Smart Building Insight - August 2023

Each month, Aamidor Consulting publishes "Smart Building Insight", a wrap up of recent news around M+A, investments, product launches, relevant reports, and other key industry developments. You can?sign up for the newsletter here.

Aamidor Consulting continues to provide insight to smart building innovators in this section. This month, we've included a summary of our takeaways halfway through 2023, as a short retrospective. We do have more interviews coming in the subsequent newsletter issues, so stay tuned. And, on our views of the market, we welcome any questions or comments that readers may have.?

The market thus far in 2023 has been perplexing; there are many signals (both positive and negative) and?it can be difficult to understand if these are part of a consistent theme, or simply anecdotes. What is signal, and what is noise?

At the macro level, investment in both proptech and climate tech is down, which is old news at this point?(we’re sharing just a few specific graphics here, first from?Houlihan and second from?HolonIQ).

And, real estate technology buyers may have bigger problems than finding a new smart building solution...?Going a level deeper, this macro environment is having an impact on individual firms across the ecosystem:

• Software users?(real estate firms and large corporates) are pulling back on spending, and may even be trimming the teams that are responsible for procuring software.?
• As noted above,?investors?are pulling back - in some cases, they are taking advantage of more favorable valuations and spending more time on diligence. But, overall they are deploying less capital, with a more skeptical eye to the firms?that they do consider investing in.?
• Vendors?are feeling the effects on both sides: less opportunity to raise money, and slowing growth based on fewer?customer procurements.?
• Larger firms, who are logical acquirers of innovative, but stagnant technologies, are not that active (yet). (The lack of M+A in the market has been one of the most surprising dynamics halfway through 2023!)

The lack of M+A is not only due to limited interest from buyers. There are not (yet) that many sellers.?Some innovative startups are unrealistic about their position in the market, future growth prospects, and actual value of their businesses. This is delaying what we see as an inevitable next step: company failures and forced sales of the least performant firms.?

How is this possible? While there are struggling firms in the market, a significant number of startups appear to have enough revenue to keep their lights on - even if there is limited growth projected in the coming years.?The fragmentation in the smart building market means that there aren't that many category winners, and the potential revenue for a given software category is spread across many vendors (not sure a few winning vendors). This dynamic is enabling a large number of firms to stay open, and delay any discussions of forced/encouraged M+A.?

That said, we still believe transactions?will accelerate in the coming months. As the real estate market appears to be in what may be a years-long correction, investor dollars are likely to flow to the smaller, younger startups with more upside. And, the small downsizings seen thus far among larger startups?may?not extend runways sufficiently.?

We believe the daylight between acquirers and potential acquisition targets will close. Strategic buyers will continue to be interested in growing inorganically (and thus are shopping and considering M&A). But, these buyers are not convinced simply by nebulous stories of “innovation” and differentiation - they want real revenue and a path to profitability. Startups may need to ‘take?the medicine’ to make a more compelling case to an acquirer.

One other observation:?There have been growing pains as we move from a low rate, growth-oriented market to a high rate, economically-uncertain and profitability-as-prerequisite market emerges. (Some have said that “gravity has returned.”) That includes buyers who now have lower approval limits and less autonomy for new technology?purchases. It includes?startups that have to rapidly change their strategy to extend runway or deliver a stronger ROI to clients. Additionally, as real estate owners/operators have been prolific investors in many smart building and proptech startups, the startups?may require more money than their existing investors are willing to underwrite. Firms are moving from the 'old days' to the 'new days' at different paces, which is creating some “churn” and mixed messages in today’s market.?

Our advice to each category of market participant is as follows:

• Buyers and users of technology,?such as real estate firms,?should not completely shelve their innovation and technology adoption efforts, but should be more focused on creating a "quick cycle funnel" to identify the most impactful offerings - and then work quickly to solidify the ROI of those promising technologies.
• Startups?need to focus more on product innovation and on keeping existing clients happy, with a core sales focus on expansions and the bottom of the funnel. Growth at all costs, which we believe still is the G2M strategy for some innovators, is not the right approach for long term success.?This is especially true in the smart building market, where there are too many companies fighting for share in most technology categories.?
• Private equity firms?should continue to observe this market with interest. They may not?find firms large enough to fit their typical transaction thresholds, but they may benefit from adjusting those expectations to find smaller firms (who will increasingly be willing to accept lower valuations).?

Aamidor Consulting works across the smart building industry, supporting startups, capital allocators, and industry incumbents throughout their journey, from the early stages of customer discovery to being on a rapid growth trajectory. Specifically, our firm supports startups on product and market strategy, investors as an independent advisor during diligence, and real estate owners/operators as they develop plans to deploy technology. See a?summary of our past projects?and also a?description of our consulting services?for more details on how we can help.??