Investing in Proptech in the current environment is reminiscent of the dotcom boom. It was a heady time where the promise and potential of the internet was just beginning to be realized. The smart money was deliberate and thoughtful with their investments while the cowboys got burned. Boston and New York are two cities that are leading the charge with the creation of real estate tech companies and massive customer opportunities. There are three keys to the proptech revolution: focusing on picking winners from a massive pool of startups (i.e. “noise”), creating defensible competitive advantages, and unlocking the full potential of real estate.
The amount of money invested in proptech per year has increased from approximately $60 million to $12 billion (a 200x increase) since 2011. There has been a surge of interest from new entrants into the space including real estate companies, generalist venture capitalist and family offices. The increased activity is helpful in growing the ecosystem but simultaneously creates a lot of noise.
Navigating the noise requires a level of discipline that is honed over years of looking at thousands of deals. The key to investing in the proptech space is distilling each opportunity into a focused investment thesis and finding the leading company that is solving the problem. For example, we developed a hypothesis that there was an opportunity to provide travelers with a differentiated, better short-term rental (‘STR’) option that was similar to staying in an apartment booked on Airbnb but still providing a high-level branded hotel experience like a Marriott. In executing our due diligence, we found around nine companies developing STR solutions of which four had minor leads. After extensive research, real world experimenting and references, we ultimately invested in WhyHotel based on the founding team’s deep real estate experience and go to market strategy that proved to have the highest level of scalability.
The next piece of the puzzle is the ability to provide a competitive advantage through networks. The Camber Creek limited partner network is comprised of some of the largest real estate owners and operators in the country. During the due diligence process we beta test the technologies with our LP’s in order to “try before we buy.” Boston based company, Building Engines, is a great example of this: Anumber of our LP’s became customers providing invaluable feedback while we evaluated the opportunity. Then once an investment is made navigating the long real estate technology sales cycles becomes a make or break for start-ups. By leveraging a built-in customer base in our LP network, we can cut the sales cycles while providing our LP’s best in class solutions effectively navigating the noise for them.
Last, the best check on the whole system is asking the questions, “are the underlying real estate assets and companies that manage them better off using the proposed proptech solution?” Continuing with the WhyHotel example, multifamily developers can utilize apartment units that would historically sit vacant for 1-2 years and monetize them. The increased profit is literally found money clearly adding value to the project. But that’s not always the case, we have seen many companies that provide a marginal ROI to a real estate firm but because they don’t consider the long sales cycle, burden of implementation, or management team time commitment they ultimately struggle to scale.
The proptech wave has the potential to increase the efficiency of real estate companies, maximize real estate assets, and unlock enormous enterprise value. The key to staying at the forefront is being completely dedicated to the effort of navigating through all the noise and leveraging networks to ensure the scalability of technology companies.
Casey Berman is the managing director and a general partner at Camber Creek, New York, N.Y.