Has Proptech Peaked?

An inside look from a CEO’s perspective

This has been a year of some concerns about over investment, specifically around SoftBank’s investments in proptech unicorns WeWork and Katerra. WeWork received as much as $18.5 billion from the SoftBank Vision Fund over the last few years and was the largest recipient of funding in 2019. Earlier this year WeWork prepared for an initial public offering, but shortly after the release of its S-1 filing, concerns over the company’s valuation began and the IPO was later postponed.

SoftBank has also invested $865 million in Katerra, the factory-focused construction start-up, in this year alone. Katerra recently announced that it is closing its Arizona factory and laying off approximately 200 employees. The company has boasted of its robust pipeline of billions of dollars in commercial real estate projects, but it has been plagued by delays and issues around the construction of some of its modular components.

However, despite these isolated cases, investment in proptech continues apace. In fact, in November alone, according to data from CRETech, over $1 billion was invested in a variety of commercial real estate start-ups. The 2019 KPMG Global Proptech survey released in October found that 87% of those surveyed believe that the real estate companies they work with will increase their spending on proptech solutions within the next 12 months.

The Biggest Proptech Deals of 2019

Some of the bigger moves in 2019 can give us a clue about where venture capital money may head in 2020.

One of the hottest areas continued to be iBuyer start-ups. The leader was Knock, which nabbed $400 million at the start of 2019. Knock’s differentiator is that it works with “trade-up” buyers looking to sell one home and move into another. In March Opendoor raised $300 million, giving it a $3.8 billion valuation. Opendoor is backed by SoftBank’s Vision Fund, among other investors. It has taken a market-by-market approach. Recent data compiled by Redfin showed that iBuying represented 3.1% of all sales in the third quarter of 2019 in 18 markets. As top iBuyers including publicly traded companies like Zillow (NASDAQ: Z) and Redfin (NASDAQ: RDFN) move into the high-priced and competitive markets in California, 2020 may be the year that iBuying faces its biggest test to date.

A WeWork competitor, Knotel, raised $400 million in a funding round in August. Knotel has sought to keep pace with WeWork by growing rapidly and has touted the fact that it has more office space in New York City than WeWork. However, a recent report from Crain’s New York indicated that the firm may struggle to fill all of its space in the city over the coming years.

Another SoftBank-fueled company is Compass, the residential real estate firm that raised $370 million in a Series G round over the summer. The start-up was valued at $6.4 billion at that time. While in 2018 and 2019 Compass was in acquisition mode, buying large independent brokerages in urban areas, it has indicated that in 2020 it plans to focus less on expansion and more on technology. Compass has established a technology hub in Seattle.

While some fintech and proptech start-ups are centered around new ideas, others focus on making an existing system better. Lemonade, a millennial-friendly company that provides renters and homeowners insurance, raised $300 million in April and now has an over $2 billion valuation. Another large transaction was a $160 million Series C round for Better.com, a company that aims to streamline the mortgage process.

(source: fool.com)

Proptech areas to watch in 2020

As you can see in the examples above, the world of prop-tech has yet to really grasp growth based on profits. Instead, it has focused solely on raising money, getting exposure, and hoping someone figures it out. Now if I was a betting man, I’d say that Proptech is still in its infancy. And when things are in their infancy, you need to look small.

There are is still plenty of disruption to happen, and most of the will come from the inner workings of the machine itself. The nuts and bolts are old, and those are the pieces the need to be replaced. Believe it or not, the world of real estate is STILL run on excel spreadsheets. The likes of Yardi, Salesforce, Oracle, Microsoft Dynamics and so on, do not touch the majority of growth in the buildable world. They are enterprise, and focused on being as agnostic and widespread as possible. The money is in the movers and shakers at the forefront of the industry. We’ve taken every measure know to advance the building process. Using the latest construction techniques, advanced materials. But developers, both commercial and residential; even though they have a plethora of sexy software platforms to spit out graphs and reports — still will not give up the spreadsheet. And that I believe is the single biggest shift that will shake the industry.