The deal gives Opendoor significant leverage to expand, and could spark more SPAC activity in the real estate technology market.
In September, Opendoor announced its plans to go public through a special purpose acquisition company (SPAC). The deal, which values Opendoor at $4.8B, will take place through a merger with Social Capital Hedosophia Holdings Corp. II, a SPAC launched by the investor Chamath Palihapitiya.
The transaction will bring over $1B of cash to Opendoor’s balance sheet, including $414M from Social Capital’s trust account, as well as an additional $600M private investment in public equity (PIPE) from existing shareholders and new investors. While the company says profitability is still likely far off, the SPAC deal could be key to the success of its expansion plan.
Below, we break down what the merger means for Opendoor and why it matters for the broader real estate industry.
- SPACs are the new direct listings. A record 164 SPACs have raised a total of $54B in funding so far in 2020, more than double 2019 full-year totals. New SPACs continue to be built as well, including those formed by Richard Branson, Reid Hoffman, SoftBank, Apollo Global, and AEA Investors.
- SPACs provide iBuyers — real estate tech companies that purchase properties online and resell them later — some protection from public scrutiny. Unlike the traditional IPO process, SPACs can provide iBuyers — a capital-heavy business model that’s under considerable scrutiny — just enough capital and protection to expand the business and ensure its successful arrival to the public market
- Opendoor is betting on an aggressive expansion plan. Opendoor is the first iBuyer to gain unicorn status. The company is currently active in 21 markets, and has 2% market share and a $5B run-rate revenue as of Q1’20. According to its new playbook, Opendoor plans to be active in 100 markets in the future, which would bring its market share to 4% and its run-rate revenue to $50B.
Why this matters
Opendoor’s SPAC announcement came as a surprise to most — the San Francisco-based iBuyer has reported net losses every year since 2015. While Opendoor’s latest SEC filing shows a slight decline in net losses between 2019 and 2020, the company openly states that it doesn’t guarantee profits in the near future.
The $50B playbook also sets an ambitious goal for Opendoor, which reported $4.7B in revenue last year. Opendoor’s biggest markets are Phoenix and Atlanta, which currently bring $1B and $664M in annual revenue, respectively. To get to the $50B goal, Opendoor will need to establish at least 4% market share in 50 markets like Phoenix, or in ~100 markets like Atlanta. This means the company will need to buy properties across more markets, and will likely continue to incur high losses in the foreseeable future.