RISE OF THE FAT TECH STARTUP
Expensive and risky, there’s a new breed of ambitious ventures in Silicon Valley
I N 2003, Keith Rabois, a longtime Silicon Valley investor and executive, had an ambitious idea: He wanted to start a website that would instantly offer a fair price for your home. If you accepted the offer, the site would agree to buy your house immediately, closing the deal in a matter of days.
To Rabois, the plan seemed obvious: Homes are the most expensive possession many of us own, and yet they are also the most difficult to trade on — to sell in a hurry if you need to relocate or are otherwise looking for quick cash. But tech could solve that. By analyzing lots of sales data, a company could come up with an accurate price for most homes; then the startup could buy houses quickly, charge people a convenience fee and sell the homes over a longer period of time.
There was just one problem: Back then, Silicon Valley was in the middle of a post-dot-com bust and nobody would fund such an expensive plan. So Rabois sat on the idea for more than a decade. Then in 2014, amid flusher times, he and several partners opened the home-buying company, called Opendoor. Opendoor has since raised more than $300 million in equity and has also taken out more than $500 million in debt. It plans to be in 10 markets by year’s end.
In the process, Opendoor also has become a model for a new kind of tech upstart: Call it the fat startup.
For much of the past decade, tech investors have been enamored of software companies that could grow very quickly for little money — like Instagram, which raised less than $60 million before it was bought by Facebook for $1 billion. Even Uber, which has raised billions of dollars for expansion, has attracted investors on the promise of eventual low operational costs, as it neither owns nor actually employs its drivers. (They are considered independent contractors.)
But modern capital markets have since unlocked far grander opportunities for tech entrepreneurs. They are blessed with essentially unlimited access to money, and ideas that once seemed too expensive, too risky or just too crazy are now getting off the ground. These startups are fat — with capital, with industry-altering ambition and, to their critics, often more than a little hubris.
Consider how Elon Musk, the chief executive of Tesla and SpaceX, is building electric cars, a gigantic automated factory, solar roofs, rockets and, as a hobby, a tunneling company. There are startups trying to create superspeedy Hyperloop transportation and others working on flying vehicles.
Opendoor fits that mold. Its plan is precarious: The company faces rising competition, high operating costs and — because we are talking about the market that caused the global financial crisis — the possibility of an unforeseen blowup. But if it works, Opendoor could be transformative; by making buying and selling houses as easy as buying and selling cars, it might thoroughly alter the U.S. economy and change how we think of homeownership.
“Real estate is a $25 trillion asset class — people spend more on housing than food, transit, health care and education,” said Eric Wu, a founder and the chief executive of Opendoor. “We think we can make it work much better than it does now.”
So far, Opendoor is growing quickly. In broad strokes, the service works exactly like Rabois’ original vision. If you want to sell a home in Opendoor’s price range, you go to the site, type in your address, answer a few questions and then wait for an email.
The company has data scientists who have developed a sophisticated system for modeling home prices.
Opendoor focuses on the middle of the market, and will neither buy distressed homes nor luxury homes, for which pricing dynamics aren’t predictable. If your house meets its criteria, it will send you an offer meant to reflect the best estimate of your home’s value.
The offer comes with costs. If you
use a traditional real estate agent, you pay a commission of around 5 percent to 6 percent of the sales price (the commission is split between the buyer’s agent and the seller’s agent). Opendoor charges an average commission of