May June 2020 VCJ

Estimated to be worth nearly $10 trillion, the global real estate market is plagued with many of the same challenges of other legacy industries: it’s old, unchanged and reticent to adopt technology.

This is about to change.

Through investment in proptech – or property technology – venture capitalists are seeking to do damage control and bring the market out of its cycle of unclearly marketed rental properties, months-long waits for mortgages and antiquated property management systems.

Real estate innovations like these make up the proptech sector. There is no exact definition for the industry, but many investors agree it encompasses asset-light technology companies aimed at supporting participants in the real estate sector including consumers, commercial property managers, landlords and real estate agents.

Early innovators in the space include such websites as Zillow and StreetEasy, which took home and apartment shopping online to make it easier and more transparent for consumers to find potential properties.

Click here to read our story on how corporates are working with proptech start-ups

Today’s proptech sector includes such companies as Enertiv, which provides software for commercial real estate managers, and Bowery, a platform that takes care of all the back-office work for building appraisers.

The last decade set funding records for the sector, with more than $16 billion of VC money pouring into the global sector in 2019 across 559 deals, according to data from PitchBook. This marks a growth of 76 percent from 2015 to 2019, and investors say they are just getting started.

Before the covid-19 pandemic and associated economic slowdown, proptech was on course to continue to grow at a dizzying rate. While the industry is certain to take a hit amid the impending downturn, the issues it looks to solve won’t go away or get better during this time.

After the close of the first quarter, it was still too early to tell what impact the downturn will have on the sector. Proptech deals were still being announced in March and April after they had been in the works for weeks or months.

Most investors who talked to Venture Capital Journal for this story declined to discuss how the pandemic and the resulting slowdown would impact their investing plans. Neither would they say what types of proptech companies would become more attractive to back during a recession.

Investors say many proptech companies’ services will continue to be relevant after things calm down. In a late March webinar, several real estate industry insiders said this period could even see an uptick in innovation, including making residential properties better suited to remote work and reducing close human contact at hospitality and retail buildings. “Given the size of the global asset class and the nature of how backwards it is, we are at best in the early second innings of what will be a multi-decade approach to improving the way business is done in real estate through technology,” says Vik Chawla, a partner at Fifth Wall, a California-based VC firm.

Vik Chawla
Vik Chawla, Fifth Wall Ventures

Fifth Wall focuses exclusively on proptech and retail opportunities and invests in start-ups across stages and geography.

The firm was launched in 2016 when founders Brad Greiwe and Brendan Wallace noticed the technology gap and hesitance of the real estate market to adopt change.

“We had all touched on property investing or real estate investing in our time at our prior firms,” Chawla says. “What was surprising was how large the asset class was and how underpenetrated it was from a technology standpoint.”

In January, the firm participated in a $175 million Series C round in Loft, a Brazil-based digital residential real estate platform. Vulcan Capital and Andreessen Horowitz led the funding with participation from Thrive Capital, Valor Capital and QED Investors, among others.

That same month, Fifth Wall led a $35 million Series B financing in Homebound, a start-up that helps families rebuild their homes after wildfires. Khosla Ventures, Google Ventures and Thrive Capital joined the round.

All hands on deck

Fifth Wall joins a handful of other firms who have recognized the opportunities in proptech to be worthy of the entire portfolio. Firms like MetaProp and A/O PropTech are also exclusively focused on the sector, both having been formed by people with previous involvement in the real estate market.

London-based A/O PropTech formally came on the scene in January. “There is nobody right now in Europe that really has the capital to make a difference in the industry,” Gregory Dewerpe, its founder, says about starting the firm.

Gregory Dewerpe, AO Proptech
Gregory Dewerpe, AO Proptech

“We hope that what we are doing, and the scale that we’ve managed to put together, can create the right momentum in Europe. The market is so big. There is room for 50 other players like us.”

A/O PropTech launched with a €250 million permanent capital base and eight investments under its belt. The firm recently led the $7 million Series C round for Fornova, which provides a revenue optimization tool for hotels. Forestay Capital, JAL Ventures and DTCP participated in the round. The firm also participated in the $32 million Series B round for Plentific in November. The provider of property management software for landlords also nabbed capital from Round Hill Ventures and Target Global.

On the other side of the Atlantic, New York-based MetaProp was founded in 2015 by Zach Aarons and Aaron Block. They each had experience in the real estate market as well as angel and venture investing, and they decided to combine the two.

Aaron Block, Metaprop
Aaron Block, Metaprop

The firm has invested in more than 100 companies since launching, including Notion, Sheltr and LoftSmart. Founders Block and Aarons personally have holdings in industry heavyweights like Airbnb and Latch.

“There is a lot of money pouring into the [proptech] space and there is an established class now of top proptech investors who have built up a track record and do good work,” Block says. “Fortunately, in the venture world, you end up being friendly collaborators with almost everybody. We rarely compete. We like to collaborate.”

