Creation as an Act of Disobedience
(or How to be Widely Shunned by Innovating)
“It costs me less in every sense to incur the penalty of disobedience…than it would to obey. I should feel as if I were less in that case.”
Henry David Thoreau — Civil Disobedience
Disobedience. Hear the term and it immediately provokes a sense of concern (from most, for whom obedience is prized as a virtue) or an almost guilty pleasure (from the more rebellious among us). As a venture capitalist, I see disobedience every day. In fact, I invest in it as a matter of course. Without it, I wouldn’t have a business. Most people in my craft would refer to this as disruption or innovation.
I prefer disobedience. I strongly prefer it, in fact. Why?
Thoreau’s Civil Disobedience is a classic discussion on the merits of disobedience in the face of laws or situations that appears unjust or unfair. In this situation, Thoreau asks “shall we be content to obey…or shall we transgress them at once?” In this spirit, the philosopher Erich Fromm penned in 1981 a series of essays ultimately compiled into the book On Disobedience and Other Essays. Fromm’s objectives in this work were clear: to bring an end to nuclear weapons and institute humanist socialism as a favored economic and political system. For my purposes here, I’m avoiding nukes and socialism (whatever one’s opinions on these might be). I loved On Disobedience for another reason. Fromm makes a persuasive case that disobedience isn’t just a fact of human life. It’s essential to our existence and progress. The work begins thus: “…human history began with an act of disobedience” (referring, of course, to the Judeo-Christian tradition of the Garden of Eden). Through the pages that follow, his point is clear.
Disobedience as a contradiction of “authority” is a fundamentally different proposition than an immoral or harmful act. In some cases, it may be the only moral choice to make.
In my professional world, disobedience at its best is manifest by creators. Creators are those, independent of role, that cast aside convention, rules, and even strong norms to do something entirely new. At times, this newness is only minimally threatening, if at all. In other cases, the creation is an existential threat to people whose livelihoods depend on its utter failure. Whether the creation is seen as benign or threatening depends in my experience on three things:
· proximity in time and space,
· the degree of potential economic displacement (job loss, to be more direct),
· and the degree of “rule breaking” (written or unwritten) involved.
Proximity in time and space.
For years (starting in the 1930s), the sole method of instant, distant written communication was the Telex.
By the time the fax machine became mainstream in the 1980s, relatively few people’s livelihoods depended on the continued success of the Telex.
A superior technology takes over for an inferior one. Job done. Little weeping or wailing. Today, the rate of creation is so rapid that almost entire industries barely have a chance to form before being run over by something new.
Tesla is in the process of commercializing all-electric semi-trucks — a huge innovation.
At the same time Nikola is commercializing hydrogen to electric semi-trucks.
Each will require huge infrastructure investments for charging and/or fueling. It’s possible, although clearly not certain, that the Tesla semi will be an inferior technology literally the day it rolls off the assembly line. The best technology doesn’t always win. But, thousands of jobs — jobs that are being filled right now — could be wiped out within a matter of a few years by the winner.
To illustrate the notion of proximity in space, I’ll use the (overused, yes) case of Amazon. In the large Western economies Amazon has succeeded in creating an existential threat to virtually all types of retailers. Just when we think there’s little else that Amazon can figure out how to sell, they begin selling it (e.g., home services, prescription drugs). For us, the “Amazon-ing” of retail now feels inevitable. To a successful retailer in Vietnam, the threat of Amazon may seem abstract (at least for now). He is proximate in time, but not in space: he currently enjoys geographic distance from the threat. We could argue about how long that will last, and at what point he should become nervous.
The ability of a creation to compete on my turf is what matters.
Economic displacement.
The concept here is simple. The more jobs at risk, the more “disobedient” a creation will feel, all else being equal. To the extent that the holders of those jobs have political clout and/or social capital, the more painful the displacement will be (for everyone involved).[1]
Rule breaking.
The most common case of creators breaking rules would apply to unwritten rules or social norms. At times, the rule breaking is much more explicit. A good case here would be HealthEquity. Stephen Neeleman founded HealthEquity without even having the legal right to offer a health savings account product. A healthy percentage of the company’s early expenditures had to go towards getting enactment of federal law to allow the product to be sold. Many entrepreneurs are bold. HealthEquity took boldness to an entirely new level.
In summary, combine proximity in time and space, significant job threats, and the breaking of rules and you have the perfect recipe for creation as true disobedience.
As a real-world case study, I’ll use real-estate tech startup Homie. I’m an investor, I’m on the board, I’m rooting for these guys. I want to see their disobedience. So let’s see how they measure up.
The idea for Homie is not unique. Residential real estate transactions are incredibly costly for both the buyer and seller, but particularly the seller. Commissions of 6% on the sale of a home are the norm. The amount is typically split 50/50 between the buyer’s and seller’s agents. In urban Utah, Homie’s current primary market, that means a commission of nearly $22,000 on the sale of an average home. What’s the value provided for this money? Pricing assistance, listing on the MLS, photos and other marketing materials, guidance through the negotiation and legal process of closing, etc. Is the value provided worth that cost? An increasing proportion of sellers (and buyers) think not. Understanding why is not particularly difficult:
· Pricing: Price per square foot comparables are as easy for me to get as they are for a realtor. In addition, it’s not at all clear that the realtor really wants me to get the best price for my home. According to Steven Levitt and Stephen Dubner, the authors of Freakonomics, a selling realtor’s personal incentives are actually too small (perhaps 1.5% in his pocket) to care about a modest difference in selling price on the margin. A home sitting on the market is a home making the realtor exactly nothing.
· Marketing: The source for nearly all research (by realtors and individuals like you and me) on homes for sale is the Multiple Listing Service (MLS). MLS data is now provided through several websites, including realtor.com, Zillow, and Trulia. Do I need a traditional realtor to get my house listed on the MLS? Thanks to Homie and others, the answer is no. And on the buyer side of the equation, most people do the research on their own to discover the houses they are interested in touring. Realtors used to have proprietary access to that information. Not anymore. What about open houses? Homes don’t typically sell from open houses. Real buyers are getting a tour with an appointment.
· Negotiation: This one’s tricky. Many people lack the confidence to run a high-stakes negotiation without help. This is understandable given that for many their home is the most valuable asset they own. Anyone who wants to innovate in this space needs to have a way of addressing this problem.
· Paperwork and closing: This is normally done by a title company. In addition to issuing title insurance, the title company processes all of the documents required for closing, filing with proper authorities, and ensuring the collection and distribution of funds. This is what they do for a living. They are good at it. A seller doesn’t need to know all of the details of exactly how this is done. She just needs to be sure that a competent party is hired to do it.
Plenty of companies have seen these conditions and decided to take on the challenge of innovating in the space. A few of these have become household names (e.g., Zillow, Trulia, Redfin). Others are less well known (e.g., Trelora and Homie).To overgeneralize, two broad approaches are being taken:
· Different (easier) process at the same cost. You still pay 6% (slightly more, in most cases) to sell your home, but there’s essentially no work to get there. The service gathers the needed data and makes you an offer.
· Similar process at a lower cost. No significant difference in the process, but delivers the outcomes at a lower cost.
Services like Opendoor fall into the former category. Homie lies in the latter.
