Startup Analysis

Purplebricks leaves Australia: Was it a complete misunderstanding of the market that caused the British startup to fail?

Stephanie Palmer-Derrien /

Airlisting

Airlisting co-founder Veronica Gravolin. Source: Supplied.

British real estate agent startup Purplebricks has exited the Australian market after less than three years, citing difficult market conditions. But Aussie entrepreneurs say blaming the market is something of a cop out, and there were much bigger issues at play.

A Purplebricks Group trading update released yesterday states that since the real estate startup launched in Australia in August 2016, “market conditions have become increasingly challenging”.

This, “combined with some execution errors”, meant the business has not delivered the progress expected, the announcement said.

The Australian arm of the business has been “put into an orderly run down with immediate effect”, it added.

In the same announcement, Purplebricks announced its founder and chief executive Michael Bruce is stepping down from the business.

Founded in 2014, Purplebricks set out to disrupt the real estate market, by combining end-to-end customer-facing technology with real estate agents and implementing a fixed-fee structure, rather than commission, to make the process of buying and selling property more transparent and cost-effective.

Now, the startup is listed on the London Stock Exchange, with a market cap of £361 million ($672.75 million).

According to yesterday’s announcement, the UK business is continuing to “outperform the market”, and the Canadian business is also tracking well.

In the US, however, the board has “materially cut investment in marketing and other overheads to reduce expenditure to sustainable levels and begun a strategic review”.

In the announcement, Purplebricks non-executive chairman Paul Pindar admitted: “With hindsight, our rate of geographic expansion was too rapid and as a result the quality of execution has suffered.”

New chief executive Vic Darvey said in a statement that while the decision was not taken lightly, “with market conditions becoming increasingly challenging, we do not believe that the prospective returns in Australia are enough to justify continued investment”.

property investing

Pure Property Investment founder Paul Glossop. Source: Supplied.

Missing the market

Paul Glossop, founder and managing director of Pure Property Investment, tells StartupSmart he sees blaming the market conditions as “a bit of a smokescreen”.

In Australia, both home buyers and sellers value having someone to walk them through a transaction as significant as a property sale. In this way, their model wasn’t quite cut out for this market.

Australia is “such a weird market when it comes to what we want to embrace and what we’re flat out not interested in”, Glossop says.

And Purplebricks has underestimated that peculiarity, failing to consider what Australian homebuyers and sellers want out of their service.

Property transaction volumes have dipped by 20-30%, he admits, and this is going to affect anyone working in the real estate industry.

However, there are “plenty of businesses who are doing very well in these conditions”, he notes.

“The ones who don’t quite understand their market are usually the ones who are found out in these types of market conditions.”

Purplebricks

Adam Rigby, founder and chief of Upside Realty. Source: Supplied.

Not innovative enough

Speaking to StartupSmart, Adam Rigby, founder and chief executive of Upside Realty, an Australian real estate startup also centred on a web platform and fixed-fee structure, also disputes the idea difficult market conditions were a significant factor here.

“The market conditions being tighter after the royal commission, and finance being tight, is actually the perfect time to change and disrupt the market,” he says.

In fact, he argues some of the biggest innovations happen when conditions are challenging, and when there’s demand for a new way to do things.

“That’s where consolidations happen, where tech takes propositions to new places, and we believe that it’s a great opportunity to disrupt the market,” Rigby adds.

Upside Realty itself is growing, he says. It’s already operating in Sydney and Melbourne, and is expanding to the ACT and Brisbane, all in “the same tough market”.

The Purplebricks announcement does admit the company made mistakes, but for Rigby, it’s those mistakes that led to its demise, not the market.

“If you’re making mistakes in tough conditions it does make things very difficult,” he says.

Airlisting founder and chief Veronica Gravolin also notes challenging market conditions breeds innovation.

Purplebricks’ problem, she says, is that it wasn’t innovative enough.

“I don’t think that challenging markets and rapidly changing markets are good for people who are following the same way we’ve always done it, but slightly cheaper,” she argues.

The business model was essentially the same as that of a traditional real estate agent, she adds, with the exception that — until fairly recently — sellers would pay regardless of whether their home sold or not.

“If someone is going to shake up the industry, they need to add significant value, and make their money on successful outcomes,” Gravolin says.

“I don’t think that can be done by utilising the traditional real estate agency model.”

The wrong model

This payment model is also something Rigby picks up on. Although Purplebricks changed its policy here in October last year, it “was just too late”, he says. The damage was already done.

This is just an example of the startup misunderstanding the market it was entering, Rigby adds. A fixed fee, whether you sell or not, may have worked in the UK, but it was never going to go down well in Australia.

Equally, in the UK, many sellers are happy to organise their own open homes.

“That’s absolutely not the case in Australia,” he adds.

“The flat-fee model clearly has appeal, and clearly there’s a need to disrupt the market … but you’ve got to understand that market,” Rigby explains.

“They really just picked up the UK model and approach, and popped it into a completely different market, and just expected it to work seamlessly.”

For Gravolin, the pay-regardless piece was a real sticking point. This detail meant there was no incentive for agents to maximise listings, or to get an outcome for the sellers.

“You end up with a bunch of properties on the market, with agents who aren’t motivated to get a sale across the line,” she explains.

“I just don’t think anybody really won.”

Marketing mistakes

Purplebricks is also copping flack for its advertising strategy, and the amount of money it appears to have poured into it.

The startup was essentially taking a “brute force” approach, investing in television advertising and billboards to buy market share, Rigby says.

And while spending on marketing isn’t in itself a bad thing, “it creates a hurdle to be cashflow positive and profitable”, he adds.

Gravolin specifically calls Purplebricks out for the tone of its marketing campaign, specifically, “how they made fun of real estate agents”.

While she’s not sure this would be “the most appropriate choice” anywhere in the world, this is another thing that doesn’t go down well with an Aussie audience.

“I don’t think that was well thought out, and it really upset a lot of agents,” Gravolin explains.

“Then you’ve got a fight on your hands that didn’t need to be there.”

From her perspective, the market is actually expanding, and there is no need for these kinds of tactics.

“We don’t need to steal listings, or make fun of anyone, in order to grow and give people another choice,” she says.

“We just need to do a really good job at what we’re doing, and that will add value.”

What can we learn?

If nothing else, the failure of Purplebricks to thrive in Australia is down to a misunderstanding of the Australian market, and the people it would be selling to. As the public announcement admitted, there were serious errors in the execution.

“Execution is the most important thing in any startup,” Rigby warns.

And there are a few things all founders can learn from this UK startup’s mistakes.

It may seem obvious, but “don’t assume every market is the same as your home market”, Rigby advises.

This doesn’t just apply to international expansions, it can also apply to micro-climates.

“Sydney is different to Melbourne, which is different to Brisbane, just as Australia is different to the US, which is different to the UK,” Rigby explains.

If you’re planning to expand, “really make sure you understand those differences”.

Equally, if you have staff in those markets, listen to them. If your sales or customer service teams are telling you something isn’t working, or going as smoothly as you’d hope, embrace that criticism and act on it.

As an entrepreneur or startup founder, “you’re your own biggest fan … you believe in your product so ferociously — you need to,” he says.

“But the worst thing you can do is pretend mistakes aren’t happening.”

Purplebricks Australia declined to provide additional comment.

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Stephanie Palmer-Derrien

Stephanie Palmer-Derrien is the editor at StartupSmart. You can contact her at [email protected].