Venture Capital Funding for Proptech Drops Sharply in 2022: Report

New CRETI numbers show just how deep the sector’s feeling the impact of rising inflation and rate hikes — expect “cautious capitalism” in proptech in 2023

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Global venture capital funding for proptech companies dropped from $32 billion to $19.8 billion in 2022, a decline of 38 percent, according to a report issued Wednesday by the Center for Real Estate Technology & Innovation (CRETI) and shared exclusively with Commercial Observer’s PropTech Insider.

The global funding falloff was due to factors such as a 40-year high in inflation, as well as spiking interest and mortgage rates, according to the report. The capital decline resulted in the second-lowest investment total since 2018.

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The investment news was best in the U.S., where entrepreneur-founders continued to receive the largest share of investments at 43.2 percent in 2022. The top five most heavily funded regions — the U.S., the European Union, the United Kingdom, India and South America — accounted for 77.5 percent of the investment.

“Like many in the technology industry, large rounds of funding have become the norm in proptech,” Ashkán Zandieh, chair and managing director of CRETI, said in a statement. “Late-stage funding and mega-rounds have driven strong growth in recent years. But, across all sectors of the technology industry, conservative capitalism and macroeconomic headwinds have challenged the valuation assumption of private tech companies, impacting deal and dollar volumes.”

As proptech enters 2023, the “theme will be cautious capitalism,” said Zandieh. The new year is expected to bring a wave of mergers and acquisitions, and to see off plenty of firms that continue to struggle financially.

”However, it’s not all gloom and doom,” Zandieh added. “An area that continues to gain tremendous interest is climate-related real estate technology. Across all sectors of the real estate industry, owner-operators, owner-developers, occupiers, and managers are exploring climate tech as companies address climate change, develop differentiated energy sources, and differentiate their assets.”

Notably, yesterday saw news that inflation’s rate of growth had cooled substantially from 7.7 percent in October to 7.1 percent in November, giving economists and markets hope for much lower interest rates in 2023.

Looking ahead to 2023, entrepreneurs concerned about remaining economic headwinds should focus on operations, customer retention and unit economics, the report stated.

“As with every downturn, we’re also going to continue to see consolidation around a few winners in each segment,” said Jenny Song, principal at Navitas Capital. “The fragmentation of the last few years in certain categories has been confusing and sometimes anti-productive for the industry, and buyers have real vendor fatigue.”

Regarding proptech’s continuing emphasis on the growth and demand for climate tech, Travis Conners, co-founder and general partner at Building Ventures, said, “The fundamental problems of how we optimize the design, building and operating of space to deliver the best possible experience to building occupants have not been solved.

“Humans spend 90 percent of our time indoors, and today our buildings are killing our planet. Our built environment must be created and retrofitted with dramatically lower embodied carbon emissions, dramatically lower operating carbon emissions, and with a much higher regard to delivering healthy sustainable Indoor air quality, while curbing overall consumption of energy and raw materials.”

Philip Russo can be reached at prusso@commercialobserver.com.