Disrupting Real Estate

Tactics for disrupting a market vary depending on whether you’re attempting to launch a new product or break out from within an entrenched one. I spoke with Jason Freedman, CEO of real estate search service 42 Floors to provide his perspective on the necessary steps to make an impact on markets both old and new. 42 Floors is an incredible one-stop shop for all your office needs. They are doing to one of the most conservative industries in the world what Uber did to the Taxi Industry.

Katya: How is a business where you disrupt a very conservative industry different from one where you create a brand-new product? Because you’ve done both, right? (Jason’s company, FlightCaster, was acquired back in 2011. They created software that intended to perfectly predict flight delays.)

Jason: The big thing is one has an existing market and one doesn’t.

Katya: And not just an existing market, but a market with a very strong set of rules that has been the same for a long time. Like Uber with Taxis.

Jason: Well, that’s just how mature the market is. So, when I build a product that’s brand new to the market, you can’t do an analysis that says people spend this much money on this, and if I can capture this percentage of them then I can make this big of a company. Instead, you’re more in the Bill Gates and Steve Jobs type mind-set of saying, “I could have this really big vision, where this thing could eventually exist that’s really huge. But right now, no one would believe that.” I think the actual motivator of disruption at that point is individual interest, not world-changing disruption. Microsoft’s mantra: “A computer in every home,” didn’t come about until years later. That all started with Steve Jobs liking micro computers.

So, I think if you’re going to create a market, the initiative must be motivated by someone who is obsessed with the early adoption phase of it. That’s the beginning, what creates the possibility for it to blow up on them. Then they do really good things to execute it, but there’s nothing exceptionally smart about going and doing it.

The biggest proof of that is the famous Harvard business study of the companies that recruit the highest number of Harvard business students. The study showed that the companies that do this are on the decline, because Harvard business students are really smart so they go to what is obviously the best company, but no one from Harvard Business School ten years ago was going to Google; they were all going to Microsoft. Google, 15 years ago, was creating a brandnew market, Search, and it was nowhere on their radar. Everyone who was going to Search at that point were kind of crazy in a sense - I remember Marissa Mayer spoke way before they went public, and she was like, “We just think search is the most interesting thing in the world.” She was really obsessed with how interesting it was. In an entrenched market like ours, you go not because you’re super interested in the thing, but because you’re really mad, because something is really crappy. We all believe searching for commercial real estate is really crappy because we had to do it, and thus we should go beat everyone because they were doing something that was really awful. Our ZenPayroll friends are the same way. They didn’t invent payroll. They simply said, “This is really, really shitty; we can do it better.” So then you have all these companies whose tagline is “We’re this, done right” or “This, but sucks less.”

Katya: So in that type of environment how much of a role do you think marketing plays? With a new product, you have to explain how it works, but in an existing industry, you are just changing something people are already using every day.

Jason: Well, if you’re beating an entrenched market you have to be ten times better. And if you’re a new widget in the market you just have to be interesting enough to try. The KPI for new people in a market is cost per trial and then they look at trials to customer conversion. All you’re trying to do is get people to try it. So everyone who is new to a market has the same strategy: You give it away. Give it away to as many people as possible so that they try it. Or, even more significant, you pay them. That’s what PayPal did. They said, we have this brand-new thing, digital payments and it’s very clear whoever wins this space is going to win because they’re the biggest, or the first to become the biggest. So they took almost all of their venture capital money and spent it on buying users. You got $5.00 for sharing it with a friend. It was the first, wellexecuted viral campaign. When you’re in an entrenched market, I don’t believe it’s marketing, I believe it’s sales. Because then you have to be ten times better, and there has to be a feature comparison. What Zenefits has is a massive, massive sales force; they have to go out and to every single customer, they have to say, “Here’s why we’re better.”

Katya: That was the same situation that I observed at Box as well. At the end of the day, with DropBox and Box and Google Drive and things like that, they all do clouds. But it was up to their sales people to almost cold call everyone and to explain the difference, which is a tiny little feature in the grand scheme.

Jason: Yep. No one’s going to switch to Box from Microsoft Exchange Server unless they’re talked through all of the benefits.

Katya: When you are disrupting an entrenched industry, what do you think becomes the key differentiator - the one thing that changes everything?

Jason: There has to be something else providing lift. You can’t change everything just by being smarter or better. There has to be something new that changes the way the world works. Because in the end, if you’re really going to be the big winner, it’s because consumer behavior changed. For Uber, it was the smartphone. We could have done Uber anytime over the last 25 years with the Internet, but you needed the smartphone because you want to be able to do it on the street, rather than just at your desk. So once everyone had smartphones, Uber becamepossible. But there’s a different app; do you know Taxi Magic? Taxi Magic was created by Concur. And did you ever use it?

Katya: Taxi Magic? No.

