HOW TO VALUE PROPTECH STARTUPS

AND WHY STARTUP COMPETITIONS ARE A DISGRACE TO THE INDUSTRY

Amidst the recent public discussions of pre-IPO valuations of some proptech unicorns, the topic of proptech startup valuation has reappeared under the spot light of the real estate industry’s discourse.

When you come across yet another proptech startup competition announcement, doesn't it make you wonder? With all due respect to the judges and the organizers, who, no doubt, have only the best intentions to support the ecosystem and help new bright ideas grow into successful businesses, how much longer will we ignore the elephant in the room?

The whole venture capital business model works for startups which are lean, quick to fail and cheap to start. If you come up with a smart algorithm, create an MVP and make basic assumptions on how to monetize it, and you can do it with a two-pizza team - you are the right candidate for an elevator pitch.

But in the real estate industry, everything is different. Why do you think the big 4 companies: PwC, KMPG, EY and Deloitte have dedicated teams for real estate while all other industries go under functional verticals? Because you have to have a right professional education and a solid track record in order to be a valued specialist in the industry.

If you are a proptech founder, you must be a real estate professional to formulate a value proposition which will resonate with your B2B customer, which means you have to get relevant education for 5 or 7 years, work in the industry for a decade to begin to experience the economic cycle and taste the speed at which property markets move.

If you want to create a future-proof tool for the industry, you have to know technology too - how to choose a sustainable architecture design, select a right technology stack which will not become legacy in 2-3 years, have an excellent team of developers who are ready to pivot without too many emotions and reflections and hurt ego, and who selflessly spend sleepless nights refactoring the code and cleaning the technical debt before a release deadline.

And then you take the stage, and you have 3-5 minutes to deliver your pitch to a venture capitalist, who may not even be from the real estate industry and just happens to be in the right place at the right time. Or when you come to sell your product to a corporate industry player, you are in such different weight categories, that you must find a way in, spend a lot of your inner positive mindset power to fight the 'unfair' excuse that keeps creeping in your head, like Tolstoy's white bear :)

VC firms who are valuing proptech startups are often run by people who at most understand the venture capital business, but who tend to heavily discount (hence undervalue) the 'real estate-specific' intangible value-add aspects.

The rapidly emerged proptech community has helped the industry to visualize the landscape of technologies which are applicable in real estate, but we also produced an eroded image of the proptech scene as a startup scene, where early-stage multiples are low and the growth expectations are exaggerated.

In real estate technology we can get the 'hockey stick' revenue growth only in the B2C models, where the scalability is provided by making 1.000.000 deals at $1 each. In the B2B sector, the sale cycle with a corporate client is many months long, the multiples are swapped, and the equation is rather $1.000.000 x 1 deal.

And don't you think, the proptech startup valuation models should reflect that?

Of course, the ARR (annual recurring revenue), CAC (client acquisition cost) and LTV (lifetime value of a customer) key indicators are still relevant, but the revenue multiples must reflect the industry-specific aspects of property technology business.

Startup competitions are a traditional way to cheaply shop for potentially successful commercial ideas, but for the real estate industry, where people understand the price of reputation and the true value of titles (like MRICS, FRICS, CFA, etc.), adapting this approach without taking into account the industry-specific aspects, is a disgrace.

Professional real estate industry players should focus on developing and delivering a well-thought and ROI-based methodology to value proptech startups from the point of added value to the real estate asset performance, instead of dancing to cheap tunes of countless 'proptech enthusiasts' and 'real estate tech strategists' who often are just disguised buzzword-joggling opportunists with no or very little relevant real estate industry background.

Until the proptech industry adapts to the pace of the real estate industry and begins to manage investors' expectations, we will probably see a few more bubbles inflated without much substance. To accelerate such adaptation, the industry needs to get rid of amateurs. After all, it is a professional marketplace.

USE LINKEDIN REACTION BUTTONS TO PARTICIPATE IN THE POLL: