VC Money Continues to Pour into Proptech Investments

Investors love a hot sector, and that’s one good way to describe proptech based on the amount of cash being poured on by venture capital firms. The recent funding announcements are just a sample:

• Property operations software company Facilio raked in $35 million in Series B financing from Dragoneer Investment Group, Brookfield Growth, and existing investors Accel India and Tiger Global Management.
• Venture capital firm Camber Creek started with real estate tech in 2011 and just closed an oversubscribed fourth fund with $325 million in investment.
• Investment management firm Tacora, which focuses on early- and mid-stage companies, closed $250 in its first fund that will focus on a number of sectors, including proptech.
• European proptech VC and accelerator firm Pi Labs completed its third fund at $90 million, which it claims was oversubscribed by 40%.

And that’s within a few weeks. Sums like this have become a regular feature in the market. Still, investors should be careful because there are distinct differences between investing in real property and in software firms, particularly through a venture capital fund.

VC firms are well established in real estate and have been seen as potentially having an edge in areas like opportunity zones. One advantage in a real estate investment fund is that if things go wrong, at least there’s tangible property owned by the fund, so a chance to recoup some loss.

VC money in software is significantly different. The investment model is similar to the particularly non-high tech book publishing business in that both depend on big winners to deliver most of the profits. 

For a typical VC firm, a few of the target investments are expected to be the big winners, although that’s not guaranteed. A number will see mediocre returns on investment, and then there are the ones that will go out of business. Furthermore, the VC companies have stakes of varying size in their portfolio companies. They don’t own them outright, so getting the right mix of investment level and ultimate returns is complex. If parts of the strategy go wrong, there won’t be hard property value left. It’s a risky business and the big money is made in solid and usually splashy exits. The company goes public or gets acquired and the VC investor gets its share. 

On the positive side, this isn’t like the dot com days where anxious VC firms poured money into new ventures, often consumer-focused that concentrated on getting “eyeballs”—users and potential advertising targets—rather than profit. There is the expectation of paying customers who will create revenue and, eventually (hopefully) profit.