A Conversation with Former Zillow Execs on Disrupting the Real Estate Market

First Republic Bank
December 2, 2020

Watch Mike Selfridge, Chief Banking Officer of First Republic Bank have a conversation with former Zillow Execs Spencer Rascoff and Austin Allison.

Learn how Spencer’s and Austin’s careers brought them together and has led to continued disruption of the real estate industry. From Zillow to their new venture, Pacaso, hear how they have keep reinventing to meet the sector’s needs.

Read below for a full transcript of the conversation.

Natalie Johnson - Good afternoon, I am Natalie Johnson, Director of Relationship Manager Training and Development. And it is my privilege and pleasure on behalf of First Republic Bank to welcome you here today. We are delighted to be joined by Mike Selfridge, Chief Banking Officer for First Republic Bank, as well as Spencer Rascoff and Austin Allison, Co-Founders of Pacaso, for a lively conversation on disrupting the real estate market. Spencer Rascoff is a serial entrepreneur, who also co-founded Zillow and Hotwire, and was the CEO of Zillow for over a decade. Today, Spencer is a frequent angel investor to venture capital firms, and is on the board of Palantir. He founded and is chairman of dot.LA, a new site focused on Los Angeles’s startup scene. Austin Allison co-founded Pacaso, to make the dream of second home ownership a reality for more people, after experiencing the profound effect it had on his own life. Pacaso is Austin's second startup. In 2008, he founded dotloop, a company that created software to seamlessly manage real estate transactions. Zillow acquired dotloop in 2015, and Austin continued to run dotloop as a Zillow executive until 2018. Before I turn the conversation over to Mike, please know you can submit your questions using the Q&A function, located at the bottom of your screens. Spencer and Austin will be answering some of the questions submitted at the end of the discussion. And with that, Mike, please take it away.

Mike Selfridge - Great Natalie. And Natalie, thank you for all that you do, we're happy to have you. I'm delighted to be joined by Spencer and Austin today, two incredible serial entrepreneurs. And I'll do a little panel session about 35 minutes, then turn it back to Natalie, for a lot of audience questions I'm sure we’ll have. And while the title here is Disrupting The Real Estate Industry, I think Spencer and Austin, just given your backgrounds, I think there's a lot more I wanna get into about innovation in general, raising venture capital, selling companies, taking companies public, and then just generally your philosophy on building great companies. So, if that sounds okay, to you two, which I'm sure it does, let's get started. I wanna start with just getting to know the two of you first, and then how you came together. And then we'll get into the Pacaso, which is really an exciting new opportunity that you both formed and launched in October. So Austin, maybe I'll start with you. And I think your background as Natalie mentioned, you started dotloop in I think 2009, in the midst of the great financial crisis. I mean, who does that? Why would you do that? And then you turn around and sell the company a few years later, maybe 2015 to Zillow. So, talk about your journey getting there a little bit, and why you had the gumption, so to speak, to raise a company, when everybody would tell you not to raise a company.

Austin Allison - Yeah, you bet. And before I get into that, Mike, I just wanna take a minute, and thank you and First Republic on behalf of our team at Pacaso, we're really honored and appreciative to call you guys business partners, you've been fantastic. So thank you for the opportunity today. So my journey started as a real estate guy, I started selling real estate when I was 18, sold all through college into law school, when I had my idea for the first company, which was dotloop. And that idea was really birthed out of a problem that I had been experiencing firsthand, which was inefficiency in the real estate transaction, I found myself driving all over town, chasing clients to get signatures and documents signed, and the process felt broken. So that inspired this idea, which was the beginning of a digital real estate movement. So we launched dotloop in 2009, which as you pointed out, it was a challenging time for the economy and also a challenging time for real estate in particular. But it turned out to be a really beautiful time to start a business, and I think there's a few reasons why. One is that when you start a company during tough economic times, it really forces the business to be disciplined in the way that it builds itself, in the way that it spends its resources in the way that it hires and expands the team. It also creates a bit of an opportunity where it becomes harder for other companies to raise money during that time. So it provides a little bit of buffer and runway to get out there and grow some market share before new competition comes into the space. But the main reason I started the company during that time and the reason why Spencer and I are starting Pacaso now, is because there was a problem that we were really passionate about solving, that we felt could benefit the broader population, in the case of dotloop, it was about helping people to streamline their real estate transactions, in the case of Pacaso, it's about empowering more people to realize the dream of second home ownership. So we followed that dream for six years or so, we're fortunate enough to join Spencer in the Zillow team in 2015. I stayed on it for four years and learned a ton, and that brings us to today.

Mike - Austin, I'll come back to you in terms of why you sold the company to Zillow, let me turn it over to Spencer, Spencer, you've got a great background, you started in investment banking went into private equity, then you too started your own company Hotwire in 2009. And then rode that through the dot-com crisis, also similar lessons learned. And then you were one of the co-founders of Zillow, which started in Seattle in 2004. So we'd love to hear a little bit of your perspective in terms of your path through to entrepreneurship and where you are today.

