Startup Review

Homegain Case Study: Working with industry players

written by Nisan Gabbay, posted on October 1st, 2006

Why profiled on Startup-Review.com

Homegain is a leader in online marketing for real estate professionals. In April 2006, ComScore ranked them the 3^rd most trafficked real estate site on the Internet with 4.3M unique visitors, topping well known real estate brands like Century21 and RE/MAX by large margins. Homegain was acquired in June 2005 by Classified Ventures, a strategic joint venture owned by 5 large traditional media companies (Gannett, Tribune, Washington Post, McClatchy, and Belo). While terms of the transaction were not disclosed, it was a significant transaction in an online real estate advertising market worth $1.7B in 2005 according to Borell Associates.

Interviews Conducted: One early employee of Homegain and three industry experts: David DePhillips (industry consultant), Mark Yellen (CEO of Appraisal.com), and a third industry insider that preferred not to be disclosed.

Key success factors

Great underlying market dynamics – a constant stream of fresh, motivated customers

Homegain was one of the pioneers in lead generation for real estate professionals and they made some very important strategic decisions to establish their market leadership position (which I will discuss in the next few points). However, through my research I was struck by the fact that neither real estate agents nor consumers seemed to be in love with online real estate products. This is not specific to Homegain - it has been a problem for nearly all online real estate companies. Real estate professionals complain about the quality of leads they get from the Internet and consumers complain about access to real estate information. This seemed somewhat counter intuitive to me. After all, aren’t great businesses built on very satisfied customers? My conclusion is - not always. Not in markets where a steady stream of fresh, eager customers are constantly being produced. A fresh stream of customers eager to try your product means that you don’t need to have a perfect product to be successful. I’ve seen this in other industries as well.

The real estate lead generation market is a perfect example. There are currently 1.3 million real estate agents in the US, up from 700,000 in 1999. Most real estate agents have short-lived careers, nearly 60% only last 3 years in the industry before exiting. Fresh crops of real estate agents enter the market every year hoping they can crack into the top 20% of agents that make a good living. This trend was magnified during the recent real estate boom that was driven by decreasing interest rates. These new agents are willing to go to great lengths to establish themselves, especially for opportunities to represent the seller in a home sales transaction. These less tenured agents are much more willing to try new marketing vehicles (like the Internet) and are willing to pay premiums for leads above their more established counterparts. My lesson learned: either have a great product (with a compelling value prop) OR a really motivated customer. A really motivated customer can make life a lot easier for a new business.

Worked within existing industry structure

My previous point asserts that Homegain was the beneficiary of favorable market fundamentals. However, there were plenty of companies that could have capitalized on this opportunity, so why was Homegain one of the successes?

One of the reasons for their success was a decision to establish a brand and product strategy that did not attempt to alter the existing industry structure too radically. Other companies tried to enter the online real estate market with a strategy to disinter-mediate the local agent from the buying/selling process or tried to centralize a fragmented market. Homegain simply aimed to drive leads to local agents – much less threatening than other possible approaches.

For its first two or three years Homegain somewhat struggled with an identity challenge, ultimately opting for the approach of being the “Intel Inside” for the Internet real estate market rather than building a known consumer brand. This approach had the effect of easing concerns around business partnerships. It was these partnerships that were a critical element to their success, as described in the next point.

Strong partnerships for both data and distribution

Homegain did a great job of forging relationships with established industry players who controlled the underlying real estate market data that was critical to creating the consumer service. This started from the very beginning with Homegain’s first product that relied on home sales transaction data. In real estate, the MLS (multiple listing service) data where homes for sale are listed, is controlled at the local level. Homegain partnered with these associations and other industry organizations to secure data. Thus, Homegain did not need to invest money to re-create this data on its own. Secondly, Homegain secured distribution agreements with Internet portals and other real estate sites, whereby Homegain powered a portion of those sites. Such agreements included Yahoo, AOL, Excite, CNBC, etc. All told, Homegain forged ~300 online partnerships.

