After a record-setting year in 2021, venture capital investments in private proptech companies dropped to its second-lowest level since 2018, said the Center for Real Estate Technology & Innovation in its 2022 Real Estate Tech Venture Capital Report. After seeing $32.0 billion in investments in 2021, the sector saw just $19.8 billion in investments this year, a 38.0% decline.
Real estate organizations have adopted a more defensive position as entrepreneur-founders and investors navigate through a cautiously conservative landscape, the report said. 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. “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 six 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.”
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.”
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 U.S., European Unio, United Kingdom, India and South America accounted for 77.5% of the investment. Canada saw a decrease in activity, ranking 11th 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.”
In terms of 2023, the theme entering the new year 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,” said Zandieh. “While some investors and entrepreneurs have experienced economic headwinds, many have not, which will drive proptech companies toward consolidation or insolvency.”