Block’s sentiment rings true to the current market landscape. In addition to the sector-focused players, many generalist firms recognize the value and the opportunities in the quickly growing segment.

Multi-sector investors like Andreessen Horowitz, Felicis Ventures and Thomvest Ventures are also heavily involved in real estate tech as part of their general portfolios.

All three have invested into such companies as PeerStreet, which operates a marketplace for finding affordable home loans. All three investors came together in the company’s $29.5 million round in 2018. AH and Thomvest also invested in PeerStreet’s $60 million Series C round last year.

Sam Jones, Torch Capital
Sam Jones, Torch Capital
Jonathan Keidan, Torch Capital
Jonathan Keidan, Torch Capital

Even consumer-focused firms like Torch Capital are getting involved with the sector. Founder and managing partner Jonathan Keidan was one of the first investors in Compass, the real estate software company that laid off 15 percent of its workforce in March, but the CEO remains hopeful that the company will be able to bounce back quickly.

The firm also participated in the €6 million Series A round into Housfy in 2019, a private house-buying and selling platform in Spain.

“Real estate is huge, [with] massive cashflow, lots of pain points and inefficiencies,” Keidan says. “There are many areas for consumers where their lives have been made more convenient and easy while real estate transactions, and everything around that, has continued to be tough.”

Part of the draw to the sector is just how far it spans. Consumer, data and AI investors are also able to find attractive opportunities under the proptech umbrella, and the opportunities keep growing.

Residential remains rough for consumers

Almost everyone interacts with the residential real estate market in some way or another through renting, subletting or home ownership. But even in the best of times, the real estate industry operates slowly and is hard to navigate.

Mortgages still take most people two to three months to secure; it is still relatively difficult to gauge the pros and cons of a rental property; and 40 percent of home buyers regret their purchase within two years, says Steven Kalifowitz, president at Localize.city.

Localize.city, which has raised $11 million in venture funding over the last four years, is one such start-up looking to help renters and buyers make a much more informed choice about where they will be potentially living. The website provides detailed information about properties including past building violations, noise and potential future construction.

Despite an economic slowdown brought on by the pandemic, real estate professionals are expecting consumers to still buy and sell homes as they move in search of work. Companies that help mitigate those moving costs and make homebuying more efficient could see increased demand in the coming months.

“When it comes to buying a home, it’s the biggest expense in your life,” Kalifowitz says. “There is really no research you can do. ‘I want to buy this home; I want to rent this place. What’s it going to be like?’”

Localize.city joins such other start-ups as Opendoor, a home selling service, and Goodlord, software to help tenants manage the rental process, looking to solve these pain points.

Goodlord closed on a $13.1 million Series B round in early March. The London company raised capital from Latitude, Finch Capital and Global Founders Capital, among others.

In November, Qualia, which provides a cloud-based closing platform for residential real estate transactions, raised a $55 million Series C round. Tiger Global Management led the round and was joined by Bienville Capital, 8VC and Menlo Ventures, among others.

“I think in the rental space, companies are making it more seamless, standardized and transparent, and that’s definitely a space that we still looking to add to the portfolio,” says Sam Jones, a vice-president at Torch Capital.

Commercial comes around

The commercial sector is also in need of an overhaul.

Some start-ups are looking to help commercial real estate buyers make more informed choices and others hope to make the subsequent building management more streamlined.

“A ton of opportunity is more on the B2B side,” Jones says. “Quite frankly, in the property management space, when you look at the software and the systems powering the behind-the-scenes operations, the majority are still highly antiquated, very outdated in their functionality, and we are seeing a lot of companies pop up in that space.”

Fifth Wall’s Chawla also pointed to building management as a growing opportunity because most managers still aren’t really sure of the nitty gritty of how their properties operate on a daily basis.

“The office tech category is still very under-penetrated,” Chawla says. “Office owners still have almost no insight into how their buildings are used. Everything from how often an elevator is run or how long a light is left on, it’s all done right now with paper logs.”

Fifth Wall led an $850,000 seed round in Enertiv in 2018. The company looks to provide that type of solution for commercial real estate managers by giving them a full-stack platform. MetaProp is also a backer of the New York company.

Before managers can take on these properties, they have to purchase them, and plenty of start-ups are looking to improve that area of the market as well by making it more data-focused and aggregate. Cherre, a property database meant to help commercial real estate buyers, raised a $16 million Series A round in February. The round was led by Intel Capital and had participation from Navitas Capital, Dreamit Ventures and Zigg Capital, among others.

New York-based Compound is an investor marketplace for residential real estate. The platform raised a $2.1 million seed round in July. Kairos lead the round and was joined by Blue Ivy Ventures and Zing Capital.

The opportunities in proptech span across all stages, too. In 2019, there were 211 angel and seed deals in the sector, or 38 percent; 234 early-stage deals, or 41 percent; and 114 late-stage deals, or 20 percent.

These numbers show a flip in the market from what was recorded in 2014 and 2015. The amount of angel and seed deals have seen declining market share over the past five years while later stages are gobbling it up.

