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How Risky Is Proptech? 4 Factors To Consider

Proptech Founders, if you’re struggling with traction, you should understand how risky your product is from your customer’s perspective. I’ve broken it down into 4 risk factors for you.

Real estate owners are in the business of preserving or increasing the value of their property, and there’s plenty of ways to do that.

On the development side, it boils down to building what the market demands, on time and under budget. On the property management side, it boils down to keeping the building occupied at the highest possible rents while staying lean on operating expenses. In both cases, we manage large amounts of capital and asset values, often more than your proptech startup is worth.

So when you ask a customer to change their processes to start using your product, we quickly run through a series of four questions in our head that dictate our decision. And they’re all about risk.

Risk Factor 1: Would I Marry Your Proptech Product?

The biggest risk factor we consider is how long your company’s product life cycle is. I group it into three categories, which are analogous to relationships:

  • Proptech products that can be sold in quick single transactions like drone inspections or construction estimations are like a no strings attached one night stand. I can use different vendors each time. No big deal.
  • Proptech products that require prolonged involvement, like smart lighting systems or a green roof system, are like dating. Breakups can be messy but survivable.
  • Long term and heavily integrated proptech products like co-working or 3d printing are like a marriage. My building is exclusively integrated with your product. If it doesn’t work well, divorce proceedings can cut my valuation in half and ruin me.

The longer term your proptech product’s life cycle is, the more can go wrong, and the higher the risk it poses to our property valuations. But if it passes this test, we next consider your company’s track record.

Risk Factor 2: How Young is Your Proptech Company?

If you’re an early stage proptech company asking for us to marry your product, I speak for most developers here. Not interested.

Apologies for the condescension, but we will not hand the keys to our multi million dollar assets to a bunch of twenty-somethings who have very little real estate experience. And yes, even if you’re a twenty-something whose entire career to date was in real estate, you have very little experience in real estate.

Track record is (almost) everything in real estate. So we apply that same thinking to proptech companies. Who else is using it? How long have they been using it for? What were the results?

It’s tough to convince your earliest customers when nobody else has tried your product yet. You need to figure out some other way to de-risk to make up for it.

We need to see a proven product that survived downturns. Unfortunately, many new technologies haven’t been around long enough to see a couple recessions. So that leads us to our next consideration..

Risk Factor 3: How Mature is the Underlying Technology?

Call us antiquated, old fashioned, traditional.. I’ve done the same and I’ve heard it all. But we actually just have higher standards when it comes to technology because we can’t expose our underlying asset values to risk.

So when a new technology starts disrupting industries all around us, we’re not blind to them. We’re just waiting until it’s mature enough to safely use on our properties.

Unfortunately that means we’re either on the “wide acceptance” or “laggard” part of the technology adoption curve.

We are more willing to experiment with nascent technology if the products are one-off, short term transactions from well established companies.

See how this works? The other two factors de-risk the technology. But there’s one more factor..

Risk Factor 4: How Are You Funded?

If you’ve put up with my snark and condescension up to this point in the article, thank you. There is a reason for it- Proptech set my real estate career back a few years. A proptech company’s product was heavily integrated with my buildings, and the VCs on the board of that company voted to raise my building’s opex so that the proptech company could profit.

Replacing the company required complex surgery that left deep scars. From that experience, I evolved the ability to identify and articulate the risks outlined in this article that I’m now sharing with you.

So the final risk factor is whether a proptech company is funded by VC.

If you take venture capital, it comes with a host of expectations. They want to drive you towards 100x returns through growth hacking. And aggressively iterate and pivot until you achieve product market fit. And rapidly acquire customers without figuring out how to profit. None of these priorities align with those of real estate stakeholders. Which, I must remind you, are your customers.

So when I see a product that’s mismatched with it’s funding, I don’t use it.

If you’re still in your ideation stage, you have to stop and really think hard about whether you need venture capital to successfully launch and grow your company.

Luckily for you, I published a guide about how to determine when VC funding is appropriate for Proptech and when it isn’t. And in case you can’t get enough of the condescension, I created a version of this post just for engineers, quantifying the risk factors into an equation. And if you’d like further 1 on 1 advice, check out my strategic advisory services!