Why Clelia Peters Puts Proptech Investment Under Three Lenses

Last week, Peters spoke with PropTech Insider about her firm’s nascent growth in 2023 and her vision for the company and the real estate tech industry in 2024.

The interview has been edited for length and clarity.

PropTech Insider: Let’s begin with what was it in 2023 that made you happy you started Era Ventures?

Clelia Peters: I think the thing that made me happiest when I started Era Ventures was the different people that I’ve gotten the chance to work more closely with within the context of the fund this year. So, first and foremost, the founders who we’ve had the opportunity to back. This really is a little different for me now, almost a decade into investing in this category, to have my own fund — putting the fund on the line in backing these companies and founders. 

I couldn’t feel better about the team that I’m working with. I feel proud of what we’re starting to build together. We’ve gotten incredible support from the overall community. I set out on this journey to build the fund, and I felt like I was trying to fill an unmet need in the market.

When and why did you start Era Ventures?

We unofficially started working on Era early in 2022. That’s when my partner Raja [Ghawi] joined me. I left Bain Capital Ventures at the end of 2021. We did a first close of the fund in August 2022. And we started to deploy capital more actively around then.

What was the fund’s first closing number?

I can’t say because we haven’t publicly disclosed yet. We expect to close in Q1 2024.

As I understand it, rather than the usual focus on early stage or later proptech investment, you have a different philosophy at Era.

I think that if you’re a sector-focused investor it’s really valuable to have some stage flexibility. You really need to catch some of the biggest fish in your small pond. That sometimes means that you need to have the flexibility to track performance, particularly in competitive categories, where you have multiple companies going after the same opportunity. It’s really important to actually invest in the company that’s going to be the outperformer of the group.

Obviously, I shared a start in this category with MetaProp. If you’re somebody like MetaProp and you’re actively investing in seed, you’re less competitively constrained. I think people understand that if you’re writing a smaller check, you’re invested very broadly in the category, and investing in multiple companies doing things that are adjacent. But, if you’re trying to deploy more capital into a company to take either a meaningful syndicate position or lead a round, you really don’t have the option of then investing in any companies doing anything that are competitive or adjacent. That puts the pressure on to ensure that you’re investing in the best of that category. We feel like sometimes we need a round or two to be sure that that’s the case.

So how do you define sector investment? Is there a particular area like multifamily that you’re going for, or is it otherwise defined?

We generally say that we look at the quote-unquote proptech opportunity pretty broadly. We use three different lenses to think about what could be included in that category. The first lens is asset class, and we are asset-class agnostic. We would invest in any real estate asset, and we think that industrial and many components of logistics are included. So, for us, it’s not just residential and commercial. We think there’s a lot of exciting new assets, whether it’s industrial or data centers. We’re very interested in pretty much anything where there are real estate assets involved. 

One thing that we see as interesting in investing in the real estate sector is that there’s been a tried and true notion in venture capital where you pick a certain business model within an existing geography and you replicate that in another geography. That could be that we see this banking model work really well in the U.S., so we’re going to try to start a neobank like that in South America or in India. We think that opportunity exists in proptech as well, but we also think there’s a really interesting additional nuance within the context of proptech, which is that you can take a business model that works in one asset class and replicate it in an adjacent asset. 

For instance, we’re going to start to see more innovative financing models that have grown in the residential space, and we expect that we’ll start to see them expand into the long tail of commercial retail. It expands the aperture of what we could invest in even more broadly.

And the second lens?

The second lens is that we think of most sector-focused investing broadly. This applies to proptech existing on what we like to call the innovation continuum. That continuum means there’s opportunities to invest in things that enable the existing industry, things that replace the existing industry, and things that disrupt the existing industry. So, in enablement, your customer is the existing industry, and you’re probably working from existing profit and loss categories in terms of the overall opportunity. In replacement, you can either be selling into the existing industry or actually trying to replace players in the existing industry. It really depends on whether you’re trying to replace a part of the value chain or the full value chain. That’s generally driven by replacement companies. Most often they’re trying to streamline the cost of doing something.

