The Real Estate Dish: 20 Minutes with David Garland of Second Century Ventures
Join QuantumDigital’s EVP and CMO Eric Cosway as he gets the latest dish on real estate technology with David Garland, Director of Strategic Investments for the National Association of REALTORS® and Partner at Second Century Ventures. In his role at Second Century Ventures, David sources and evaluates investment opportunities that promise to improve the global residential and commercial real estate industries. Second Century Ventures’ REach® program is among the largest tech accelerators in the industry, with a network of experts that includes over 300 executives and more than 4,000 realtors.
Eric: Dave, welcome to the podcast and thanks for joining us.
David: Yeah, I appreciate that very much, Eric.
Eric: I wonder if you can give our audience a little overview of your current role at Second Century Ventures, and a little bit more of your background.
David: I’m a partner with Second Century Ventures, which is the venture capital arm of the National Association of REALTORS®. That venture capital arm also oversees the REach® accelerator program, which is an accelerator that focuses on bringing top technologies into the real estate space for the benefit of the Realtor community. The goal is to provide exposure for those organizations, but it’s more importantly to keep the Realtor at the center of the transaction. So, as part of all that, the official title that I hold at the NAR is the Director of Strategic Investments.
Eric: Okay. So, it sounds like NAR oversees the fund and the program, but you as Second Century Ventures fund it. Would that be correct?
David: Yes. Second Century Ventures is, as we’ve mentioned, the arm of NAR. But we don’t fund our investments with dues from members. So, it’s off balance sheets investment from previous successful investments that NAR has had.
Eric: Okay. So, it sounds like you’re mentoring a lot of early-stage companies and tech companies. As you look back, what are some of the biggest or prevalent mistakes startups tend to make?
David: Yeah, that’s a great question. I think that i really starts with an understanding of the industry. There’s a lot of excitement right now with applying new technology trends and services to the Realtor community, or for the benefit of consumers. I think that the general understanding of the industry is super important. What I mean by that is understanding what, really, the total addressable market is versus what the total market is, versus the total accessible market. I think that oftentimes there is a misconception as to how fast a technology can be adopted by, really, 1.3 million entrepreneurs, and each entrepreneur being their own boss. Having a technology that applies to everybody sometimes is a very difficult feat to achieve. Certainly, companies have been able to achieve that feat to date, but that’s a big misconception. I think another misconception is not truly understanding the competition in the space. And when I say competition, I don’t necessarily mean alright, who’s my competitor—if I’m a CRM company, who are the other CRM companies. Or, if I’m a transaction management company, who are the other transaction management companies. Or, I’m a lead-gen organization, who am I competing with. I think that what most entrepreneurs fail to recognize, especially when trying to suss out really how much value is achievable in their given segment in the industry, is realizing that they’re not just competing against CRMs, if they’re in the CRM space, or transaction management, if they're in the transaction management space—they’re competing against every other entity. So, it’s not about competition per se, it’s about competing for wallet share of these agents and brokers, especially if you’re selling products to agents and brokers. Because, there’s a finite amount of capital that agents and brokers are able to achieve through their transactions in any given year, and that capital is being attacked by everybody from the largest organizations, like the Zillows and Realtor.coms of the world, all the way down to the local print shop that’s printing business cards. And each and every single one of those players, as part of the real estate ecosystem, has its place, and each and every single one of them is asking for wallet share of that agent and broker or the office. And again, there’s just a finite amount of capital, so I’d really encourage entrepreneurs out there to try to understand that your competition… if you don’t think you have competition, you’re dead wrong.
Eric: Right. Sounds like when they’re presenting the financials to you, they’re probably a little over-bullish. Is there a sense of each of your classes—that REach has a class every year, and you put a number of startups through this—is there a sense of what makes a good participant in the program? Are there attributes that will make an excellent, not only entrepreneur, but company come through that program and be successful?
