In the early days of the COVID-19 pandemic, interest rates for mortgages dropped to historic lows. Predictably, home buyers made hay, taking full advantage of the favorable financial environment to pick up new homes and refinancing mortgages on their existing homes. Startups operating in the financial side of the real estate tech market suddenly faced a surge in demand, and many departed on hiring sprees to keep up.
But as those interest rates, housing prices and inflation began to climb back up, demand slowed dramatically. This meant that the once high-flying startups were suddenly dealing with the opposite problem — too many employees and not enough transactions to make money.
Layoffs became widespread. Shutdowns were a thing again. As interest rates soared even higher, the once frothy market morphed into an environment where only the fittest could survive.
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To get a sense of how investors who have backed proptech startups with a financial focus are dealing with the market shift, we reached out to three active investors. The trio shared their thoughts on everything from what types of startups in the home buying and lending space have the best shot at survival to the advice they are giving startups in their portfolios.
Pete Flint, general partner of NFX, noted that the chances of survival are higher for proptech startups that let consumers fractionally invest in properties and increase access for those seeking a rent-to-own approach. “The best thing founders can do during a downturn is move quickly and efficiently, and evolve their offering to match the new needs of the market. This will help them capture more market share, which will give them the highest chance of survival,” he said.
Nima Wedlake, principal at Thomvest Ventures, agreed, noting that agility is a critical trait. “Startups that survive this period will adapt their product offerings to meet the needs of today’s homeowners and buyers,” he said.
In such a climate, companies that help others navigate tough times seem to be in special demand. “Companies that sell software that enables cost-cutting or additional lead-generation opportunities are seeing accelerating adoption as incumbent mortgage companies realize they need an edge to drive demand,” Zach Aarons, co-founder and general partner of MetaProp, pointed out.
“If a startup can prove its users see significant savings, then they shouldn’t have a hard time being successful in this market,” he said.
We spoke with:
- Pete Flint, general partner, NFX
- Zach Aarons, co-founder and general partner, MetaProp
- Nima Wedlake, principal, Thomvest Ventures
Editor’s note: For a more complete picture, we’re examining the proptech sector from three different angles. This survey covers proptech startups with a financial focus, and we’ll soon publish a survey that looks at upcoming tech in the space, and another that examines the environmental impact of proptech and what startups are doing to minimize their footprint.
Pete Flint, general partner, NFX
Startups doing anything related to home buying or lending have struggled this year. Which types of startups operating in the home buying/lending space do you think have the highest chances of survival?
Resilient proptech companies have to be able to navigate the cyclicality of the industry. It is embedded in the category, and with the long housing and tech boom, many founders have underestimated this.
In my view, it is less about the “type” of startup that is more likely to survive now and more about what the startups do to respond to this moment. The best thing founders can do during a downturn is move quickly and efficiently, and evolve their offering to match the new needs of the market. This will help them capture more market share, which will give them the highest chance of survival.
The verticals that we think will be more resilient during this economy are:
- Products that simplify the process and save money for homebuyers.
- Platforms that open up additional income opportunities for landlords, agents and brokers.
- Companies that enable consumers to fractionally invest in attractive properties.
- Products that increase access for consumers who are looking to take the rent-to-own path.
What advice are you giving fintech-focused proptech startups in your portfolio regarding growth and keeping burn low?
When I was building Trulia in 2008, housing transaction volumes plummeted. It was a scary time, but we used that opportunity to develop new products that spoke to the state of the market, like foreclosure search, data reports to navigate the market and more.
Startups have the advantage of being able to move quickly and tailor their product faster than incumbents. There are two questions founders should be asking themselves right now:
- Are there unmet needs that can be serviced with my product?
- How can we evolve to meet these new opportunities?
Beyond that, you should try to keep burn low enough to give yourself at least 18 months of runway. If not, attempt to raise more financing now to extend your runway.
If you’re in a lending or highly leveraged business, become comfortable with lower margins and lower risk. It’s hard to predict what’s ahead. Focus on cost-efficient and scalable distribution. Be mindful of cash and burn and force efficiency in all you do. But most of all, play to win; don’t play not to lose.
Don’t pull back from innovation, but stay focused on an efficient and scalable go-to-market motion. Think about how you can use this time to lock in your supply or demand.
Some fintech-focused proptech startups are thriving in this environment. What types of companies do you view as the least risky to back?
