not authorized to speak publicly on the matter. In addition, company officials said all employees signed a confidentiality agreement when the acquisition went through.
In the short term, local insiders told TRD that consumers in Miami and D.C. will be worse off, because StreetEasy had access to 100 percent of the listings in both markets, while Zillow has about 80 percent, despite being the most-used site in those locations.
“StreetEasy was regarded as a much better source of information, much more accurate,” said Alicia Cervera, managing partner at the large residential brokerage Cervera Real Estate in Miami. “I think Zillow has some challenges that create problems for the consumer and realtors alike.”
While some had been hopeful that Zillow’s purchase would lead to greater transparency in urban markets around the country, the company has said it will not replicate StreetEasy’s model in other cities.
“StreetEasy is our New York City brand, and Zillow is our national brand,” the company said in a statement to TRD. “We’re very excited about the massive opportunity to grow StreetEasy in New York City. StreetEasy has the number-one online real estate brand in New York City, while Zillow has the top online and mobile brand in every other major U.S. city.”
The news came as a surprise to some who’ve been closely following StreetEasy since it launched.
“I think they are leaving acquired technology on the table,” said Jonathan Miller, a top residential data-cruncher in the city, who prepares quarterly market reports for Douglas Elliman covering New York and South Florida.
“Zillow is a national model whose strength is single-family properties, and it would benefit from the [StreetEasy] interface for high-rise properties in major urban markets,” he said.
Following the money
Before StreetEasy launched in New York, there was no dependable, consumer-friendly way to wade through residential listings, much less historical sales data. The go-to site at the time was the New York Times, said Noah Rosenblatt, founder of UrbanDigs, an analytics and consulting firm, and one of the city’s top apartment-tech gurus.
“StreetEasy solved the problem of data transparency and data reliability,” Rosenblatt said. “Never before could you get an accurate listing history.”
For example, he said, if an apartment had lingered on the market for months, the broker might simply resubmit it to the Times as a new listing to make it look fresh to potential homebuyers, he said.
Recognizing the opportunity, Smith, along with fellow techies Nataly Kogan and Douglas Chertok, formed NMD Interactive (taken from their initials) in 2005. The following January, the company debuted StreetEasy’s website.
Kogan and Chertok have since left the company.
Investors took to the idea quickly, providing a total of $400,000 to the company in February 2006.
Those early investors included executives at the consulting firm Global Strategy Group —StreetEasy’s original landlord at 895 Broadway — hedge fund Southpaw Capital Management and lender Sig Zises, among others, according to court records. Then, in August 2006, the Boston-based venture capital fund FA Technology Ventures invested $2.5 million, injecting the firm with cash and obtaining control of most of the firm’s preferred stock.
While the exact ownership structure of the company is not public, court documents filed in connection with a lawsuit against Chertok, as well as Zillow’s contract to buy StreetEasy, which is available on the U.S. Securities and Exchange Commission website, offer clues.
According to information from both of those sources, Smith was the largest stakeholder at the time the company launched, with about 64 percent of the company — or 6.45 million of the 10 million shares of common stock. (At the time, Chertok had about a 25 percent stake, a board member, Tony Schmitz, had a 9 percent stake, and Kogan had 2 percent.)
By the time of Zillow’s purchase, there were nearly 10.48 million shares of outstanding common stock, according to the contract filed with the SEC. On top of that, there were nearly 6.7 million shares of preferred stock. The bulk of StreetEasy’s $50 million sale price was divided through an undisclosed formula among the company’s shareholders.
While it’s unclear who all of those shareholders are, as of 2006, FA Technology owned 5.3 million shares of preferred stock, while the other early investors, including those from Global Strategy, owned 1.4 million shares. In addition, several million shares of stock and stock options were set aside for an incentive plan for the company’s employees.
Calls to the investors, along with company board members, were not returned.
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