Spencer Rascoff - Oh so, I've been chasing things I find interesting and things that I love since the beginning, I'm gonna start as an investment banker, I quickly realized that that wasn't what I wanted to do professionally. So I did a two year analyst program and left, I moved to private equity around the corner from here actually, it's 345 California Street, I think at TPG. And I like private equity, but I found it a little bit too transactional for me and not as deeply involved in the operations of the company. So I left TPG to start Hotwire, which was sort of a portfolio company of TPG. And actually, for about a year, I kept an office at TPG, and then the Hotwire offices, the startup offices were just a couple blocks away, just south the market. And I had kind of this like cultural AB test for that year, where I would be able to sort of go back to the private equity environment, where they were fresh cut flowers, everyone had their own assistants, and it was a very fancy, beautiful view of the bay and Golden Gate Bridge, and the Bay Bridge. And then, walk just two blocks south of market and there was this very gritty dot-commie, ground floor office space that had an ATM, like kind of attached to it. So, all day long, you could hear ATM receipts being printed, it couldn't be more different than being the high-rise to literally being on the ground floor. And I just preferred it, it was just more fun and the vibe and the energy of being at a startup and not knowing, whether feature was gonna work and not knowing the constant struggle and strife, and sort of living on the edge, and the risk associated with that was just more energizing for me. We sold Hotwire to Expedia a couple years later, I moved to Seattle at Expedia, and I left to start Zillow. Just too sort of double click on one thing that Austin said in his answer about starting dotloop, during the financial crisis, it's actually a great time to start a company during a period of crisis, including right now during COVID. And, if you can afford it, if you can get the capital and attract the team. And the reason for that is during those periods of crisis, that's when all the cards get thrown up in the air and everything kind of gets sort of resettled. So, consumers, for example, change their behaviors during crisis. In 2008, during the financial crisis, consumers change their behavior to start shopping for homes online, instead of offline with a real estate agent, in 2001, after 9/11, travelers change their consumer behavior to start searching online, not offline for discounts. And now in the financial crisis, consumers are changing their behavior, they're shifting to remote work, they're shifting to more productivity tools. Like there's so many shifts occurring right now in business and in consumers. Companies are reevaluating their ad spend because they're pulling back because of COVID, like everything is changing. And that actually presents great opportunity for startups. So I think its great time to build startups.

Mike- I appreciate it. I wanna follow up on that theme because that's a great theme. Before I come back to Austin on selling dotloop, just something you said Spencer, no fresh cut flowers and grit. We want more grit. And as you think of Zillow that started in the mid-2000s and then went public 2011, you been with the company for a long time, market cap last I checked today was about $23 billion. What are sort of the lessons learned from startup to post-public, post-IPO type company in terms of building great companies?

Spencer - Prioritizing the consumer in the case of Zillow, and also in the case of Pacaso, and having the consumer as a north star that you’re singularly focused on is critical. Now, Zillow, like Pacaso is a two sided marketplace, meaning in the case of Zillow, we needed consumers, and we needed real estate agents. And the case of Uber, they need riders and drivers, in the case of Yelp, they need diners and restaurants or bars, right. So these two sided marketplaces need both sides to create network effects and to have a good product. In the case of Zillow, what made it successful was we focused on the consumer and we said, "Look, if we can build a cool product that will attract a large enough audience, then the professionals will follow." And that was really, that didn’t change right from the very beginning from 2006, when we started the company until present day, there were many business model pivots along the way, but focusing on the consumer was something that never changed. And I guess the second thing I would mention, which is relevant also to the Zillow sorry, to the Pacaso experience, is the quality of the team, and surrounding yourself with people that are better than you, people that share your mission and vision. It's definitely one of the things that attracted me to, I know we'll talk about in a moment, but to buying dotloop, the fact that Austin was mission driven and was had this goal of digitizing real estate transactions, which is a big, audacious goal. And he wanted to achieve that mission within Zillow, and just trying to attract a mission oriented consumer. So at Pacaso, we start or end every all hands meeting reciting the mission, we did that at Zillow as well. We're trying to enrich lives at Pacaso by making second ownership more affordable and accessible. And just attracting great team and mission oriented people that are consumer oriented. That's what's made Zillow and hopefully Pacaso successful.

Mike - That's great. Austin, your journey back to your startup in '09, you raise some venture capital from Trinity Ventures, and I'm assuming a few other investors, just your thoughts on raising capital. And then you got to the point where you found a very good exit, and that exit was selling to Zillow. So maybe kind of walk us through from an entrepreneur’s perspective, raising capital, building a great company, and then getting the point where it may make more sense to actually sell it or partner with another firm like Zillow.

