Building a $1.5B real estate empire, with Spencer Rascoff and Austin Allison

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1:24we grew from zero to billion and a half was our series c valuation which we did in like the first 18 months we were operating in 35 40 markets we had three to four hundred people we were growing fast. Hundreds and hundreds of percent year over year. And then the music stopped. Austin Allison's startup, Picasso, lets people buy a fraction of a luxury vacation home. It boasted about being the fastest U.S. company on record to reach unicorn status, but then mortgage rates started climbing and fast. Fortunately, Austin's co-founder is Spencer Raskoff, the co-founder of Zillow. We started Zillow in 2005, moving into the 2007-2008 global financial crisis, which was a real estate and mortgage meltdown.

2:19And we managed to pull through. And so I've seen this movie before a couple of times. Spencer and Austin weathered the storm and got Picasso back on its hyperscaling path. It's a stunning example of a startup bringing decades of experience to bear on clever market insight.

2:41You've got to have incredible talent at every position. It's like this huge push. There are fires burning when you're going home. Can you believe it? Such an idiot. And then you go back to, this is totally going to be amazing. There are so many easy wins. I have no idea what to do. Sorry, we made a mistake. But you have to time it right. Oops. Working out of a three-bedroom apartment. Stuff that just seems absolutely nut balls. Ten years later, we're like, well, that's just how you do it. We haven't made it just how you do it. This is Masters of Scale.

3:39vacation home company. Austin Spencer, welcome to Masters of Scale. Thank you. Good to be here. I have been looking forward to this conversation ever since my friend and I'm guessing you are certainly your investor, Marcy Vu, told me about Picasso and I was like, oh my God, this is genius. How has this not been done before? So Austin, we start with you. Just what is Picasso? What do you guys do? Yeah. So Picasso is a global marketplace that enables people to co-own luxury vacation homes. and the reason why we exist is because most people who own a vacation home only use it five or six weeks a year so our model enables people to buy what they actually need which for most people is about one eighth of a home and then we manage every part of the experience everything from designing the home to paying the bills to coordinating repairs and maintenance so that as an owner you get to just use the home without any of the headaches that are customary of traditional home ownership i mean it sounds a lot like a timeshare but what's different about Picasso from Timeshare?

4:37Well, the biggest difference is that with Picasso, you actually own an asset, whereas with a Timeshare, you're effectively prepaying for the right to use time in a hotel. So it's kind of like comparing an asset to a liability. The better analog for Picasso would be buying a home with friends. If the three of us wanted to own a home in Mexico or wherever our dream destination is, the way that we would go about doing that is we'd form an LLC. The LLC would take ownership of the property, and then we would divvy up the calendar and divvy up responsibilities. Picasso's ownership structure is exactly the same, except for you don't have to know the other people, and Picasso manages all the details.

5:16We've now been around for four and a half years. We've sold well over a billion dollars of these Picasso units. We have thousands of owners and operate in about 40 destinations around the world. So what usually happens is about half of the home is spoken for by the time we close. We then take temporary ownership of the other half of the home, and we have great financing partners that enable us to finance that. And then we sell through the remaining interest over a period of about 90 days thereafter. And once the home is fully subscribed by its owners, Picasso retains no ownership in the real estate.

5:52So you as a Picasso owner get all the upside in the capital appreciation that occurs in the home How do you guys make money then if you're not holding on to any share of the property? Where do you guys get paid? Well, we think about the business like a tech-enabled marketplace that offers lots of services within the marketplace and Many of those services produce revenue for us So the first service is organizing the group of co-owners sourcing the property and setting up the LLC that we monetize through a service fee that is baked into the share price. So when you look at a property on our website, in that share price is a little fee for us for all the work that we do on the front end.

6:31Then once the home gets into our ecosystem, it stays in the Picasso ecosystem into perpetuity in most cases because once somebody buys a share of a home, if they decide to resell at a future date, they're not triggering a whole home sale. They're just selling their interest, whether it's a fourth or an eighth. And therefore, all the other services that we provide from financing to property management to design and furnishing to resale are all revenue streams for us that are recurring in nature. Where did the idea come from? How did this get started? Well, I grew up a real estate agent. When I was 18 years old, I had to find a way to pay for college.

