Startup Review

LoopNet Case Study: Partnerships build data asset

written by Rob Finn, posted on June 3rd, 2007

Why profiled on Startup Review

Loopnet is a leading online marketplace for real estate brokers, agents, buyers, and investors to sell and buy property. Founded in 1995, the company IPO’d in 2006 and has grown to feature more than $408 billion in properties for sale and 3.2 billion square feet of space for lease as of March 31, 2007.

Interviews conducted: Rich Boyle, CEO; Patricia Nakache, General Partner at Trinity Ventures and investor in LoopNet.

Key success factors

Persistence in slowly developing market

Dennis Deandre founded the company believing that he could bring people “into the loop” using the Internet to connect the fragmented commercial real estate market. He never stopped believing, although it took 9 months to land the first customer and three years of bootstrapping (selling personal possessions such as cars, homes, etc. as he funded growth) before raising a first institutional round of $3M in September ’98. This was not a market with evangelical customers who signed on because they appreciated technology innovation.

The commercial real estate market is comprised of office, industrial, retail, multi-family and land for development. This market is valued at over $5 trillion in the United States and primarily relies on brokers and agents to facilitate sales/leases of property. According to CB Richard Ellis, the industry generated approximately $23 billion in revenue in 2004. This brokerage system is highly fragmented and Ellis states that the top five commercial real estate brokerage firms accounted for less than 15% of the revenue generated by the industry. The market is mostly dependant on local newspaper advertising and dominated by a few big companies who know the buyers and the sellers. As a result, the market is not very transparent to those who are not in the know. Disrupting the market required a slow process of education, as those entrenched are only now becoming technology savvy. LoopNet relied on the early team’s connections, most of them from the commercial real estate industry.

LoopNet’s slow growth led to a strong appreciation of early customers and a customer service focused philosophy; namely, not to lose them! The commercial real estate market is segmented by property (agricultural, healthcare, industrial, hotel, land, apartments, office, senior housing, industrial space) and geography, each segment requiring a dedicated but not consuming amount of varied customer service and product offering from LoopNet. The industry has two major groups: tenants leasing space from owners or landlords and the investment market for buying and selling properties. LoopNet built a service valuable to both, as today 40% of users are brokers and 45% are owners/investors (10% are service providers and 5% are other).

LoopNet’s resolve to grow the business conservatively was tested in the early years, when competitors raced into the market. There were 19 competitors in ’99 and $500M-$1B in VC money put into the market from ’96-’00.

Partnership with industry leaders to gain access to data

Unlike some other B2B exchanges that disintermediate certain sections of a supply chain, LoopNet did not have to worry about alienating a powerful group of professionals who would do everything in their power to kill the exchange. LoopNet is only the starting point for the commercial buyer and does not attempt to displace or own any other part of the sell side’s domain.

LoopNet is a classic example of user generated data business. All the property data on the site is generated by LoopNet customers. LoopNet made this process as easy as possible for the large brokerages through several innovative strategies.

LoopNet rolled out a white label service named LoopLink that large brokerage firms could use on their own web sites to allow web visitors to search listings, create full-color brochures, view maps and photos, and contact listing agents. Most importantly, LoopLink inventory would also be auto populated onto LoopNet.com. This strategy has been used by a few other successful startups. StubHub, for example, had a similar product for sport team web sites in their own early years.

LoopNet is based upon a “cooperative and collaborative” relationship with the brokerage community. This relationship was solidified further in funding terms. Marcus & Millichap, Grubb & Ellis Co., Trammell Crow Co. and Insignia/ESG funded a $20 million round. Fine print of the round: each firm agreed to use LoopNet exclusively to market its clients’ properties on the Net.

The resulting large inventory from these relationships attracted the long tail of the listing market which in turn attracted buyers. Today, the 480k listings are split equally between “for sale” and “for lease”. Landlords and owners of property realize the advantage of making data public and fostering competition amongst brokers.

Continuous business model innovation

Being the first mover in an industry is not a guarantee or driver of success. LoopNet did not quickly reach critical mass despite the word of mouth benefits of adding new customers, and further innovation was required to attract new segments of the fragmented industry.