Austin - Yeah, you bet. So first on raising capital, the answer depends on the stage, I think, to some extent, in the very early days, I find that it's about the team, and the idea, and the market size. And to some extent, the timing as well. And the reason for that is because in the very early days, there's not much of a business to underwrite. So like when Spencer and I raised for Pacaso, it was just he and I, and a PowerPoint deck, basically, I mean, there was no business. So clearly, the investors were investing in the team and the idea, and the market size, and I think that's pretty consistent with early stage investing. As things move along, and the business evolves, it becomes more about the business's results on a small scale, and the ability to kind of predict into the future, how those results could be amplified and scaled up in a larger way. So as an example, with Pacaso, while we're available in a lot of markets across the country. You know it really only takes a couple of markets, for us to achieve, really strong success in a really repeatable model, that can then be modeled out into the future to forecast what the business looks like at scale. And it's those things that investors start to look at, as the business matures. In terms of the exit, I would say when I first started dotloop, oh, really all the way up until the moment that we sold, I viewed selling as a failure. My vision was to build a company that would stand alone and become public in its own right and fulfill on this mission of empowering people in real estate to work together more efficiently. That was my mission, or our mission at dotloop. But what ended up happening was we reached a point in time where it became obvious to me that by joining forces with Zillow, we could achieve our collective missions more effectively than we were going to be able to do on our own at dotloop.

And because there was so much alignment, in the mission orientation, the emphasis and focus on culture, the consistency and the core values between Zillow and dotloop, it really didn't feel like a sale, it kind of felt like we were just joining forces with a long lost, cousin, that just made a lot of sense. And once I started seeing it through that lens, I saw Zillow as an opportunity to fulfill the dotloop mission in the bigger way, then it became it became the obvious decision. The other and that proved to be true, fortunately, it was a really amazing, opportunity for both dotloop the company and me personally and our team. And the one other thing that I would add, since I'm sure there are other entrepreneurs on the line here, a lot of people often ask, how does that happen? Did Zillow just call one day and say we want to buy your company? And the answer is no, it usually doesn't happen that way. It usually starts, years before the actual transaction, and that was the case for Spencer and I for sure. We got to know each other probably four years before I ever became part of Zillow, and during that period of time, I became more fascinated with Zillow and their mission, Spencer, I think became more fascinated with what we were up to. And when the time came that it felt natural, we were already acquainted. So I would encourage the people on the call, regardless of whether you plan to sell your company or go public someday, I think it makes a lot of sense, to open up the lines of conversations with potential strategic partners, and even companies that might appear to be competitive, in today's environment, you never know where those conversations may play out.

Mike - The relationships matter, and I think you also said it, Austin, you look at the vast majority of venture backed exits, they’re M&A, and so I think you said well, you don't view selling the company as necessarily a failure at all, could be a great combination, and so that brings the two of you together, in which you had extraordinary results at Zillow and even dotloop within that. So talk about your relationship during the great Zillow times, and then we'll get to the leaving of Zillow and then eventually founding of Pacaso.

Spencer - Yeah, so just to kind of give my side of the M&A story. Austin's right, it's a relationship, it's cultivated over a long period of time, and that's critically important. So I definitely recommend for startups to start building those relationships with bigger companies, even though you sometimes enter those conversations with some trepidation, because you're not sure is the big guy gonna kill me or not? And are they gonna copy my ideas, and so you wanna walk gingerly down that path, but I do recommend walking down that path, because it's a multi-year journey. And then the other thing I'd say is, we bought 16 companies in my 16 years at Zillow, and dotloop was one of them. And 15 of those acquisitions were wildly successful, one was, sort of take a mulligan on it, and importantly, the one was a pretty small one, so not a huge issue. But the common thread through all of the successful acquisitions was that the founding team, the founder, and the founding team of the acquired company, viewed the sale, not as the end, but sort of as the beginning, and as Austin articulated, I thought really well that they could just continue to execute on their mission as part of the acquired company. So I'm thinking of HotPads, for example, which is a rentals website that Zillow acquired, and the HotPads team, they really wanna build the best rentals website there possibly was, and they felt that selling to Zillow would help give them the resources in order to achieve that mission.

And they're still there to this day, 10 or more years after that acquisition. We already talked about dotloop, I could give you literally 14 other examples. But from an acquirer standpoint, that's extremely important to hear and to see on the other side. And the only acquisition that didn't go well, was one where the team, basically they punched out post deal, and the thing sort of fizzled in our hands. So once Austin was at Zillow, he and his team they started having more resources available to achieve that mission. We started integrating dotloop into other pieces of the Zillow software suite, the CRM that we provide, the customer relationship management software that we provide real estate agents started connecting to dotloop, and the listing feeds that we got from MLSs started connecting. And so we started kind of piecing all of this software together. And as Austin said, he was there for about four years, and I think that was probably longer than he would have guessed, he would have stayed, it's one thing I'm proud of, from my time as CEO that we did a great job of keeping entrepreneurial founders from our acquire companies, in their chair, or in other chairs. We created career development opportunities for people like Austin to move into different roles, even if the person felt like they no longer wanted to run, their required division anymore. We both left around the same time, about a year, year and a half ago. And in my case, I just thought it was time I had moved from Seattle back to Los Angeles, and I didn't wanna keep commuting from LA back to Seattle to keep running Zillow. It sounds quaint now, but there was a time when you had to actually be in the office in the corporate headquarters of the company that you were CEO of. And so, that was that had lost its appeal to me when I moved to LA for personal reasons. And I wanna to be doing more startup stuff, so I started angel investing, I started dot.LA, as Natalie noted in the introduction, which is a new site that covers LA tech, and then Austin and I started brainstorming on startup ideas. And I'll let Austin maybe take the baton there and talk about how we what happened next.