Quickly adapted product lines to changing trends

For a lead generation company, the business is about generating and selling leads. To be successful, Homegain had to adapt their business to the way that consumers seek real estate information online. Homegain went through three major product changes as it recognized shifts in consumer behavior and fine-tuned its business model accordingly. Homegain started in 1999 with the one of the first online AVM (automated valuation model) to gain traction in the market. This product appealed to consumers seeking home valuation information, presumably as a precursor to putting a home up for sale. By providing home owners with recent comparable home sales, Homegain was then able to upsell these home owners on a service for matching them to local real estate agents. In 2001, Homegain recognized the trend of consumers seeking inventory information about what homes were for sale and launched a new pay for performance service for agents to capitalize on this trend. This service became a success by 2003 driven by a PPC (pay-per-click) revenue model. The PPC model was an important change because of changing MLS guidelines to preserve data ownership, as well as the popularity of PPC driven by Overture and Google. By 2004 Homegain had developed a suite of products, each with different monetization schemes. It was this constant product evolution that drove new revenue generation for Homgain.

Launch strategy

Homegain was founded in 1999 and raised ~$51M in VC funding and $10M in debt from May 1999 to January 2000, thus it was well-financed at its launch. Homegain got initial mass and consumer attention by employing radio advertising in targeted cities. This was an expensive customer acquisition strategy, but one that was made possible by readily available financing during the bubble. Radio was how Homegain acquired its first million or so registered customers. After that, Homegain relied on SEM (search engine marketing) and SEO (search engine optimization) to acquire users.

Exit analysis

This is where I am a little lacking in information. I have not heard how much Homegain was acquired for or what its revenues/profits were at time of acquisition. The press releases state that Homegain was profitable since 2002 and employed ~100 employees. If anyone can add some color here, please leave a comment below or e-mail me.

Classified Ventures, Homegain’s acquirer, is a joint venture owned by media companies whose core newspaper classifieds business has been hurt by the shift towards online advertising. Their holdings include Cars.com, Apartments.com, Homescape, and Homegain.

Food for thought

For the most part, the first generation of online real estate companies like Homegain has provided satisfactory, but not exceptional products for consumers. Since the business model is based on collecting contact information from consumers to sell to real estate agents and brokers, companies have erected barriers to information that consumers would like to access without having to register or fill-out forms. A new crop of Web 2.0 companies is emerging that are trying to provide a better consumer experience and steal market share from industry leaders like Homegain. Will these new companies be successful? I think that they have a few big issues that will need to be addressed.

While the new entrants might create a cleaner user interface experience, they will be constrained in providing a significantly better value proposition than the established sites for one simple reason - data. Everyone seems to be working off the same underlying data sets that are controlled by industry players who do not want to cede control. Thus, to create a truly breakaway company in this space, one would need some type of data that is not available to anyone else. Creating such a data asset would require significant investment. I am also skeptical that tweaks to the business model, while possibly superior, would be enough to overcome the SEO/SEM advantages of the current market leaders or the brand equity of the offline players now emerging as strong competitors.

Thus, my broader takeaway from this case study is the importance of understanding the structure and dynamics of any industry you enter above just the product and value proposition that you are attempting to create.

Reference Articles

There were not many insightful articles available on Homegain, thus I relied primarily on the interviews to create this case study.

“HomeGain offers varied services,” Inman News, May 2006 provides a good description of the Homegain marketing services.

“Homegain’s web real estate grows,” East Bay Business Times, May 2004 has some good quotes from Homegain founder Brad Inman on the overall online real estate market and how Homegain survived the downturn.

“Classified Ventures Buys Real Estate Site,” Online Media Daily, July 2005 has the best coverage of the Homegain acquisition that I could find.

Questions for Startup Review readers

What do you think were the reasons for Homegain’s success?

How do you think new start-ups will compete against Homegain and other established sites?

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