Proptech Bubble Deflates As Startups Swallow Lower Valuations
After years of exuberant dealmaking, the proptech industry is facing a reckoning.
Proptech unicorns that raised boatloads of cash and went public with promises to disrupt the multitrillion-dollar commercial real estate industry have seen their valuations plummet in recent months. The sector’s losses have outpaced the overall market drop this year as the Federal Reserve has taken aggressive measures to curb inflation.
The crash has now rippled into the private markets for proptech funding. Six venture capital executives and four proptech startup founders who spoke to Bisnow for this story say the fundraising market today is virtually unrecognizable from last year’s.
The power dynamic at the negotiating table flipped seemingly overnight, as startups that would have been fighting off suitors last year are now having trouble convincing investors to back their business.
Some are struggling to raise money to keep operations going — and risk going bankrupt if the market doesn’t improve soon, insiders say. Many of the companies closing funding rounds today are doing so at lower valuations than in rounds past, diluting the equity shares of their founders and investors.
“This is the hardest fundraising environment I’ve ever witnessed,” said Dave Eisenberg, who co-founded proptech startup Floored in 2012, sold it to CBRE in 2017 and is now founding partner of proptech venture capital firm ZiggCap.
This market correction has caused real pain in the proptech industry, with companies laying off employees in an attempt to cut costs and stretch their funding further. If the economy falls into a recession and conditions don’t improve soon, sources say many companies will be unable to raise their next round.
Investors and startup founders say the worst is yet to come.
“Valuations have significantly dropped, and it felt like it was overnight … We’re not seeing 10% drops, we’re seeing 50-plus percent drops,” JLL Spark partner Laurent Grill said. “There are going to be some companies that may not make it through this, and they would have otherwise because it was such a frothy market.”
The correction the proptech sector is undergoing could be particularly painful for many startups because of how hot the market was last year, with record funding pushing valuations skyward.
Private investment into the proptech sector totaled $32B last year, according to the Center for Real Estate Technology & Innovation. That record total represented a 28% increase from 2020 and a 3.2% bump from 2019.
A wave of late-stage proptech startups decided to use the bull market and the trend of special-purpose acquisition company mergers as an opportunity to go public. Those companies were the first to feel the impact when the market turned south.
“There was a bit of hysteria in the proptech SPAC market, and I attribute that to the fact that real estate people love deals, so there were a lot of people in the real estate space who saw that SPACs were great deals and got involved,” said Era Ventures Managing Partner Clelia Warburg Peters, a co-founder of MetaProp and former venture partner at Bain Capital Ventures who launched her own proptech venture fund in January.
Smart lock company Latch went public through a Tishman Speyer-backed SPAC last June at a valuation of more than $1.5B. It ended its first day on the market at $11.27 per share and remained above the $10 per share mark until mid-October before falling dramatically.
Latch is now trading at $1.26 per share with a market cap of $181M. That drop has come as the company has struggled to move toward profitability, with its net loss growing to $44M in the first quarter. The company last month laid off 130 people, 28% of its full-time staff.
Tishman Speyer took a 4% stake in Latch as part of the SPAC merger, which was valued at roughly $60M at the time. That initial investment would now be worth less than $8M.
WeWork went public through a SPAC in October and ended its first day of trading at $11.78 per share. It is now trading for less than half that. Smart glass manufacturer View went public with a SPAC in March 2021 and closed its first day of trading at $8.92 per share. But the company has faced significant financial issues over the last year, and its stock now trades for less than $2 per share.
Matterport, a 3D mapping company that is widely considered a success story in the proptech industry, is trading at less than half of the $14.47 per share price at which it closed its first day last July.
Because relatively few proptech companies had gone public before the SPAC frenzy, Peters said the poor performance of those companies is casting negative light on the industry among investors.
“It is something that has to be addressed and explained when I’m talking to fund investors,” Peters said. "I don’t think that what’s happening with proptech companies that IPO-ed via SPAC is indicative of the industry writ large."
Peters said she thinks the entire tech industry experienced a bubble over the last year with overinflated valuations, and proptech wasn’t immune. Residential-focused firms have been hit particularly hard.
“Businesses around the residential transaction are getting doubly pummeled right now, because you have the combination of the skepticism about technology companies and the skepticism about what’s going to happen in the residential market, you’re basically suffering from the fact that residential technology companies were in a bubble within a bubble,” she said.
Residential tech companies that have been hit particularly hard after going public via SPAC, other than Latch, include OpenDoor and Compass, both of which are down more than 70% from their opening day highs.
The stock market pain began to seep into the private fundraising market during the first quarter, insiders said. As the overall economic picture has worsened over the last two months, venture capital investors started hitting the brakes.
“Once it became apparent that interest rates were going to continue to rise … panic set in,” said Nick Durham, senior associate at proptech VC firm Shadow Ventures.
Deal flow hasn’t fully halted, as VCs are still charged with deploying the money that they have pooled into funds, but they are becoming much more conservative in their investments.
Last year, Durham said it was common to see funding rounds for the highest-quality startups with 100x multiples, meaning their valuation was 100 times higher than their revenue. Today, he said most deals are in the 10x to 20x multiple range.
When startups raise money at lower valuations than in previous rounds, it can heavily dilute the value of the stakes of its founders, early employees and investors. This can be a hard pill for founders to swallow, but Durham said it is better than the alternative.
“Smart founders are 100% accepting that because they understand that taking dilution is better than their company being worthless,” Durham said. “The biggest risk to any startup is going bankrupt.”