Mike - And yeah, you're doing great at Zillow, what was going through your mind when you decided to maybe take a little time off?

Austin - Yeah, so I'm an entrepreneur at heart, I love solving big problems from scratch, and all the highs and the lows that come with that journey. So I would say that was, I knew that that day was coming at some point, it was just a function of when was the right time. And when we sold to Zillow, it was very important to me that the acquisition was a big success for both Zillow and for dotloop, and the people of the company. So there was work to be done to ensure that the integration was smooth. And, we eventually reached a point in time where that work was done, and it felt like the impact that I was having there had diminished a bit. And it just felt like at the right time. So I took a little bit of time off and pursuited some hobbies and traveled the world, and spent a lot of time thinking about what I wanted to do in my next venture.

And there was an idea that I had been thinking about, for about seven years it dated back to when my wife, Angela, and I, in 2014, we were fortunate enough to buy a second home in Lake Tahoe. And prior to that point, I mean, like at that time, it was a stretch, like we didn't have the liquidity that I had post Zillow, so we really had to stretch to buy this home. And we'll never forget that first evening after closing, when we were sitting in the home, it was completely empty with no furniture, we're sitting in front of this old wood fireplace. And we just felt this like almost euphoric sense of accomplishment. And feeling like we had just realized the dream that we had been thinking about for a long, long time, and that dream is second home ownership. And that sparked the beginning of a new chapter of our lives where our second home became like part of who we are, we became part of a community, we met new friends. But more importantly, it became the place where we can go and just reconnect and recharge, and now with COVID, I mean, that's one of the things that I think as it relates to disruption in real estate, this is one of the biggest themes that we're seeing around second homes is that, because more people now have the opportunity to work remote, or at least not visit the office as frequently, it empowers more families to rethink how and where they live and work, so that the dream of second home ownership now is much more top of mind, and much more realistic for more people than it was in the past. But having gone through that experience firsthand, I realized how hard it was to be a second homeowner, well, this is a dream for 10s of millions of families all over the world. It's unfortunately a reality for just the top 1%. And when you start to ask yourself, why is that? The answer is underutilization. Most second homes stay vacant 10 to 11 months a year, and so the whole idea for Pacaso, and the thing that the business idea that ultimately connected Spencer and I to form this company is the idea of co-ownership, empowering people to right size their ownership, whether you're an owner of a second home that you don't use, and you wanna sell it down, or you're somebody who aspires to own a second or even a third or fourth home, but don't need to own 100% of it. Pacaso enables you to right size, your ownership and benefit from true ownership but for much less cost and hassle.

Mike - That's incredible, I wanna dig deeper into the model, but Austin, you mentioned this idea then sort of germinating for seven years. But then how do you guys start this company? Are you sitting in a room throwing ideas against the wall and Austin, you say, "Oh, I've had this idea for seven years. What do you think about this?" And how did how did Pacaso really come to the point you said we're doing this, we're putting our own money at stake, and let's go?

Spencer - It started in a different category, it started with the conversation about utilization of things and the sharing economy, and how there are a lot of the successes of the last decade have been about solving this excess utilization, and underutilization issue, whether it's Uber, which is helping improve the utilization of cars and or car sharing services, or Airbnb, which helps solve utilization issues, or even Postmates, TaskRabbit, Instacart, I mean, these are things about, like, the Invisible Hand kind of rectifying, like, I'm willing to give money, someone else is willing to give time, therefore, the economic equilibrium between the provider and the recipient of the service is being remedied, I mean, it's a very academic conversation. And we're focused actually, initially on knowledge, thinking through, there are a lot of things that I know about that you don't, and there are things that that I don't, and how might we create sort of a knowledge marketplace, where we rectify this information asymmetry or information utilization, like, I've got things in my brain, you've got things in your brain. And I was super excited about that concept, and then we kind of adjourned, and then Austin kind of called me back and said, "What about houses? What about a vacation house, about second homes?" And this was something I could immediately relate to, Austin has his story about the importance and the personal significance of a second home, I have a similar story, I had a beloved second home in Napa Valley, in Calistoga that burned down to the Tubbs Fire a couple years ago. And that was my family's happy place, that's where we spent every Thanksgiving and Christmas, that's where we went to reconnect with my kids, that's where, I wasn't on an airplane, I wasn't working all the time. I could put my Blackberry or iPhone away, and ride bikes with the kids and just kind of, be the type of parents and husband that I wanna be.

