Can PropTech Dream Big Enough For VC Investors?
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The money targeting PropTech is getting serious.
Earlier this month PropTech venture capital specialist Fifth Wall submitted a U.S. Securities and Exchange Commission filing which showed it had raised $468M for its second fund. And data from CREtech showed that, even when you take out the $6B investment in WeWork by SoftBank, PropTech investment almost tripled to around $4B in the first quarter of this year, compared to the same period in 2018.
VC investor interest in the sector is at an all-time high. But can the sector live up to the expectations of the money targeting it? One of the biggest and best established names in the sector thinks PropTech needs to think more about scale, or risk going out of business.
“There has been a real focus on the industry with new venture capital money coming, and that is good for the industry, but it brings new pressures,” VTS co-founder and Chief Strategic Officer Ryan Masiello said.
“There will be winners and losers in this space. There will be companies that just fade away because there isn’t a buyer for them, and at the very end someone comes in an picks up the scraps for a few hundred quid, leaving investors that have lost $20M, $30M, $40M.”
Masiello said there are two interlinked problems for companies in the PropTech industry, software companies in particular: finding a problem that needed solving and scaling up.
“When we started, our challenge was convincing people they had a problem to solve,” he said of setting up VTS, which is a data platform that allows real estate owners to better manage their assets. “Now the standards are higher. There are too many companies out there who are looking too short term and asking, what next, what next? They run the risk of not being big enough to satisfy the demands of their investors. Investors want scale, but it is a challenge to scale a software company, and a lot of the ideas out there might not have a broad application across a whole industry.”
Masiello’s comments echo that of the biggest tech investor of all, SoftBank.
“No one has yet come up with a full stack, end-to-end software solution that covers the full spectrum of everything that an investor or operator would need, something that covers where to build, what to build, the leasing and asset management side, investment and lending,” SoftBank Vision Fund Investment Director Justin Wilson told Bisnow earlier this year.
“I’ve been surprised at how fragmented that world continues to be, and the fact that there is no software package that powers commercial real estate,” Wilson said. “There’s still a lot being done in individual platforms and Excel. Companies are coming at it from different angles, but it is still fragmented. That is an area ripe for investment.”
Masiello said the new wave of investment in PropTech is superseding a less sophisticated first wave, and he believes this will improve the rigour at PropTech firms and how they seek to grow.
“You have quite a large cohort of inexperienced venture investors in this space, people who have invested in real estate and want a piece of this market, but don’t know how hard it is to scale an idea outside of their own portfolio. Someone might know about marketing in real estate, but that is still very touchy feely, whereas marketing in software is totally metric-driven.”
VC investors that have been successful in other sectors like Trinity Ventures, Sequoia Capital and Andreessen Horowitz are making increased forays into the sectors, and specialists like Fifth Wall and Concrete VC are also raising large amounts of new capital.
“They see an interesting potential in the sector and they bring greater insight and sophistication, but again they will be looking for scale,” Masiello said. “When they do invest, it will send a message — these are the companies to get behind.”
Only 13% of PropTech companies are more than five years old, according to MetaProp. The sector is still incredibly young. Unless firms find real problems that the industry as a whole has, and then figure out how to expand, they may not make that fifth birthday.
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