Generally, B2B-focused companies do better when consumer spending pulls back since they operate on longer timelines and have better access to capital. Companies like Lev are positioned well with their fintech marketplace for commercial real estate financing. Another one is Withco, which helps small businesses lease-to-own the properties they rent.
On the consumer side, companies that lower barriers of entry to investing in real estate will also do well, as people have less money to invest. This includes Landa, which lets anyone invest in income properties for $5.
We’ve been seeing more companies offering fractional investing in real estate, whether it be rental homes or vacation properties. What do you think of this trend, and where do you see it heading?
Fractional investing in real estate is part of a broader trend changing the nature of real estate ownership, or what I call Real Estate 3.0, and we are at the start of a much larger shift that will change the real estate industry for the next decade or so.
I’ve seen this industry innovate in three major waves over the course of my career. I think of them as three layers, where one innovation builds upon a previous one.
The first was the information revolution, where companies like Trulia and Zillow gave a generation of homebuyers access to information that had historically been siloed. We call this Real Estate 1.0.
The second layer was the transaction revolution: Real Estate 2.0, which is about digitizing, streamlining and bringing the transaction online.
The third layer coming into sight now is the ownership revolution. We are seeing companies innovate on the core concept of ownership, which is opening up affordability and accessibility to ownership to underserved groups, and we suspect this will ultimately change the core industry.
The foundations that have been built along with the new finance, and potentially web3, technologies have the potential to create an even more liquid market for fractional shares of real estate. This builds upon a more digitized and frictionless transaction (Real Estate 2.0), and the emergence of a hyperaware buyer (thanks to the information revolution, or Real Estate 1.0).
What other trends are you seeing in this space?
The biggest trends we’re seeing are companies innovating on the concept of ownership as part of Real Estate 3.0. This has manifested in five major opportunity areas:
- The evolution of rent-to-own.
- Fractional ownership (lifestyle version — think vacation homes, etc.).
- Fractional ownership (asset version — trade fractions of real estate like a stock).
- Rapid liquidity for real estate owners.
- Rapid issuance of mortgages or loans.
We’re incredibly passionate about backing founders building in these areas, and encourage any of them to reach out and learn more at www.nfx.com.
Zach Aarons, co-founder and general partner, MetaProp
Startups doing anything related to home buying or lending have struggled this year. Which types of startups operating in the home buying/lending space do you think have the highest chances of survival?
Within proptech, there are mortgage technology companies that originate mortgages directly to consumers, and there are also SaaS technology platforms that sell to existing mortgage customers. Companies that sell mortgages directly to homebuyers are struggling with the interest rate hikes, as more people are priced out of obtaining a mortgage right now compared to a year ago.
However, companies that sell software that enables cost-cutting or additional lead-generation opportunities are seeing accelerating adoption as incumbent mortgage companies realize they need an edge to drive demand. They also have more time to demo and test software since demand is more slack.
What advice are you giving fintech-focused proptech startups in your portfolio regarding growth and keeping burn low?
For growth, startups need to keep their options open when it comes to alternative financing options where appropriate. In addition, they should prioritize building what they know is working, and think about how to keep those efforts alive as the market continues to correct itself.
To keep burn low, exercise a hybrid work model if you find your office cramped and you aren’t already working this way. It will help you use your space for meetings and other essential engagements. This will create a culture of productivity for team members when they go into the office. In addition, you should avoid significant purchases or signing big, long-term contracts. Also consider building a blended team by utilizing contractors if your company has a hiring need.
In 2021, we were advising our companies that they needed to grow their revenues by at least 3x every year in order to secure the following round of private financing. This year, the market has shifted substantially. We are telling our companies that they need to reduce burn drastically and also improve on margin profiles in addition to achieving revenue growth.
However, the revenue growth we expect is now more like doubling year over year as long as burn rate is under control and the margin profile is expanding.
Some fintech-focused proptech startups are thriving in this environment. What types of companies do you view as the least risky to back?
Companies that focus on streamlining operations and positively impacting business bottom lines are thriving. If a startup can prove its users see significant savings, then they shouldn’t have a hard time being successful in this market.
Also, payment platforms are a simple concept, but they work. People want ease. Back-office fintech workflow SaaS tends to thrive in recessionary environments, as customers are looking to cut costs. The global financial crisis proved to be a fast growth period for enterprise software companies in proptech that worked with business units like accounting, as they were able to streamline back offices.
