If you’re looking for big opportunities in tech, find an industry that hasn’t fundamentally changed the way it works in 50 years. Look for businesses where there are frequent transactions that require an intermediary to manage the relationship between the buyer and seller. Get a deep understanding of how these buyer and seller transactions work, where the pain points are, and where there are opportunities for efficiency that can be addressed through software and modern technologies.
This process of disintermediation, of removing an intermediary from a transaction, is what Uber did to the taxi industry. Up until their recent IPO, Uber held the title of the world’s most valuable venture-backed startup, followed by Chinese ride-share competitor Didi. Third on the list in recent years was the $30B proptech company Airbnb, another two-sided marketplace connecting homeowners and short-term renters.
The most recent venture-backed company to join the $30B valuation club is focusing on a classic legacy business: commercial leasing. New York-based WeWork raised an incredible $7.6B in 2017 and over $5B in 2018, and has shot past Airbnb with a recent valuation of $47B. All that capital has allowed WeWork to lease space (at the time of this writing) at over 718 office locations in 123 cities worldwide. Typically WeWork leases space in bulk, renovates and equips them them according to local market needs, then sublets desk space directly to freelancers and office space to companies of all sizes. Though startups have been WeWork’s bread and butter, where the need to double (or halve) headcount over a couple of months is not uncommon, companies as large as Microsoft and Amazon are also finding something appealing about WeWork. Facebook recently announced they would fill all 7,000 seats in a massive new WeWork space in Mountain View, California that’s still under construction. WeWork’s business has been successful enough to make them the biggest tenant in both London and Manhattan.
While WeWork definitely deserves credit for seeing opportunity in the rise of freelance and remote workers in the last decade, their timing was fortuitous. While established flex space firms like Regus were hammered by the 2008 recession, WeWork’s initial growth occurred when long-term leases in major centres could be had for cheap. WeWork’s cool startup vibe also resonated with a steady stream of corporate layoffs-turned-freelancer-types looking for collaborative, dog-friendly environments and good espresso.
But Airbnb and WeWork are only addressing specific segments of residential and commercial real estate. And as with any business that’s been operating essentially unchanged for decades, lots of disintermediation opportunities remain.
The growth of corporate investment and startup activity in Toronto alone is impressive. Not only is it Canada’s biggest real estate market, it’s home to several global commercial real estate players, including the world’s largest, Brookfield Asset Management. In just the past few months we’ve seen Colliers International graduate the first cohort of their Techstars-powered startup accelerator, the arrival of Alate Partners, a Toronto-based VC fund focusing specifically on proptech, and the launch of ProptechTO, a community event hosted at TWG for founders, leaders, investors and builders in the Canadian proptech ecosystem.
If there is a common thread among proptech startups, it’s that they are typically founded by people who started their careers in the traditional real estate industry and were aghast at how inefficiently their former employers ran their businesses.
Take, for example, Utah-based Homie. They are taking a huge bite out of the traditional commissions and closing costs real estate sellers pay. Unlike enhanced listing services like Zillow or Redfin that help with the search but don’t address that actual sale process, Homie is a full-service real estate company. Their software automates much of the paperwork and provides customer-centric features that improve the buyer experience. While Homie is best suited to new housing developments where a buyer might not need a walkthrough of every single home, the appeal of drastically reduced commission fees is obvious.
Of course, Homie is not the only contender in the low-fee, full-service home sale market. It competes with startups like Reali, Faira, Purplebricks and the 800-pound gorilla in this space, Opendoor. Having raised $1.5B in funding to date, Opendoor is currently operating in 20 cities across the US. Rather than help sellers find buyers, Opendoor simply assesses and purchases your home from you outright, closing most deals within a few days, then offering those homes for sale through their online marketplace. For homeowners who need to sell quickly, who want the assurance of a specific closing date, or just want to ensure they aren’t stuck paying two mortgages waiting for their old house to sell, Opendoor is an attractive option.
Disruption in the real estate space isn’t just about disintermediation. There are dozens of startups targeting slow and expensive legacy services with efficient digital ones. Rhino is easing the pain of expensive security deposits on rental apartments by offering micro-policies payable to the landlord, costing tenants as little as $10-$15 per month. New York’s Nestio is targeting traditional real estate agents and property managers with digital portfolio management tools and social-friendly marketing automation services. If there’s a lucrative niche — like commercial real estate appraisals (which, according to an industry report, is an $8B business) then there is a startup like Bowery Valuation that is modernizing the process with a platform that is better, faster and smarter than the old way of doing appraisals.
Fueling the emergence of these modern, software-based real estate businesses, sometimes called RETech or Proptech, is an unprecedented wave of VC investment. According to industry reports, a whopping $12.6B was invested in real estate technology companies in 2017 (including Softbanks’s jaw-dropping $4.4B investment in WeWork), a massive increase from a comparatively paltry $33M in 2010. While total 2018 investment in proptech dropped slightly to just under $10B, 2019 opened with a stunning $7.9B in January alone (all figures from CRETech).
The chart below lists the global Top 30 cities for real estate investment over the past 3 years (data courtesy of JLL).
In spite of the massive investments in Proptech in the last year or two, there is still a lot of room to manoeuvre for those who have well-shaped ideas and product/market fit. Given the accelerating pace of venture capital investment in this space expect the rise of innovative business models and disintermediation to continue.
In our next post we’ll look at how the increasing accessibility and transparency of real estate data is creating new opportunities, disrupting traditional businesses and opening up significant new pools of capital, and talk to some of the people on the front lines of this multi-trillion-dollar industry.
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Jun 6 • 5 min read