Disruption Comes (Finally!) to Commercial Real Estate
"I was pretty freaked out," recalls Woodworth. "Jason told me we could still get into Y Combinator. All we had to do was come up with something completely different in the next two weeks."
The good news was that Graham's brief comments had gotten right to the heart of the issue. They had been struggling to solve a problem no one cared about—finding the right broker. What tenants cared about was finding the right space. That was what 42Floors had to be about.
Chapter six: "We're brokers." The company would be an online brokerage, employing actual brokers, who would do all the usual broker stuff, except do it online. Brokers assured them 42Floors would never win a single listing, and tenants said they wouldn't trust online brokers.
Chapter seven: "Kayak for commercial real estate." Search for the kinds of spaces you want, see photos, read what brokers say about the spaces, narrow things down to a few choices, then get handed over to a broker. The listing data would come from owners who wanted more exposure for their spaces and tenant brokers who wanted to impress tenants with their knowledge. Revenue would come from advertising from tenant brokers.
Bingo.
Chapter Seven passed the Paul Graham test: It got 42Floors into Y Combinator. A month later, in December, Freedman and Woodworth are in the lobby of the Ace Hotel in New York City, meeting Alex Bresler, an angel investor whose family owns a lot of real estate. Freedman has his Mac open on a coffee table and is showing Bresler a demo of the 42Floors site. The home page is dominated by a huge, lush photo of the sort of open, warm, sophisticated space every tech entrepreneur dreams of. Bresler loves what he sees and says he's eager to have the commercial real estate business brought into the 21st century. He points out an opportunity: After a user picks out a space, 42Floors could offer to set the user up with office furniture, which typically sells at a high margin.
Afterward, Freedman says that last idea resonates with something he had been told earlier that day by Joel Spolsky, co-founder of Fog Creek Software and a popular tech blogger. Spolsky didn't think much of 42Floors's chances, warning Freedman that he was—yet again—trying to solve the wrong problem. As someone with experience looking for modest amounts of office space, Spolsky insisted the real pain came not from the few weeks it took to find the space but from the nine months it took to build it out. Was serendipity trying to tell Freedman something?
But Freedman is wary of the idea. Besides requiring the team to lose its tight focus on helping tenants find space, providing furniture and services is the sort of business that VCs are much less enamored of, because it's "linearly scaling"-that is, as more users sign on and revenue increases, the costs of labor and goods go up proportionately. In contrast, a pure information service can handle a big increase in the number of users without incurring many incremental costs, sending profits soaring. Plus, says Freedman, being responsible for providing furniture, painters, and electricians could be a logistical and customer service nightmare.
Next, Freedman and Woodworth visit a top executive at a big New York commercial real estate brokerage. The executive quickly brushes aside Freedman's pitch, launching into an explanation of how his company needs a better online way to present listings to big clients. Freedman, who for once seems a bit flustered, tries to steer him back to their model, where listings are focused on smaller spaces. It's a way for new brokers, who normally are consigned to the deep hell of cold calling potential tenants, to differentiate themselves and win clients more efficiently, Freedman explains. The executive persists. "Big-block brokers won't benefit from this," he complains. "Why not offer something that lets you tap into big deals?" Freedman counters that the system already works for big tenants. It's the 80 percent of the market chasing smaller space that has a problem. The executive seems disappointed but does concede a crucial point: He would like to see CoStar get some competition. The executive offers to poll his brokers. If they're in favor of it, he will share the company's listing data with 42Floors.
Freedman insists that was sort of a win, in that getting data is crucial. He adds that the industry's focus on big customers is exactly what has left the door open for 42Floors to score. "Successful start-ups usually get big by starting with the small stuff that no one else was worried about," he says.
Next up is a midsize brokerage that also owns property. The manager seems receptive but emphasizes that many deals happen not with listed spaces but with so-called secret, shadow, or rumor spaces—vacancies that are sniffed out by brokers before the spaces ever hit the market. Freedman insists that 42Floors can reach that market by giving brokers incentives to share this information online. Doing so will make the brokers look good to the community of online users and help them close more deals. The manager also worries that allowing brokers to comment online will result in spaces getting badmouthed, perhaps unfairly. Freedman promises those problems will be solved by moderators. The manager seems cautiously approving and notes that he certainly wouldn't hesitate to provide listing data on the properties his company owns. Freedman seems satisfied.
A week later, the team members have moved into a rented house in Redwood City, California. They will stay there for the three months of the Y Combinator session as they whip the company into shape. The house is in a residential neighborhood miles from anything interesting. The goal is to keep everyone inside together, focused and working side by side. The main workspace is a large table in the living room topped with Apple computers. Freedman and sometimes Woodworth spend all day meeting with real estate execs and investors, while Ehmke and the Bracys mostly stay at the table. After a short dinner break, the team often works until 1 a.m.
Some distractions are needed, of course, and the house is equipped for that, too. There's a jukebox, a slot machine, a chess table, and, in the backyard, a mini-golf green, a Jacuzzi, and a Ping-Pong table. But breaks are brief. The time pressure is constant and explicit. Freedman has posted a paper countdown pad in the middle of the house that shows how many days are left until the company launch. Every night, he ceremoniously rips off the top number. "Right now we need to be obsessed," says Freedman.
