Proptech Hits Record VC Investment

It’s a tough market for venture capital investment at the moment. With inflation pressure and chances of a recession in the offing, some name firms in start-up spaces—like Sequoia Capital and Y Combinator—have been warning companies not to count on raising more capital, as CNBC reported.

The greater context makes the latest VC funding report from the Center for Real Estate Technology & Innovation (CRETI) more remarkable than on its face. There was a big jump of investment that went to real estate-focused tech: 26% of global funding, according to the CRETI analysis.

“Venture capital investments in private real estate technology companies outperformed the global venture capital market,” CRETI wrote. “In H1 2022, $13.1 billion was invested in real estate technology companies, including commercial, construction, residential, industrial, and other real estate sectors.” That was up 5.65% from the first half of 2021, even as the stock market, and especially the tech side, took a deep dive in a cold lake. 

The split was roughly 60% of money going into seed and Series-A rounds, while Series-B and higher funding received 40%. The biggest tech subsectors targeted by the investments were residential and industrial (26% each), followed by hospitality (20%), commercial (12%), construction (11%), and other (5%).

While the report does address how much and what, it doesn’t touch on the whys, but some consideration of what VC business models, historical practices in CRE, and recent financial success offer potential insight.

On the VC front, the companies raise money from institutions and accredited investors who play the role of limited partners. The general partners of the VC firms are charged with wisely investing the money, enduring disappointments in a majority of the investments, and hitting blockbuster success with a handful that generate the big profits.

If VCs can’t find anything to invest in, they can’t make money for the limited partners, who are likely to then take their fiscal ball and go home—or at least to some other place with promise of returns. Even when times are tight and the warnings go out to their existing investments (most of which, remember, will be disappointments to one degree or another), the firms must continue to seek returns.

Real estate has been on a tear for a few years, with the pandemic and easy monetary policy flooding alternative investments, driving up prices, and suppressing cap rates. There was money to be made and, simultaneously, an industry that has been slow to adopt technology to aid operations, marketing, and performance.

CRE firms and investors had money to spend, and many tech startups saw the field as ripe for innovation, with the ability of customers to support it. That attracted the VCs.

But the continuing interest in investing? The CRE industry is already seeing pressures from questions about whether tenants could continue to enable historical rates of rent growth. Companies also faced significant increases in financing costs as the Fed pushed up interest rates to slow inflation. The combination of factors meant profits, still necessary, were going to take more work.

Technology offers a hope of improving operations, data analysis, marketing outreach, and other areas that could lead to stronger performance. So, the VCs continue to fund startups in an area that has yet to see the big consolidation that’s happened in many other tech areas, because the general partners have hope they’ll latch onto one of the next big winners.