The switch shows that the market is on its way to maturity as many of the companies that began in the early days of the sector continue to raise further funding rounds and expand.

In 2014, angel and seed deals made up more than half of the deal activity in the sector. The stage saw 148 deals, or 56 percent of the activity. Early and later stages saw significantly less market share.

There were 85 early-stage deals in 2014, representing 32 percent of activity, and 30 late-stage rounds, accounting for 11 percent of the deal count.

Going global

Many of the woes that exist within real estate aren’t specific to any particular geography and parallel proptech companies pop up everywhere.

Fifth Wall invests in the proptech sector worldwide and counts multiple investments in such places as Brazil and the UK. Torch and A/O Proptech also invest in Europe.

The latter invested in Venn, a Tel Aviv, Israel-based company that looks to provide rental solutions that include co-working spaces. The firm also invested in London-based Alte, a fintech platform for private equity investments into European real estate.

In November, Habi, a Columbian company that simplifies the cycle of home ownership in Latin America, closed a $5.5 million pre-seed round led by Tiger Global Management. Supernode Ventures, Homebrew and Zigg Capital also participated, among others.

Habi is not alone, as more than 4 percent – or $79.5 million – of all venture dollars invested in Latin America in 2018 went to proptech and real estate tech companies, according to data from LAVCA, a Latin American venture capital industry organization.

Asia is seeing its own solutions pop up in companies like Ziroom. The Beijing-based company provides property management software for rentals. The start-up raised a $500 million Series B round in June 2019 with investors Tiantu Capital, Sequoia Capital China and General Atlantic participating.

Africa has also seen its fair share of proptech innovation over the last few years. Proptech Africa, which serves as an industry organization for the sector, was founded just last year. Companies like Nigeria-based Mypadi, which helps connect students to off-campus housing, raised a seed round led by EchoVC Partners in late 2018. EchoVC also invested in Hotels.ng, an online hotel booking company.

WeWork provided industry clarity

While the proptech industry continued to sprawl across the globe and count its early successes during 2019, some of that progress was clouded by the well-documented, and arguably dramatic, decline of WeWork.

To be clear, WeWork is not a proptech company or a technology company; it is a commercial real estate landlord that markets itself as an innovative tech solution to coworking.

However, the decline of the asset-heavy conglomerate helped strip the company’s facade and showed the difference between an asset-heavy business model like WeWork and what a proptech company looked like.

Block, of MetaProp, says that the WeWork collapse actually may have provided clarity to outside investors on what business models should and shouldn’t fall under the proptech umbrella and why WeWork had been incorrectly lumped in by some outside the industry.

“The WeWork IPO was a really important time for our space,” Block says. “There was a misalignment of expectations between entrepreneurs who were building more asset-heavy real estate-centric tech companies around valuations that were unsustainable.”

Block, Keidan and Dewerpe all avoid investing in these asset-heavy start-ups because they are harder to scale, less recession-proof and aren’t as good of an overall investment as asset-light companies rooted in technology are.

“Everything that is asset heavy, we don’t think is scalable,” Dewerpe says. “We think they are very capital-intensive and the minute the market changes, and becomes less attractive, those guys are going to be facing massive issues. We’ve stayed away from those business models.”

Considering proptech investors didn’t invest in the behemoth landlord, investor confidence remained high after the company’s public meltdown.

MetaProp found that investor confidence in the sector was still high at 80 percent, which was down from 88 percent recorded in June last year, but up from the 70 percent from the end of 2018. MetaProp reported this number from its semi-annual investor and start-up survey that culls response from 2,300 respondents.

“For every half a step back with a WeWork type of situation, we are getting eight, nine steps forward,” Block says. “Still, right now, it’s all been very positive.”

Off to the races

Despite all of the progress the sector has made and the pause it may encounter in an economic slowdown, investors believe it is just leaving the starting blocks.

“Disruption is happening. Transformation is a huge thing and will have impact beyond the real estate industry itself,” Dewerpe says. “The only thing that we don’t know is how long it is going to take. I know it will probably take more time than what most people will think.”

Similar to other legacy industries like banking and insurance, opportunities in proptech are plentiful and growing because the technology gaps are huge and not going away.

Block says that MetaProp typically sees 240 proptech company pitches a month across both residential and commercial focused start-ups.

“Broadly, we will continue to see increasing efficiencies in, hopefully, all the major parts of the real estate ecosystem,” says Chawla of Fifth Wall.

Investors like Chawla are excited for the areas of the market that are just getting started, like streamlining online mortgage applications, which he predicts will be a one-click process in the future.

Keidan of Torch Capital predicts a few areas that are ripe for innovation. This includes easing the pain point that comes with home storage and trying to solve the gap that sometimes opens between selling and buying a home. Also primed for disruption is handling the transition from when a lease ends and another begins.

“We are in the very early days of this industry development. We are still five to seven years behind financial services tech as far as venture investment and industry adoption,” Block says. “There is a lot of room to run and everything still remains exciting.”