Proptech Funding Starts to Pick Up Again

So, while optimism combined with a long-term view are endemic to real estate, the improving macro- and microeconomic landscapes have many in proptech polishing their rose-colored glasses.

“It starts with interest rates for sure,” said Gavin Myers, managing partner at Prudence, a Manhattan-based proptech investment firm, adding that post-presidential election clarity and other underlying factors are in the mix. “There is generally a sense that once there’s a 5 in front of the 30-year fixed mortgage [under a 6 percent rate], people will make the decision to give up this big financial asset they have to make the life changes that they otherwise would have made.”

Along with an increase in homebuying and selling due to lower interest rates, reading the overall real estate cycles is fundamental to how Prudence looks at its proptech investment horizon, said Myers.

“You have to always normalize to cycle averages,” he said. “So I think that kind of discipline is something that we’ve always employed. It’s why we didn’t get too overextended in our transactional businesses and why we found businesses that based on the valuations we paid, the capital they raised and how they deployed the capital, have been able to consistently grow, even though we’ve been at a cycle trough for more than the last 18 months.”

Myers agreed with the notion that the market slowed the past two years and has now noticeably picked up. “There’s no question that is a function of the interest in artificial intelligence more than a general desire to invest in all sorts of things that were invested in during 2020, 2021,” he said. “There’s a lot of business models that were funded that I do not believe will receive venture capital funding again, because they weren’t fundamentally technology companies.”

Going into the new year, Prudence is deciding how much more to invest in software versus transactional proptech companies, he added.

“Everybody knows interest rates affecting the cost of capital made transactions go down for a variety of reasons,” Myers said. “Part of what we’ve also had to do over the last 18 months is not completely discredit and turn away from transactional businesses. In fact, the two transactional businesses in our fund were two of our fastest growers in the last 12 months, so the transaction volume has started to come back. Those businesses, on a year-over-year basis, grew faster than our software companies. So transactions have been coming back.”

In fact, said John Ensign, president and executive managing director for North America at MRI Software, the funding pipeline is already unclogged.

“I think, to some extent, it’s already happening, and it’s broader than proptech,” said Ensign. “There is a flow of capital that’s already happening in multiple markets, but certainly in software and technology in general. If you look at the number of deal transactions over the first three quarters of `24 it’s just been a steady march up and to the right, especially coming off the lows that we saw in mid to late `23, when there was a slowdown. Things have been ramping back up.”

It’s largely about staying ahead of the macro curve. 

“You’re seeing people that are making a bet that they believe rates will continue to decline based on the indications of the Fed, so they’re deploying capital now, even if it’s still a little bit more expensive than they would like,” Ensign said. “They’re deploying now to get in a little bit earlier, hoping that they’ll be in a position to refinance or drop rates as rates continue to decline. I think everything points to the end of `24 and especially `25 as being exceptionally active.”

The coming year should see MRI continuing its historically acquisitive game plan, said Ensign.

“We’ve done a number of acquisitions this year, including some larger ones, so we looked at `25 and I think we’re seeing, as a buyer, a lot of opportunity in the market,” he said. “There’s still a lot of fragmentation within proptech, a lot of quality assets that are coming to market, that are looking for the next phase of investment. That’s a really nice opportunity for us.”

Others also see the investment fundamentals creating a sunny, if not completely cloud-free, picture for 2025.

“While funding is expected to rise, I expect a steady increase rather than a dramatic acceleration,” Ashkán Zandieh, managing director at the Center for Real Estate Technology and Innovation, a Dallas-based proptech research organization, said in an email. “We need time for the market to sort itself out and liquidity to flow through the market. Investor caution remains after previous periods of aggressive overvaluation and recent market corrections. By the second half of 2025, the landscape could shift as liquidity increases and startups show stronger metrics, enabling more aggressive rounds.”

Funding proptech companies in the anticipated easier money environment depends on several factors, Zandieh added. “In this lower-rate environment, profitability, cash-flow resilience and scalability will remain key criteria. Investors will still seek startups that can demonstrate efficient use of capital and clear paths to market traction.”

Along with a focus on housing, sustainability, construction and infrastructure tech, CRETI is studying the continued growth of artificial intelligence in proptech in the coming year. “We’re closely monitoring AI developments, given the rise of ‘AI-washing’ across various industries.”

As to what stage of startups investors will favor with more money to throw around, beauty is in the eye of the beholder, said Zandieh.

“Early-stage startups and later-stage companies have their appeal, but it all comes down to value capture,” he said. “The goal posts have shifted, and we’re now seeing tremendous value capture at the early stage. Later-stage companies remain appealing due to their proven traction and scalable business models, offering a lower-risk profile. However, many of these companies need to clean up their cap tables and balance sheets to maintain investor confidence. As a result, while later-stage funding persists, the shift toward earlier-stage investments reflects the growing desire for capturing value in the earlier phases of innovation.”

Although we are not returning to the cheap money era that dominated the earlier part of the last decade, things are looking more positive for those seeking investor funding, Raja Ghawi, partner at Manhattan-based proptech venture capital firm Era Ventures, said in a statement. Era in September closed an $88 million fund for investment. 

“The current consensus seems to be that, while we will not return to a zero interest rate phenomenon in the foreseeable future, a lower interest rate environment will be net-positive for many proptech businesses as well as the venture capital industry writ large,” said Ghawi.

Continued interest rate cuts will help proptech businesses that have exposure to debt improve their unit economics, making their access to non-venture capital easier, fueling their growth, Ghawi said.

“Venture funding will also become more available over the next two-plus years. This ‘two birds, one stone’ scenario could fuel real growth for many businesses that were driven to shrink or hibernate in response to the double whammy they suffered when the Fed raised interest rates at a historically fast pace. As interest rates soften, we should see an increase in transaction volume on the residential side and hopefully will see more access to construction financing. This should help businesses in these sectors, particularly later-stage businesses.”

Like a number of other experts, Ghawi also sees the interest rate reduction as possibly having an impact on financing-dependent parts of existing businesses, particularly residential transactions and construction.

“As interest rates soften, we should see an increase in transaction volume on the residential side and, hopefully, will see more access to construction financing,” he said. “This should help businesses in these sectors, particularly later-stage businesses.”

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