2019 year review banner – annual review or summary of the recent year – word abstract in letterpress … [+]
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At the end of December each year I am wont to reflect on the past 12 months of my life, and dream of what the next 12 might look like. In this column we do the same for the PropTech market, with the help of investors from around the world. So, for the second year running, I am closing out the old year, and kicking off the new, with a review of 2019 and new year predictions for 2020. Today’s column will focus on 2019; look out for the predictions piece in the first few days of the new year.
As always, I couldn’t have done this without the input of some of the top PropTech VCs globally. They are: Pi Labs founder Faisal Butt, Concrete VC founder Taylor Wescoatt, MetaProp co-founder Zach Aarons, RET Ventures partner John Helm, Camber Creek general partner Jeffrey Berman, JLL Spark APAC lead Anuj Nangpal, and Taronga Group co-founder Jonathan Hannam.
What are the top things that stand out for you from 2019?
The investors all agree that 2019 has been yet another bumper year for the sector, which saw investment skyrocket even beyond the wildest expectations they had at the start of the year. According to some estimates, in Q3 2019 global investment into PropTech reached $24.6 billion, making $30 billion a plausible target for the year.
Certain events, like the failure of WeWork’s IPO, caused mixed feelings. As Berman puts it, though WeWork is not a PropTech firm but a real estate services firm, “because the media, certain investors and even the company itself labeled (and valued) it as a tech firm, its effect on the proptech universe was vast. So, I’d be lying if I didn’t say that the implosion of WeWork’s IPO wasn’t #1 on this list.” Wescoatt and Butt concur, with Wescoatt stating that though WeWork hasn’t dented proptech, it’s definitely cast doubt on lease arbitration models.
Butt and Aarons agree that the sector is now firmly in the mainstream, with Butt using the example of the Times releasing a 16-page report on the future of PropTech, something that would previously have been unthinkable.
Real estate players are taking PropTech more seriously than ever before. Hannam noticed an ever-greater focus on innovation from his partners across Asia. “Senior leaders and boards are now taking regular trips to Silicon Valley or to Israel to look at the innovation ecosystem and there is an understanding that change is coming and that the corporates may need to be better prepared. (…) A great example is with a major global developer – Lendlease – appointing a senior global technologist from GE Digital – Bill Ruh – with a mandate for change and as a direct report to the CEO.”
Nangpal and Helm concur. Beyond adoption of proptech by occupiers, Nangpal can now see a strong interest in this from investors and landlords, with owners happy to set up test environments to try out new things. Helm pointed out a strong uptick in what is known as “rent tech” with large multi-family and single-family rental owners rapidly adopting solutions that not only improve resident experience to differentiate themselves in an ultra-competitive environment but also streamline operations.
Sustainability was also a strong theme in 2019, with Wescoatt and Butt noting that the drive for companies to hit net-zero emissions by 2050 is propelling PropTech to help find solutions to reduce the built environment’s carbon footprint.
Was the year in line with your expectations?
Unsurprisingly, all the VCs agreed that 2019 was a great year for PropTech, both from the perspective of investment growth and that of increasing maturity in the space. This is caveated with reservations around valuations in some cases by both Helm and Berman, with the latter stating that “a pleasant by-product of the whole WeWork imbroglio is it highlighted the importance of fidelity to our investment strategy.”. Helm noted that “later-stage PropTech company valuations are generally high right now, as they are across the board, but things are calming down after this summer’s excitement with WeWork.”
Looking back on the year, Nangpal shared that “I was expecting more rationalization in the use cases that tech startups would chase and I think that that has happened as expected. There is active feedback from end-users like corporates and investors which has allowed products to mature.”
Butt feels that for Pi Labs, 2019 was about change, evolution and maturing. Hannam is excited that in a short space of time he is already seeing a revaluation in Taronga’s investments. The feeling is shared by Wescoatt, who is “excited about the uprounds in our portfolio and the tremendous transformation our partner JLL has made.”
What tech and what sectors won in 2019? Which lost?
There was a vast array of “winners” in 2019.
In no particular order, these were software-as-a-service companies according to Aarons, who made the example of Buildium, which was acquired by RealPage for $580 million; facial recognition and artificial intelligence according to Butt, who saw them being harnessed more effectively in PropTech; and flexible real estate according to Wescoatt, who believes the market has been forever changed with landlords now aware that they need to care about the end user.
Helm has seen a strong focus by rental property owners on smart home automation solutions to keep up with residents’ tech-enabled lifestyles, with a focus on connectivity and IoT. Tech-enabled amenities and digital management tools to make the owner’s operations more efficient were also winners, as well as furniture-as-a-service offerings such as Fernish.
Hannam focused on five key themes in 2019: better, safer construction, customer experience, operational excellence, automated processes and digital market places. Taronga has also been working on solutions to provide last-mile logistics in retail malls as well as digital market places that will look to improve revenues and returns from retail – especially suburban or sub-regional malls.
According to Berman, “The winners are and will continue to be the companies that reduce friction around transactional elements in the real estate industry. It boils down to this: the companies that are winning are raising table stakes with real innovation. The sectors that are winning are those that are proving real utility.” He higlighted portfolio companies Nestio (a multifamily industry software provider) and WhyHotel (a pop-up hotel that adds value to multifamily buildings during lease up) as good examples of this.
Off the back of the WeWork bubble bursting, the investors all concur that lease arbitration models where no real innovation is taking place, and which are “masquerading” as tech companies, have definitely lost their shine in 2019. Another much-hyped segment that has now tapered off is blockchain. As Berman and Wescoattput it, the real estate market isn’t ready for the tokenization of assets, and the hype currently exceeds its practical uses.
Has your business as a VC changed over the course of the year?
This is what each investor had to say.
Butt: “Pi Labs has been through an intense year of growth. This year we have focused on growing our platform, hiring new people into our Pi Labs team and building an international scouting capability. Next year we will launch Fund 3, which will be significantly more impactful than our past funds.”
Aarons: “It becomes more competitive every day. There are more PropTech-focused venture capital funds globally than ever before. There are also more strategic real estate companies investing in technology as well as generalist Sand Hill Road venture capitalists pouring capital into the sector.”
Helm: “We have – and will continue to – focus solely on helping build cutting-edge real estate technology companies for the multifamily and single-family rental industries. Rent tech represents a substantial opportunity within proptech that has been largely ignored by the investment community. We believe we are in the right market, with the right business model, at the right time.”
Hannam: “During the year we launched RealTechX – a government-supported and industry-led scale-up program for Asia. The response was well beyond our expectations with more than 180 applications from 22 countries. Most pleasing for our team was the quality of applications, especially from markets like the US and Israel, where emerging businesses are looking to use the RealTechX program to help them launch into Asia.”
Nangpal: “From being opportunistic, we have become more focused. We have a better understanding of use cases driven by adoption, ROI, sales cycles, etc and therefore are fairly clear on what and where we will invest in.”
Berman: “We are way busier! Every ‘node’ in the real estate tech ecosystem has grown. There are more willing end users in the real estate community seeking innovation alpha, more companies addressing industry pain points, more high-quality entrepreneurs joining the fray and smart investors deploying capital to support nascent companies. It’s great!”
Wescoatt: “Nothing’s changed in our strategy, as we watch the rising appetite from the RE corporate sector grow in line with our expectations. We also see a lot of Corporate RE backed funds not creating the right incentives for good VC managers.”
2019 was a great year for PropTech, albeit one with a few bumps on the road, and many surprises. Tune in next week to find out what the VCs I spoke with expect for 2020!