Has Proptech Funding Turned the Corner?
After rising interest rates tightened the flow of investment money, the spigot has begun to drip again
The news surrounding investment in proptech, and much of technology in general, has been consistently bad through much of 2023. Now, however, some investors and entrepreneurs are beginning to see some green shoots amid the autumnal browns.
Over the first half of 2023 in particular, the funding news ran the gamut from bad to horrible. But, like a Major League team making a playoff wildcard run after a bad first half of the season, even tepid performance seemed to tease some hope.
For example, in July, investment bank Houlihan Lokey reported: “The proptech market saw one of the lowest first-half funding totals since [we] began tracking the space, but positive momentum in Q2 signals a potentially stronger 2H.”
Similarly, Manhattan-based early-stage venture capital firm MetaProp’s Mid-Year 2023 Global PropTech Confidence Index, reported in late September that, on a scale of 1 to 10, investor confidence rose to 6.1 in mid-year 2023 from 5.4 at year end 2022. Startup sentiment also rose slightly but lagged behind investor confidence at 4.8 in mid-year 2023 compared to 4.4 at the end of last year.
Weak tea, perhaps, but the brew became somewhat stronger when the Center for Real Estate Technology & Innovation (CRETI) reported its latest figures just over a week ago.
“Compared to Q2 2022, which saw an investment of $3.225 billion, Q3 2023 experienced a decline with a total venture capital of $1.878 billion,” the CRETI report read. “This represents a drop of about 42 percent. However, it’s still an 11 percent increase compared to Q1 2023, which had investments totaling $1.693 billion.”
So, like with the leaves turning, have proptech’s funding fortunes turned brighter?
“It’s hard to say if we’ve turned a corner, but I think that we’ve entered the next chapter in the ongoing startup market correction that’s affecting the entire venture and startup ecosystem,” said Zak Schwarzman, general partner at MetaProp. “Certainly, I don’t think it’s yet reflected in a lot of the industry data, but from the front lines.
“Over the summer, it became pretty clear that deal activity has begun to meaningfully pick up, pricing has been resetting, ask spreads have meaningfully narrowed, and more companies are needing to come back to market as investors are increasingly being well compensated for putting fresh capital at risk.”
Schwarzman says he’s seen the investment community prioritize proptech companies that have built a strong foundation, are run efficiently, have low burn rates and high margins, and provide clear comps in the public market that are attractive to investors.
“When the market began to correct, the immediate reaction was to shift all these companies toward profitability,” Schwarzman said. “Investors funding companies want either profitability or a path to profitability, but they also want growth. So the challenge for founders is that in a capital-scarce or capital-constrained environment to orient their businesses towards efficiency without sacrificing too much of both.”
Among the proptech companies already reaping the financial benefits of funding opening up from various types of investors is Clockworks Analytics, a Boston-based provider of software as a service (SaaS) building analytics that closed a funding round of $16.1 million in August.
“I’ve raised a lot of capital in my career,” said Brian Day, co-CEO of Clockworks Analytics. “And I would say it was definitely more difficult for us in this environment than it has been with me in other situations.”
Despite the difficulty, Clockworks Analytics’ funding came not from venture capital investors but from Carom Growth Partners, a growth equity firm focused on investments in high-growth business-to-business software businesses.
“I still think that there’s a lot of uncertainty out there right now,” said Day. “I think it’s human nature to say, ‘Hey, the markets have been kind of challenging for two years, so it feels like it must be getting better.’ But I don’t think it’s necessarily calendar-driven. I think it’s environmental, and I think the environment still has some problems. We have a couple of wars going on now, and we’ve got uncertainty in the interest rate environment.
“There’s money available for really good companies with great markets and great products. But if you don’t have all those boxes checked, it’s still going to be a challenge sometimes.”
In any case, as recently as this week, two proptech companies announced major fundings: Connected access startup SwiftConnect secured a $10 million post-Series A funding round; and Banner, a spend management platform for real estate owners and developers, closed $10 million in Series A funding.
Proptech venture capital firms are definitely keeping their eyes — if not always their wallets — open for funding opportunities as 2023 moves through its last quarter.
“We are still actively investing in new real estate tech startups out of several funds,” Christopher Yip, partner at RET Ventures, said in a statement. “Like many VCs, our investment activity slowed over the winter as we focused on ensuring that our existing investments were well positioned and on advising our portfolio companies and strategic LPs on technology deployment as the market shifted.
“Since then, we’ve invested in several new companies, and have also led and participated in several new rounds for existing portfolio companies. We expect to continue investing at a similar pace moving forward.”
MetaProp’s Schwarzman expressed a similar outlook for his firm’s investment strategy.
“We believe in investing through the cycle,” Schwarzman said. “We do one thing and we do it very well: investing in early-stage proptech. Some of the themes that we are continuing to invest in are construction-related technology, and vertical SaaS for professional categories within the real estate industry that have not yet had modern workflow and software introduced.
“We maintain a focus on climate-related technology and technology to address the affordable housing crunch and crisis in the United States. And increasingly, but selectively, [investing in] companies abroad that are replicating or adapting models that have proven successful in the U.S. and North American markets.”
Still, despite the growing optimism, skepticism remains.
“I don’t think everybody can raise money right now,” said Chip Kruger, co-CEO at Stamford, Conn.-based SwiftConnect. “You need to have a good company. And it’s not just a good product-market fit that you need. You also need execution.”
The shock of the Hamas-Israel conflict increased uncertainty.
“If you’d asked me [prior to the Hamas-Israel conflict], I would have said I continue to see funding growing, albeit a lot more disciplined than it was a couple years or 18 months ago,” said Kruger. “Given events, I don’t know how it’s going to impact it. I do think that commercial real estate is going to go through some really difficult years going forward.
“But, for core technology with good product-market fit that saves costs for landlords, you’re going to see funding. After all, the venture capital guys can’t raise new funds until they put the money out from the old ones.”
Philip Russo can be reached at firstname.lastname@example.org.