Disruptive companies create an entire new category of customers or new category of revenue altogether. For instance, in construction tech, you can think of somebody like Procore, an incredible story of best-in-class performance as an enablement company. You can think of a company like EquipmentShare as a replacement company. And then a company like Assembly bringing an entirely new approach to construction as a disruption. A lot of the existing investment in the proptech category has been a little bit more biased toward or focused on enablement. 

In fact, when people talk about proptech, I think they often are talking purely about enablement companies. It’s like they have used the term proptech as a proxy for technology companies that are trying to sell into the real estate industry. I think some of this has to do with the fact that so many of the initial proptech funds actually were backed by strategic investors who were looking for investments that could augment their existing operations. But, at Era, we are as, if not more, interested in investing in companies that can replace or disrupt the industry, which is one of the reasons why we made the choice not to have strategic investors, primarily owner operators, as investors in our funds.

That leaves the third lens.

As I was saying, we’re asset-class agnostic. We are interested in the full continuum of enablement to disruption. The third lens is that we believe there’s seven core business models that are investable in the proptech sector: SaaS, which I think is an obvious one; marketplaces; fintech; and hardtech and robotics. Then there’s a few that we think are particularly interesting or relevant to the proptech sector: propco/opco models, balance sheet and lending businesses, and tech-enabled services businesses. I would say that we are equally open to all seven of those business models and I do think that’s relatively distinct. 

There are competitors of ours who would say that they’re really only interested or primarily interested in SaaS. We have a somewhat divergent view. We are somewhat skeptical about the ability of SaaS companies in this category to have true breakout performance. We think it’s really, really hard to sell into the incumbent real estate industry as it exists. It’s an unusually private and geographically specific industry and it’s very hard to gain national scale rapidly. Even Procore, which I think many people consider the best example of SaaS performance in the overall category, needed a decade of slogging to build up their early customer relationships and sales before Bessemer invested. And I believe it was another seven years before they could IPO — so an unusually long period compared to SaaS.

What type of investors do you have in the fund?

We have a couple of family offices in the fund, but we’re primarily raising money from institutional investors who are people who would typically invest in venture funds. The original group of investors in our fund includes a major academic institution, a large multifamily office, as well as a smaller but still very significant family office. So people who are financial investors who are looking for financial returns, not strategic returns.

What proptech startups have you invested in during 2023?

We haven’t made that many investments this calendar year. It has been pretty slow for everyone. We did make one new investment this year, which we’re pretty excited about: a company called ViaBot, which is a robot that cleans parking lots. We’ve actually made a couple of investments so far that include a hardtech component.

Technically we are a multi-stage fund, but the reality of our fund size is that we’re going to focus on seed through Series B. And the overwhelming majority of the investments that we make will be in that earlier true venture period, but we do have the flexibility where we could invest in things outside that range.

As your investment model is somewhat different, do investors understand what you’re talking about?

We will be putting out some thought leadership pieces about this in the new year. I think for most people, the terms that we’re using are broadly identifiable. Even talking about this innovation continuum and the seven different business models, for many people that we’ve spoken to, it’s a kind of ‘aha’ moment. They think that because people have historically associated protech with businesses that enable the incumbent industry, at times they’re confused about what is or isn’t a proptech company. 

According to our definition, we fully consider Airbnb a top-performing proptech company in the past decade. But many people wouldn’t think of Airbnb as a proptech company because they really siloed in their mind proptech being technologies that enable the existing industry. And, clearly, Airbnb moved to market as a disruptor of the existing hospitality industry. But, in our category, many of the top-performing companies today have been disruptors, not enablers. 

So, for every Procore, you have an Airbnb, or even a company like Opendoor, which obviously isn’t performing the same way that it was when it initially came to market a couple of years ago, but still is something in which I would have been very, very happy to have been an early stage investor.

Looking at the macroeconomics going into 2024, how do you view next year for Era and for proptech in general?

