Alumni Ventures

Greg Baker

My venture capital funds are intentionally diverse.  We invest across the spectrum of VC backed companies. I am usually surprised by PropTech’s portion of the VC market.  Many aspects of the industry make me think it should be higher. Recent trends are improving.  In 2012, global PropTech investment reached $32 billion (per CRETI), up from just $1.5 billion in 2014.  As in many areas, that number decreased significantly in 2022. 

The general growth trend is being driven by a number of factors, including the increasing digitization of the economy, the growing demand for real estate data, desire for household automation, and the need for more efficient and transparent real estate transactions.

One of the ways that I think about a company is a simple four question screen:

1. Is the company solving a problem?
2. Is it a big problem?
3. Is the solution simple?
4.Is the solution scalable?

PropTech companies should do well with this screen.  It is almost always a big problem since real estate is one of the largest market segments in the world. Many companies in other segments we look at do not have as large an addressable market.

Let’s look at some of these questions in a little more detail. 

Is the company solving a problem? A simple concept, but it is not always there in some start-ups. Many of them are dealing only with inconveniences. The biggest competition, and one most entrepreneurs miss, is status quo. If you are building a company with a new product or service, you need to get people to stop completing a task the way they have been solving it in the past and PAY you for solving the problem, or making it easier to deal with. I saw a demonstration of an AI product last week. 

I counted the steps to complete the task with the AI solution versus the steps to do the same task without the AI solution. It was actually quicker and easier to continue with my current process. If I had to do the same thing more than 100 times, the AI solution would ultimately save me time and effort. This company is not currently solving a problem. Will some people adopt it? Yes, will it grow to be solving a problem for most of us? Possibly, but for now it is a cool gimmick and very few people would pay money for the product.

Is the solution simple? Education of customers is slow and expensive. PropTech needs to be simple for the customer so that the training cost of conversion is very low. My son lives in an apartment building with a great system. He can let me in the security door in Wisconsin when he is in Iceland and I can feed his cat. The system allows him to see who is buzzing and let them in on his phone (it also allows multiple other useful functions). The building just has to tie a new cell phone number to an apartment, no wiring, no reconfiguration, no changing door locks if too many entry keys have gone missing. Simple for all the users. Assuming all your tenants have cell phones. Don’t try to sell this to a retirement/elderly housing unit yet.

Is the solution scalable? If it takes too much effort to make, install, or support the solution, the company cannot grow to the size necessary for VC investment. When Airbnb was getting rolled, the ability to scale was easy to envision and has certainly been proven. There are great companies that cannot scale to become tens or hundreds of millions of revenue. That does not make them bad companies, just not right for VC. This is not a bad thing. I actually believe that more than 80-90% of startups should not seek VC funding. There are better financing alternatives, especially if the company cannot easily scale, but is solving a big problem and people will pay for the business or service.

"There are great companies that cannot scale to become tens or hundreds of millions of revenue. That does not make them bad companies, just not right for VC.”

PropTech is an exciting and growing market. The VC investments are increasing and lives are being made easier. From property management software to financing technologies to construction technologies to smart home devices, there are exciting new companies. I hope this helped you understand a little more about how some investors will evaluate startups in the PropTech market, and many other markets. My screening process may be very different from other VCs - and we certainly look at other aspects of a company besides the core product or service before we invest. However, if you don’t have a product or service that I can clearly answer, “yes” to my four questions, venture capital might be a tough financing path.

VCs are always looking for great companies to invest in. If you have started a great company, and you believe it has the potential to grow very quickly, find a VC that shares your vision and you want to work with. You will be working with your first lead VC for several years. It is a long term commitment on both sides.