In 2016, Brad Greiwe and Brendan Wallace faced a problem familiar to many first-time fund managers: potential limited partners had little interest in their debut venture capital vehicle.
Two years and a $212 million top-performing maiden fund later, the duo face the opposite problem: handpicking limited partners to participate in their second fund.
In between its two vehicles, the real estate world seemingly woke up to the vision Greiwe and Wallace built their VC firm, Fifth Wall, on: real estate has long ignored technology, but to do so now means it risks being left behind.
Funds for sector-specific technology abound for agriculture, education and other seemingly more niche industries than real estate. The Fifth Wall founders – who each have experience in real estate and technology – identified a market ripe for disruption.
“What we saw was this massive void in the VC ecosystem, where you had real estate, which is the largest industry in the US – 13 percent of the US economy – and anyone who’s familiar with real estate at all knows it’s one of the least technologized industries,” Wallace says. “That’s true impressionistically: if you walk into a building, it doesn’t look or feel much different than it did walking into that building before the dawn of the internet. But empirically, real estate is one of the lowest spenders on IT versus all other major US industries.”
Interest in property technology has begun to accelerate. VC spending increased from $2.42 billion in 2015 to $1.91 billion in the first half of 2018, according to data provider CB Insights.
Offices: San Francisco, Los Angeles
Total invested capital: over $150 million in 25+ companies
Strategic investors in Fund I: Hines, Macerich, Prologis, CBRE, Equity Residential, Host Hotels & Resorts, Lennar, Lowe’s Home Improvement, Rialto Capital Management, Rudin Management Company
Funds: stage-agnostic, but typically targets investments in Series A, B and C
2016-vintage Fund I: $212 million.
Investment sizes: $1 million-$12 million
Fund II: currently in market, targeting $400 million. Investment sizes: $5 million-$25 million
Wallace and Greiwe have identified a few trends driving this interest. Over the last five years, they say consumer and sector changes have forced real estate to think higher-tech. Across property types, landlords have adopted a more customer-centric approach to management, offering more amenities and more opportunities for tenant engagement. Existential threats – from sources few predicted – have also popped up, with Airbnb, WeWork and other startups-turned-mega-companies threatening traditional business models, though those groups own little or no real estate. In a longer cycle, real estate owners have shifted from buying low and selling high to focusing more on value-adding operations, typically enabled by technology.
And for firms of all stripes, the money now cares. Investors, boards of directors and other stakeholders are asking managers about their technology strategies.
“If you don’t have an answer to how technology is going to influence, enable or disrupt your business, you’re going to be in trouble,” Wallace warns.
Wallace and his co-founder are betting that technological trends will only accelerate, as real estate plays catch-up to finance and other sectors that began evolving years ago.
“It’s in our humble opinions that in 10-15 years from now, there will be no discernable difference between a technology company and real estate company,” Greiwe says. “If you’re still just a real estate organization, you’re going to be losing to your tech-enabled competitors.” Greiwe and Wallace share backgrounds that prove their thesis about real estate enabled by technology. Both came from real estate families and started at real estate investment banks before working with some of the largest private equity real estate companies. Later, Wallace co-founded two companies: a workforce optimization company that raised $33 million of venture capital and was acquired in 2014, as well as the largest ridesharing service in Latin America. Greiwe co-founded a Blackstone platform that relied on technology for deal sourcing and asset management: Invitation Homes, which would become a $12 billion single-family rental company.
With those backgrounds, the pair identified not only massive underinvestment in real estate technology, but also a need for corporate buy-in. An in-house corporate VC arm, however, was not an appealing option, since they had seen too many fail across industries for lack of the right talent, incentive, operations and other problems. On the other hand, corporates offered sizable portfolios in which VC-backed companies could immediately scale; deep industry knowledge and relationships; and the power to sway peers’ technology adoption.
For the best of both corporate and private VC funds, the co-founders put together a hybrid vehicle, which they claim has no equal across industries. Half of the fund’s limited partners are financial: Ivy League endowments, other university endowments and pensions that are investing out of a VC bucket, not out of real estate.
The other half – which invest under the same terms as financial investors – are corporates acting as both capital partners and portfolio company accelerators. These real estate firms, chosen to represent facets of real estate – Hines for office, CBRE for property services, among others – work with Fifth Wall’s advisory team to evaluate the startup landscape and adopt what the groups deem the best technology. Some technology fits with just one strategic partner, but others, such as energy efficiency, can be broadly applicable, which helps widen the potential distribution funnel for the portfolio companies across the fund’s investors.