7:08So I started selling real estate, which led to, I know you went to law school as well, I did, although my classmates would tell you I barely went, but yeah. So yeah, I went to law school as well and ended up starting a real estate tech company in my first year of law school to digitize real estate transactions, which we ended up selling to Zillow. And that's how I got to know Spencer really well, which led to this company, which I'm sure we'll talk about. But along the way, that entrepreneurial journey led my wife and I to San Francisco. And in 2013, my wife and I had an opportunity to buy a second home in Lake Tahoe, and it just changed our lives for the better.

7:43If you've reached a point in your life where you have some discretionary income and you have some savings, a second home is kind of the ultimate privilege because it provides a separate space where you can be a better version of yourself, whether it's a better partner, a better husband, a better hobbyist. I used to always love mountain biking when I was growing up, but I never made time for it in my primary home in Cincinnati or San Francisco. It wasn't until we had this home in Lake Tahoe where I rekindled my relationship with mountain biking, and it's now a really important part of my life. So this Lake Tahoe home really became an important part of our lives, and I wanted to find a way to make it possible for more people.

8:25But the other thing that I learned about second home ownership is that it's a huge hassle. We wanted to find a better way. We wanted to find a more efficient way because when second homes are sitting empty 10 months a year, which is the norm, it creates all these other downstream problems for communities. Spencer, when did Austin come bring you this idea? We both left about five and a half, six years ago. We both left Zillow at the same time. After, we should say, the tremendous run at Zillow. I mean, a lot of success there. Yeah, about 15 years or so of running Zillow, and it was a great run, and I'm very proud of what we accomplished.

9:01When Austin and I both left years ago, we immediately started brainstorming startup ideas. I had another idea in the sharing economy space about something else that I was interested in, and Austin improved upon that idea and applied that concept to second home ownership. And as soon as he said it, I said, yeah, that's a good point. I have an empty second home that sits there 92 % of the year and drives me nuts. And it's the cost. It's the hassle. It's also the stress and sense of guilt. And so I immediately realized it was a good idea. And it's another good way to find startup ideas is to find things that people hack themselves in kind of an okay way.

9:35And people have hacked this. Friends buy ski houses together, beach houses together, et cetera. and it usually doesn't work out. Usually you argue over the furnishings. You have a hard time with the scheduling. You can't get a mortgage. I mean, one of the big benefits of buying a Picasso is you can get a mortgage on just your portion of the home because Picasso created that financing instrument. So you can't get a mortgage and you can't really resell. If the three of us bought a home together, what happens when one of us wants to get out? Are the other two gonna be saddled with a stranger, et cetera, and so Picasso solves the resale model.

10:07We solve the storage issue as well because you want to keep things at your home. And we have owner closets in all of our homes. So people keep their personal effects in our Picasso. So we thought this was something that's already happening kind of on a small scale in a hacky way that we could democratize and standardize. When was this conversation? It was, I would say, early to mid-2019, where we raised our seed round February 15th of 2020. Okay. So a few weeks before the world shut down. Very scary. But we just went after it. We were pretty scared at the beginning. I think we thought that this startup was DOA for the first couple of months post COVID starting.

10:48It turned out to be an incredible tailwind to the business because people wanted sanctuary. They wanted to get away from their primary home, away from the city and have a place to feel safe and secure. And so the Picassos that they purchased were able to provide that. But it was dark days at the very beginning. Well, and I assume also just the move to remote and hybrid work gave opportunity there as well. That had to be part of the tailwind. But before we get to that growth part, those dark days, I mean, Zillow and Dotloop, you guys have done great, but still you're a founder, you're starting a company, like your heart, your soul, everything's in it emotionally.

