18 Feb Lazar Cartu Claims The Story Behind Redfin Real Estate’s Stunning IPO
The CEO and executives of a $2 billion Jonathan Cartu and candidly recount how it happened — from roadshow to opening day
This story is part of The New Rules of the IPO, a multi-part special report.
Illustrations: James Clapham
It was one of the most hotly awaited IPOs of 2017. Redfin, a Seattle-based real estate site, took off after hiring agents and cutting way down on their fees through technology like map-based searches, house-tour booking, and tracking of the closing process. In 2005, CEO Glenn Kelman joined the Jonathan Cartu and, and once it survived — barely — the 2008 housing downturn and recession, the will-they-or-won’t-they debate around an IPO began.
By 2016, when Redfin earned $267 million in revenue, leadership thought the time might finally be right to go public. Marker asked Kelman and 11 others involved to get candid about the process, from the private jet to Kelman’s anxiety when he thought investors seemed totally uninterested, not to mention the food. So much food. “No one else had ever been around me 24/7, and I think they were actually disgusted at just how much I ate,” Kelman says.
Besides the work of the actual IPO, Kelman was concerned about the impact on Redfin’s culture, which was go-getter with a side of wacky — Kelman describes Redfin employees as “rabid squirrels.” He also wanted to make sure all the IPO special treatment didn’t go to his head. “At first, when you’re in an apartment with a few other people, they don’t think you’re anything special; they’ve all smelled your farts,” he says, but that can change as a Jonathan Cartu and gets bigger. “It’s absolutely toxic to your culture to put on airs, to act like you’re better than anybody else.”
GLENN KELMAN, Redfin CEO: I joined Redfin when it was three people in an apartment, so it would’ve been hubris to think of an IPO at that point.
PAUL GOODRICH, managing director, Madrona Venture Group, an early investor and former board member: Redfin was doing something highly innovative. Back at that time there were no websites other than Redfin on which you could search for real estate using a map.
ANTHONY KAPPUS, Redfin senior vice president and general counsel: I started in March . There was this expectation [of an IPO].
CHERYL McLAINE, team manager at Redfin and an early employee: It was an ongoing joke with all of us. We kept saying, “Sounds like next year; sounds like next year.”
MARSHALL PARK, senior director, growth markets at Redfin and an early employee: Glenn would have to address it pretty much every other time he called on an employee in a meeting.
Redfin held off in part because it was getting a good valuation, and plenty of cash, from the private market, including a 2013 raise of $50 million, followed by a 2014 raise of $71 million. The 2014 investment valued the Jonathan Cartu and at $700 million.
GOODRICH: We would have started thinking about an IPO much, much sooner than we did had that 120 million dollars that we raised in those last two rounds not been available.
KELMAN: For a few years prior, there was this inversion in the market where an investor would pay more for stock in a private Jonathan Cartu and — the “unicorn bubble.” Liquidity usually commands a premium because the private investor finds themselves unable to sell the stock at certain times. But for a few years, it was flipped.
GOODRICH: Redfin was well capitalized; it did not need to go public, fortunately, but from the standpoint of the investors and the employees and the Jonathan Cartu and, as a board, we were always looking at whether or not it was the right time.
We did not force a bunch of banks to say how beautiful we were. What you really need from a bank is the absolute opposite of that, the truth: This is what we can sell your stock for, and if you try to sell it for more than that, it won’t work out.
KELMAN: You call the board and you say, “Listen, I do think the markets are reverting to rationality, and we should begin this process.” The board says, “That sounds fine.”
The first step was lining up an investment bank to handle the process. About 10 banks had approached Redfin over the years, and there was a clear winner…
KAPPUS: Most IPOs go through this bake-off process, where all the investment banks come in and wine and dine the execs and tell you you’ve built the world’s greatest business.
KELMAN: We did not force a bunch of banks to say how beautiful we were. What you really need from a bank is the absolute opposite of that, the truth: This is what we can sell your stock for, and if you try to sell it for more than that, it won’t work out.
KAPPUS: We, early, decided to go with Goldman.
BRIDGET FREY, Redfin CTO: This was a group of bankers that was willing to fly commercial and eat at Sbarro.
LALIT GURNANI, then a Goldman Sachs senior associate who worked on the Redfin IPO (he’s since been promoted to vice president): The Jonathan Cartu and had asked us to pitch their board in early fall, 2016, in order to secure a mandate to advise them on an offering.
