In 2013, as the U.S. was still coming out of the Great Recession, venture capitalists poured $475 million into property technology companies.
By 2018, that number had climbed to more than $5.4 billion, according to investment bank GCA Advisors. And in 2019, the flow of cash shot up 69 percent year-over-year to $9 billion.
These are enormous sums. And they helped turn the last decade into a kind of golden age for real estate innovation and property technology, or “proptech.”
But now, as the coronavirus sends stocks plunging and markets into bear territory, the golden age may be drawing to a close. In fact, as economists debate a potentially contracting economy, proptech experts believe the sector is poised to see news of consolidation, layoffs and generally harder times.
That doesn’t mean things are entirely grim. Dror Poleg, for example — the author of Rethinking Real Estate and a member of the Urban Land Institute — believes that amid the chaos there will be silver linings. But, he told Inman, there “will be some blood” along the way.
First, the bad news.
The gist is that in times of economic uncertainty, investors “tend to start sitting on the sidelines,” according to Eric Stegemann, CEO of real estate software company Tribus.
Stegemann told Inman that investors understandably want a degree of certainty when it comes to their money. However, the coronavirus has created a unique situation in which conditions are rapidly changing and there’s little understanding about what tomorrow holds. And that uncertainty may prompt investors to dig in rather than spend.
That’s “why you’re starting to see these wild swings in the market,” he explained, adding that “the same thing happens when it comes to venture investing.”
This process is apparently already beginning.
Taylor Wescoatt — a general partner at real estate-focused fund Concrete Venture Capital — told Inman in an email that while the companies in his firm’s portfolio aren’t currently seeing significant impacts, he is aware of “general reports of VCs talking about retrenching as they typically do in an economic downturn.”
Wescoatt said that his firm is now asking potential recipients of its cash about the virus’ “downstream impacts” to their business. He also explained that the current situation “does dampen our appetite for companies that rely on customers having strong economic growth.” In other words, Concrete is now less interested in companies that depend on sales transactions or leases, which Wescoatt’s firm sees as “starting to stutter.”
Stegemann agreed that if the the current situation with the virus isn’t corrected soon, it could begin to impact things like home sales. If that happens, even great deals may not be enough to counteract the problem.
“If you’re a consumer and there are great interest rates, but you’re worried you might die by going and looking at homes, are you going to go look at homes?” he asked. “I personally believe that if you don’t have to go buy a car right now, if you don’t have to buy a house right now, you’re not stepping outside to do those voluntary items.”
Stegemann speculated that if the housing market itself slows down, funding opportunities for proptech companies could further dry up. Even deals that have already been agreed upon, he also said, could suddenly be put on ice as investors wait to see what happens.
“If you’re a company that’s reliant on funding, it’s very possible that tomorrow that funding deal that you had lined up but not signed yet isn’t going to go through,” he added.
The results of less funding could play out in a number of ways.
Depending on the severity and duration of the coronavirus situation, companies that are reliant on a flow of venture capital to stay operational may have to look for opportunities to consolidate with other firms, Stegemann said. Or, they may need to find buyers in order to survive.
Some will also probably lay people off.
“You’ve already seen companies starting to make these decision even before some of this was going on,” Stegemann said, pointing to data firm Remine’s move to dismiss 38 employees this week. “I think you’re going to see more of that.”
Stegemann did also say, though, that some companies may also use the present moment as an opportunity to correct over hiring, meaning that layoffs may happen during the spread of the coronavirus, but not because of it.
In any case, though, Wescoatt also said that “consolidation’s very much on the table already, in our portfolio and out, and may accelerate if the funding environment gets wobbly.”
All of this comes just a week after Sequoia Capital, a powerful Silicon Valley venture firm that has backed Trulia and Airbnb, sounded the alarm over the coronavirus.
“In downturns, revenue and cash levels always fall faster than expenses. In some ways, business mirrors biology,” Sequoia Capital argued in a memo. “As Darwin surmised, those who survive ‘are not the strongest or the most intelligent, but the most adaptable to change.'”
While all of this sounds dire, Sequoia’s Darwinian take hints at a silver lining as well.
Poleg agreed that in shakier economic times, investors tend to pull back. And he said that some companies simply may not survive a period of possible tumult on the horizon. Others will “have to cut, and they’ll have to cut aggressively.”
However, Poleg also argued that there are currently dozens of real estate startups trying to do similar things. If the field contracts, “somebody will have to come in and consolidate them.” And that could eventually lead to stronger, more holistic and more durable products that merit the investment of whatever cash remains on the table.
“There’s still money on the sidelines and they’ll have to prove that they’re worth it,” he said.
The situation could also be a boon to the companies that survive because they’ll finally emerge as the leaders of whatever segment of the market they were competing in.
“It creates an opportunity for each of them to pull ahead,” Poleg said.
Wescoatt made a similar point, saying that consolidation actually makes sense because “many companies start as single-problem solutions.”
The point here is that there may indeed be some tough times in store for real estate startups that have relied on venture capital. And GCA Advisors’ report next year is unlikely to show the same explosive and consistent growth in investment that has dominated the past decade. But, at least some experts also see the industry emerging stronger on the other side of the coronavirus crisis.
Poleg said that concept even applies to layoffs. Though any layoffs would obviously be painful in the short-term, some of the people affected may come up with the new ideas of tomorrow.
“We’re definitely seeing more and more talent coming into the market,” Poleg said. “Which I think will lead to the creation of a lot of great companies.”