Leading PropTech VC MetaProp has released a book sharing its vision and approach in cultivating a full community of resources, partnership, and mentoring to accelerate success for PropTech startups. An executive summary of “PropTech 101: Turning Chaos into Cash Through Real Estate Innovation”
Dave McKenna, CREB Editor Jaunuary 14, 2020
PropTech focused VCs are creating a unique ecosystem in which their funds not only supply capital and expertise, but the fund’s LPs themselves are often large real estate players which can offer built-in test beds, pilots, and much needed revenue. The combination of money, mentorship, and innovation-friendly customers is proving to be a potent combination to accelerate PropTech start-ups. New York based MetaProp has literally written the book on creating an innovation ecosystem within the historically slow and conservative PropTech world.
Not so very long-ago, real estate technology resembled the ancient terracotta army of the first Chinese emperor – great columns of motionless statues frozen in rank for ages, yet charmingly lifelike. As with the 2,300 year-old clay statues of Xianyang, real estate is defined by century-old business models, inherently conservative investors, and immovable, decades-long capital commitments that made real estate technology a virtually uninvestible category.
But the world’s largest asset class ($38 trillion in the US alone) nearly untouched by 21st century technology, is beginning to feel to the lively promise of tech-enhanced returns. An emerging cadre of investors, VCs, and operators are rapidly constructing a unique, purpose-built, PropTech ecosystem – laser focused on unlocking what they believe is one of the most valuable opportunities on the planet.
Fifth Wall Ventures raised a stunning $503 billion second fund in 2019, laying claim to be the largest PropTech war chest in the world, as well as the largest fund based in LA. A growing roster of similarly focused funds includes Chamber Creek Ventures, Navitas Capital, and Prudence Holdings.
One of the most intriguing aspects of Fifth Wall is the LPs themselves. Unlike most funds, the investors in Fifth Wall are also consumers of the technology they are backing. The fifty investors in Fifth Wall Fund II are like a Who’s Who of global real estate operators and investors. The fund offers a ready-made test bed and revenue opportunity for its portfolio companies. It is reported that Fifth Wall Fund I companies generate $100 million in revenue from the fund investors’ assets.
New York based MetaProp takes the ecosystem investment strategy to the next level. Similar to Fifth Wall, MetaProp’s LPs provide access capital as well as 15 billion square feet of real estate that can pilot and test (and pay for) its products. They also form the core of MetaProp’s RE 200 – a collection of mentors and sponsors focused on helping portfolio companies perfect their products and their products and business models. MetaProp co-founders, Aaron Block and Zack Aarons, detail the MetaProp investment approach in PropTech 101: Turning Chaos into Cash Through Real Estate Innovation.
Released in 2019, Block and Aarons provide a very insightful survey of the current proptech world. But PropTech 101 also offers a practical guide for investors and operators seeking to tap into the innovation world intersecting real estate. Several chapters provide actionable guidance for start-ups, investors, and operators respectively.
“There are billion-dollar opportunities lurking throughout the PropTEch value chain”
– Aaron Block, Co-founder MetaProp
The sidebars alone are worth the price of the book. Each contains an inside nugget from a big name in PropTech. For example, Peter Flint, Trulia founder and Managing Partner of NFX, describes how he was rebuffed by very wise and successful investors who believed that it was impossible to make money in real estate technology. And that was only in 2005!
The primary thesis of the book is that proptech is ( too large if such a thing exists) and that such scale accounts for both its appeal and its challenge. The appeal is that the real estate economy is so vast, its like is own world that makes its own weather. The industry is complex and almost unimaginably valuable. Even small improvements throw off enormous returns. But the challenge is that adoption is slow. The assets are static after they are built and are inherently resistant to refits. What’s more, the investment thesis of real estate in general is security and cash flow, which is antithetical to the go-go tempo and “disrupt everything” ethos of would-be unicorns.
Three Key PropTech Drivers
Commercial real estate has been in a strong growth period for years, but there are signs the rates are slowing. There are several US markets seeing rent growth plateau and cap rates expand. Some aggressive investors seek technology as a way to gain a competitive advantage and the market turns.
But Block and Aarons argue that the PropTech surge is more deeply rooted in fundamental trends than any transient market condition. They point to three key drivers which are fueling the recent combustion in proptech.
- Investment Vehicles – there has been a significant evolution in the channels available for new classes of investors to diversify into real estate. Block points to institutional vehicles like debt/lease-backed securitization and REITs as fresh sources of capital in the built-world. The proliferation of investment vehicles has added a degree of liquidity and accelerated the tempo of the industry to a degree. The acceleration has created a space for automation which start-ups are scrambling to fill. Ironically, as technology is drawn deeper and deeper into the real estate transaction, new tech-native investment platforms are emerging which could radically disrupt the process. Start-ups like Fundrise and Roofstock are developing platforms which allow passive investors with relatively small investments to access the growth and income advantages of real estate.
- Tech Commoditization – the same tides which have been transforming other industries for twenty years are finally making an impact in real estate. The advent of cheap, secure, highly- scalable computing infrastructure in the cloud, next generation software languages, mobile-first design, and global code delivery have combined to dramatically lower the cost and accelerate the innovation cycle.