So, how does Homie approach the challenge? It’s pretty simple. If I’m a seller, I list my house with Homie. I pay $199 to start. Homie contacts me to schedule a photographer. In the background Homie is running a market analysis to guide me on pricing the home. I get that report plus my pictures, finalize my decision on both, and the basics for the listing are ready to go. Homie installs a yard sign and prepares ads. The listing then goes live on Homie.com, realtor.com, Zillow, etc. When interested parties respond with tour requests, Homie uses trained parties (usually realtors) to conduct the tours. When an offer comes in, Homie uses in-house lawyers and agents to help with the negotiation and documents. Appraisals, inspections, title insurance, etc., all still have to be purchased at their own cost (the same as with a traditional realtor), but Homie helps with the process. At close, I pay Homie an additional $1,299. As the seller, I have the choice of whether I wish to allow a commission to a buyer’s agent. If I choose to do so (which many do, so that buyer’s agents don’t avoid showing Homie listings), then I will likely pay 3% to do that. So what’s my total cost? Again, using the median Utah home, I pay $11,000 in buyer’s agent commissions plus $1,498 to Homie for a grand total of $12,498. Through the traditional process at traditional pricing, I’d spend about $22,000. A cool 10 grand in my pocket. If I sell to a buyer also represented by Homie (which is the case in 18% of Homie’s transactions), then I pocket the $11,000 in buyer’s agent commissions as well. Pretty sweet.
Using this model, Homie became the largest real estate broker by listings in the State of Utah within 18 months of their first listing going live. No mean feat.
So why would I characterize Homie as “disobedient?” Think about the criteria I listed above.
Proximity in time and space. Check. Homie billboards and yard signs are everywhere in Utah and becoming more common in Arizona. In one of the hottest real estate markets on record, hundreds of houses are being bought and sold using Homie. You don’t live in Utah without knowing about Homie. It’s here, it’s now, and it’s doing a great business. This success doesn’t come without challenges, of course. Utah is ranked #6 in the nation in number of realtors per capita. In the last few years there have been as many as 6 realtors living just in my little neighborhood. Johnny Hanna and his team all have dozens of realtors in each of their extended families and social circles. We’re not just talking about possibly missing a Christmas card or two. Think: Friends not inviting you over any more. Neighbors shunning you. Extended family not inviting you to parties.
This is not trivial stuff.
As Homie and its competitors move through the country, they will find the same conditions. Realtors aren’t concentrated in specific geographies like auto factory workers. Everywhere there are homes to be bought and sold, there will be realtors roughly in proportion to the volume of homes.
Economic displacement. Double check. Being a realtor isn’t easy. Many barely make a living. A few make a ton. In boom times, people flood into the profession, assuming it will be easy money. In downturns, many leave. But independent of the economic cycle, a lot of people have chosen to be a realtor for a living.
In the late 1990s I was at a conference and heard Don Tapscott, a famous author and speaker, talking about the jobs that were most at risk from the internet. One thing he said has forever stuck in my head: “If you have ‘broker’ or ‘agent’ in your job title, you should be very nervous.” In stock trading, the concept of a traditional stock broker has all but vanished. Travel agents are a dying breed, as almost everything that used to require an agent can now be done by the traveler cheaper, faster, easier, and with more choice and flexibility. It’s hard to see the profession of the realtor going away, but it’s also hard to see a future with anywhere near the same number of people earning a living doing it.
Rule breaking. Check. Apart from the ability to view listings (essentially the MLS data) online, most of the rest of what happens in a real estate transaction hasn’t changed materially in decades. Automation has certainly replaced manual document management, contracts, and financial transfers. But the same people are playing the same roles doing pretty much the same work. It’s just the way it’s done. If you’ve bought or sold real estate without using Homie or one of its competitors, it can feel intimidating, complex, and high risk. Those three descriptors can also be applied to medicine and education, two other huge economic sectors. Both of these are being disrupted by automation. And it’s only just beginning.
So, is the creation and success of Homie an act of disobedience? I’m counting on it.
To quote Fromm again,
“Disobedience…is an act of the affirmation of reason and will. It is not primarily an attitude directed against something, but FOR something.”
Here’s to being for the creators and innovators that are forging, at great personal cost and risk, a better future for us all.
Thank you to Miles Romney and Christian Volmar for their wise edits
[1]Much research has been done on the massive economic disruption that can come from significant innovations. I won’t seek to opine on that research here. Suffice it so say that benefits from innovation that are experienced by some parties can come, at least in the short term at significant cost to others.