Fifth Wall’s proposition partly rests on these marquee names – Hines, Equity Residential and others – adopting the VC fund’s portfolio companies’ technologies, making them the industry standard.
Both types of investors benefit from the hybrid model, the co-founders say.
“A generalist VC fund looks at their LPs every three years and says, ‘I lost money on a large portion of my deals but made a very high return on a small subset.’ This is in large part because most generalist VCs are forced to speculate if certain technologies will be adopted by the market incumbents,” Wallace says.
“By contrast, if Fifth Wall’s losing money on a large portion of its deals, that means we’re almost not doing our job, because we’re in the business of not just trying to speculate or guess what the future of built world technology will be; we’re tasked with knowing it or making it happen. When we invest in a company, we don’t just cross our fingers and hope it grows. We’re often pre-engineering growth for our portfolio companies with contracts with our strategic partners that can immediately boost revenue 4-5x. This is broadly what we mean when we use the phrase ‘Kingmaker.’”
From construction to micro-mobility
The firm is making progress on its second fund, closing on $101 million against a $400 million target for Fifth Wall Ventures II in June, according to a filing with the Securities and Exchange Commission. The firm declined to discuss fundraising.
Both funds invest in Series A, B and C companies – startups that have some proven technology. By category, Fifth Wall is investing in the overall “built-world environment.” That overarching term can encompass anything touching real estate, from construction materials to building systems to micro-mobility – a term used for Lime, one of its portfolio companies that offers shared bicycles and electric scooters. The firm’s most recent public investment was follow-on capital for Blueprint Power, a company that helps landlords sell buildings’ excess energy.
No matter the portfolio company, the firm follows standard VC underwriting practices to examine a target’s financials, leadership and other elements. In addition, Fifth Wall considers three areas: asymmetric information, which often comes through corporate relationships; access, to avoid being squeezed out of funding rounds – though that has not yet occurred; and a unique ability to influence outcomes, typically based on partner relationships and the firm’s embedded business development team.
At its outset, dealflow came from the firm or its corporate partners. Now, however, VC funds seeking out Fifth Wall have become the greatest source of deals. Wallace says relationships with generalist funds, which now look to Fifth Wall for anything built-world-related, are among the firm’s strongest assets.
‘A less risky endeavor’
Houston-based Hines, which oversees $111 billion in assets, works with Fifth Wall to identify opportunities for its office-focused portfolio. Even if its fund investment does not perform well, the Houston-based firm gains knowledge and partnerships, says Charlie Kuntz, the firm’s head of innovation.
Portfolio company spotlight: Blueprint Power
One of Fifth Wall’s recent investments helps building owners monetize excess energy
Reducing energy use is a laudable goal, but going a step further to monetize energy could be the next frontier for landlords.
Blueprint Power, Fifth Wall’s most recent investment as of press time, is betting it can bridge the landlords that generate excess energy through sources such as solar panels and the entities that could buy power. The New York-based startup, which raised a $3.5 million Series A financing round in late July, has built technology that uses machine learning to both manage the use of generated energy and to predict consumption needs and sell excess energy.
Claiming a $400 billion opportunity, Fifth Wall joined a group of investors for the Series A including proptech-focused MetaProp Ventures, sustainability VC-focused Congruent Ventures and two partners at VC firm Union Square Ventures. The startup also overlaps with Fifth Wall corporate partner Lennar: Blueprint Power co-founder Robyn Beavers came up with the idea while working at Lennar, the company acted as a founding investor and Lennar’s president sits on the startup’s board.
Blueprint Power envisions buildings of the future serving as next-generation power plants, with smart energy management systems, onsite generation and energy storage.
“We’re trying to utilize our own capital for strategic reasons in this area. It’s much less about creating substantial returns. The amount of capital we’re talking about that we’re focusing on in this space compared to our broader real estate portfolio is quite small, but the effect that those kinds of investments and partnerships can have on our portfolio could be much greater than the investment we’re making into the tech itself.”
Fifth Wall opened access to the full startup ecosystem, which Hines could not access on its own. Without Fifth Wall as an intermediary, engaging with startups is “a risky endeavor for us,” Kuntz says, noting Hines’ background is not in venture capital. Startups benefit from the partnership, too. Engaging with Hines directly without the Fifth Wall intermediary would be “way too cumbersome for these startups” because of Hines’ institutionalized nature.
