Is Starting a Proptech Company Still a Good Idea?

The bleak venture landscape of 2023 can be described with just three words: the morning after. Reeling from a massive hangover, there's one part of it that looks especially grim: proptech, a kind of business that tries to solve interactions (and ) around residential, often specifically rental property. Are there better days ahead?

The property market overview

The corner of the startup graveyard  previously hyped proptech projects lay (or are crawling towards) isn't very big but is pretty packed. Near the end of 2022, the average public PropTech enterprise value-to-sales multiples were down 40% for incumbents and 65% for new entrants from NASDAQ's 4Q21 all-time high. 52% of global proptech startups surveyed by GPCI have reported under 12 months' worth of runway left. Businesses that used to raise rounds as big as $50M are now being sold for single digits, at best. Nowhere else has a reality check come so hard. What's gone wrong?

Firstly, the venture market is tight. Crunchbase analysis shows that the end of 2022 saw a dramatic pullback, with numbers falling by over 50% year over year. Early-stage funding declined somewhat less dramatically, by 39%. The overall global financial turmoil characterized by high inflation and wide expectations of a global recession has left investors uncertain. Thanks to that, money has become more expensive for everyone, especially investments that come with higher risk premiums.

The property market has been hit especially hard by the rate hikes, being very dependent on the beneficial relation between the cost of capital and the demand and price curves in the hot markets, which are in turn affected by the job markets (remember the recent mass layoffs in IT?).

More specifically, VCs' usual modus operandi is hardly compatible with the peculiarities of proptech. Their traditional approach, bred in Silicon Valley and largely built around software companies, is the following: stumble upon/dream up one highly useful feature, find a way to scale it economically, and then invest to accelerate the growth trajectory, carefully expanding the scope on the way. Proptech products, due to the nature of their customer base, have to be more of Swiss army knives, nailing multiple features at once, preferably perfectly. So much more upfront headache!

The startups aren’t blameless either. For years, they had been promising to remove those “pesky middlemen”. They smartly aimed to serve their customers better and tap into the multi-billion dollar commission rate pool, only to find in the year of 2022 that over 90% of those looking to complete an expensive, stressful transaction prefer a human-to-human relationship built around the traditional agency model.

What’s next?

Despite the challenges, we expect the property market to continue to present innovators with ample opportunities to attack and mitigate widespread problems, such as various relationship and financial inefficiencies which the governments in many places will enthusiastically try to resolve through tightening regulations. Property owners and investors will yearn for certainty even more.

In turn, those who are contemplating starting a proptech company will have to prepare to fight a two-front battle. Not only will they have to come up with multifunctional solutions that instill confidence in users but do so in a way that will make sense for venture-minded investors. To understand how to survive the current state of proptech it's useful to take a closer look at those few market players who are thriving through it.

How to succeed?

If I were to combine my 10 years of experience in proptech with the findings from observing some of the more successful peers that are still alive and well, a successful proptech startup with a chance to survive the winter is:

• Doing something genuinely useful and innovative for the customers;

• Not pledging to “remove the middlemen”;

• Solving a lot more than one issue for its customers, preferably all of them;

• Frugal with its customer acquisition costs, balancing them carefully against the lifetime value of a typical customer (and that's where investors need to take a closer look!).

In our opinion, 2024 is a good year for any potential proptech entrants to reflect on what has set the rare success stories apart from the rest in the previous cycle, and how their products need to account for those lessons.