This is a really interesting period for both venture and real estate. I’ve been seeing that both industries are facing changes that are secular, not just cyclical. We often characterize things like shocks created by interest rate shifts as being part of a natural cycle. But I think both in real estate and in venture right now, just saying that this is part of the cycle is really reductive to some significant nuance. 

I think that in real estate we clearly are going through a cycle, but I think we’re also going through a secular shift in the relationship that many people have with the spaces in which they live, work and play. Just saying that we’re in the cycle is going to leave people very exposed to some of the outcomes of the more fundamentally secular shift. 

I think that the industry is grappling with various levels of acceptance — kind of like what got us here is not going to get us there. Those fundamentally secular shifts are going to create some really interesting opportunities around innovation on the enablement side, where I think there’s never been more of a burden in managing buildings efficiently.

I also think that the real estate industry looks weaker to outsiders probably than at any other point in the past 30 to 50 years. So, if I was thinking about big industries that I wanted to come in and disrupt or do some larger-scale replacement, real estate suddenly seems a lot more attractive as an opportunity to do that, because the damage is enormous. And you can see that many of the incumbent companies aren’t moving fast enough to adapt to these fundamentally secular changes.

And on the venture side?

On the venture side, I think we’re seeing some similar stuff. Obviously, there was a cycle where things got really, really frothy in the 2021 era. We almost certainly should have seen a market correction in 2020. But, instead of a correction, we got this insane momentum or enthusiasm in the market. We’re now seeing a counter-correction that’s pretty deep. 

All of that from a macro perspective, from a purely cycles perspective, makes sense. We’ve now seen almost a 20-year pool of capital within the venture industry writ large, with venture having gone from being an obscure subsector of the overall alternative investment space to being the driver of many institutional LPs and investing strategies. I don’t think that will continue in the same way. What you’ll see is that there are some funds who will basically be mega funds. The fact that we have so many now multi-stage funds for raising billion-dollar-plus funds in venture fundamentally changes what you can do in venture. I think we’re going to see the number of funds meaningfully diminish. 

There’s going to be greater competition for deals. It’s going to create a sort of tale of two cities, where you’re going to have top-performing companies that are still being bid on in rounds with multiple term sheets. And I think valuations will come down, but they won’t come down so much. Then you’ll have a middle group of companies who are fighting to get the attention of investors, and valuations will reset there. If you can find top performers in that bunch, you’re going to see extraordinary returns right now. 

Also, there will be a group of companies, who for many years were buoyed by the overall enthusiasm in the whole sector, who will find that it’s impossible for them to raise more money. We’re going to see many more companies die or shut down, both existing companies and companies who come to market as seed-stage companies who just can’t make it to Series A or Series B. That is going to be a painful reset for those of us who have never lived through a cycle or through a more demanding venture market.

But I think what’s going to be secular about it versus just cyclical. It’s going to happen against the backdrop of a lot of capital in venture overall and a lot of capital accessible for top-performing companies. It’s almost like there will continue to be a market where if you can get yourself into the top quartile of company performance, it will still be a robust market. We will see people who are continuing to be attracted to building venture-backed companies because we will still see a lot of attractive funding events.

Given that broad view of venture, do you anticipate finding enough viable targets that you can fund in 2024, or is it going to be a struggle?

We are actively looking for companies to invest in because we think this is going to be such an interesting period to be building a company in the sector. With that said, we’re pretty discerning in terms of the companies that we will invest in. Just in our pipeline, we are at about 1 percent conversion in terms of meetings that we take and then companies in which we are interested in investing. 

But I couldn’t be more excited to be investing in this category right now as I think it’s going to be a period where the tourist interest in proptech is going to dissipate and it may appear that proptech is out of favor for a while. But we really think that the fundamental rails that drive sector-focused innovation have been laid very deeply already. The continued evolution of the real estate industry driven by tech and innovation is inevitable at this point. And, so, we think that we’re probably moving into a second-generation growth and innovation overall. If you look at things like fintech, it was really in that second generation where you started to see the truly top-performing companies be built. And we think that it’s very likely that proptech will look the same.

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