11:24What were those days like? How were you managing through that with each other? The way that I've managed through challenging times, whether it was 2020 or 2009 when I started my first company, is to just stay focused on the mission. I've started two companies now where I was CEO, and in both situations, I was incredibly passionate about the problem that we were solving. And if you believe deeply in the problem that you're solving, it serves as a North Star to help you navigate through whatever challenges you're facing. So I didn't actually think, Spencer may have thought we were DOA. I didn't actually think we were DOA when COVID happened.

12:05I just wasn't sure how we would have to evolve to find product market fit. I knew there was a there there. I knew that people aspired to own a second home. I knew that it was silly for people to own 100 % of something that they were only going to use 10 % of the time. I just didn't know how we were going to solve that problem. Was there a point, Spencer, where you realized, oh, not only were you not DOA, we're really onto something here? Yeah. And that happened very quickly. And, you know, I've now been doing this for a long time, been doing this for almost 30 years. And I've seen this a couple of times.

12:40We had this at Hotwire.com online travel company after 9-11 in 2001, where it seemed like the company was on the ropes. And we were an online travel company through September 11th and people didn't want to travel. And then through a lot of hard work and focus on the mission, we were back on the upswing within a couple quarters and then had a successful exit. And we started Zillow in 2005, moving into the 2007-2008 global financial crisis, which was a real estate and mortgage meltdown. It looks like Zillow was going to be on the ropes and we managed to pull through. And then Picasso, similar thing, started a home sharing business, moving into a global pandemic.

13:20So I've seen this movie before a couple of times and Austin's absolutely right. Staying focused on the mission, staying focused on your team, controlling the things that you can control, caring deeply about your customers and being nimble. Like these are all, they sound kind of trite, but if you follow that recipe, that's how you manage through adversity. And we've had our fair share at Picasso. Actually, frankly, the more almost existential challenge, more so than COVID really, was the rise in mortgage rates. when mortgage rates started going up, that hit the brakes on really most real estate transactions, whole home, partial home, everywhere in between.

13:57And so managing through that set of challenges, I think was even more difficult in a lot of ways than managing through early COVID. What'd you do to manage through that? Wow. Well, it was a challenging time. So we grew from zero to billion and a half was our series C valuation, which we did in like the first 18 months. We were operating in 35, 40 markets. We had 300 to 400 people. I mean, we were growing fast, hundreds and hundreds of percent year over year. And then the music stopped. So fortunately, we had raised a big Series C just prior to this. And Spencer and I had both gone through challenging economic cycles in the past.

14:37And the last thing I or Spencer ever wanted to have to do as a founder was downsize the team. And we tried to plan for that as we were growing. Like we expected that this growth would eventually slow down, but we didn't expect that it would slow down as quickly or as dramatically as it did. So we had to downsize the team. And we did it with class, I think, and took care of everybody. And, you know, many of those people are now hiring back, which is really awesome. But that was hard. You know, we had to cut our cost basis. So that was number one. Number two, we had to focus in on the markets where we had the most scale and the strongest product market fit.

15:12Was there a concern with Picasso now, given that you're, you know, in higher end markets where there tend to be more restrictions on not just fractional ownership, but Airbnb has trouble operating a lot of these markets, right? Was there a concern that you'd be running afoul of local regulations and you'd run in some trouble there? I would say that the main thing that we've learned from it is that it's really important to be proactive and not reactive on this front. So anytime we're entering a market or innovating on a product offering or something like that, were two steps ahead in terms of talking to local electeds, making sure we understand the rules and regs in that market.

15:50So we structured Picasso now in such a way that it was compliant in the same way that our core ownership experiences. I mean, this is really kind of the opposite of the Uber and Airbnb approach, which is like effort, like YOLO, we're coming in, we're going to do it. We'll pay a price later on. We'll activate a user base to rise up. We had a little bit of that bravado at the beginning. You know, like people are very emotional for good reason about the composition of their neighborhoods. I think some of the public affairs issues that some other sharing economy businesses faced were more about disrupting legacy industries that had lobbyists and entrenched interests.

