One common entrepreneurial misconception is that an early venture raise is primarily about the money. Of course, most startups — in proptech and otherwise — do require funding to power their growth. But the capital raise, in and of itself, does not ensure success — the dustbins of history are littered with well-capitalized ventures that couldn’t deliver.
As tech veterans know, a startup needs many things besides growth capital to succeed, including an understanding of the competitive landscape and the ability to build a team that can navigate growing pains. But perhaps most importantly, especially in B2B sectors, it also needs a deep understanding of what actually moves the needle for its core user. And, to the extent it can gain access to these vital assets as part of its capital raise, the company will be better positioned for success.
The Inherent Challenges of B2B Technology
Unlike consumer technologies, most proptech and other B2B products and services are often highly specialized and costly to implement. Instead of a shiny gadget that might be an impulse buy for a consumer, these products are generally utilitarian. The startups that make these technologies are sometimes founded by seasoned professionals with deep roots in the industry. More often, they are founded by young entrepreneurs with great ambition, but who are relatively new to the end market they are targeting.
For over two decades, on both the startup and VC sides, I’ve focused my career on proptech and the sub-category of rent tech — technologies that solve problems for the multifamily and single-family rental markets. A major challenge for many proptech startups throughout has been the slow pace of industry leaders to invest in technology deployment. Even within companies that recognize the operational efficiencies the technology can deliver, there is often a serious concern that precludes adoption: the stability of the startup.
Evaluating and deploying hardware — even at just a few properties — involves a significant investment of time and money, and users often have concerns about whether the startup will still exist in 12 months; and a capital round is not enough to render a startup stable. The very concept of a “well-funded” startup is a short-term one, which can be obliterated by a high burn rate.
Beyond financial resources, stability is a byproduct of expertise, credibility and execution.
And since many proptech and rent tech startups are founded by entrepreneurs often with limited real estate operations experience, they may not have enough expertise to establish sufficient confidence from potential clients. Even as they bring on board members, advisors, and clients, the potential for a startup to fail or pivot quickly is often a disincentive to the adoption of technology by large, risk-averse enterprise customers.
But, maybe there’s a more holistic way to ensure startup stability.
A Novel Approach to VC
As a veteran of the multifamily, proptech, and VC worlds, and with the backing of several major multifamily REITs, I founded RET Ventures with a deliberate approach to fund technologies that would enhance productivity and create value for real estate operators. Because of this focused mandate, we have to date exclusively brought in LPs who are aligned with our mission: real estate owner-operators and managers poised to benefit from new technology solutions.
This gives our fund and portfolio companies distinct competitive advantages. When we’re evaluating a startup, we work closely with our LPs to fully understand the user’s side of the equation: the extent to which the technology will solve specific pain points, the level of value this provides, etc. But sometimes, the knowledge we gain directly from our LPs about products that aren’t on the market is even more significant.
As an example, as a result of our ongoing conversations with our LPs, we concluded two years ago that there was serious demand for a comprehensive smart home solution purpose-built for the multifamily industry. We knew this was a viable technology, as similar platforms had been developed primarily for the residential homeowner markets, though we knew there was no quality solution on the market built specifically for the unique needs of rental operators. There were several early-stage startups, but none had a significant client base or mature enough technology to effectively serve the large enterprise market. With an investment in one of these companies and the guidance of our LP group, we understood that we could help one of these nascent vendors develop their product into a best-in-class, industry-leading solution.
Choosing the Right Investment
To identify the strongest startup, we actually initiated an RFP on behalf of our LP organizations and invited five finalists to present their technologies to our team and several CTOs and other senior leaders within our LP group. The group was particularly impressed by one firm, SmartRent, which had a compelling vision and a CEO with very relevant experience. We negotiated a seed investment in the company, while several of our LPs eagerly signed up to pilot SmartRent’s platform.
A critical aspect of our investment was the fact that we worked extremely closely with SmartRent in the early going. Our LPs, several of whom helped vet the company pre-investment, became development partners to SmartRent. This ensured that the SmartRent team had ongoing feedback from numerous real estate owner-operators, and that it could hone the product to meet the needs of those varied users. Our team was also in constant communication with the team at SmartRent, leveraging our collective experience to guide the company on all aspects of business planning and operations. Effectively, through its capital raise, SmartRent went beyond raising money: it also secured connections to key industry intelligence that would make its platform a success.
With a highly experienced industry executive, several development partners, and RET serving as a referral source to potential clients (within and beyond our LP group), SmartRent’s grew rapidly. After our seed investment in 2018, we led SmartRent’s Series A round and participated in its Series B and C raises, the latter of which closed in Q2 of last year, led by Spark Capital. SmartRent is now the market leader in its category, with over 100,000 units live on its platform.
SmartRent’s valuation has climbed by a factor of over 20x since our first investment, and all signs point toward the company’s continued growth. But despite the fact that we were the first VC to bet on them, we realize that the financial resources we deployed only played a small part in making SmartRent a market leader. Of greater importance were the perspectives our team and LPs were able to give them, which helped a very capable founder/CEO transform his vision into a best-in-class product and then execute flawlessly. Especially when it comes to proptech, cash is not enough to be king.