And as Austin said, like, I think most of us want a place like that, but second home ownership has historically only been available to the 1%. And a common investing theme of mine is trying to democratize access to things, okay, how do we make things that are only available to 1%, how do we make them available to the 10%, or the 50%, or maybe someday 100%? And whether it's democratizing access to information in the case of Zillow, or democratizing access to vacations in the case of Hotwire which provided discounted hotel rooms, and allowed people to... mean that was one of the most meaningful things that Hotwire would be to get emails from people saying, "I was able to go on my honeymoon and stay at a four star hotel for a two star price," which was actually our tagline four star hotel for two star price. And I never thought I could stay at a Hilton, I never thought I could stay at a Weston, I never thought I could stay at a Sheraton, but because of Hotwire I was able to on this vacation stay at this hotel that exceeded my wildest expectations. And to people on this call, that's probably doesn't sound all that aspirational, to stay at a hotel, but for the other 99% it’s pretty aspirational. And so democratizing these types of experiences, now second homes with the Pacaso, has been a common investing theme and startup theme of mine throughout my career.

Mike - Where the markets today? And if one of us listening is interested, and we'd love the idea of the thought here is co-ownership, again, for whatever reason, you don't necessarily wanna own the whole home, whether you don't have liquidity, or you just don't wanna own it. Explain how I go through the process, and also is this, why is it different than a timeshare or fractional, or even an exclusive resorts type model?

Austin - Yeah, I'll take that. So first on the market, so Pacaso is available in about 25 markets across the country, most places that you would think of as a second home destination, you can have Pacaso there. However, there are a smaller number of markets that we’re focused on as our feature markets where we have active listings. So in the, since we're standing in California right now, I'll talk to the California market, so we have Napa, we have Lake Tahoe, in Southern California, we have the LA coast, basically everything from Malibu down to San Diego, we have Palm Springs, and then outside of California, we have Park City, we have Colorado, we're working on a bunch of things in Colorado ski towns. So those are all markets where you could actually go to Pacaso right now, and see listings that are currently available through this model. In another market though, let's say for example, that you were interested in owning a home in Scottsdale, and you have the home in mind, you found it on Zillow or Redfin or wherever, you could actually come to Pacaso, and we're gonna give everybody a dedicated First Republic contact email at the end of this webinar for you guys, if you're interested in learning more. But you can reach out to us say, "I wanna buy this home in Scottsdale, it's a $2 million home, but I really only need 25% of it." Pacaso will basically help you to buy the whole home, and we'll go aggregate the other co-owners, to form the ownership group. So it really, it's quite flexible, but it yeah, it breaks down into one of those two buckets, either you find a listing that we currently have, or you bring a listing to us that you're interested in. In terms of how it differs from timeshares, it's actually very different from resort timeshares. I’ll cite, a few of the biggest differences, though, one is that this is true ownership versus a right to use, when you buy into the Marriott Vacation Club, regardless of how it's marketed, what you're really buying is the right to use that hotel room for a certain period of time in the future. In this case, it's no different than if the three of us Mike and Spencer, if we were to go, buy a house in Lake Tahoe, the way that that would work is we’d form an LLC, we'd create an operating agreement, we'd of course, go to First Republic to try to line up financing.

And then we'd have to figure out, who handles all the details, everything from furnishing the house, to paying the bills, to coordinating the schedule. Pacaso is like that, but we take care of all the details and all the hassle, but it's true ownership when you buy into this you and the other co-owners own 100% of the home, big difference from timeshares. The other big difference is that these are true residential single family homes, not hotels or resort products. So the only other place you could go to get this product is to buy the whole house. And as for how it differs from some of the other private residence clubs, Inspirada is probably the most common one that we hear about, great product. I'm a big fan of Inspirada, I have a lot of friends that are Inspirada members, but it solves a different problem. Inspirada solves the problem for kind of the jet setter transient use case, like if I wanna go to Italy, and I'm only gonna go there once a year or once every other year, Inspirada might be a better solution for that. But if I live in San Francisco, and I wanna go to Lake Tahoe five, six, seven times a year, or I live in LA and I wanna go to Malibu on the weekends, Inspirada doesn't really solve that problem. Second home ownership solves that problem, and this enables you to get into, like right now we have a $4 million lake front, split lake front with a pier on Lake Tahoe that would otherwise cost you three and a half to 4 million bucks. You can buy it for $499,000, and half that is your down payment with Pacaso. So that's a bit about how it works.

Mike - That's awesome. And the way you both describe it on your website, at least is supply side demand side, I think you just described Austin, the demand side, supply side, if I have a right, now let's say I want a second home. Can I put it in the Pacaso pool? And because I think you've got good stats on how often I were on average people use their second home. And it's not a whole lot, so I could sell it back in, I could sell it to you essentially, on the supply side, is that correct?

Austin - Exactly, Spencer, you wanna take that?

Spencer - Yeah, you can, yeah, I mean, the data says that people use their second home at most one month a year. So that's one 12th of the year. So yeah, we're trying to allow you to right size your ownership. So if you own that second home, you could, for example, sell a quarter of it off, and you use 75% of it, it would still be your home, you still own it, you'd then use the Pacaso app to schedule visits as the other co-owner or co owners would, you use Pacaso as a property manager, and somebody else is shouldering the burden of 25% in that example of the home ownership, you have a liquidity event from getting 25% paid to you for the value of your home, and now you right sized your ownership. And we've that's been a common use case for us, in fact, our first couple of transactions in Napa Valley, were exactly that where somebody sold off, I think it was six eighths of their home, and they hung on to two eights or a quarter of their home, was the first transaction that we did, for example.

