The immediate future for proptech startups is knuckling down, getting to business, and maybe not depending so much on raising money.
In this case, though, the future was presaged by the past year. A report from the Center for Real Estate Technology & Innovation (CRETI) shows that 2022 was largely a down year for funding real estate-related technology companies from venture capital groups, which would include some of the venture arms of the bigger CRE companies.
According to CRETI’s count, proptech companies raised $19.8 billion in total globally from venture capital firms in 2022. That was down 38% from 2021’s nearly $32 billion. That’s the second lowest investment year since 2018.
“The narrative in the proptech industry continues to change along with the macro real estate environment,” the organization explained. “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.”
A major reason for the shift is, ultimately, inflation. Not because it’s more expensive for startups to grow, though it is. But with the Federal Reserve raising interest rates, there are more competitive choices for investment dollars, creating higher opportunity costs combined with risk. Risk-adjusted returns have to be higher to justify investment. It sounds as though, for many of the limited partners that fund venture capital firms, the potential just wasn’t there.
Deal volume was down by round because investors aren’t sure what realistic valuations of companies are. “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,” the report said. What had really pushed overall investment previously was large late-stage funding rounds. Lower valuations mean less money per round, and the effect was strongest in companies seeking a Series C, D, or even E round. Pressure at the upper end brought down aggregate global investment.
The US continued to grab the largest share of proptech investment with 43.2% of the global total.
The theme for the coming year will be caution. “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,” the report quoted Ashkán Zandieh, CRETI co-chair and president. “While some investors and entrepreneurs have experienced economic headwinds, many have not, which will drive proptech companies toward consolidation or insolvency.”