2022 Proptech Venture Capital Report

The narrative for the proptech industry has changed as companies across real estate and technology adopt a defensive position in response to market volatility & economic headwinds.

 

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  • VC-backed proptech companies raised $19.8 billion in 2022, down 38% from 2021.

  • Monetary policy has dramatically increased the opportunity cost of capital and the hurdle rate for investment.

  • To weather economic headwinds, entrepreneurs should focus on operations, customer retention, and unit economics.

Venture capital (VC) investments in real estate technology (proptech) companies dramatically weakened from the record-setting levels of 2021. Globally, capital allocation in proptech companies declined by 38% from $32.0 billion in 2021 to $19.8 billion in 2022. The significant drop-off in funding is the second-lowest investment year since 2018.

The narrative in the proptech industry continues to change along with the macro real estate environment. Real estate organizations have adopted a more defensive position as entrepreneur-founders and investors navigate through a cautiously conservative landscape. Market volatility continues to persist due to monetary policy, rising interest rates, and recessionary fears.

“We have just lived through a decade of historically low-interest rates, which has now all but come to a stop,” said Mike McAra, Director at Second Century Ventures & NAR REACH Canada. “While this has broad sweeping impacts for the economy at large, for venture, this has dramatically increased the opportunity cost of capital for GPs. On a risk-adjusted basis, the hurdle rate for investment is much higher now than just 6 months ago, and thus capital is being allocated much more diligently and much slower.”

On a positive note, deals are getting executed more diligently, leaving plenty of capital available. Founder-entrepreneurs capable of putting together compelling business and revenue models will continue to raise money, even in a tightening market, with a focus on scale, retention, and customer acquisition.

“There will be a key emphasis on burn ratios, unit economics, and runway,” said Nish Patel, Managing Partner at Inertia Ventures. “Spending in companies will be scrutinized much more heavily than in prior years, and there will be more attention paid to the quality of revenue.

Funding Rounds

Deal volume, or funding round count, was off significantly year over year, continuing a slide as the industry grapples with valuations. While deal volume was down, late-stage deals were down significantly, driven by a lack of mega-rounds. Globally, late-stage deal volume, Series C equity rounds, and greater, in proptech companies declined by 19.7% from 193 in 2021 to 155 in 2022.

“Like many in the technology industry, large rounds of funding have become the norm in proptech,” said Ashkán Zandieh, Chair and Managing Director at the Center for Real Estate Technology & Innovation. “Late-stage funding and mega-rounds have driven strong growth in recent years, but across all sectors of the technology industry, conservative capitalism and macroeconomic headwinds have challenged the valuation assumption of private tech companies, impacting deal and dollar volumes.”

Regions

United States-based proptech entrepreneur-founders continue to receive the lion’s share of investments at 43.2% in 2022. Across the top five regions, the US, EU, UK, India, and South America, accounted for 77.5% of the investment.

Canada saw a decrease in activity, ranking eleven by the number of deals. The region saw investments decrease by 14.3%.

“As with every downturn, we're also going to continue to see consolidation around a few winners in each segment,” said Jenny Song, Principal at Navitas Capital. “The fragmentation of the last few years in certain categories have been confusing and sometimes anti-productive for the industry, and buyers have real vendor fatigue.”

2023 Outlook

  • Ashkán Zandieh, CRETI:
    ”The theme entering 2023 will be cautious capitalism. As long as monetary policies remain in flux, the macro real estate industry, proptech investors, and the greater real estate technology industry will deal with some rough and choppy seas. While some investors and entrepreneurs have experienced economic headwinds, many have not, which will drive proptech companies toward consolidation or insolvency.”

    ”However, it’s not all gloom and doom. An area that continues to gain tremendous interest is climate-related real estate technology. Across all sectors of the real estate industry, owner-operators, owner-developers, occupiers, and managers are exploring Climate Tech as companies address climate change, develop differentiated energy sources, and differentiate their assets.”