16:31Home ownership is really different. It's quite emotional. And people care a lot about who owns the house next door and what does that mean to the neighborhood? And are they emptying the trash cans? And is the house in good order? And these types of things just to change the character of the neighborhood. And so we've gotten a lot smarter about where we operate, how we operate, the way we form relationships with the communities that we're in. And I'm quite proud of the impact that we've had on communities, but we also made mistakes along the way. Picasso has faced some resistance from neighbors and local officials, specifically in Northern California.

17:05Many of the critics are already frustrated by what happens in communities when guests come in on short-term rentals. And they were worried that Picasso's fractional ownership model would degrade their neighborhoods. So when we first started getting feedback in Napa is where it all started, or St. Helena, actually, I just kind of ignored it because i'm like, you know, these people just don't understand like this is actually a great thing for them These are not renters. These are owners who have invested, you know millions of dollars who care about the home They care about the community. They're supporting the local charities.

17:42It's not changing the character of the neighborhood So I just ignored the noise thinking it would go away But what ended up happening was the noise didn't go away The noise built and perception became reality and before we knew it that many people in these communities thought that Picasso was like a short-term rental and that it was going to be this revolving door of renters. A party house. Yeah, that owners were partying and that we were driving up home prices. And none of that stuff was true. Still ahead, why Spencer recently took on the role of CEO for dating app empire Match Group.

18:26Real leaders don't back down when the stakes are high. They innovate, they push forward, and then they take the stage at the Masters of Scale Summit. Join us in San Francisco, October 7th to 9th, to hear from the CEO of the New York Times, scientists using cutting-edge technology to find cures, the leader of crypto powerhouse Coinbase, a retired four-star general, and many, many more. Apply now at mastersofscale.com slash apply25. That's mastersofscale.com slash apply25. If you're ready to take your startup from idea to impact, then AWS is your launchpad. From data storage to machine learning to secure app hosting, AWS gives you the tech trusted by the world's fastest scaling startups.

19:16And here's the best part. Join AWS Activate today and you could score up to$100 ,000 in AWS credits tailored to your stage and network. Go to aws.amazon.com slash activate and start building. Expanding your business in the U.S. can feel like a maze. Every state has its own payroll, benefits, and compliance rules, which can pull your focus away from growth. That's why founders use Deal. Deal is the professional employer organization, or PEO, that gives you a dedicated HR expert plus Fortune 500 level benefits for your team. The National Association of PEOs says businesses can grow twice as fast if they use one.

19:59So if you're scaling, make it simple with Deal. Go to deel.com slash MOS and get up to three months free. Welcome back to Masters of Scale. You can find this conversation and even more on our YouTube channel. Spencer, you referenced Hotwire, Zillow, Picasso. By the way, you're also CEO of Match Group now and you run an investment fund and you teach at Harvard. I mean, it's a little mind boggling what all that you do. But like going way back, where did this entrepreneurial drive, this zeal come from? I mean, I grew up, I think, sort of like Austin, always tinkering and starting businesses. I would bake cookies and sell them to my parents' friends.

20:46I would trace drawings and sell them to my parents' friends. And I was always trying to make money, arbitraging comic books and doing whatever I can to start companies and try to build things. My dad was an entrepreneur in the music industry, and that was very inspiring to me. I watched his career as an early tour producer and business manager of rock groups and watched him pivot his career over many decades as the music industry changed. and that was an inspiration for me. And then my sense of drive and ambition, I think, came from the fact that I lost my brother in high school and it's the eve of his high school graduation and he was going to Princeton and he was gonna have, I'm sure, a very successful life, which was cut short.

21:29And that motivated me to try to kick ass and I'm still trying. Yeah, what's driving you to still innovate? Life is short and I think you should make a big impact in it. And I'm not ready to just play golf. I don't even like it that much. I like working with teams. I like coaching and mentoring. You know, the role that I play at Picasso as Austin's co-founder is Austin runs it and he's the CEO and I'm just here to help. And I really like that. I like coaching and mentoring, whether it's a company that I'm running like Zillow as CEO or now Match Group as CEO, where I'm working with people and building camaraderie.

