The future of online real estate innovation

This week, many picked up on reports that show venture capital activity slowed significantly in the third quarter of 2008. The week before that, the big story was the shock treatment VC firms were giving their portfolio CEO’s.

No surprises here really. But it made me think about the future of the online real estate category, where the flow of new investment capital has been even more dramatically curtailed. If the VC flow trickles for the foreseeable future, we will need other drivers of innovation in our space. More on that below.

But first: What becomes of the money pumped into our most high-profile companies, Zillow, Trulia, and Redfin? New companies may be hard pressed to find funding, but these three seem trapped in a room with no exit door in which oxygen is running low. The opportunity for a successful public offering seems remote. Zillow, the company many saw as the top candidate for such an exit, long ago deferred this possibility.

Exit through successful acquisition seems equally dubious. I can’t tell you how many times people ask me “Who will buy Zillow?” or “Will ________ acquire Trulia?” This makes for interesting conversation, but most of the scenarios seem improbable.

And of course, the idea of these companies operating into the future as profitable, dividend-producing firms is pretty far-fetched.

So they will hunker down, manage smart, and attempt to outlast the nastiness. HomeGain and LendingTree made it through the dot-com bust to successful liquidity events. It can be done.

And I hope they make it. Zillow and Trulia have been catalysts for innovation over the past three years and have forced the real estate industry to be more consumer focused. I’d like to see that continue. Redfin has played this part as well, but I have felt from the start that they would follow a tragic arc, a heroic force doomed to ultimate failure.

With what are we left? Well, it’s not all that bleak for those of us who believe in the power of the Web to remake the real estate experience. Innovation will continue to come from the dozens of bootstrapped and angel funded companies that have popped up over the past three years and those that follow in their footsteps.

Here’s why:

1. Start-up costs are lower than ever. The amount of money it takes to build a web application has never been lower. Coding is faster — and, with the economy tanking, cheaper — than it was in the past. Second, the ethos of Web 2.0 is such that web apps and services are essentially DIY propositions. Think about it: How many customer service reps does Zillow have? Did trulia need to build a call center? And Amazon Web Services alone has dramatically lowered the barriers to entry.

2. The slow burn. A corollary of #1 is the fact that many companies can now run small and lean forever, slow embers waiting for the wind to pick back up. A company like HomeThinking, which has been around for three years, isn’t going away, even though they haven’t hit the jackpot. They’ll ride it out, incrementally pushing innovation (in their case, a new neighborhood comparison app released last week). A lot of smaller real estate Web 2.0 plays that got a lot of adulation in 2005-2006 now operate as space junk, dormant shells floating through the ether, but the gems will remain alive.

3. Better, smarter entrepreneurs. Rich Barton is a rock star. A visionary. Someone with tons of brains and a killer track record. But going forward, I’m not sure that’s all that’s needed to win. Future online real estate innovation will likely be driven by smart business people with tons of domain knowledge focused on solving a specific problem. We are working with some of these people right now. They know their stuff, nail the use cases, and evidence none of the hubris that has wrecked too many large-scale online real estate plays.

So VC is tough to come by. Fine. It’s been that way in our category for a while now. The innovation will continue. And lord knows, there are still plenty of problems to solve in real estate.

— Brian Boero