We’ve been seeing more companies offering fractional investing in real estate, whether it be rental homes or vacation properties. What do you think of this trend, and where do you see it heading?
I’m a fan of fractional investing; it gives more people the opportunity to own real estate. Historically, the chance to purchase more considerable assets has [only] been available to institutional investors with the money and the team to do due diligence.
It’s important that fractional investors are financially literate and understand the risks. A benefit of fractional investing is that it will help diversify an investment portfolio. We haven’t made an investment yet in the space, but we are tracking it actively.
What general trends are you seeing in proptech?
Given that the MetaProp partners are currently in Asia for the firm’s inaugural APAC Alumni Summit, it’s fair to say we are seeing proptech going global fast.
The timeline in which founders can take their startup global is as instant as they want it to be. We are seeing companies like Mapped, only founded in 2019, become able to scale their business in Asia as soon as three years later. This is due to increasing proptech demand from abroad, coupled with an appetite for startups to create versions of their products that function in different markets.
At the macro level, digital transformation has a hold on the real estate industry and there is room for massive growth.
Nima Wedlake, principal, Thomvest Ventures
Startups doing anything related to home buying or lending have struggled this year. Which types of startups operating in the home buying/lending space do you think have the highest chance of survival?
It’s certainly true the startups across the housing finance category have faced meaningful headwinds this year — mortgage origination volume is expected to decline by 49% year over year, according to Fannie Mae. Larger mortgage companies like United Wholesale Mortgage have aggressively reduced pricing in order to capture market share. That creates a challenging environment for even the best entrepreneurs.
Agility is a critical trait. Startups that survive this period will adapt their product offerings to meet the needs of today’s homeowners and buyers. For example, Figure quickly scaled its HELOC product offering, which allows homeowners to borrow against their home equity. The company surpassed $325 million in origination volume in June.
What advice are you giving fintech-focused proptech startups in your portfolio regarding growth and keeping burn low?
Both the venture capital and debt capital market funding environments have meaningfully shifted to “risk off” in 2022. It’s unclear when these markets will normalize, and as such, we are advising companies to extend operating capital and reorient the business toward profitability instead of growth.
This may mean pushing back certain elements of the product roadmap or pausing commercial efforts on products that have longer payback periods. Additionally, many companies are shifting to more permanent capital markets structures — i.e., dedicated fund capital via an OpCo/PropCo model compared to the traditional credit facilities used to fund transactions or originations.
Some fintech-focused proptech startups are thriving in this environment. What types of companies do you view as the least risky to back?
While there is an element of risk present in every venture investment, I have been impressed by several companies at the intersection of fintech and rental management, such as Baselane, which provides banking tools for emerging landlords. There are more than 14 million individual real estate investors in the U.S. who have been historically underserved by software vendors, who tend to focus on larger property owners.
Additionally, I believe there are tremendous opportunities to embed technology and financial products within construction workflows. Several startups are growing nicely within this space, such as Ergeon, which enables anyone to order construction projects like fences and driveways, much like how you order other products and services online.
We’ve been seeing more companies offering fractional investing in real estate, whether it be rental homes or vacation properties. What do you think of this trend, and where do you see it heading?
We are big fans of the broader trend around lowering the barriers to entry for investing in real estate. There is a burgeoning ecosystem of startups in the rental management space, and landlords are now equipped with a powerful set of tools for building a portfolio of investment property, at any scale.
Collectively, they offer several distinct “flavors” for ownership, from fractional, passive investing opportunities (Arrived, Lofty) and single-asset purchases (Roofstock, Doorvest) to real estate fund investments (Fundrise, Keyway).
Ultimately, individual investors will be able to create rental portfolios similar to the way they build stock portfolios, giving more people a new way to build wealth within the real estate asset class.
What general trends are you seeing in this space?
We’re seeing interesting early-stage startup activity in a few areas:
- Novel models for financing homes or accessing equity in homes, given the rising interest rate environment, which increases barriers to entry for prospective homeowners and disincentivizes existing homeowners from listing their properties for sale.
- PropCo/OpCo company models, where startups partner with institutional investors to “programmatically” deploy capital into an asset class. See Mynd’s partnership with Invesco or Bungalow’s partnership with Deer Park Road.