'PropTech' Needs to Die
Lumping a bunch of very different businesses together is good for neither entrepreneurs nor investors
Thesis Driven dives deep into emerging themes and real estate operating models by featuring a handful of operators executing on each theme. This week’s letter the second of a two-part series exploring the future of financing innovation in the built world. Part 1 can be found here.
Last month we highlighted five alternatives to venture capital for real estate operators looking to diversify their funding. Today we’ll tackle the ‘PropTech’ category itself, as I’ve found it to be a major source of confusion for entrepreneurs and investors alike. Rather than a coherent category, ‘PropTech’ is a nonsensical combination of two entirely separate types of companies:
Vertical software businesses selling into real estate and real estate-related companies;
New real estate operating models, brands, and financial engineering plays in the housing market.
Understanding this distinction is key for any operator looking to raise money for a real estate-related company—whether from traditional VCs or one of the alternatives we discussed last month.
There are few shared traits between (say) VTS and Sonder. VTS has more in common with an electronic medical records company or compliance platform than it does with many of its peers in the “proptech” category. Similarly, Sonder has far more in common with legacy hotel brands and management companies than it does with technology startups selling construction management software.
This is not a semantic point. Historically, companies in both these categories have pursued—and received—venture capital investments under the broad ‘proptech’ banner. But while there are examples of software companies producing venture-like returns, the second category has been wholly disappointing. As we mentioned in Part 1 of this series, WeWork and OpenDoor, perhaps the two best examples of venture-backed companies with financial or operating (rather than technological) innovations, are both currently valued at less than the total capital they’ve raised from outside investors.
This is the second of two letters diving into the future of the financing new things in the built world. The first letter looked at new financing models for innovation in the built world. Today’s letter will discuss the implications for entrepreneurs, investors, and the real estate industry. Specifically, we’ll tackle:
The assumptions investors—specifically VCs—have made about the real estate industry;
Where those assumptions are correct and where they’ve been wrong;
Where various investors sit on the risk/return spectrum, and how real estate operators and entrepreneurs can match the right kind of capital to a given concept;
How operators and investors are adapting to the nature of the real estate industry and what that means for ‘proptech’ as a category.