Fundraising for real estate technology strategies was approaching escape velocity. But to get there now, it must weather a far less forgiving economic environment than it has experienced to date.

The top 20 firms raising proptech-focused venture capital raised nearly $10 billion of discretionary equity during the past five years, data from PERE’s second annual Proptech 20 ranking shows, an increase of more than 80 percent from the year prior. When factoring in non-discretionary commitments and partnerships, some of these groups grew their war chests even more substantially in 2021.

“When we started doing business about a decade ago, less than $100 million a year was invested in the category,” says Jake Fingert, managing director of Camber Creek, which jumped into the top five of the Proptech 20 this year by adding more than $300 million of fund capital. “Over the last few years, there’s been tens of billions of dollars invested, so investors see a real opportunity in the space.”

Several factors drove this expansion of proptech fundraising, market participants say. These include greater engagement by institutional investors and an appreciation by the sector’s initial backers – large real estate owners and fund managers – that tech investment is not just ‘nice to have’ but, rather, key to remaining competitive.

“This is now a differentiator,” Jonathan Hannam, co-founder and managing partner of Sydney-based Taronga Ventures, says. “If you are at the forefront of real estate technology, then as a manager, you become more attractive to institutional capital.”

Taronga, which added $122 million to its fundraising total, is one of three Asia-Pacific-based firms featured in this year’s Proptech 20, along with China-based Hidden Hill Capital, which is backed by logistics giant GLP, and Hong Kong-based Gaw Capital Partners, which ranked second and third respectively.

The APAC firms raised more than $3 billion total, surpassing their European counterparts which amassed just $927 million. North American firms, meanwhile, led the way with more than $6 billion of committed capital.

External factors have also played a role in the growth of proptech. Venture capital more broadly had its biggest fundraising year to date in 2021, according to the industry group National Venture Capital Association, with more than $128 billion committed to the space. Like other private markets, this was facilitated by easy monetary policy, pent-up demand coming out of covid-19 lockdowns and elevated public equity valuations, which freed up investment capacity for institutions in other asset classes.

Darker horizons

With inflation running at historic highs around the world, central banks tightening monetary policy and stock prices well in the red, the macroeconomic winds have shifted, making a repeat performance of the growth seen in 2021 unlikely.

“We’re in in the early innings of proptech, and we have an anachronistic industry that is ripe for change. But the exuberance of last year is likely not to be repeated in 2022-23,” Liza Benson, partner at Chicago-based Moderne Ventures, says. “Financial [investors] need to correct their public-versus-private allocations. So I think it unlikely that we see a year with that much growth. But I don’t expect fundraising to be particularly down.”

Moderne Ventures made the biggest jump in this year’s ranking, going from 18 last year to number six by adding $350 million of eligible capital. Along with pureplay proptech, the firm invests in technologies related to insurance, finance, hospitality and healthcare.

Benson says roughly half the firm’s investors are “financial,” meaning institutions that invest solely for returns, while the other half are “strategic” real estate groups looking to access promising technologies. Like other firms in the Proptech 20, Moderne Ventures offers the startups in which it invests a ready pool of end-users.

“We don’t just bring dollars to the table, we bring customers. That really resonates both with the companies that we’re investing in and our LPs. We are not just green money, we’re more than that,” Benson says. “We enable the success of our companies and that’s a very important factor in how we work.”

Being able to serve as a conduit for tech innovators and adopters is one reason why proptech managers are not concerned about the macroeconomic uncertainty on the horizon. Also bolstering their confidence is historic under-investment in proptech relative to technologies focused on other sectors of the economy, Brendan Wallace, co-founder and managing partner of Fifth Wall, says. New York-based Fifth Wall topped the Proptech 20 ranking for the second year in a row.

Wallace points to fintech, which sees nearly three times the investment volume of proptech, despite financial services accounting for a smaller share of US gross domestic product than real estate. Given this disparity and the lag in tech adoption within real estate, Wallace believes the secular argument for investing in proptech will withstand broader economic uncertainty.

“I see proptech, as a category, growing to well over $100 billion flowing into the space. What I think that means is that there will correspondingly be larger dedicated proptech funds, Fifth Wall among them,” Wallace says. “This is simply because… real estate, on a relative basis, is the largest industry with a relatively lightly funded technology ecosystem. So, it’s just poised for growth.”

For firms that have established a track record in the space and amassed dry powder in recent years, turbulent economic conditions could prove beneficial, says Aaron Block, co-founder and managing partner of New York-based MetaProp.

“We’re sensing fundraising headwinds in almost all real asset categories as markets adjust to the new realities,” Block adds. “In proptech, this will likely slow new manager entrants and will help the top-tier institutional GPs to continue growing, albeit more slowly, their most successful strategies. As more opportunities develop, I’d also expect some money to seek distressed and special situations strategies.”

“Real estate, on a relative basis, is the largest industry with a relatively lightly funded technology ecosystem. So, it’s just poised for growth”

Brendan Wallace
Fifth Wall

Rising borrowing costs and falling values for listed proptech companies have already hemmed in valuations for many startups, managers in the space report. But there are some noteworthy exceptions.

“Technology valuations have definitely been corrected, especially late-stage, a little less in seed and Series A, except if you had the word climate in your pitch deck,” Christian Hernandez, president and co-founder of 2150, a venture platform launched by the Danish real estate fund manager NREP, says. “That’s been corrected a bit, but not to the same extreme, because so much capital came into climate tech.”

With $324 million raised since its February 2021 launch, 2150 is well positioned for the years ahead, Hernandez says. But, he notes, he would be less enthusiastic were the platform just coming to market.

“I would not want to be a brand-new emerging manager raising from scratch right now,” Hernandez says. “What I’m hearing from LPs is that they’re focused on doubling down on the managers they have or, if anything, culling some of them.”

Proptech managers are entering a new era, one of greater uncertainty and new challenges. But the top groups are doing so on a high, after a banner fundraising year, and they are confident their journey is only just beginning.