Reonomy Raises $60M In Uncertain Post-WeWork IPO PropTech Climate
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Enthusiasm among investors for the PropTech sector is high, especially this year, but the memory of WeWork's botched IPO is also fresh, leaving investors a little more circumspect about the startups they buy into. Even so, the deals keep rolling.
Real estate data juggernaut Reonomy has raised $60M in Series D funding, with the latest round led by Georgian Partners alongside investors like Wells Fargo Strategic Capital, Citi Ventures and Untitled Investments. This round bumps New York-based Reonomy's total funding to $128M.
"Fundamentally, the WeWork situation shined a light on a truism, but one that might have been glossed over," Reonomy CEO Richard Sarkis told Bisnow in an interview this week. "Investors should be investing in businesses that are viable from the inside out.
"There's been a lot of marketing razzmatazz in recent years," Sarkis said. "Anyone could put together a nice PowerPoint presentation, have a logo that's a fruit or something, and be able to raise money on that. WeWork has been a wake-up call. And not just WeWork. PropTech needs to be a business, not just a fundraising vehicle. Investors are going back to basics, and that's a good thing."
Sarkis said that the latest round of funding for Reonomy will be used to expand its machine learning capabilities and platform-driven applications. Since Toronto-based Georgian Partners' primary goal is investing in companies using machine learning for a competitive advantage, he said, the investor was a good fit for Reonomy.
"There's a big opportunity in PropTech now," Georgian Partners principal Emily Walsh said. "Historically, the industry had disconnected silos of data, but with the advancement of machine learning, these sources of data can be linked to do new things and create useful insights.
"That's where our interest in Reonomy comes in," Walsh added. "We have a machine learning R&D team, and so we saw the opportunity to create a productive partnership with Reonomy."
Since its founding in 2008, Georgian Partners has made more than 40 investments in North American software companies. Though WeWork's failed initial public offering might give investors pause — it raised billions in funding at a $47B valuation only to cause massive losses for its biggest investor and need a $9B bailout package — overall investor interest in PropTech remains strong, Walsh said.
"One of our team members went to a PropTech event in New York recently, post-WeWork, and there was an incredible amount of momentum among investors," she said. "We believe there will always be a market for businesses with strong fundamentals."
Camber Creek General Partner Jake Fingert said that he also sees a shift in focus among investors.
How a company is run gets more attention now, and so does valuation, along with paths to profitability, Fingert said. Camber Creek, which specializes in PropTech investments, has invested in more than 20 companies and currently has $100M under management.
"With any investment opportunity, there are always a number of variables — the founding team, their track record, market size and outlook, among many others — and so you need [to] prioritize different aspects of a company, and of the market, when investing," Fingert said.
The change now is probably a shift in that prioritizing, Fingert said. Fundamentals are getting more attention, while intangibles, such as a charismatic founder, seem to be getting devalued. Also, Fingert said, much of the mass of capital coming into PropTech is in latter rounds of funding.
"The increase is in Series B and later," he said. "As early stage investors, that's been beneficial for us, because we have capital partners that buy out our investment or support our companies as they grow."
The most recent data on PropTech investment supports the idea that investors want to be in the space, though WeWork canceled its IPO after that data was collected.
Global investment in PropTech was $14B during the first two quarters of 2019, a 309% increase compared with the same period in 2018, according to CREtech. But that ballooning investor interest in PropTech isn't simply a matter of more money chasing more deals, the report found.
Rather, investors actually put all that money into fewer companies. During the first half of 2019, there were 13.7% fewer companies funded than in the first half of 2018, while deal size was up by 50%.
Whatever impact WeWork's spiral from a $47B company to one valued today at less than $8B might have, in the short or long term, investment data suggests that investors are focusing more closely on better-established companies, such as Reonomy, which was founded in 2013.
"The overall PropTech venture climate remains very strong," MetaProp NYC partner Zak Schwarzman said.
MetaProp has been an aggressive investor in PropTech, putting money into more than 50 companies. It also functions as an incubator, hosting new startups in its New York office and providing them with funding and guidance.
"In recent months, two notable shifts have occurred. First, venture capitalists have swung from rewarding growth at all costs to placing a premium on profitability, or at least a plausible path to profitability," Schwarzman said. "Also, the venture market is taking a more discerning look at business models and valuing the minority of companies that more closely resemble 'prop' than 'tech' accordingly."
Schwarzman also said the PropTech customer base is now larger than it has ever been, and real estate incumbents have opened their businesses to engaging with startups to a degree that would have been unimaginable a few years ago.
"The volume and quality of entrepreneurs in this space is stronger than ever, the range of products coming to market is broader than it's ever been, and both the strategic and venture investment communities are more engaged than ever," Schwarzman said.
Startup executives likewise say that funding is robust, while investors are now more cautious.
"Businesses that solve real problems and have strong fundamentals will continue to prosper irrespective of WeWork or other arbitrary macro-events," BuildOps CEO Alok Chanani said.
BuildOps specializes in scheduling, customer management and invoicing software for commercial contractors, and has received funding from MetaProp, Fika Ventures, Crosscut and others.
“There is less investment interest in seed projects and more interest in Series A and above for PropTech companies," B+E CEO Camille Renshaw said. B+E Net Lease is an online exchange that allows commercial real estate investors to trade triple-net-lease assets across the U.S.
"Companies like B+E are looking for investment opportunities and strategic partnerships that will help them scale faster and take market share," Renshaw said. "Targeted investments need to have proof of concept in most cases for investors to be interested."
VCs have closely monitored the successes and failures in the PropTech industry over the course of the last few years, said Bracha Halperin, the chief operating officer of Cazamio, a platform to facilitate apartment rentals.
An investor's goal, Halperin said, is to determine what problem a specific PropTech venture is trying to solve, how it will make the real estate process more efficient, and whether it’s something that can effectively be implemented at scale.
Investor enthusiasm for PropTech isn't an unalloyed good, however, according to Stratis IoT CEO Felicite Moorman, whose company offers a smart apartment Internet of Things platform.
"Our investor pool five years ago was a unique group of individuals who had been in the investment arena for decades and who really viewed investment in and around real estate as a long-pole play with slower returns but stronger business models," Moorman said. "The blinders came off a couple of years back, and everyone wants in now. I believe the pendulum has definitely swung too far in the direction of unabashed zeal."
On a call recently with a seasoned investment group that invests only in real estate technology, Moorman said, the investors lamented the "fast and easy" cash investments that are diluting the value of hard-vetted technologies and creating confusion and irresponsible follow-on investments.
CORRECTION, NOV. 8, 10:30 A.M. ET: A previous version of this story misspelled BuildOps CEO Alok Chanani's name. The story has been updated.