The Motley Fool's Austin Smith sat down with Kathleen Phillips, the Chief Operating Officer of real estate market platform Zillow (NASDAQ:ZG) . The two talked about the process of going public, the company's philosophy when it comes to mergers and acquisitions, and the service's most underused tool.
Austin Smith: Hey Fools, Austin Smith here with Kathleen Philips, COO for Zillow. Thanks again for taking the time to sit down.
Kathleen Philips: Sure thing.
Smith: Zillow has been one of the most exciting and most rewarding public companies of the last few years, and shareholders have you to thank for that. You're the one who took them public.
I'm curious if you could just comment on what that's like, taking a high tech, high growth, groundbreaking company public, and the differences from being a private to a public company.
Philips: Sure thing. I'm flattered that you think I was the one who did it, but obviously it was a very large team effort that could not have happened, not only without the big team that worked on the transaction, but of course with all the people who built our business, from day one.
The process is fascinating. The capital markets have always been super interesting to me, and obviously they are to you, which is why you are engaging in your chosen profession!
It's an interesting process because, like so many things in business and in life, it is what you make it. Our focus at Zillow was always on treating the IPO as a step in our growth. Our code name for the deal actually was "Project Step" because it was just another step in our process of how we built the company, not only from a capital perspective but product perspective and all of that.
For us, we completed our IPO in record time, like we like to do things. We were very focused on getting through the process quickly and efficiently.
The thing that I remember most, now we're three and a half years in, you go through the bake-off with the bankers, and we had a terrific partner in Citi as our lead underwriter. Then you spend a lot of time in a room, writing down your story.
What I remember most vividly from that time is that we didn't argue about our story. We all were pretty clear on the Zillow Management Team about the story that we wanted to tell, and what our mission was.
Of course we went through a million redrafts of our S-1, as everybody does. But our bankers commented later, once we were finished with the process, that they had never seen a team that was so clear on what they were trying to accomplish. That made that aspect of the project much, much easier.
That said, it's a laborious process. I think we started in earnest -- I'm getting a little fuzzy on this now -- in about February, and we completed our IPO in July.
Philips: ... which is pretty fast, yes, but lots of back and forth with the SEC, as everybody has.
It was a terrific outcome for us, obviously. We believe we've delivered a lot of shareholder value since then. It's very exciting.
Smith: As a shareholder, I can confirm that, so thank you!
Smith: I'd love to get your thoughts, as somebody who's gone through the capital markets -- and Zillow is a company that, given their growth, has received let's say a generous valuation.
The private valuations now just seem, to an outsider, so crazy with companies like Uber and Snapchat and the tech companies getting such high valuations. I'm just wondering if you have thoughts on that, and if Zillow was still private today would you still choose to go public, given the private valuations that companies are seeing?
Philips: It's hard to say. I think that the high valuations are a bit of a mixed bag. When you talk about a company like Uber, it's a pretty well-deserved high valuation.
What I see in evaluating smaller and mid-sized companies is that the valuations can really limit their exit options or their acquisition options, because they do raise capital at such a high valuation that it's difficult for us, as an acquirer, to look at them and take the risk of recouping that value in an acquisition.
Would we have gone public? I think probably yes. There were many reasons that we went public at the time that they did, and one of them was to provide us with liquid currency to use for acquisitions. Trulia will be our ninth acquisition that we've completed since the IPO.
Having marketable securities available to you provides you with a lot of options for growth through acquisition. Then of course capital available to you for other ways of investing in the business, through product development primarily, but also through marketing.
Smith: As a serial acquirer, you have taken out the big fish, the most obvious fish in the field. Who's next?
Philips: Oh gosh!
Smith: No? We can't go there?
Philips: We can't go there!
Smith: How about if I just say some names and you wink?
Philips: We'll do that!
But I can tell you more generally our philosophy around M&A. That is that we don't have a shopping list. We don't go around saying, "We're going to do this one, then this one, then this one."