Mike - That's phenomenal. You obviously, I think you started the company, certainly thought of it well before a pandemic, and I hope you all are doing well and everybody on the line during this tough time, but you launched you just launched the company in October in the midst of a pandemic, did you have to pivot in any way as entrepreneurs? And as you look forward? It was there a big change in the way you ran the company?

Austin - Yeah, I'll start on that one, so we did launch the company, or at least we conceived the company pre-COVID, post-COVID, obviously, when COVID first happened like like other businesses, we were unsure, how things were going to shake out and what it would mean to our company. But from a macro perspective, it's actually presented a big tailwind to Pacaso, and the reason why, it's because of this big shift in the way that people are thinking about home, people can now spend a week or two in a second home destination, with confidence that otherwise would have been more difficult in a world where you have to go into the office every day. So in total, it's been, interestingly, pretty good for our business. It's been difficult on the supply side, because one of the things that we're seeing is a lot more demand, and this is true, a lot of markets outside of major cities, but very true in second home markets, demand is very, very high, inventory is very low. So it makes it a bit harder to aggregate really quality listings, in terms of what it is meant for our like how we run the business, I would say, we've definitely, there are some things that need to change in this environment, if you're a leader of a business or a manager of people. And I would say that the biggest one is, you really have to develop new muscles that didn't exist before. And I would say the one that's been the most difficult to develop inside the organization is just regular connectivity between the team. When you're in an office, these water cooler conversations, and this kind of natural connection just happens by walking around. At dotloop, I would see everybody on our team, every week or every other week, during times when I was traveling at a minimum and just that walk past the desk or that conversation at the coffee pot that establishes a bit of connection that you have to create in a fully distributed environment. So it requires the development of a new muscle, I would say the other thing that was pretty natural for us just given our stage, and the values in the business is you have to be very agile. So on the supply side, for example, going in pre-pandemic, we expected that supply would be very easy to aggregate, and the reason why pre-pandemic second home markets is were slow, days on market was long, and there was more inventory than then demand and kind of the opposite is true now. So we had to completely rethink how we aggregate supply, and that's one of many examples of things that we had to pivot for. And I think the key to navigating those pivots for an organization is instilling a core value around agility. The company needs to be comfortable moving quickly listening to consumer needs.

Mike - That's great. Oh, go ahead, Spencer, sorry.

Spencer - No, I agree, nothing to add.

Mike - I was just gonna say, we're gonna, first of all, I wanna thank you both, we're gonna bring Natalie Johnson back, she's queuing up a lot of questions that we have from our audience. And I just wanna say you're both very inspiring entrepreneurs, and we really appreciate the time, you're all still stick on, but Natalie, I'm gonna hand it over to you.

Natalie - Thank you, Mike. So first question, and this is both for you, Spencer and Austin. What are your general thoughts on the current real estate market? Are there any other trends that you're seeing? Or do you know of anything specific to certain cities that you wanna share with this group?

Spencer - Sure, so this is supposed to be the slow time in the real estate industry, usually from Halloween to the Super Bowl, real estate sort of shuts down. It is not though real estate is on fire right now. And that's for the reasons that we all know as Austin alluded to, there's this situation where a lot of people are reassessing where they live based on COVID in the short term, but in the medium term, a change in the way we're all gonna live and work. So just to give you some data, for example, this is data from Zillow for the most the week most recently ended, pending sales now up 19.7%. So up 20% year over year, so that's just deal activity up 20% year over year, and inventory is down for the 23rd consecutive week, inventories down 37% year over year. So except for San Francisco, let's come back to in a second, there very few homes for sale because they're selling so quickly, and home transactions are up 20% year over year, as a result, we all know this, of course demand up supply down what happens, prices up so median prices up 11.8% year over year. And specific to second home markets, Zillow demand in second home destination is up 50% year over year, and pending sales in second home destinations up 30% year over year. So vacation homes are going gangbusters, but really there's just tons of real estate activity everywhere. The city of San Francisco as those of you who live there know, it's experiencing something kind of different. People are leaving, nobody was sure if this was just gonna be an urban legend or if it was real, but the data is saying so far that, some people are leaving, rents are going down, I think I've seen data between 10 and 25% declines in rents. It's hard to calculate that because a lot of rents are subsidized by first month free, second month free, et cetera, it's hard to get good rent data, but the best I've seen is down about 10 to 15% year over year, this is residential, not commercial. And people are leaving the city, the city of San Francisco, because they can work from anywhere now. And a lot of people that moved to San Francisco were doing it for tech jobs, and they don't have to be there right now. So anyway, so that's what the data says.

Natalie - Exciting, all right, well, question number two. What are your thoughts? Do you think brick and mortar real estate brokerages are on the way out? Do you see more of a cloud based system being the new norm? That's for either of you.

Spencer - Yeah so. you wanna take that Austin?

Austin - Yeah, I think.

Spencer - Okay, go, go.

