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5 Criteria to Use VC Funding for Proptech

My previous article listed 5 Reasons to Avoid VC Funding. But it doesn’t mean proptech and VC are entirely incompatible. This article explores 5 criteria where VC funding works in proptech’s favor and can accelerate technology adoption in real estate.

5. VC Experience with Real Estate and Proptech

In the previous article, I mentioned that proptech founders should avoid VCs without real estate experience. Naturally, the opposite is true. If a VC does has real estate experience along with how to scale a proptech company, they would be an invaluable asset to your team.

There are a number of VCs out there that focus specifically on proptech and contech. And chances are at least one person on their team has scaled businesses from zero to one hundred million in revenue. They know what works and what doesn’t, and they can share those insights with you so that you don’t make the same mistakes. As a proptech customer, I tend to trust proptech companies that are funded by these VCs a little more than those who are funded by generalist VCs.

4. The VC can Open Doors

Not all VC dollars are equal. The industry follows a power law distribution, where 50% of the VC firms don’t make enough returns on their fund to cover their operating expenses. The top 5% have the best reputation, so they tend to be connected to the most important people in the industry, so they end up getting the best deals, so they end up getting the best returns… It’s nice to be in the top.

If you’re in the enviable position of having multiple term sheets from VC’s, one of your deciding factors should be their ability to connect you with more investors, potential hires, or prospective customers. Getting intros from a respected VC saves a lot of time vs cold calling. You need to balance how you spend your time in the early days.

3. The Proptech Product is Extremely Complex

The hardest problems to solve in real estate often involve some kind of hardware. These products need R&D, prototyping, and manufacturing expertise. It’s rare for a small founding team to have all that expertise, especially if they’re bootstrapping. The product development timelines are so long and the costs can be so high that raising a lot of money is a requirement.

Many VC’s provide this domain expertise and can connect you to the right people to scale a hardware business. I personally would be hesitant to use a complicated hardware product that doesn’t have a solid team, track record, and enough money in the bank to survive a downturn. But the best proptech products aren’t complicated at all..

2. The Proptech Product is Low Risk, High Reward

If the downside of the proptech product is low but there’s a high chance of significant upside, real estate customers will think, “Why not?” Here are some examples:

  • A free listing app for rentals: There’s little downside because a property manager isn’t precluded from using other listing apps. Worst case the app doesn’t provide any leads and wastes a little time. Best case, it increases lease up speed and minimizes vacancy.
  • A debt marketplace that costs the customer nothing if they don’t close on a loan: If a borrower can get some quotes to see what they’re qualified for, that’s valuable information. If they like the options and pick a loan, the marketplace has done its job and both sides win.
  • A drone inspection: These are getting cheaper, faster, and more consistent than human-only inspections. Inspections are typically one time transactions per project, so there’s no lingering downside. If the developer didn’t have a good experience they can switch vendors for the next project.

VC’s love to coach companies with these kinds of products because every transaction is an opportunity to test and evolve the product. And real estate customers love these products too because their underlying asset values are unaffected.

1. The Proptech Product Has a Short Life Cycle

Along the same lines as being low-risk and high reward, proptech products with short life cycles are inherently low risk in real estate. Pretty much any product that helps with the closing process or pre-development process is a one-off transaction or has a life cycle of a few months tops. For example:

  • Rental of Construction Robotics: If a GC saves a ton of labor and time with a piece of equipment they don’t have to own and maintain, this transaction makes sense for the GC and developer as long as the pricing is competitive.
  • VR Walkthroughs and Visualizations: There’s plenty of marketing collateral that a brokerage team produces when selling units. If a new type of marketing product closes units faster, then there’s little downside. Worst case, they’ll still have all the other marketing materials.

If the proptech product has a short life cycle, this is right in VC ecosystem’s wheelhouse. Iterating quickly until achieving PMF is how VCs push growth.

On the other hand, proptech products with long life cycles that are literally and figuratively tied to the building can open the landlord up to risk if the product fails or the company disappears. Iterating and requiring the customer to reinstall the product may not be a viable option. For Example:

  • Windows with Smart Glass: Imagine a glass skyscraper where large portions of the facade is smart glass. After 5 years, the startup that produced them goes under. And in year 6 the product starts failing inexplicably. That’s a multi-million dollar problem that a landlord wouldn’t have with normal windows.
  • Asbestos: Remember that amazing stuff that made buildings fireproof? Oh wait, they also caused mesothelioma. We’re still removing it from buildings today, and asbestos inspections and abatement are a significant cost in many transactions.

As a customer, I simply don’t trust new products that have long life cycles and potentially big downside risk. VCs compound that risk, as I’ve mentioned in many of my other founders’ guide articles.

The Choice for Funding Isn’t Binary

There are plenty of alternatives to getting VC funding for proptech. Despite VC deals hogging all the media attention, bootstrapping is by far the more popular path. But if you must raise money, crowdfunding on platforms like Kickstarter and Indiegogo have quite a bit of precedent in proptech. And friends and family and angel investors are typically the first sources of capital before a startup raises from VCs.

Choose Wisely

At the end of the day, riding a bunch of up rounds is glorious. It’s what you read and dream about, and seems like an accessible and admirable path to becoming a paper billionaire. I’ve outlined the pros and cons. Don’t let your ego get in the way of a careful strategy for your startup. And if you need some consulting on whether your product should go the VC route (and some introductions), feel free to contact me on LinkedIn!