- Consumerization of IT. Aaron Block gives the millennial innovators a lot of credit for the new ideas in proptech. He points out that this up and coming generation of leaders are digital natives. They have come to expect convenience as consumers and are applying that ethic to business processes with relentless energy. A surprising number of proptech entrepreneurs launched their start-ups based on their own awful experiences with the traditional real estate. Example like OpenPath, Hemlane, and Spatial Laser were all born out of personal frustration with the creaky age-old business modes that populate the industry like boulders scaled by Neil Armstrong his way to Mare Tranquillitatis. They all seek to lower the friction of real estate transactions which gave their founders such carpet burns.
PropTech Value Chain
Given the wide compass of PropTech, Block and Aarons share a particular concept MetaProp has developed to subdivide the sprawl into manageable tracts, from “dirt to disposition.” Aaron Block, co-founder and Managing Partner of MetaProp, describes the taxonomy as just one of many ways to organize the space. However you choose to carve it up, “there are billion-dollar opportunities lurking throughout the value chain,” said Block.
The value chain described in PropTech 101 tracks with the stages of an asset lifecycle akin to a manufactured product in which each stage of the process, from raw material to delivered consumer good, adds a certain value to the final product.
Three Taxonomies
Defining a tech space is a naturally arbitrary exercise, but the effort can be well worth it when attempting to discern opportunity from opportunism. Block and Aaron offer not one, but three taxonomies in PropTech 101 used by MetaProp to classify the space.
- By Tech – the first most obvious distinction to make is the type of technology used in the solution. Often the product is a software (SaaS) solution in which the service is delivered via the cloud on a subscription basis. It might be a hardware device like a sensor, a camera, or a whole food chain of IoT gadgets. Another example would include tech-enabled service in which a traditional human-based service is augmented or reoriented with the aid of technology.
- By Asset Type – all commercial real estate shares the quality of being a built environment, but the environments are very distinct and have specialized needs. The typical categories include office, retail, residential, and hospitality.
- By Geography – Location, Location, Location is the gospel of real estate. But proptech is a global industry and the solutions must be suited to the particular markets they serve. These idiosyncrasies represent opportunities for well-designed products. What works in New York may fall flat in San Francisco. And what flies in Beijing may be grounded in Moscow.
When these three taxonomies are overlaid on the value chain it creates a very flexible and specific framework in which to consider the proptech space and begin to make critical distinctions.
Capital, Partnership, and Community
Just as Fifth Wall does, MetaProp leverages its investors’ real estate assets to give their portfolio companies a jumpstart with built-in customers who are friendly to the innovation process and willing to sponsor new technologies within their assets. This is a powerful formula that allows the funds to derisk a bit and has allowed the PropTech ecosystem to evolve faster than it might have otherwise.
In addition to the capital and partnership, MetaProp is very actively cultivating a PropTech community – specifically in New York City. “Location matters in real estate and in proptech. New York is the center of the world, the number two tech market in the US, and the gateway city to America,” said Block. “Silicon Valley has a lot of consumer technology, but New York is the home of real estate in the US and the center of gravity for proptech.”
Ten years-ago there was literally no PropTech community according to Block and Aarons. Today there is a growing number of PropTech focused VCs, and a global series of PropTech events designed to foster its growth. MetaProp itself organizes, co-produces, or sponsors over thirty PropTech events every year.
A significant community-building enterprise is the MetaProp Accelerator at Columbia University. The 22-week program provides a $250,000 seed investment to early-stage start-ups along with extensive access to industry mentors, asset partners, and other investors.
The program is in its seventh annual cohort and boats a number of successful alumni like Hom, Enertiv, Liveby, and OutsideIQ.
Advice for Start-ups
With dozens of PropTech investments to its credit and as advisors to other funds entering the space, MetaProp has honed a mechanism that would be PropTech founders may find useful. The three critical assessment factors of deal selection are 1) Product Idea, 2) Market, and 3) Team…but not in that order.
The evidence shows that the team is the single most important predictor of success – more than product or market. MetaProp employs the Hipster, Hacker, and Hustler test. This is a formula from Rei Inamoto, who coined the phrase with the idea that a successful team needs to have a creative force, a technical prodigy, and a driven evangelist.
The second most important factor is the product idea and not the product itself. Perhaps more to the point, the best companies are driven by a problem to be solved, not a love affair with a particular product. And finally, the market must be ready and able to grow a huge business.
Following Reid Hoffan’s adage, “if you’re not embarrassed by the first version of your product, you launched too late.” Block and Aaron encourage proptech founders to pursue a minimum viable product approach…“Failing fast and iterating often, making incremental improvements based on an almost continuous feedback loop.”
The book wraps up with a Pre-Investment Checklist developed by MetaProp as due diligence outline. This is presented as a tool for investors, but it may actually be more valuable for the founder as an orientation to the funding process and a hint at what raising money will actually require.
PropTech 101 does an excellent job orienting the reader with the major trends in PropTech and offers good insights for a variety of readers on how to approach this rapidly evolving space. With a strong conceptual framework and very hands-on practical advice the volume is a good primer on the industry and great introduction for a founder to the venture world.
About the Authors
Aaron Block as been co-founder and managing director of leading PropTech venture capital firm MetaProp since its inception in 2015. Previously, Aaron was an executive running the Chicago region of global commercial real estate services firm Cushman & Wakefield before serving as the chairman of Chicago-based BayRu, the US-Russian e-commerce company, and eBay’s exclusive drop-shipping partner for Russia/CIS consumers.
Zach Aarons has been working at the intersection of real estate and venture capital for the past decade. Zach is the most active early-stage PropTech investor in the United States, having funded over 60 startups in the space as an individual as well as 40 startups (and counting) through MetaProp NYC’s venture capital funds.