Austin - No, I don't think if, I mean brick and mortar will definitely become less of a thing over, there will be less brick and mortar as time goes on, but I don't think that traditional real estate brokerage is going away. If you look at the data, great real estate agents add a lot of value in the transaction, and all the data supports that on on the buy and sell side, and this has been something that people have focused on for a long, long time. But having come from the industry myself, I was a real estate agent, I basically spent my whole career building services for real estate agents, I'm a big believer that they are here to stay and that the good ones add a ton of value. I think that the digital real estate movement, though, is real, and it's gonna continue to shape the way that business gets done, I think you're gonna see, less square footage in terms of actual brick and mortar real estate offices, and that's a trend, that's been happening for a long time and being accelerated by COVID. And I think more digital tools, everything from, immersive virtual tours to electronic notaries and closing services, to interior virtual design of homes, I think, in anything that really enhances the consumer experience, using technology, I think has wind at its back. And that's gonna continue to transform the real estate industry in a really positive way, and agents will be part of that transformation.

Natalie - Sounds good. So, Spencer, this question is for you, how does a founder shape and maintain a company culture, when a company is purchased and you keep the founders on?

Spencer - So it depends on the specific company, I mean, in case of dotloop, for example, dotloop was based in Cincinnati, Zillow didn’t and have an office in Cincinnati? So we had to decide, okay, is that the dotloop office or is that the Zillow office. And dotloop for example, had very clear core values, which were different than Zillow. So, do you scrap them and jam the acquired company with the core values of the acquirer or not. And, in the case of dotloop, for example, we kept it relatively independent, they have their own signage, their own core values, their own, T-shirts and brands, and email address, something is kind of mundane as an email address, is really important employees draw a lot of identity from that email address. But there were other companies that were smaller, sorry dotloop was 100 or more employees. There are other companies that were smaller, and had a less well developed employee culture. And in that case, we kind of, ran it over and like rebooted it as Zillow. So I think it's very situationally dependent. The one lesson I would share is in the case of Trulia, which was our biggest acquisition, a two and a half billion dollar acquisition and a real direct competitor with Zillow. And, five to 800 employees like a big company. I think we probably sort of took too long to get to the end state. So it was pretty clear, for example, that eventually, a lot of Trulia services would end up as Zillow services, and it took like three or four years to get there, because we were kind of walking on eggshells trying to make sure that the culture was maintained sort of to your question, and had I to do it over again, I probably would have accelerated some of that and sort of just gotten there faster, get to the end state faster, rip the band aid off, if you will. And that was a lesson learned, I think we could have done a better job there.

Natalie - Thank you for that. So this question ties in nicely because it is around M&As, but how does the small guy protect against getting copied or squeezed by the large guy? If the potential partner is also a potential competitor?

Austin - Yeah, is this question related to pre-acquisition or post? I'm assuming pre-acquisition yeah. So- it's like pre-acquisition. My answer, there's probably a lot of different answers out there on this, but my answer is just execution. Like I'm a big believer that as long as you're following your passion, surrounding the company with the best team, and fulfill it, and executing to fulfill on that mission, as effectively as possible, I mean, that's the best thing that you can do, to fend off competition, I've never found it really productive to overly obsess over over competition, in fact, that I oftentimes find it to be a bit distracting. So a book that was recently referred to me by one of our company’s investors, Howard Schultz, is called "The Infinite Game" by Simon Sinek. And in that book, they talk about competition, not as competition, but they reframe it as a worthy rival. And they that the theory here is that, you should look at your competition to learn from them, because there's probably things that they're doing better or differently that you can learn from, you should not look at your competition and let that kind of get you off track or distracted. So that's how I've always thought about it, and frankly, like, there was totally a possibility that Zillow, and I'm sure Zillow was thinking about this before they acquired us. I always thought that there was a possibility that Zillow could build a productivity software like dotloop. And it was something that I would worry about from time to time, but it never distracted me from focusing on the mission.

Spencer - I'll just say that I actually have a blog post on this exact question, Natalie, which I can't remember if it's posting today on dot.LA, or the next couple of days, but it'll be on my LinkedIn, and on dot.LA, which was inspired by this exact question, 'cause as soon as we launched Pacaso, the big companies started calling us, and Austin and I had this conversation. Okay, well, now the shoes on the other foot, I was used to being the big guy at Zillow. Well, now, should we take that call from Zillow? Or should we take that call from Airbnb or whomever and now we had to discuss, how do we handle it? So well, I wrote a blog post about it, giving my feedback, but also mostly covered it but there's some more detail in that post.

Natalie - Well, I'll have to make sure to read that blog post, and also Austin that was a nice phrase that you coined a worthy rival. So I thought that I wanted to call that out. All right, back to Pacaso, so how is scheduling handled? For example, the holidays or a long weekend? Or, in general, what are the most popular times to use a second home? So how does your team handle that?