JLL’s Grill said any VC firm that participated in early-stage funding rounds when the market was hot will experience a drop in the value of their investments when startups raise down rounds.
“The early-stage investors that came in at these very high valuations — we were all a part of that, we all had to partake in some version of this frothy environment — they’re going to get diluted along the way, and unfortunately the founders are getting hurt, too,” Grill said.
Today’s environment is especially difficult for later-stage startups that haven’t yet achieved profitability and need more cash to continue operations.
Startups that otherwise may have gone public this year now don’t want to take that step because of how poorly the stock market is valuing tech companies. But they also likely can’t raise another funding round without taking a big hit to their valuation and dramatically diluting previous investors.
The smartest step for these companies, Grill said, is to return to existing investors and ask them to put more money into the company. This way they don’t have to face the wrath of the stock market or the skepticism of new private investors, but they can secure enough cash to extend their runway.
This is the path that co-living operator Common took this year, Bisnow can first report.
The company’s last funding round came in September 2020, when it raised a $50M Series D round that brought its total funding to $113M. Common founder and CEO Brad Hargreaves told Bisnow he considered going public early last year during the SPAC craze.
He said he is glad he chose not to go that route, given the losses that many proptech firms have experienced since going public. And he said he has now secured enough money to keep operations going until either the market improves or the company reaches profitability.
Common raised $23M from existing investors at the end of the first quarter, Hargreaves told Bisnow. He declined to share the valuation at which it received the investment.
“We looked at what was happening in the market, and we felt like having a stronger balance sheet would be a good thing,” he said.
“You saw real retrenchment in the proptech sector as a whole with stock prices coming down, and we felt that was going to hit the private market,” Hargreaves added. “It was becoming clear people were getting spooked.”
Early-stage startups may have an easier time closing a funding round than their later-stage counterparts, but they are still being forced to take lower valuations, insiders said.
Altrio aims to digitize the real estate capital markets workflow and raised an $8M Series A round last week. Founder and CEO Raj Singh said its valuation was lower than he initially expected — three times higher than when Altrio raised its seed round in August, despite the company’s revenue increasing sixfold during that period.
“I’m certain the multiple of revenue would’ve been higher six months ago, significantly so,” Singh said. “It was a good bump up in valuation from the round we did 10 months ago, but it wasn’t what we were hoping for, or what we expected to get, based on market conditions before things turned.”
Singh said investors this year weren’t as interested in his long-term vision and growth projections, and they were instead focused on the company’s current finances and path to profitability.
“The focus is a lot more on profitability and a lot less on balls-to-the-wall growth at all costs,” Singh said.
The companies that are likely to face the most difficulty raising money, insiders said, are ones with business models that require a large amount of capital in order to scale.
While software companies can grow quickly at relatively little cost, many startups that raised money at tech valuations during the funding boom have business models that don’t actually scale like a tech company. These include coworking and co-living firms that require capital to build out each space and tech-enabled brokerage firms that operate more like traditional real estate services companies.
“The more capital-intensive your business is perceived to be and the farther away you are to going profitable, the harder it is for you to raise money right now,” ZiggCap’s Eisenberg said.
Alpaca VC General Partner Ryan Freedman said investors made a mistake during the last cycle by placing tech-sized valuations on companies that don’t have the profit margins or scalability of a tech company. But he said even for high-margin software companies, this is still a difficult time to raise money.
“The reality is everything’s getting punished right now,” Freedman said. “So [the market] will continue to do that until we reach a new bottom. Nobody knows where or when that’ll be, and we’ll rebuild from there.”
'Batten Down The Hatches'
The uncertainty around when the market will recover is leading executives to lay off staff to cut costs and conserve cash, and it is causing them to shift their business strategies to focus on achieving profitability sooner. For companies that remain far away from profitability and aren’t attractive to VC investors, the situation could soon turn dire.
“I’ve gotten emails from every one of our investors they send to all of their portfolio companies, telling everybody to batten down the hatches, figure out how to get to profitability and don’t count on your next round of funding,” CompStak co-founder and CEO Michael Mandel said.
Mandel said CompStak is in an advantageous position because it raised a $50M Series C round in November. He said this gives him the ability to hire people who get laid off by other proptech firms, and it could allow CompStak to acquire companies that have trouble raising money. He said he expects a wave of M&A to occur, but not until after startup executives have exhausted their other options.
“The reality is it takes time for expectations to adjust,” Mandel said. “If you raised a round not long ago at a great valuation and think your company is awesome, you’re not going to admit you’re going to have to look at alternatives until you really have to.”
Multiple VC executives said they expect to see a wave of “acqui-hire” deals in which startups are acquired at low prices that essentially amount to a way for a larger company to hire their staff.
“You’re in the early innings of that,” Freedman said of the acqui-hire strategy. “You’ll see a lot of that coming as companies get tighter on cash over the next six months and where they have to make decisions around ‘Can we raise? Do we need to explore a sale at the same time?’”
Eisenberg said he sees the proptech funding market breaking down into three tiers. The first tier is the strongest companies that are able to raise money at the same valuation they did in their previous round. The second is companies that can raise money but are forced to take a loss on their valuation.
“The third tier is where companies aren’t growing well, they need to raise money and there’s no bid, so what happens to that company remains to be seen,” Eisenberg said. “You might see some very inexpensive acqui-hire scenarios, or you may see some companies fail outright.”