Disruption Comes (Finally!) to Commercial Real Estate
Much of Silicon Valley's business is done in coffee shops, and one morning Freedman heads over to a Peet's Coffee in Burlingame to meet Bob Ghoorah, an investor who works closely with Marc Andreessen, the legendary co-founder of Netscape. Ghoorah has met with Freedman before, and that makes this meeting crucial. Second meetings are often when top Silicon Valley investors make their judgments, because they have had a chance to see how much progress the founders have made since the first meeting. Ghoorah had been interested at the first meeting but was skeptical that brokers would hand over data, and he didn't like the advertising-based revenue model. Freedman explains that the model has changed: 42Floors will now make money by taking a percentage of brokers' commissions. This will convince brokers that 42Floors wants to make sure they close deals, argues Freedman, so they will want to hand over data. Freedman also talks about possibly offering build-out services.
Ghoorah likes everything he's hearing. "We paid twice as much to provision our space as we did to lease it," he says. "It's a bigger market." He predicts that if 42Floors can establish even a small foothold in New York, it will quickly become a $100 million company. He adds that VCs are going to be fighting over who gets to fund it. Freedman asks Ghoorah if he would like to invest $10,000 as an adviser. "Absolutely," says Ghoorah, without blinking.
Freedman is ecstatic afterward. The credibility of having Ghoorah as an adviser is huge, he says. He would rather not give away shares this early, but advisers take their commitment more seriously if they are at least lightly invested, he says, and it doesn't hurt to have seed money. But the build-out service thing still makes him nervous. Is such a labor-intensive service too much to take on? And pricing could be complicated...could the company offer flat-fee pricing on services?
Next, during successive meetings at the offices of two VCs, the reviews are mostly positive. Sunil Bhargava at Tandem loves the site,but he thinks Freedman's plan to start with listings from the Bay Area is a mixed blessing—tech start-ups will be all over it, but it's a brokers' market, because space is extremely tight. Most spaces go before they are listed. And Bhargava is hesitant about offering services. "Getting into interior design is heavy lifting," he says. "That worries me a bit." But Ryan Spoon of Polaris is hugely enthusiastic about the service aspect, noting that he went through the tortures of the damned to find the people needed to get his elegant offices outfitted. "We can Apple-fy the process," says Freedman, referring to Apple's reputation for making tricky technologies user friendly. "And we can definitely do flat-fee pricing."
The last meeting of the day, and one of the last before Y Combinator starts, is one Freedman has been anxious about. It's with Jonathan Siegel, founding partner at RightVentures. Siegel knows a lot about real estate, of which he owns plenty, and technology, in which he has made a bundle as both a founder and investor. Freedman has met with Siegel twice before. The first time, Siegel saw Chapter Five and pronounced it useless. The second time, Siegel saw a very early version of Chapter Seven and said it might be workable but found 45 things he hated about it. "He may be the hardest guy to convince in all of the Bay Area," says Freedman. "And he knows what he's talking about."
Siegel listens to Freedman explain the latest version and immediately starts firing off a stream of questions and suggestions—more than everyone else had in the past six meetings combined. The intense barrage lasts for half an hour. At the end of it, Siegel asks if he can invest as an adviser.
"Now I know for sure we've got something big here," says Freedman afterward, looking exhausted and content. Then he and Woodworth try to figure out how to work some of Siegel's suggestions into their business model.
When the company launched in March—a week before Demo Day and just as this article was going to press—Freedman had a few new reasons to believe he may have a hit on his hands. The founders of the other 64 start-ups in Freedman's Y Combinator session voted 42Floors the best start-up of the batch. And a slight twist on Chapter Seven now has tenant brokers eligible to receive clients from 42Floors only if their firms share listing data with the company. That little change has brokers lining up to share information. Build-out services will be offered soon.
Paul Graham says if anyone can pull off the digitalization of commercial real estate, it's Freedman. "Starting up a company is riskier than people can comprehend," he says. "You have to give it a level of attention that will seem excessive to any normal person, and that's what Jason does." Graham adds that part of the reason he and many others are pulling for Freedman is that he's so nice. "He is genuinely the menschiest guy we've ever funded," says Graham.
VC interest in the company continues to mount. Before launch, Freedman had accepted only one substantial investment—making an exception because of the prestige it confers: $200,000 from Ron Conway, one of Silicon Valley's so-called superangels. Freedman says he will open his doors to investment negotiations at the end of Demo Day and close them two weeks later. He aims to take in $2 million to $3 million.
Meanwhile, Freedman has tied up one other loose end. He finally had that relationship talk with Jennifer Karol. They are now engaged.
David H. Freedman is a contributing editor for Inc. He wrote for the December/January issue about Evernote, Inc.'s company of the year.
Start-up Proverbs
Now launching his third company, Jason Freedman has developed several rules and principles, which he shares on his blog, humbledMBA. Here are a few of them:
- If you're worried about protecting your great business idea from potential competitors, you're not getting the feedback you need to have a chance at making it work.
- It's not the amount of money you raise, it's who you raise it from.
If your idea is really unique, you're doomed. The market is either too far behind you, or it's too small.
Don't close deals. Build relationships.
When no one has succeeded in a market, it's because everyone has missed something. Figure it out, and you've got a great business.
If you're not getting feedback from customers, it's because they don't like you, and you're going to die.