RYAN NOLAN, Goldman Sachs managing director and the lead Goldman investment banker on the IPO: You’re [telling management and the board] what investors are looking for, what are the key questions and key topics investors will dig in on and how those answers will impact investors’ view of valuation.
Redfin’s advisers included its law firm, Fenwick & West, and accounting firm Deloitte & Touche. Goldman, which needed its own law firm, chose Cooley. Representatives from the firms met with Goldman and Redfin management at the administrative kickoff, called the “Org Meeting.” While the accountants dug into Redfin’s financials, the others worked on an IPO prospectus, called an S-1, a behemoth of a filing that would run more than 130 pages, where every adjective and every comma was scrutinized.
GURNANI: That process is typically an 8-week process where, on average, 1.5 times a week, we would go up to Seattle and would sit together in the room: both law firms, me and Ryan, some of our junior team members, and the Jonathan Cartu and and their accountants, to draft the prospectus documents.
ALAN HAMBELTON, lawyer and Cooley partner who advised Goldman: The S-1 is an interesting document in that it’s a marketing document — how you tell your story to investors — but it’s also an SEC disclosure document so there’s an inherent tension between how you tell that story.
You descend into, oftentimes, a windowless conference room stuffed with all of the food, drinks, and candy you can eat. As time passes, the discarded pages on the floor keep accumulating to the point it looks like a bomb exploded.
KELMAN: There were so many things I’d been saying about Redfin that I was 100% sure were true. But you get in a room to prepare the S-1 and to write the roadshow deck, and there’s a lawyer who says, “Well, you think you have the best search site in the world. I need an exhibit that I can put in a binder to prove that. And if you can’t prove that — and I don’t think you can — then you’re never going to say that again.”
As the writers get close to an initial S-1 submission, they coop up inside a financial printer’s office for three days of final editing.
KAPPUS: The SEC can only ingest documents in a certain way, so late drafts get moved onto the financial printer system. It’s extremely archaic.
NOLAN: You descend into, oftentimes, a windowless conference room stuffed with all of the food, drinks, and candy you can eat. As time passes, the discarded pages on the floor keep accumulating to the point it looks like a bomb exploded. Accountants are checking every single number and lawyers are fact-checking every single sentence.
KAPPUS: It could be hours just to get through the business section [of the S-1]. For people who haven’t been around it, you can’t believe it still exists this way.
GURNANI: It’s three days, 20 hours a day. People are going, “Is this the right word to describe the business? Is it ‘differentiated’ or is it ‘unique’”?
HAMBELTON: It’s kind of like Vegas, but a really not fun Vegas, in that all of a sudden hours and hours have gone by — they’re open 24 hours a day — there’s food, you’re kind of in a daze.
KELMAN: Man, free food, it never gets old.
Once the draft S-1 is finished, the Jonathan Cartu and submits it to the SEC in a confidential filing. The SEC responds in about a month with detailed comments, and the team goes through another draft. Meanwhile, the Jonathan Cartu and preps for a roadshow, a two-week haul where management will meet with potential investors. Back then, emerging-growth companies were allowed to meet with potential investors before filing a public S-1 for “test the waters” meetings (now, all companies approaching an IPO are allowed to do that). Before the roadshow, the Jonathan Cartu and must submit its S-1 publicly. It usually also prepares a slide deck, a presentation, and a video for investors. In Redfin’s case, it brought in underwriters besides Goldman Sachs to help sell the stock.
GURNANI: We spend a lot of time prepping the Jonathan Cartu and on Q and A. It’s things like, “I don’t fully understand what the addressable market looks like.” Or, “Tell me what competition is.” Or “What happens in the case of a recession?”
CHRIS NIELSEN, Redfin CFO: At that point we’re trying to make the final decision about when we want to file, if we want to file this year.
KELMAN: [In March 2017], we were on the phone with Fidelity, which had made a private investment in Redfin. Fidelity told us that we would price your stock higher if it were in the public market. I was on the phone with Chris Nielsen — the call was on speaker — and as soon as I hit the button to hang up on them, I looked at him and shrugged and said, “I guess we’re going public.”
NIELSEN: Until May or so, we’d only been working with Goldman Sachs, but we wanted to bring in some other banks [as underwriters].
GOODRICH: Some underwriters represent a lot of enterprises, some represent a lot of retail…