David: Yeah, I’d say that’s a great question. It starts with the entrepreneur. I mean, when we look for a company that we feel that can succeed within the REach program, we feel that it does start with, not only the passion and the energy that an entrepreneur brings to the table, but that level of curiosity. And that curiosity is super important that all that attitude of “How do I learn? How do I learn more about the nuances of the business? How do I get to know the appropriate parties, the leaders in the areas that I’m focusing on selling my product or service?” And that type of curiosity is first and foremost… I mean, that’s at table stakes. And then, we start to look at organizations that have a little bit of traction, and are gaining traction, within the market. I’d say that’s typical for most of the REach companies. Now, what we also look for is areas where NAR can provide substantial value to these operations, because ostensibly we want it to be a win-win scenario for those organizations when they come into the program. So, if NAR can assist in these mentorships, in these connectivities, in these product testing environments, then we want to say, “How do we get together and build an equation where it is a 1+1 = 5?” Because if we can do that and if we can do that well, then not only are we helping out the membership of NAR, but we’re also substantially benefiting the company and the company’s growth trajectory. And then, finally I’d add that looking for opportunities for these organizations beyond just the traditional residential or commercial brokerage space. So, organizations that are providing technologies that are not just specific or unique to the real estate channel. I really like technologies that can be applicable to the wider sphere of influence—the settlement services aspect of the industry—everything from lending, to titles, to insurance, to the property management, to even more globally thinking where you can have a technology that is applicable to other industries that don’t have anything to do with real estate—that’s what’s really interesting. Because, I think that when you put the venture hat on, you’re looking for venture-size returns. And it’s very difficult to get a venture-size return when you’re investing in an organization, and that organization is only focused on a really small nuance within the real estate market. And then, getting back to my original point, which was if you don’t really understand that there’s so much competition and a limited addressable market within the Realtor channel, then you’ve got to go bigger in order to get those venture returns.
Eric: Yeah, you can be too granular and that’s not going to get you where you need to go. You mentioned a term that I thought was pretty interesting, it’s called the “network effect.” And the real focus of the accelerator program is to keep the Realtor in the center of the transaction. Can you describe that network effect?
David: Yeah, I think that the network effect takes on a couple of different characteristics. At its basis, it’s that phenomenon where, a product or service, you gain additional value as more people use it. That’s sort of the baseline definitional understanding of what network effect is. And, with 1.3 million realtors, that are dues paying members to the National Association of REALTORS®, we have that fiduciary obligation to really provide these technologies and services that make sense to better their business. That's who we’re trying to serve. So, if we find products or services that can leverage that network effect where, if they are bolted onto one broker and another broker is able to leverage that, and they’re able to pass it onto their agents, and the product and service becomes stronger, and they’re able to better serve their customers, and those customers are able to then provide word of mouth to share that with other actors within the real estate ecosystem, you’re able to build on that particular network effect. And I think that you see a lot of organizations that successfully leverage the network effect to their benefit, not only to gain market share and share of voice, but also to really build on their product offerings, and be able to meet the specific needs of not just one constituent in the market, but multiple constituents, because it truly is an ecosystem. And in order for the network effect to work, you have to really be able to handle all nodes within that particular ecosystem.
Eric: Okay, that makes sense. So, you’ve been in real estate a long time. In fact, I think you started out… did you start out in residential or commercial when you started buying and selling properties?
David: I started out in the commercial space—which was on the brokerage side trading assets on the multi-family, self-storage, mobile home parks, office—and then quickly transitioned into land development, doing development projects up and down the coast of California and as far east as Denver. And this was all prior to the downturn, and really focused on every product type with the exception of industrial. Never got around to industrial. It’s a completely different animal. But certainly, it was a fantastic experience, and I’m grateful to have gone through that run up, in the run up period where there was such a high demand. I don’t want to say I was grateful for the downturn, but in a lot of ways it taught me a lot. This is the biggest downturn in modern American history. So it was fascinating going through that and watching what that did to my peers, to my business, and others’ business, and then figuring out ways to rise above. It was a troublesome time in America, but I’m really grateful that we were able to pivot so quickly as an industry, and rise above it, and come out better on the other side. I think that now you’ve got some controls and systems in place that we’ve never had before. But the demand is still there, especially for housing, for office space. Population is still growing. This is one of the things that I tend to mention to a lot of organizations that are trying to understand the ecosystem and the real estate environment. When I was born, the population in America was roughly half the size as it is today. The housing stock hasn’t kept pace with that. So, when you’re looking at residential opportunities, the residential business isn’t going to go away. Sure, we’ll have cycles here and there, but it’s not going to go away. Now, that’s one side of an interesting ironic coin, as I like to phrase it, and that is, on the other side of that coin, is that there’s a finite amount of transactions that tend to take place for a number of reasons within the US market. And one of the stats that I like to point to is, before Zillow existed, before we had the Zestimate that’s captivated the consumer attention, and Zillow did a great job in building that, before they hit the market, before they were able to hit over a hundred million unique visitors a month on their website, there was around 7.5 million transactions that went on in the United States. And that was pre-crisis and pre-downturn. And fast-forward to just last year in 2017, we only had 5.5 million transactions. This is post-Zillow, this is post all of the lead gen technology that we have out there, all of the new technologies. So, we’ve had fewer transactions that took place in 2017 than still prior to the height, right before the downturn, before all that technology was in place. I think that’s sort of a fascinating thing to look at, especially when you’re looking at “How does my technology effectuate a transaction?”
