Real Estate Technology Businesses Rise
Real Estate Technology Businesses sometimes referred to as “Real Tech” are technology businesses centred around the real estate industry.
A “Unicorn” is the term given to a technology business that has an implied valuation of more than $1billion and is still privately owned.
Four real estate tech companies became unicorns last year (Compass, Homelink, SMS Assist, and OpenDoor Labs).
In fact, 2016 was the biggest year yet for real estate technology funding with $2.6 billion invested in in 235 real estate technology businesses. This is bad news for real estate agencies operating traditional business models as these new players develop technology driven business models to take market share from incumbent real estate agents.
Since 2012, real estate tech companies have raised almost $6.4 billion in funding across 817 deals.
Of particular concern to the real estate industry is that much of this has been invested by some of the world’s leading venture capital funds, who have excellent track records of backing successful companies. These investors include:
- Greylock Venture Partners who funded Skype, Twitter and Tesla,
- Draper Fisher who were very early investors in Airbnb and Dropbox, and
- 500 Startups who in 2016 were the most active venture capital investors in the real estate technology space in the world.
While most of this investment occurred overseas, Australia is a very attractive market. It’s widely known that real estate technology disrupter Purple Bricks is operating in the Australian market, but few people have heard of Compass (one of the Unicorns mentioned earlier) which was founded by Australian Ori Allon who has already publicly indicated that Compass will be coming down under.
Additionally, 500 Start-ups announced recently that they will be opening their first office in Melbourne.
Australia now has two real estate specific venture capital funds. The first is managed by PieLAB Venture Partners, and has a focus on the residential industry. Operated by former Rental Express founder Chris Rolls, the fund pools the investing resources of some of the leading real estate agencies and groups in Australia.
“Our focus is to invest in businesses that provide products and services to the real estate industry,” says Mr Rolls, “this includes technology that brings efficiency or additional revenue streams to existing real estate agencies, which will strengthen traditional agencies and make them less prone to wide scale disruption.”
The second real estate specific fund is run by Taronga Ventures and has a focus on the commercial real estate market.
Funding by venture capital for technology start-ups usually occurs in stages starting with Seed and then Series A, Series B, C etc, with the investment size typically growing rapidly as the business valuation increases.
An interesting trend in real estate tech funding in 2016 was that early-stage (Seed + Series A) deal share reached a 5-year low accounting for 66% of deal share. Early-stage deal share has trended progressively downward since 2012 as the category has matured. Conversely, when looking at mid-stage (Series B + Series C) activity, 2016 reached a new high, accounting for 15% of deal share.
This indicates that many of the start-ups that were funded over the last 3-4 years are now starting to get traction in the marketplace. In short this means they are starting to make money!
Start-ups working on real estate tech products have the potential to upend the industry, and the more capital that is invested in them the more likely they will be successful. The impact of new business models is already starting to have an effect. Macquarie Bank’s latest industry benchmark report shows sales commissions have dropped by approximately 13% since 2009, much of that having occurred in the last 2 years. The same is happening in property management where Australia wide average commission rates have dropped by 5% in the last 2 years.