Late-Stage Proptech Players Face a Reckoning

Late-stage proptech startups that already have burned through the Series A capital they raised will need to make it last for another 12-18 months because the tide of venture capital that has funded startups for the past five years now is being shut off.

Proptech valuations are plunging as VC capital is heading to the sidelines in a volatile market, several proptech players told us at CREtech 2022 in NYC last week.

“There’s a massive amount of capital that’s sitting on the sidelines, waiting to have some of the variables in the marketplace sort themselves out,” Kevin Danehy, vice chair, global head of corporate development at Willow, told GlobeSt.com.

As a recession sets in, underwriting for proptech startups has become far stingier than it was for the past five years, especially compared to 2021 and the first few months of this year.

“In 2021, the underwriting became very frothy. Now, [VC funds] are going to be much more deliberate about where they’re investing,” Danehy said.

“VC money is pulling out of the later-stage stuff because late-stage proptech is priced like the market. Those companies were looking at multiples of the market and they raised money based on those valuations,” Lisa Picard, partner at Sway Ventures, told GlobeSt.com.

“Companies are looking at more conservative valuations in the companies they’re investing it,” Danehy said. “If your expectation was a 30 or 40 multiple of revenue based on what you raised last year and the year before—and now you need capital, and it becomes 10 to 15 times revenue—you’re going to have a significant hit to the enterprise value.”

“Your existing investors are going to be unhappy and new investors may not come in. It’s becoming more challenging to those organizations that may have been recipients of capital in a much frothier market,” Danehy added.

“Valuations have collapsed quite a bit, especially in proptech,” Navigator CEO Taylor Odegard told GlobeSt.com.

The valuations have changed for small, late-stage companies that are on Series A funding, he said. With venture capital pulling back, these companies will have to prove that their business model is working to continue to draw investors, Odegard said.

“You have to have a green business model, you have to have a track record and you have to have revenue,” he told us. “If you haven’t proven your business model by now, it’s going to be difficult for you to keep pace with the larger and later hitters.”

Danehy says companies that currently are commercially viable with products that are scaleable today will fare better than those with ideas still in development.

“Capital has been driving technology. Companies that don’t have a strong business model and capable leadership are going to have a tough time weathering this storm in the capital markets,” Danehy said.

The proptech players in the best position are those that currently are well capitalized or are well-positioned to raise funds from strategic investors, he told us.

“Capital in proptech has grown exponentially in the past 10 years, but there are still more solutions looking for a problem than proptech that’s commercially viable and scaleable today,” Danehy said.

“It going to be really tough for the later stage companies that raise money on 12 to 18-month cycles. With rising interest rates, a lot of these companies will have to cut back to save cash until market conditions get better,” Picard said, projecting that it will take two to three years for the market to sort itself out.

Picard expects VC funding to keep flowing to early-stage startups, which usually have low valuations. “The tension and the stresses and the fallout of the market actually creates opportunity for early-stage [proptech] that hasn’t raised money yet,” she said.

Odegard also believes there will still be available seed money for early-stage proptech, but, overall, he projects a “vast consolidation” of proptech technology.

“You’ll see a lot of [smaller companies] becoming parts of larger businesses rather than acting as a greenfield of independent point solutions,” he told us.