  • Mike McAra, Second Century Ventures, NAR REACH Canada:
    ”I think that cutting burn (rate) and driving operational excellence will be mandatory requirements going forward in 2023. Achieving a high investment hurdle rate requires high margins, which in turn require efficient uses of capital. Founders in 2023 will need to show clear outcomes vs. spend, have high growth rates, and low burns to gain investor interest. If they have all of that, then they face a final hurdle that is my third and final key trend for 2023: recalibration of expectations on valuation.”

  • Nish Patel, Inertia Ventures:
    ”There will be two key themes we will see in 2023, consolidation and sustainable growth.
    In terms of consolidation, many companies will likely sell to or merge with better-capitalized or faster-growing competitors. As for sustainable growth, there will be a key emphasis on burn ratios, unit economics, and runway. Spending in companies will be scrutinized much more heavily than in prior years, and there will be more attention paid to the quality of revenue.”

  • Jenny Song, Navitas Capital:
    ”2022 has been an adjustment, but we continue to be excited about proptech in 2023. I think we're going to see start-ups really begin to deliver more value. They can't just buy growth, they're going to have to really demonstrate their value proposition and get tight on their business model. That's going to be a big win for the real estate industry overall in terms of the value that will be felt.”

  • Alex Shtarkman, Revolution Ventures:
    ”2022 has driven a "shake-up" of the existing proptech landscape. 2023 will be defined by the consolidation of existing, crowded categories and the development of new, proptech 2.0 solutions.”

  • Jeanne Casey, Nuveen:
    "We are at an exciting inflection point for tech adoption, and I'm looking forward to seeing the proptech industry continue to mature in 2023. Although the choppy macro environment will create challenges for startups, real estate incumbents are much more open to working with new proptech companies than they were a few years ago. The startups with the strongest value propositions, focus, and discipline will emerge stronger than before. I'm excited to be a part of this next phase of the maturation of our industry."

  • Travis Connors, Building Ventures:

    “The fundamental problems of how we optimize the design, building, and operating of space to deliver the best possible experience to building occupants have not been solved. Humans spend 90% of our time indoors, and today our buildings are killing our planet. Our built environment must be created (and retrofitted) with dramatically lower embodied carbon emissions, dramatically lower operating carbon emissions, and with a much higher regard to delivering healthy sustainable Indoor Air Quality while curbing overall consumption of energy and raw materials.”

  • Daniel Fetner, Alpaca:
    ”We are in the midst of a unique inflection point within the sector. On one hand, PropTech 1.0 has matured into a true institutional asset class and will continue to grow at record levels, and on the other hand, new asset classes such as “PropCo” have emerged, representing “PropTech 2.0.” We believe there are tremendous synergies between the two and are excited to see the value-creation continue to unfold.”

  • Paige Pitcher, Moderne Ventures:
    ”The pandemic accelerated adoption of real estate tech, and now wage inflation and shortages are further emphasizing the need to digitize to lower operating costs and unlock new revenue opportunities.”

Methodology

The Center for Real Estate Technology & Innovation (“CRETI”) defines venture capital investing in real estate technology (“proptech”) companies and adjacent companies and/or industries as a form of private equity financing that is provided by venture capital firms, funds, and/or organizations to startups, early-stage, late stage, and emerging companies.  CRETI defines venture capital funds as a collection of capital raised to invest in a company for a current and/or future equity position. CRETI also includes funds raised by any organization, including but not limited to real estate organizations, with the primary intent stated above.  

CRETI indexes and analyzes investments made in proptech startups primarily by sourcing (1) media announcements, including but not limited to press releases, media announcements, media mentions, news aggregators, and social media, (2) publicly available, paid, and/or open third party data sources, and (3) investors including but not limited to investments submitted to CRETI, surveys, and others. CRETI information, including but not limited to research, insights, and reports, aim to be directionally accurate.

Disclaimer

Investing in startups, including but not limited to proptech startups, is risky. The information provided by CRETI should not be used to make investments in startups. Please consult an investment professional before making any investment.