VC doors are wide open for real estate startups
Over the last couple of decades, online streaming, shopping and social networking startups have revolutionized the art of sitting around the house. Now, a new generation of internet entrepreneurs is focusing on getting us a better house to sit around in.
Seed and early-stage investment in real estate have grown in recent quarters, even as overall seed-stage rounds declined. At least 108 real estate-focused startups in North America have raised seed or early-stage rounds in the past year, securing more than $400 million, according to Crunchbase data. In the same period a year ago, 102 companies collectively raised just less than $300 million.
Rising interest in real estate deals comes amid a period of generally rising property and rental prices, as well as cultural and demographic shifts that are altering longstanding patterns of household formation. There’s also a sense among investors that real estate, despite being the world’s largest asset class, has historically been slow to embrace change.
“Real estate and its adjacent industries are broadly behind in technology adoption, so many investors look at the space as low-hanging fruit,” says Constance Freedman, managing partner at two-year-old real estate-focused VC firm Moderne Ventures.
Brendan Wallace, co-founder of Fifth Wall, another newish real estate-focused VC firm, echoes the sentiment, observing that “real estate has been a tech laggard.” The industry seems to be in catch-up mode lately, however, and Wallace says he’s seeing “an explosion of companies trying to solve pain points.” Those solutions include improving how buildings are designed, managed and financed.
Sure, there have already been some multi-billion-dollar businesses like Zillow and Redfin that brought online, mobile and data analysis capabilities to the industry. But real estate VCs believe that it’s still very early innings.
Here are some of the areas where we see significant seed and early-stage funding activity.
Group housing and the sharing economy ecosystem
Airbnb wasn’t valued at $30 billion by providing a service people didn’t want. So it’s not surprising to see upstarts looking to capitalize on many of the qualities — instant community, flexible time commitments and nicely equipped spaces — that are desirable to dedicated travelers, digital nomads and young adults who have yet to settle down.
Crunchbase has identified at least a half-dozen companies that have raised good-sized seed and early-stage rounds in the past year with a temporary housing focus. Probably the biggest early-stage funding recipient is Pillow, which raised a $13.5 million Series A round in June to build out a platform for short-term rentals that allows revenue sharing for residents and building owners. Other funded companies include Starcity, an urban group housing provider; Bedly, focused on short- and flexible-term furnished housing; and HubHaus, focused on shared housing for working professionals.
IT for landlords and managers
This isn’t the sexiest space, but there are big bucks at play. A sampling of the most heavily funded early-stage players includes several startups, such as Zumper, HomeMe and Apartment List, which are focused on adding efficiencies to the apartment rental process, as well as property management software providers like Cozy and Rentalutions.
One of the trends Wallace sees at play here is that the real estate industry has historically spent less than one percent of revenues on IT, compared to about three percent for most other industries. That indicates there could be substantial room for growth if startups can prove their technologies boost the bottom line.
Renter nation
U.S. homeownership rates have decreased over the past decade with more Americans, and millennials, in particular, turning to the rental market. With more money going into rentals, more landlords and property managers are looking to raise the bar on perks and amenities to draw new residents and convince them to stay longer.
“Multifamily owners and operators are increasingly creating digital, service-based amenities to give their renters back a commodity we have never needed more: time,” Freedman said. This is a big part of Moderne’s strategy for building its portfolio, which includes services like Hello Alfred, which provides housekeeping and errand-running for building residents; Baroo, a pet-care service targeting luxury apartment dwellers; and Hello Tech, which helps people set up their home electronics.
Workplace-as-a-service
WeWork is the best-known company playing in this space, but it’s not the only one. Broadly, the concept here is that the old-fashioned commercial space for long-term lease model isn’t appealing to a broad swathe of business customers who might be looking for space providers that offer more customization, flexibility or amenities.
Here, the most heavily funded early-stage player is Knotel, a provider of turnkey office spaces for flexible terms that closed on $25 million in Series A funding in February. Wallace sees this sub-sector as one of the best growth bets in real estate, given the size of the market, changing nature of work and potential to customize space for a host of industries and use cases.
Housing finance
The longstanding models for buying and selling a home are also in flux. Startups are aiming to make life easier for sellers by offering tools to reduce time on the market, find agents and cut commissions. For buyers, they’re offering streamlined mortgage processes and expanded options for purchasers who don’t fit standard lender criteria.
Knock, a two-year-old service that guarantees to sell homes in six weeks or less, closed a $32.5 million Series A round in January, while HomeLight, a marketplace for finding real estate agents, closed a $40 million Series B this month. Overall, Crunchbase has identified at least nine companies targeting home buyers and sellers that have closed rounds in the past year, with total investment of nearly $90 million.
Scaling up
There’s good reason to expect significant expansion and valuation markups for at least a few recent early-stage funding recipients.
For one, real estate is a weighty presence in the unicorn market. Airbnb, both a tourism company and a real estate play, is valued at more than $30 billion, while co-working space juggernaut WeWork is reportedly worth around $20 billion post-money. Other real estate unicorns include Opendoor, which purchases homes directly from sellers and markets them to new buyers, and Compass, a luxury real estate sales platform.
Real estate investments can deliver big returns, too. After a string of lackluster technology IPOs, tech-focused real estate brokerage Redfin reversed the trend with big first-day gains and sustained aftermarket performance. Zillow, which went public in 2011, has also been a big hit with investors, maintaining a market cap of more than $7 billion despite a history of steep losses.
For those looking for liquidity, it’s also worth noting that the real estate industry knows a thing or two about generating returns. After all, before it was co-opted by venture capitalists, the word exit usually applied to real estate.
Featured Image: Li-Anne Dias
Published at Sat, 26 Aug 2017 17:05:35 +0000
