It wasn’t that long ago that Connected Real Estate Magazine reported that investments in property technology, or proptech, were setting records. Today however, enthusiasm for investing in proptech has started to wane, WealthManagement.com reports.
The recent decrease in enthusiasm – and funding – for proptech stems from the tech sector facing a valuation reset earlier this year. Plus, it appears many venture capital investors have lost their fear of missing out (FOMO) on the next big deal, according to industry experts. The combination of the valuation reset and a lower urgency among VCs has led to less capital being put toward proptech and a decrease in startups that are getting funding.
“There’s been this feeling of FOMO among proptech investors that if ‘I don’t invest now, (the startup) is going to find another VC, and I’m going to lose the deal,’” Adam Demuyakor, founder and managing partner of Los Angeles-based Wilshire Lane Capital told WealthManagement.com. “But now investors are thinking, ‘If some of the best startups are slashing their valuations that much, and their investors are licking their wounds, was there really a need for that FOMO? Am I actually losing that much by waiting and being patient?’”
Demuyakor is not taking part in the VC proptech investment pause, however. His firm is raising a fund with a goal of more than $100 million to invest in early proptech strategy. Wilshire Lane Capital recently raised $13 million in Series A funding for Piñata, which offers reward and credit building programs for renters. The firm also led a $9 million seed round for Awning, a rental home acquisition platform.
Demuyakor told WealthManagement.com that his company is still optimistic about proptech opportunities, and he believes VCs eventually will make their way back to the sector and the startups that can survive this current downturn will be rewarded.
Investments in proptech fall, but some remain in the game
In 2022, VC firms invested $32 billion in proptech companies worldwide, which was close to pre-COVID-19 figures and a 28-percent increase from 2020, according to The Center for Real Estate Technology & Innovation (CRETI). Proptech funding picked up momentum during 2021; VCs put more of their dollars toward mid- and late-state companies rather than early-stage ones. VC investments in private proptech companies then hit $13.1 billion during the first half of 2022, according to CRETI.
Investment momentum has started to cool off during the second half of this year, however, WealthManagement.com reports. Funding fell 23 precent between the first and second quarters of 2022, according to CRETI.
“The current climate has certainly dampened the collective ‘mood,’” Kitty Sullivan, investment principal with JLL Spark Global Ventures, the corporate venture arm of JLL, told WealthManagement.com. “The general sentiment is that near-term market conditions will be choppy.”
JLL Spark remains one of the funds that remains confident in proptech. The fund made the second largest deal of 2022 to date—$170 million Series round for CRE lending startup Lev, according to Pitchbook.
Sullivan said JLL Spark keeps investing in new proptech because venture investing is a “long-term game.”
Tough times for proptech startups
For the first time in several years, proptech startup founders are witnessing a different environment when it comes to funding—one with a lot less available investment dollars. More than 70 percent of investors had planned to put more funds into proptech companies in 2022, according to MetaProp’s 2021 Year-End Global PropTech Confidence Index. That level of enthusiasm pushed the Investor Confidence Index to 9.3 out of 10, tying the record set at year-end 2020. Additionally, 85 percent of investors – another record – said the proptech companies in their portfolio were meeting or exceeding expectations regarding customer growth, WealthManagement.com reports.
Today, MetaProp’s PropTech Confidence Index has fallen to 7.4 out of 10 and almost 75 percent of startup founders believe it will be harder to raise capital.
Proptech startups looking for investors might want to start with showing they’re mindful of their spending. Today, VCs are taking these companies’ spending habits into consideration much more than their revenue growth, which is a significant change. Investors want to know how much money they’re going through (burn rate) and how much longer can they survive on the money they have before going broke.
“We didn’t hear those questions much in the past few years, but in this type of funding environment, companies that are reckless with their money will have to pull back and may lose market share, or they may even die outright,” Demuyakor said.