LoopNet had plenty of potential concerns to address as they grew. The industry has a high amount of customer churn (3-5% monthly), but this was countered by customer inflow from the strong marketing relationships with large brokerage firms who do not get any revenue split and instead are paying customers. There is also the threat of stale or low quality (poor description, pictures) listings. The LoopLink service partly addresses this problem as brokerages are motivated to maintain quality listings on their own web sites, and these listings are auto submitted to LoopNet.

LoopNet did not start charging subscription fees until ’01; prior to that revenue source was mostly through paid listings. Today, they have 80k premium memberships (70% are brokers and the average monthly fee is $50) which account for 80% of revenues. There is large incentive to sign up for premium subscriptions both for buyers and sellers as free listings are not shown to non-premium members. This is significant as 90% of buyers are non-premium members.

Additional areas of growth have been from M&A such as BizBuySell (LoopNet acquisition in ‘04) which is an exchange for buying and selling businesses and charges a monthly $40 subscription. LoopNet also merged with PropertyFirst (the 2nd largest in the space at that time) in ’01.

Other innovative, new and expanding revenue streams include lead generation for loans, promoting professional profiles on LoopNet, advertising on LoopNet search results, showcasing property among listing results and newsletters, enhanced listing page, email marketing tools, pre-screen buyer and tenant tools, real estate reports such as recent sales data, saving, and alerts.

Launch strategy and marketing

In the beginning, LoopNet relied a lot on a classic startup success tool, the art of exaggeration. LoopNet was one of the earliest movers in its space, and used this to its advantage by convincing prospects it was larger than it actually was. After a few initial customers signed on, the company pitched itself as the largest commercial real estate site on the net (again, absolutely true at the time, although a look at actual numbers might have brought a chuckle).

LoopNet marketed how it was a dramatically cheaper method of advertising properties compared to running spots in local newspapers. LoopNet also marketed the fact that customers could now more easily expand beyond their local markets. This was great timing for the large firms who wanted diversification along with more control over placing advertising into new markets.

Exit analysis

LoopNet raised $30M mostly from 13 institutional investors and eventually IPO’d closing their opening day at a market cap of $521M. So how did the VC investors do? According to my rough calculations from the SEC filings, the two largest VC investors (Rustic Canyon and Trinity Ventures) each had unrealized gains of 15x or around ~ $40M on the IPO’s closing market value. Today, LoopNet has a market cap of $767M and a revenue multiple of 13.80. Trailing twelve month revenue is $54M and the Price/Sales multiple is 14.5. This is rich compared to the median 5.2 for online real estate companies. Investors are valuing the subscription and network driven nature of the business model. LoopNet is the only online real estate web site with more than 2m members.

Food for thought

In an industry not known for adopting technology, LoopNet patiently built a business by treating its customers as partners and not trying to shrink the market or compete against any of the players in the market. It is obvious from margin trends that capital efficiency has been ingrained into management execution.

The company innovated along the way to discover and effectively execute the fremium model. Definition of fremium model courtesy of Fred Wilson - Give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base. Premium membership churn is around 50% annually but LoopNet continues to annually grow memberships by converting higher numbers of basic members.

Other companies in online real estate services rely on listing fees or pay for performance, and thus are exposed to market downturns. LoopNet’s subscription model is more secure and the commercial sector less volatile than residential. LoopNet is not severely impacted by a weak commercial real estate market because memberships are not tied to listing frequency- All it takes is one listing to make that membership valuable. A member may go three months without listing a property, but most members who are committed to LoopNet do not have the time to manage cancelling and reactiving their memberships. LoopNet also sells membership on quarterly and annual tiers.

LoopNet’s success will attract well funded competitors. Today, there are a few small competitors such as CCIMNet, Commercial Real Estate Exchange, CommercialSearch, WebRealEstate.com, CityFeet.com and Property.com. This is probably a market newspapers and portals will eventually pursue with large investments. Barriers to entry are low but barriers to critical mass are a lot higher. LoopNet listings are SEO friendly. Basically, LoopNet increases its SEO status anytime a listing is created because a new page on the LoopNet.com equals a better ranking given by search engines. That adds up and is a snowball that is tough to catch!

References and further reading

Startup Garden
Great detail on LoopNet’s founding story and early days.

PikeNet
This short overview highlights the change to the subscription pricing.

123Jump
Overview of LoopNet products and the commercial real estate industry.

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