Jason: This was, like, seven years ago. You’d go into Taxi Magic, and you’d say, “I want a taxi,” and you’d get to watch a little taxicab on the map come towards you, and you’d pay through the app. It was awesome. But what Uber did is they took something that created lift, which was the smartphones, and they realized you could package it up with a few other key things, the biggest of which was dependable, instant reliability, and the only way they could do that was by overpaying their drivers at first, because they didn’t have enough demand. This is a huge part, because what Uber did was, they paid their drivers to sit there, so that when you clicked on it, the driver was right there. For the past 45 minutes the driver had just been sitting there making money. Crazy.

Katya: Do you think they figured it out right away, or do you think there were a bunch of things that they’d done before they hit on that?

Jason: Well I know they were passionate about one thing, which was instant dependability. No taxi company has ever remotely tried to solve that problem.

Katya: There are so many different aspects to your company — which one do you think is going to make the difference for you?

Jason: We have made our bet on speed. Everyone basically has the same data and we don’t believe the service is that different. I don’t think our people are significantly better or worse than people at other companies; I don’t think they’re trained better; I don’t think they have access to different data. We work really hard to build our data, but I don’t think it’s way better or way worse. But what you have with us is we’re way, way, way faster. If you are searching, you can be on tour immediately. You don’t have to waste as much time. I actually don’t know if that’s going to be a winning differentiator, but my experience when I was touring, is that the whole thing took way too much time; it was really frustrating. The whole reason we make it so you can view stuff online is just so you spend less time doing it. Maybe that’s not the right point. It may be that access to the best data is clearly the most important thing. I think if you’re sitting in a traditional brokerage firm, listening to them talk about how they’re going to beat us, they would say quality of sales people. So I don’t know the answer to that.

Katya: How does 42 Floors become the service that pops into people’s heads when they need real estate?

Jason: We will get to that point when we’ve already won the first stage. No one came to Airbnb directly until they built a brand, and at the point you successfully build a brand, you’ve already won a lot. So we haven’t won that. An SEO in Google is the way you get traffic before you’re a brand. Because you don’t have to search for 42 Floors, you simply need to search for officespace. You will get Craigslist, which is it’s own bag. Tons of our users have already searched several times on Craigslist, and if you successfully find your space on Craigslist, and close it, then we never see you. You just never exist from our perspective. Usually what we find is that people making it to our site have tried Craigslist and it’s been incredibly annoying because it takes up so much time. Usually we are number one, sometimes number two to Craigslist on all the SEO turns that we care about. We’re almost never number three. We come to you and say, “Isn’t Craigslist really freaking annoying to work with? Basically you get all the same data that’s on Craigslist, plus a whole bunch more, but now you don’t need to spend any time doing anything. We’ll package it all into one two-hour tour and you’ll see tons of great spaces.” We say, “Would you rather do that or do you want to keep doing what you’re doing? By the way, there’s no cost either way.” And then people say yes.

Katya: And in terms of the markets--San Francisco’s a little bit crazy. It’s not your typical market. Do you think it’s an advantage? Do you get to innovate more and move faster because you have such a concentrated amount of people who need new offices and people who go out of business?

Jason: We would’ve built differently if we’d started in New York. I don’t know if it’s an advantage or disadvantage. I think one of the things that’s nice in San Francisco is you have a high density of early adopters, and early adopters are willing to try things, and they prefer to try something. That’s a big advantage. It’s easy to get forgiveness from early adopters, whereas in St. Louis or Atlanta or New York, they don’t care that you’re struggling. They don’t want to work with a startup, they want to work with what’s proven, and we’re not proven. We have lots to do before we get there. So that part’s an advantage. It’s harder because it just so happens we started our company when San Francisco was literally the hottest commercial real estate market in the world. What are the odds? We could have started this company any time, but we started during this one particular time in which in between our start and now, San Francisco’s gone from a normal city to crazy, crazy overcrowded.

Katya: What would be one event outside of your control that would have a major positive influence on the company?

Jason: Well, we’re a marketplace, so anything that affects our supply or demand changes things significantly. On the demand side, if all the companies continue to grow, that’s really good for us. We have companies that came to us several years ago that are now worth billions of dollars. On the negative side, if the tech economy crashes, it’s not good for us. We’re dependent on them. On the landlord side of our business, those landlords need to keep building buildings because they’re currently out of space and it’s hard to be a broker when the landlords are out of space. We’re reliant upon them to build more space. It’s kind of how Amazon as a marketplace, rises and falls with the strength of the US economy. They need the economy to be strong because that’s why people buy stuff.

Katya: And one last question that I ask everyone. Which product do you think is going to blow up in the next 24 months that’s not on the market right now or in the very early stages?

Jason: Gosh, I wish I knew that answer so I could invest in them. I am really excited about virtual reality. I just think it’s going to be a significantly different experience and that we’re at the phase in which people are making little toys with it. Have you seen the cardboard virtual reality glasses? I just put mine together. But they’re at the toy phase--these are little toys. But it’s phenomenal and at Sundance everyone was stunned by how good movie making could be with virtual reality. We’ve been waiting so long for the technology to be good enough, but I think we’re going to see it in the next 24 months. It’s really freaking cool.