Smith: That would be the world's coolest shopping list.
Philips: Yes, it would be pretty neat.
Smith: If you just had a bunch of companies and you got to go down the aisle and pull one off ...
Philips: If I make one, I'll send it to you, OK?
Philips: You'll be the first to know.
We instead take a much broader approach to talking to companies at all stages, inbound and outbound. It's a learning process for us. It's getting to know people.
What we look for in an acquisition target is an awesome team who we think we can work with -- I always think, "Would I want to sit at the desk next to this person?" -- and ways in which we believe we can accelerate our growth. It's pretty simple in that regard, but those companies aren't necessarily that easy to find.
Smith: I was going to say, easier said than done, certainly.
Getting to how to achieve that, as a serial acquirer who's picking of high growth, very interesting, very dynamic companies, how do you preserve their culture, their growth, while also infusing Zillow's own?
The portfolio of brands strategy has always really interested me. You have made it work; a lot of people haven't been able to do that, so I'm just curious, how have you made that work for you in such a dynamic industry?
Philips: I always joke that we learn one big lesson in every deal, so we keep getting better at that, I would say. But it's really, really difficult.
As I said, we choose to acquire companies primarily because we value the people, and in that we want to preserve the culture that they have built. That said, you have to have a common language and a common set of values across all of your brands, or it becomes really challenging to communicate.
Even with independently operated companies we spend a ton of time working cross-brand with people, so we need to make sure that we're all on the same page and rowing in the same direction.
There are ups and downs. We don't want to come in too heavy-handed, but we also want to provide people with the benefit of the culture that we have created here, because we think it's pretty terrific.
San Francisco has been a great laboratory of how we do that. We now house essentially three different product teams in San Francisco -- well, three different teams, I should say.
The HotPads team is all based in San Francisco, the former RentJuice team is all based in San Francisco, though many of them are working on different products now. Then we have part of our display sales team from the Zillow brand in San Francisco.
We all work together in the same office. I sit in that office, so we test out this "How do you preserve these distinct cultures, but all speak the same language at the same time" every day.
Philips: It's working pretty well.
Smith: You said you learn a lesson every time. What's the most recent lesson, from Trulia?
Philips: Oh gosh. Well, that one's not done yet!
Smith: Okay, maybe the one prior.
Philips: The one prior. Let's see, what did we learn? The prior acquisition was Retsly, and I think one thing we learned there is international acquisitions are complex!
Smith: They're tough.
Philips: Even a small deal like that. But it was a fun deal because it's a small team, they had started their business fairly recently. We got to remind ourselves what it's like to work in a really small office with plywood for desks, and how exciting that time is.
Then we got to think a lot about how do you preserve that part of their business, especially given that this is a small team of people who are in Vancouver, where we have no other Zillow ties.
It's been terrific. I think they breathed a little fresh air back into our entrepreneurial and start-up spirit here.
Smith: They keep a young company even younger.
Smith: I'm just curious if you have any thoughts on Redfin as a company. You're both Seattle natives, there's obviously going to be similarities in your experience, but differences in your structure.
Now that you're pending acquisition of Trulia, are they the biggest competitor in the space for you? How do you regard them in your operations?
Philips: We certainly regard them as a competitor, but we regard thousands of companies as competitors. What we really focus on in terms of competition is not what websites look just like ours, but what options consumers have for shopping, and what options agents have for advertising.
As we were joking about in our discussion earlier, bus benches are still a thing, as are refrigerator magnets and yard signs, and all of the things that agents spend their money on.
When we think about it from the revenue perspective, we think about a broad variety of competitors and from a consumer perspective, yes, we think about all the ways in which a consumer can shop for homes and find agents.
Smith: As somebody who, the past two homes I've purchased have been For Sale By Owner. There's this interesting subset of the industry where technology has enabled owners to start getting more involved in the selling process themselves.
