Chamath Palihapitiya is one of the top operators in Silicon Valley. He served as an early executive at Facebook (NASDAQ:FB) and then went on to become a venture capitalist. One of his latest deals is the Opendoor IPO (Initial Public Offering).
Yet this is not a typical IPO. The company is coming public via a SPAC (Special Purpose Acquisition Company). This is where a shell company first raises money and then merges with an operating company. In the case of Opendoor, it is merging into Social Capital Hedosophia II (NYSE:IPOB).
Keep in mind that Palihapitiya is also one of the leaders of the SPAC industry. His deal for Virgin Galactic (NYSE:SPCE) has sparked huge interest in this segment of finance.
The Opendoor IPO will include $414 million from the SPAC entity as well as $600 million from a private investment in public equity (PIPE). In fact, Palihapitiya will chip in $100 million of his own money in the deal. Based on all this, the current estimate of the value of Opendoor stock is about $4.8 billion.
Background on Opendoor
Eric Wu, Keith Rabois and Ian Wong founded Opendoor in early 2014 and they had little problems raising capital. After all, Rabois was a high-profile venture capitalist at Khosla Ventures and a former executive at companies like PayPal (NASDAQ:PYPL) and Square (NYSE:SQ). As for Wu, he founded Movity (a real estate startup that was sold to Trulia) and Wong had been a machine learning expert at Square and Prismatic.
Note that the first round of capital – which raised nearly $10 million – had the participation of a myriad of Silicon Valley angels. Just some included Paypal co-founder Max Levchin, Box (NYSE:BOX) co-founder and CEO Aaron Levie, Facebook CFO Gideon Yu, and Eventbrite (NYSE:EB) co-founder Kevin Hartz.
Then again, Opendoor was looking to completely upend the $20 trillion U.S. residential real estate market. The company’s mobile app allows people to buy and sell homes with a few clicks, such as by handling the valuation, inspections, the closing, title and escrow processes, financing and home services. Because of the convenience and speed of this system, the conversion rate for Opendoor leads is an off-the-chart 34%. The company also has a Net Promoter Score (NPS) of 70, which is the same level as Apple (NASDAQ:AAPL) and Netflix (NASDAQ:NFLX).
In terms of the business model, Opendoor uses two approaches. One involves buying homes and flipping them. Then there is a business unit that provides traditional brokerage services to customers.
Growth for Opendoor has certainly been robust. From 2017 to 2019, the revenues have jumped from $700 million to $4.7 billion.
There are risk factors. The U.S. economy has been stalling, which could weigh on home sales. The break-neck growth for Opendoor could also be difficult to manage. And yes, there is stiff competition, such as from Zillow (NASDAQ:ZG). “Zillow is years ahead of vertically integrating a real estate ecosystems,” said Aaron Norris, who is the VP Market Insights at PropertyRadar.com.
“Opendoor is having to play serious catchup. In their investor documentation, they mentioned expanding into other markets like insurance. It’s hard to be the best at everything in record time.”
Bottom Line on the Opendoor IPO
Consider that the market is still in the early stages and is massive. Note that a 4% penetration rate of the U.S. would translate into revenues of $50 billion for Opendoor!
“Opendoor has reached an impressive scale,” said Nima Wedlake, who is a Principal Thomvest Ventures. “They’ve clearly demonstrated that some home sellers prefer the convenience and speed of transacting with an iBuyer as opposed to the more traditional listing process.”
In other words, even with the competition, there is lots of room for multiple players – and Opendoor should have a good chance of remaining of the the leaders in the space.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is an advisor/board member for startups and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.