Austin - Yeah, so we've come up with a really innovative and dynamic scheduling tool that we call "Smart Stay" that's available through an owner app that each owner downloads via iOS or Android. And it enables you to block time in your calendar with as little as two days’ notice, or as much as 24 months. And then in the back end with the "Smart Stay" technology does, is there's a series of rules and algorithms that distribute the request and time equitably across the owners. So there are rules around, how many holidays for example, you're allowed to book. And that the gist of it, the way that I position this to people is like with Pacaso, you're gonna get 80 to 90% of the dates that you want. But you're gonna get all of that for 80 to 90%, less cost, and 100% less hassle. So high level, that's how it works. The second thing that I'll add is, one of the first questions that we almost always get from people about scheduling is, well, what happens if everybody wants to use the home on 4th of July? This is actually a very common question that we get in San Francisco because a lot of families travel to Lake Tahoe and many of these families like to go on 4th of July. But what people were... in a by the way, I asked that same question before we started Pacaso, so it's a very it's understandable why people ask it, but one of the things that we've learned since being in this business and doing all the analysis, and modeling and having lots of people use our app now, is that it's not actually accurate that everybody prefers to travel at the same time. The reason why it seems like that is 'cause we generally hang around with people who have similar travel preferences or kids that are similar ages, or similar hobbies, and all of those things cause us to travel at the same time. But when you democratize access to in this case, second homes, it breeds a more diverse ownership group, you'll have some people with young kids, some people with old kids, some people with no kids, right? Some people that prefer like my wife and I, we actually prefer the shorter season. So even though we have a house in Tahoe, I can't tell you the last time, I've been to Tahoe in July, because I prefer to avoid the traffic and the people I prefer May over July. So that magic really plays out in every Pacaso and people end up getting, almost all the dates that they want, through a combination of a more diverse ownership group and this innovative scheduling software.

Natalie - Great, so let's say someone is over the moon, about this idea about Pacaso, but they wanna just understand what happens if they wanna sell or maybe it's not the right time, and they need to get out of their co-ownership. If they find it's not something they want to continue with? What's the process like or is that possible?

Austin - Yeah, it is possible, absolutely, it's an important part of the value that we provide. So the only condition on resale is that we require every Pacaso owner to hold their Pacaso for one year. And the reason why we do that is because we don't want people buying Pacasos and speculating on them, and trading them as investments. This is for people who intend to purchase and occupy a second home for their own personal use and enjoyment. But after that one year period, you're free to sell, and Pacaso is building a dynamic marketplace and network of partners with real estate agents that empowers people to sell their Pacasos in a really streamlined way. So the way that it works is quite analogous to the way that you would sell a whole home, except for you have a lot more horsepower and marketing juice behind it with Pacaso. So let's say that you bought our Lakeside Pacaso here in Lake Tahoe for $499,000, and you decide a year from now that you wanna sell it. First thing you do is you pick your price, you tell Pacaso you wanna sell, and then the next thing that happens is the other owners in the ownership group get a right of first refusal for five days, to buy the share at your price. If the other owners choose to not buy your share, it then gets listed with our local real estate agent partner posted on the MLS, posted on the Pacaso website and syndicated to all the other real estate websites from Zillow, to Redfin, to, to find the right new co-owner to purchase that share. And the only thing that you pay is a standard real estate commission, the same real estate commission, you'd be paying if you were selling a whole home.

Natalie - Great, so speaking more about the marketplace? How do you determine what area or the size of the home that Pacaso brings onto the platform?

Austin - Spencer, you wanna take that or you want me?

Spencer - Why don't you grab that one?

Austin - Okay, so, it's informed very much by demand, so we have thousands of people that contact the Pacaso every month, and they tell us where they're interested. And from there, we use that interest to inform, where we go acquire houses. So as an example, if 100 people tell us they're interested in owning a house in Malibu, and because Malibu home prices are expensive, the home price is gonna be more than it would be in a place like Tahoe most likely. So they'll give us their budget, and we would aggregate, I'll just use an example, let's say, we'd have eight people that are interested in spending a million dollars to own a $8 million home in Malibu. Once we aggregate that demand, we then gain insights on what it is that we're looking for. And this is all done in a really scalable and automated way on the back end. And that tells us what homes we need to go out and buy, but as a general rule, while this varies a bit by market as a general rule, what we typically see is that home prices on average, the right Pacaso home on average is two to three times the median price point in that market, the average bedroom size tends to be somewhere between three and five bedrooms, and the home needs to have the right amenities that are locally relevant. So in a snow market like Lake Tahoe, it's pretty important that the home has a garage, in a market like Napa Valley, it's pretty important that the home has a pool. So those things are basically aggregated by us and we use that to inform our buying decisions.

Natalie - Thank you

Austin - So thank you everyone for your time, this has been a real pleasure.

Mike - Yeah, I wanna... Natalie Johnson with First Republic Bank thank you for the Q&A. Natalie is one of our rising stars, and we just love the great work she does. Austin and Spencer is Pacaso, P-A-C-A-S-O, so just make sure everybody gets that. I just wanna thank you both your life story as entrepreneurs is inspiring, and you're off to another great start building an incredible company Pacaso, so we just wanna thank you for your time today, and look forward to speaking again.

Spencer - Thank you, Mike. Thank you, Natalie. Thanks, everybody.

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