Eric: I didn’t realize that the transactions were that much lower than they were previously. Wow.
David: I think a lot of that has to do with the tightness of the marketplace. Financing is still somewhat of a constraint for certain segments of the economy. And also, you have the new housing challenges. We’re still, from a permit standpoint, still not really on track to where we should be, and new housing starts still aren’t on a track to where they should be in order to satiate this incredible demand for owner/occupants.
Eric: I’m going to ask you a question that’s way out there. Do you still dabble in architecture?
David: You know, architecture is one of those fascinating fields that… I really don’t dabble in that field much anymore, except on the land development side, working with architects. We have a lot of pretty cool projects on the Bay area that we’re building, and I was fortunate to be part of some pretty massive projects prior to and immediately after the downturn. Architecture is what shapes the skyline. It’s a fascinating study and a field, and kudos to the people that have the time, and the focus, and the energy to keep up with the technology on the architectural side, because that technology is changing so dramatically. And I think in the next 50 years, the buildings that we see are going to be so profoundly different than what we’ve been accustomed to over the last 50 years. I’m really excited about the future of architecture.
Eric: Very good. I’d be remiss if I didn’t ask you—and I think I know the answer to this—but in terms of your personal passions and outside, you’ve described yourself as a “lifer,” and you just love investing in real estate. Is that your personal passion, or do you do other things as well in your spare time?
David: Yeah, there’s always the fun things that one does in their spare time, on like the hobby side—golf, to sailing, to snowboarding in the wintertime. All those are great things to do with friends and family. But in terms of what I see myself doing for the rest of my life in real estate… I’m a real estate lifer. That means that I will be in this industry, like it or not, just because I love the deal. I’m a deal junkie. There’s nothing like putting a good deal together, whether that’s on the financing side for a startup company that’s looking to get their feet wet in the real estate space, all the way to putting together the makings of a mid-rise or a skyscraper in a central business district. There’s deals to be had. And it’s not about the money. It’s about the soul that goes into it, in my mind. And the players that you usually interact with in the real estate space are not like any of the players that you would deal with in any other industry. We’re an industry on the brokerage side, just as an example, where every day you do deals with your competition. Every day. If you’re with brokerage firm A, and your competitor right across the road is brokerage firm B, you’re doing a deal with them. You’re signing contracts. Either you’re representing the buyer or the seller, and then you go back and you compete. You compete for brand, you compete for recruiting other agents. But, you come to the table every day. You do deals with your competition. That’s fascinating to me. Let me take it outside the brokerage space, and there’s some other really cool things associated with that as well, like on the land development side. Your competition is not the traditional competition. You’re not competing against other land developers. Once you have the land tied up, you’re really competing against everything from the economics of the area, to time, to things that you can’t control, like population, to job growth, and things that are much more intangible. And that’s super exciting, especially when you’re a deal junkie.
Eric: Dave, thanks for the time today. I thoroughly enjoyed getting to know you better, and it was certainly a pleasure. Good luck with SCV and your accelerator program.
David: Eric, thank you so much. I really appreciate the time, and I’m grateful for the opportunity to share some insights with you and your audience.
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