22:07and teams as a CEO coach, or if it's a company that I've invested in or a company that I've co-founded, I just really like connecting with people and trying to help them succeed. I left Zillow about five, six years ago. And for those five years, what I did was I focused on incubating new startups, mostly with former Zillow people. And so I started four or five companies. Picasso is the largest of them, but there are several others that I'm co-founder and chair of. And then I also did some angel investing. So that was a period of my career where I was really focused on the zero to one stage of startups.

22:43And as part of that, I also started teaching this course on how to do startups at Harvard College, which I've been doing for five years. I decided to get back in the arena as a full-time CEO just a couple months ago as CEO of Match Group because I was so interested in the mission. Because Match Group owns Tinder and Hinge and 20 consumer social and dating apps. For me, curing loneliness, sparking meaningful connections, helping people find a spouse, partner, friend, anywhere in between, that inspires me. I think that's a really cool, exciting mission. I love the power of those brands. And so I connected enough with the mission to decide to put the cleats and jersey back on and get back on the field as a full-time CEO.

23:23And so I'm not angel investing anymore. I'm still working with folks like Austin, whose companies I helped start. But I'm not launching new initiatives. I'm a full-time CEO of a big publicly traded company now. With Match, as someone who's not in the dating market, how is it running a consumer company where you're not actually a user of the products? Well, I am a user of the product now. I mean, I'm very happily married. I've been with my wife for more than 30 years, but I'm on all the apps. And she's a trooper. She's a good sport. I get notifications all the time of, you know, this person just sent you a rose and this person is chatting with you and this person's waiting for you to respond.

23:59Be careful which way you swipe. Yeah. So she's a good sport about it. I mean, I need to be on the apps. I said to her when I took the job, I was like, can you imagine if I was running Zillow and I never used any real estate apps? Like, I can't do that. You have to have consumer empathy that comes from using your own products and spending a lot of time talking to your users. So I do use the products. My profiles all say I'm the CEO of the company. I'm just here to learn, just here to research. So I disclose the fact that I'm not single. But I mean, more to the point though, I think you can develop user empathy through research and just spending a lot of time with the users.

24:33Actually teaching my class is really helpful because that is our demo. Gen Z, 18 to 24 is the primary user of Tinder Hinge and our other apps. So spending a lot of time on college campuses, which I do is really valuable. Having a 20 year old in college And a 16 and 13-year-old is actually really useful because they're the ones that are using consumer social apps like Snap. And so that's also where I learned. Before Austin and Spencer co-founded Picasso, they worked together at Zillow. That's thanks to a years-long professional courtship where Spencer, as CEO of Zillow, eventually acquired Austin's startup, Dotloop.

25:07Dotloop was a software tool to streamline the process of buying property. I was curious to hear how that acquisition played out from both sides of the deal. So Spencer, how do you find out about Dotloop? It had a great reputation in the industry. I would hear about it in conferences and the courtship, the kind of mutual courtship between Austin and me was several years. And it's actually worth reflecting on that for a moment for startup founders listening to this. Zillow bought 17 companies. I bought 17 companies when I was CEO. Dotloop was one of them. the median time from when I first shook hands with the founder of those 17 companies to when those 17 wires crossed was about two years.

25:50And I don't remember what dot loop was probably longer, probably three years, I'm guessing of how long we knew each other and we'd see every couple of quarters and we'd catch up and, you know, have a cup of coffee at a conference or an event. And so it's really important for startup founders to remember that because companies don't get sold, they get bought. And I always advise startup founders to make a list, create a spreadsheet of every potential strategic acquirer of your company, five, 10, 20, 50 companies, ideally figure out who the CEO is and the head of corp dev and be very intentional long before you want to sell, start building those relationships and carve out time on your calendar, literally block an hour a month, call it M &A planting seeds.