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5 Reasons to Avoid VC Funding for Proptech

Founders, seeking VC funding for your proptech startup may have crossed your mind a few times. You may have even fantasized about it before you came up with your startup idea. While VC money can be helpful in certain situations, there are also some major downsides. Here are 5 of the biggest ones:

5. You Will Have to Give Up Equity in Your Company

One of the most obvious drawbacks of using VC funding for proptech startups is that you’ll likely give up a larger portion of equity in your company than you would if you raised money from other types of investors. VCs understand what they bring to the table and they charge you for it in the form of your equity. Friends and family and Angels usually won’t be as aggressive. And of course, if you bootstrap, you don’t give up any equity at all.

4. You’ll Have Less Control Over Your Company

The direct consequence of giving up equity is that you also give up control of your company. VCs will have voting rights through their shares, but they also usually take up a couple seats on your board of directors. This means you won’t have control over some of the most important strategic decisions. The operating agreements and term sheets you sign with your investors will typically dictate which decisions they have a vote on.

This can be especially problematic for proptech because the VC’s investment horizons can be shorter than proptech customer life cycles. Any product that is heavily integrated with a building’s operable life is inherently riskier when VC funding is backing it. And you’ll see in the next three reasons why these priorities may not be aligned.

3. The VCs Probably Won’t Have Real Estate Experience

There’s no typical path into VC, but very few of them are former real estate professionals – developers, landlords, architects, brokers. It’s a HUGE leap to VC. Some of them may own properties as side investments, but most VCs are ex-tech founders, especially generalist VCs.

VCs will sometimes let it slide that nobody on their team or your team has real estate experience, making the assumption that an outsider with expertise in an applicable technology can shake things up. Not understanding the customer perspective can lead to overly ambitious targets for TAM, traction, and of course, valuation. This leads to pressure to grow.

2. The Pressure to Grow Quickly Can Be Dangerous

If your valuation is clearly ahead of your company’s existing profitability, you have to grow into that valuation. Some proptech products are just not a good fit for a rapid iteration and high growth model. But all VCs have a grow or die attitude. This mismatch between investor goals and customer needs leads to several critical issues.

Real estate by its very nature has a slow iteration cycle (I made an analogy of its disruptability to the viscosity of liquids here). Products with long life cycles need consistent support from the manufacturers. But if VCs are pressuring founders to rapidly iterate and ditch early customers, the startup’s reputation will almost definitely take a hit.

Compounding that problem is that VCs have a 10 year investment cycle with their funds. Depending on how you define failure, anywhere from 25-90% of a VCs portfolio companies will fail in 10 years, and they’re okay with that. It’s part of their strategy. They want a small handful of companies in their portfolio to 100-1000x. So they want you to take your best shot at extreme growth, knowing that you’ll most likely fail trying.

And on the other hand, during a downturn (like right now) they may hit the panic button and pressure you to exit. Or they could suddenly stop funding future rounds, which leads to..

1. There’s No Guarantee You’ll Get Funded

The most valuable asset of an early stage founder is time. And if you commit to raising VC funds, most of your time will be spent on pitches that lead nowhere. This is time that could otherwise be spent on product and customer development. The vast majority of startups do not get funded by VCs and end up bootstrapping, if they didn’t choose bootstrapping in the first place.

So Should You Just Avoid VC Funding for Proptech?

No. While this article outlined when VC funding goes wrong in proptech, VCs are still really good at what they do. VCs have had a hand in the bulk of the S&P 500’s market cap and have had a huge influence in how the world uses and adopts technology. In the realm of proptech and real estate, it’s important to understand how and when to work with VCs to get the best outcome. And you don’t have to guess. It’s outlined in my next post.