Disrupting Yourself

Audio source: https://www.youtube.com/watch?v=bOo6XSYW66c

Spencer took on the competitive threat of OpenDoor at Zillow when he didn't need to, taking a tiny competitor startup seriously and pivoting a $5 billion company into a $30 billion one without a crisis.

News at the time:
- https://techcrunch.com/2018/04/14/zillow-surprises-investors-by-buying-up-homes/
- https://www.geekwire.com/2018/zillow-group-will-start-buying-selling-homes-taking-open-door-expanding-real-estate-footprint/

Transcript

swyx: [00:00:00] Normally, I try to make these clips under five minutes, but for today I absolutely could not because this is one of the most fascinating business stories and business moments that you can encounter. And this is the best explanation of a recent pivot that was very, very high profile and very successful. So I want to give you the story of Spencer Rascoff pivoting, Zillow as a successful company, not against the wall, and succeeding. Despite having an incumbent startup where the classic disruption theory would tell you that he had an innovator's dilemma. He got past that, and it was just nearly a train wreck, as he will tell you towards the end. But he had enough friends to give them good advice and he took it and he paused at the right time and he went for it at the right time. And it was just an amazing, amazing, real life story.  

Spencer Rascoff: [00:00:51] And then I guess the second takeaway from Zillow would be the importance of disrupting yourself. And this is all about Zillow's move into ibuying and the business of buying and selling homes directly, which was a very controversial, difficult decision that I made. And it was very much the right one.

It's what moved Zillow's market cap from 5 billion. A couple of years, post IPO to 30 billion today was deciding to put at risk the core business. Of selling ads to real estate agents by launching a new business of buying homes from people, renovating them and selling them to other people. And pulling off that business transition or business extension was a lot of sleepless nights, but it was very much the right move.

Do you mind 

James Besheara: [00:01:37] walking me through almost the specifics of one of those sleepless nights and what that internal dialogue was like and where that internal for use uncertainty lied? 

Spencer Rascoff: [00:01:47] Sure. Let me paint a picture. So as Zillow goes public in 2006, We do 16 acquisitions. We buy Trulia, we buy StreetEasy in New York.

We buy hot pads at the top rental site. And now here we are in 2000, like 12 ish, and it's about a $5 billion market cap. We've got like a thousand employees top of the world. We won, online, real estate and we consolidated the category. Victory is ours. Okay, we're done. But then we see this startup Opendoor.

And open doors, buying homes for people sight unseen. And we're like that's crazy. That's not going to work. And we have to decide, do we enter that business? And the first, the first thought that I had and the team had was. What about the core, w we have about a billion of revenue selling ads to real estate agents.

And if we start buying houses ourselves, real estate agents, aren't gonna like that very much. Because there might not be agents in those transactions. Now, it just so happens that when we eventually entered a year or two later, we did put real estate agents in those transactions as a way to, to keep the peace.

But after I left Zillow started. Hiring those agents themselves at Zillow and cutting agents, other agents out of the transaction. And so now Zillow's in, in unchartered territory with respect to the, how the industry perceives it and that might or might not, we'll see put a strain on the core business of selling ads.

So it's very similar just to give an analogy that can listeners have experienced as a consumer. Think about the Netflix business with DVD by mail. So Netflix has a great business DVD by mail. It's probably a I dunno, $10 billion market cap company. This was whatever, five, five, 10 years ago.

What about streaming? The idea that you could press a button and start to see the movie right away on your computer was crazy. Like instead you just press a button and the DVD arrives in the mail to, two days later, but Netflix decided to disrupt their core business and shift to streaming and put at risk the whole core business and.

It worked and then they did it again when they decided to create originals. Cause like they had a great business. Now they're a $50 billion market cap, but you know what, all their content comes from the studios. And now they say we're going to create our own shows. How are the studios going to feel about that?

That's crazy. Don't do that. Like why risk it? You're doing great. They have a 300 billion market cap today. Why? Because. They pulled off the pivot to originals. So Netflix is like the rare company I can think of has done this twice. Zillow has basically done it once so far. But anyway, so back to the decision-making first risk is what happens to the industry, the perception of Zillow and the impact on the core business.

Second risk is the investor community reaction, which is to say, we had public market shareholders that are like. Don't do that. That's crazy. You've got a 95% gross margin business selling digital advertising. Why would you move into it? The business of buying and selling houses, which is cyclical, risky, complex, operationally intensive.

It's a real estate flipping business. Rather than a digital media business, you're going to trade at a lower multiple, I didn't sign up for that. I'm an internet hedge fund. I'm an internet mutual fund. Like I buy tech stocks, not real estate stocks. And so there were a lot of naysayers from that community.

And then there were naysayers from the employee community, also back to the importance of people in culture that were like, I don't get it. Like they just don't do that. Why would we risk everything for that? What is that even that. I'm compressing about six months, 

James Besheara: [00:05:11] six minutes.

How did it, how did you navigate it? How did you mentally nap? Did you S did you know there, did you almost have like faces in your mind that you were going to piss off by making this decision and you were like, yes. 

Spencer Rascoff: [00:05:24] It, it's very stressful as a executive, especially when you feel like you'd won, like at an earlier stage, a pivot, right?

Especially a pivot driven by your backs and feeling of necessity, right? Yeah. It's okay, COVID happened. I talked to a company today that, that ran an events business and they suck, and then COVID happened and they successfully pivoted to virtual events and it's wow Bravo but you had no other choice, in this case it's Zillow, we HAD another choice just like Netflix had a choice to not move into streaming and not to move into originals. And so the status, when the status quo, it looks attractive. It's even harder to pivot. And so what we did, I'll tell you the two steps that we took to arrive at the decision. The three steps, the first was we tracked competition closely and we started looking carefully at Opendoor data and Opendoor metrics.

How many listings do they have? How quickly are they selling? What do we think their unit- level profitabilit...