For 42Floors, it's not how much but how

By Michael Carney , written on November 17, 2012

From The News Desk

There’s a Silicon Valley startup expanding into New York City this weekend and aiming to disrupt one of its powerful industries. Yet most people inside the world of startups wouldn’t be able to name it. And unlike the waves made recently by bad actor Uber, there’s no current of Randian Libertarianism underlying this quest. 42Floors' offers a two-sided commercial real estate marketplace that benefits both the supply and demand constituencies.

As we reported in September, the Y-Combinator (YC) alumni company quietly revealed that it had raised $5 million in Series A funding. At the time, the company declined to disclose who participated in the financing. Today, it became clear why. Two names: Jared and Joshua Kushner, third generation New York real estate aristocracy. When the brothers' venture capital firm Thrive Capital co-led the most recent round into 42Floors, it signaled a coming shift in the way the stodgy New York real estate community viewed emerging technology. But the startup's co-founder and CEO Jason Freedman was concerned about word getting out before he had met with remaining industry leaders and earned their support.

New York’s commercial real estate market is the embodiment of old money, with wealth and power at its upper echelons that traces back multiple generations. Manhattan was always the most important market in 42Floors’ expansion playbook, but Freedman knew he couldn’t go in alone. Too many of the industry’s leaders carry scar tissue from past encounters with technology companies, and he would need an insider endorsement if he was to make headway.

There have been so many real estate technology startups targeting New York over the past couple decades, but few stuck around. The nature of startups are that many fail. Landlords, however, think in terms of long term commitments, and own buildings for generations. "They want tech partners that share their long term focus," Freedman says. "I don't think we've fully convinced them yet that we are indeed that long term in our focus, though we've looked them in the eye and promised that we would try. You better believe our investors are also long term focused.”

He saw his recent financing round as an opportunity to quietly bring aboard the captains of the industry as his investors, advisors, and ultimately, parters of the city’s velvet ropes. In the end he rounded up 35 different investors, but it's the Kushners in particular who hold the keys to the New York commercial real estate market. No technology company has ever been able to build consensus among the most influential landlords in Manhattan. With the help of the Kushners, 42Floors have been able to do just that.

Getting the Kushners' buy in wasn’t easy, however. Despite its real estate pedigree, Thrive Capital had long shied away from investing in real estate technology companies, although it was pitched by nearly every company in the sector. “We only have one bullet to fire at this problem,” Freedman recalls the Kushners telling him the day the finally wrote him a check, explaining their hesitancy to invest in lesser real estate technology opportunities. The difference this time around was that 42Floors is an engineering company first and foremost, and one with YC pedigree at that. The Kushners knew their Rolodex could solve the supply side of the marketplace equation, but they had yet to find a technology company that they were confident could deliver in equal measure — until Freedman's 42Floors.

The startup couldn’t have chosen better backers for their entry into the New York market. With the Kushners' guidance (and Rolodexes), the startup was able to convince nearly every commercial landlord of any consequence in the city to buy into its system. As a result, the company is launching in New York today with 1,466 premium office space listings in its marketplace.

At its simplest, 42Floors is a search engine for office leases that enables companies to look at office space without a broker having to let them in. At the same time, it allows brokers to more efficiently move the type of highly fragmented low-dollar inventory that they would otherwise loath handling.

In its initial market, San Francisco, the startup has achieved 20 percent month-over-month revenue growth since launching in March. Ninety percent of the company’s tenant users in the market are technology companies, Freedman estimates, a category of lessee with which Manhattan landlords are growing increasingly familiar – he describes the city’s Midtown and Flatiron districts “currently the hottest commercial real estate market in the world,” in large part as a result of the explosion of technology companies.

42Floors was designed for the way startups and other modern small businesses are likely to search for real estate. The site is heavy on images, including the insides and outsides of buildings, a rarity for most online commercial real estate marketplaces. The company's method for ensuring these images are always available is part of its secret sauce. In a system modeled after AirBnB, 42Floors has a network of freelance photographer “scouts” on call in each of its markets. Landlords or brokers simply press a button in the company’s software and one of the photogs shows up to take photos and confirm other details of the property. All the information and photos are uploaded on-site via a proprietary mobile app, after which the inventory is instantly listed on 42Floors. Critically, the cost of this service comes out of the 42Floors’ pocket, not the landlords’.

“Our goal is to raise the bar across the industry of how owners show off their properties,” Freedman says.

Like its photographer hack, the company has a similar solution for disrupting the listing process. A system internally called “Excavator” is used to scrape primary sources (broker websites, MLS boards, public records, etc.) across the Web for information on each property. The company then pre-populates the bulk of the listing profile without any effort on the part of the landlord. Once a property is tenanted, the vacancy is automatically removed from 42Floors. One key to its success is that it doesn’t charge the lessee or the lessor to use its platform. The only monetization on the site is its affiliate commerce-based “Showroom” of office necessities like furniture, decor, accessories, and services. Freedman says this strategy is paying off handily and that his company has no plans of exploring alternate monetization anytime soon.

42Floors’ raised all but $75,000 of its most recent round by May 13, its CEO tells me, but the company delayed announcing it until September so as not to tip the strength of its Gotham City hand to competitors. It would have waited longer had PandoDaily not uncovered what they were up to.

The real estate tycoons aren't the only pedigreed investors in 42Floors' round. Their co-lead was Bessemer Venture Partners' Jeremy Levine, of Pinterest investment fame. Levine initially told Freedman he knew nothing about commercial real estate, but had a change of heart after apparently spending weeks doing an enormous amount of research on the company and the market. His next message was, according to Freedman: “I now know everything about your company, and your space, and I think I can help.” He had come to view 42Floors to real estate as Yelp is to restaurants.

Levine not only invested, but he restructured the proposed round from a convertible note to a traditional common equity Series A – something investors rarely do unless they are supremely confident. The Bessemer seal of approval, and Levine's personal credibility in New York, only further solidifies the company's foundation in the market.

"The five boroughs of New York City represent 24 percent of the US' commercial real estate inventory. It's astonishing," says Freedman. "We quadrupled our capacity from SF to New York. We're going all in. But I like our chances."

[Image source, Hjjanisch]