Hines identifies what problems it wants to solve or what it wants to create, then liaises with Fifth Wall to create a request for proposals. Hines evaluates respondents based on operations and quality, while Fifth Wall evaluates candidates from a financial perspective. Once the firms agree on the best candidate, Hines works on implementation.
“It’s incumbent on us not just to enable our strategic partners by identifying technologies that allow them to do their existing business better, but it’s also to challenge them, in terms of bringing them ideas that might disrupt, dismantle or even re-invent some of their existing business lines or open up new business opportunities altogether that they may have never considered before,” Greiwe says. Kuntz adds that the partnership also benefits Hines’s investors, which are increasingly focused on technology.
“It’s coming up more and more with our capital partners,” he says. “I think that more and more investors are frankly trying to decide for themselves whether they want to be proactively engaging in real estate tech or if they want to lean on their operating partner to figure it out. We’re seeing some institutions that are interested in what we’re doing because it makes them feel more confident in partnering with us. Others are interested in what we’re doing because they’re thinking about getting into it themselves.”
Fifth Wall’s Wallace sees ever-increasing interest from investors, not just from those that manage their capital, in technology. “If you’re an asset allocator, seeing these trends and frankly being at the forefront of them is increasingly important to you because you have an increasingly competitive real estate capital market,” he says. “So being forward-looking gives you an edge, especially as it relates to the creation of these new tech-enabled real estate concepts.”
Working with fund managers
Fifth Wall’s model benefits more than solely its investors, its co-founders say. They have been approached by all the largest private equity real estate managers interested in technology and insights, including what the next big technology-enabled real estate investment opportunity, like Invitation Homes, could be.
As traditional managers have these conversations, the lines between a private equity real estate fund and a VC fund are already blurring. Blackstone, for example, invested $3.3 million in portfolio management software VTS in 2015, using capital from its eighth opportunistic fund. In a $15.8 billion fund, that investment barely registers – but it indicates a shift in strategy from a traditional fund mandate.
Fifth Wall is also investing in portfolio companies with heavy real estate needs, which could lead to opportunities for managers to provide what they already know: buildings. Clutter, a company that raised Series C financing last year from Fifth Wall and generalist tech VC firms such as Sequoia Capital, is one example. The firm transports customers’ items from home to a remote, underutilized industrial property, rather than a purpose-built self-storage building in a city center.
Homebuilder Lennar’s investment management subsidiary, Rialto, also found an opportunity beyond Series D financing to work with portfolio company Opendoor, which buys single family homes from individuals. Rialto provided a mezzanine capital investment, which created an inventory line for Opendoor to buy housing stock at lower capital cost.
As Fifth Wall continues expanding its startup reach, the firm is also broadening its investor base, looking to grow both the number and the caliber of strategic investors.
Adding strategic investors internationally should help broaden portfolio companies’ reach, because the bulk of Fifth Wall’s investments to date have been North American-based startups that are now looking to expand abroad. The firm is also working with real estate investors for the first time in its strategic investor pool. Wallace says his team typically talks with both the head of real estate and the chief investment officer for such groups.
“The bigger the asset allocator, the more important this collision between real estate and technology seems to be for them,” he says.
“This is very, very top of mind because anyone that’s allocating billions or tens of billions into real estate capital markets recognizes that they cannot be caught short-handed when the first true real estate assets or real estate portfolios tokenize and start to trade on blockchain. That’s going to be something any asset allocator has a point of view on.”
Fifth Wall is also broadening the very definition of what proptech encompasses.
“Looking to the future, our investment strategy will both include the obvious opportunities that we can all agree on is real estate technology, but it will also include situations where we can accelerate the growth of any business through real estate distribution and relationships,” Wallace says.
The duo is confident that value proposition will be even more important if and when the market turns.
“I think in the next downturn, most real estate organizations, knowing full well that trend has taken hold, are going to be looking to double down on technology or enter the space for the first time with the intent of coming out of that downturn stronger, faster, leaner, more tech-enabled by accessing this space in ways they hadn’t before,” Greiwe says.
Even though the firm hasn’t yet turned three years old, Fifth Wall plans to be the trusted advisor to help these firms weather those storms.
For now, just like any fund manager, its focus is on raising capital and putting it to work. Rather than buying, fixing and selling buildings, though, they’re planning to shape the future of real estate and technology as they go.