COMMENT In history, 2020 will be remembered as the year that brought in a decade of transition in a matter of weeks. This year we’ve been questioning everything from the state of our health and our economies to our societies and social structures. The questions about proptech’s future were already trending in 2019 after WeWork’s dismal performance. Is proptech still a good investment?
The answer to this question requires that we understand both the nature of the business and the capital. We may bracket the companies that classify themselves as proptech into the challenger and the empowerer.
The list of proptech unicorns highlights many challenger businesses, including Airbnb, WeWork, Compass, Kanterra and Open Door. These businesses are all venture-backed (many by Softbank). They also do not sell any technology or product to the industry. They are mostly new brands within a traditional real estate-related business that internally use technology to run an old business model in a new version.
The value proposition is to create a strategy for developing a brand with technical advances to generate growth opportunities at lower marginal costs. Such companies are created with teams that the VC already know. The thresholds are set for each funding round to allow the valuation to be marked for exit for the term of the fund. The firm is then required to execute a business plan focused on top-line growth and the eventual improvements in margin. The exit options include either selling the business to another company that can gain value from its IP, tech or market share synergies, or achieving a public listing. The business plan is based on the assumption that the technology that creates the growth margin can be developed and deployed at the same speed as sales. In the real estate industry the sales cycle for any new product or service is very slow. It has a lethal combination of low appetite for change and cost. For a traditional VC, the fastest route to growth is to compete.
Empowerer companies, however, take on the challenge of selling technology or tech tools to the industry. This may include software for 3D modelling, planning tools, resident apps, IoT, accounting software or inspection technology. These companies need to find a market fit rather than colonising an already established market. Due to the slow sales cycle, their growth rates are lower but margins can be high. This does not mean that empowerers are not successful.
There are many example of companies such as Real Page, Yardi and Appfolio which have billion dollar valuations but their journeys have taken longer. These businesses grow slowly by cajoling the industry into platforms and then focus on product enhancement to increase their revenue per client. These companies will need to achieve profitability and then use leverage with private equity backing for growth. They can remain private or go public as a medium-growth stock. These businesses also attract strategic or corporate investment.
Recently proptech venture capitalists have raised large amounts of money from LPs within the real estate industry. The investment comes as a hybrid of advisory and investment with a promise of keeping the LPs informed of the trends in tech and also acting as gatekeepers to tech providers. However, these funds have not yet resolved the schizophrenia of wanting to achieve high growth in a slow industry. The analogy of the kingmaker while very catchy is completely misplaced in this scenario. Unlike the original kingmaker Richard Neville, Earl of Warwick, who could guarantee the support of his army and resources to Edward IV, there is no guarantee the army of LPs will put their whole weight behind portfolio companies. For many of them, as publicly listed companies or funds governed by best practices, such preferential treatment is not feasible. The only exception is the case of family offices and the volume is just not large enough to be material.
Many empowerer businesses are torn between the expectation of selling fast and increasing their top line but without the patience needed for product development to discover the market. The boom in start-ups has ironically benefited the incumbent technology providers the most. The stock price and market share for companies such as Real Page and Appfolio have surged. Clients are learning from start-ups but asking for platform solutions from the incumbents.
The marriage of tech and property will continue but its success is also linked to the kind of capital it draws on.
Tripty Arya is founder and chief executive of Travtus