I'm curious how you facilitate that and how you see that growing or changing over the next few years, as technology brings those powers down to the seller level.
Philips: Yes. We certainly do facilitate that in a few ways, primarily with our own For Sale By Owner product. We believe that sellers should be able to sell their home in whatever way they wish.
That being said, for the vast majority of buyers and sellers, they will always need an agent. It's a complex transaction. For most people, it is the largest purchase they're ever going to make, and being guided by professionals in that process is important.
I don't ever see a world where For Sale By Owner becomes the primary means of marketing a home or purchasing a home, but for consumers who that's what they want, we want to make that easy for them, and we do.
Smith: Looking at Zillow's growth over the last few years, your page view growth has to be one of the most mind-boggling and impressive numbers that exists out there. I'm curious, do you have a sense for what percent of those are serious home buyers or shoppers?
I imagine at a certain scale you start to bring in incrementally less valuable page views. Is that correct? How do you see the makeup of that growth in your page views?
Philips: It's actually not something that I spend a ton of time thinking about or working on. What I would point to most, I think, is that our agents are very, very happy with the clients we send them, so we have a lot of serious home shoppers on our site.
We also have a lot to offer people who are not yet in the market. The home shopping process is a very long one, and it doesn't even end with the purchase. As you I'm sure know, once you've invested in this asset, you spend a lot of time going and seeing what's happening in your neighborhood, what's happening with Zestimates, and all of those things are valuable.
As I said, we deliver many, many, many leads to agents. They seem very happy with them, so I think we're doing a pretty good job for shoppers.
Smith: Well, I'm certainly doing my part to contribute to your page view number.
Philips: Visit every day!
Smith: I certainly do, and at a higher volume than I'd like to admit!
What are a few tips for home buyers in 2015? Technology has changed the home buying and selling process in so many ways. A couple tips for how to buy homes better in the year ahead?
Philips: Oh gosh.
Smith: Now that Erin has promised we're going to have rates near 4-5% it should be relatively affordable.
Philips: Yes. I would say, educate yourself. That's our mission, is to provide information for consumers so that they can make the best possible choices. I think that, through Zillow and through many other means, consumers now have access to information that is unprecedented.
It's quite different than when my husband and I bought our first home, where we found a house we liked because we drove by it. Our agent showed us two other options, and we bought the one we saw first.
We would certainly never go about a home purchase that way now. Consumers have all this information available to them and I would say, use it. Once they get serious about shopping, we can provide all kinds of information about their wide variety of choices with agents too, whether that be ratings and reviews, or past sides, information, things like that. It's like anything else; make an informed choice.
Smith: Last question; what is the most under-used tool on Zillow in making that informed choice? What do you see as this great asset in the Zillow environment that people aren't using enough, or should be using more in making home buying decisions?
Philips: I would have to say our email alert. It's the thing that I certainly value the most, because we all get busy. You want to go check every day what's going on in your neighborhood, or your saved search, what your new choices are. Or if you've already purchased, what's happening with other purchases and sales.
But when I've been in active shopping mode, I find the emails providing me with information about new listings really to be the most interesting and useful tool, and I would encourage anyone who's shopping to sign up for alerts.
Smith: Wonderful. When you are shopping, is the Zestimate ... how much does that play into your purchasing decisions?
Philips: It's certainly an important data point, but there are so many other important data points, including all the great things that we provide -- the tax history, recent sales in the neighborhood.
We say that the Zestimate is a terrific starting point, and we really mean that. I think it's a valuable tool. Consumers now have unprecedented access to information about the value of their home that they never had before, and it's one thing to put in the mix when folks are thinking about what they think a home is worth.
Smith: Wonderful. Thank you so much for your thoughts.
Philips: Thank you!
Smith: It sounds like we have an exciting year to look forward to, both as investors and home buyers.
Philips: For sure.
Smith: Thanks for taking the time, and good luck on closing your acquisition.
Philips: Thank you.