Insights on technology and real estate.

The CRETech Los Angeles event held last week Downtown dove into the nuances of tech integration in the commercial real estate industry. The event opened with a discussion of technology with some of the leaders in real estate, and concluded with a discussion of Fifth Wall executives. Fifth Wall is a venture capital firm focused on funding real estate tech start-ups. The discussion at CRETech included Brad Greiwe, co-founder and managing partner; Brendan Wallace, co-founder and managing partner; Natalie Bruss, partner; K.C. Cleary; partner; and Vik Chawla, principal.

“What is really critical in a venture capital model like ours is to delicately orchestrate this tension between being corporate and yet independent,” said Wallace says about the firm’s model. “On the one hand, we must listen to our corporate LPs and internalize their acute understanding of their own technology pain points and absorb their deep domain expertise. Yet, Fifth Wall must simultaneously recognize that corporate venture capital almost always underperforms financially because they have been challenged in their ability to think outside the box and lack the venture capital investment acumen to structure great deals and find great entrepreneurs.”

The firm recently surpassed $100 million in revenue—a first for a real estate-focused venture firm. Wallace says that the firm’s “expansive” view of Built World technology and investing in disruptive technologies related to energy, mobility, logistics and fintech. “It is in these nonobvious Built World technologies that corporate venture capitalists have been so limited and where they’ve struggled to ‘see around the corner’ and to capitalize on how their business or industry will transform over the next decade: like Airbnb and hotels, co-working and office owners, Opendoor and homebuilders and clutter and self-storage or industrial,” Wallace explains. “Conversely it is in these nonobvious Built World technologies where Fifth Wall has excelled in investing and capitalizing early in disruptive technologies that are highly strategic to our corporate LPs but that, on their own, real estate corporate venture capitalists have failed to recognize early enough.”

Looking ahead, Fifth Wall is specifically interested in the digitization of capital markets in real estate and in innovation and technology in construction. Currently, the firm is investing in Harbor, Hippo, States Title. It is focused on maintaining the strategy of its first fund while growing the platform. “The innovation that is occurring in real estate technology is not just happing here in the US and our strategic partners don’t just own real estate here in the US, they have global portfolios with global needs,” explains Wallace. “We need to have our fingers on the pulse of that innovation if we’re going to be true strategic partners.”

The platform has also evolved as Fifth Wall has worked with international institutional owners “As we’ve started working with the largest international owners and operators, we see these intellectual economies of scale in Fifth Wall’s consortium model,” Wallace says. “While there are some regional idiosyncrasies in owning and operating an office building in Singapore, London, Tokyo or Chicago, the technology pain points are nonetheless quite consistent and now Fifth Wall has a scale of distribution that exceeds any individual office owner investing on their own from a learning and distribution perspective.”

To read the full story via PERE please visit: https://www.perenews.com/fifth-wall-meet-venture-capitalists-funding-future-real-estate/?utm_source=sailthru&utm_medium=email&utm_campaign=pere%20daily%20us%20paying%202018-09-03&utm_term=pere_daily_us_paying

Meghan Morris, PERE

In 2016, Brad Greiwe and Brendan Wallace faced a problem familiar to many first-time fund managers: potential limited partners had little interest in their debut venture capital vehicle.

Two years and a $212 million top-performing maiden fund later, the duo face the opposite problem: handpicking limited partners to participate in their second fund.

In between its two vehicles, the real estate world seemingly woke up to the vision Greiwe and Wallace built their VC firm, Fifth Wall, on: real estate has long ignored technology, but to do so now means it risks being left behind.

Funds for sector-specific technology abound for agriculture, education and other seemingly more niche industries than real estate. The Fifth Wall founders – who each have experience in real estate and technology – identified a market ripe for disruption.

“What we saw was this massive void in the VC ecosystem, where you had real estate, which is the largest industry in the US – 13 percent of the US economy – and anyone who’s familiar with real estate at all knows it’s one of the least technologized industries,” Wallace says. “That’s true impressionistically: if you walk into a building, it doesn’t look or feel much different than it did walking into that building before the dawn of the internet. But empirically, real estate is one of the lowest spenders on IT versus all other major US industries.”

Interest in property technology has begun to accelerate. VC spending increased from $2.42 billion in 2015 to $1.91 billion in the first half of 2018, according to data provider CB Insights.

Wallace and Greiwe have identified a few trends driving this interest. Over the last five years, they say consumer and sector changes have forced real estate to think higher-tech. Across property types, landlords have adopted a more customer-centric approach to management, offering more amenities and more opportunities for tenant engagement. Existential threats – from sources few predicted – have also popped up, with Airbnb, WeWork and other startups-turned-mega-companies threatening traditional business models, though those groups own little or no real estate. In a longer cycle, real estate owners have shifted from buying low and selling high to focusing more on value-adding operations, typically enabled by technology.

And for firms of all stripes, the money now cares. Investors, boards of directors and other stakeholders are asking managers about their technology strategies.

“If you don’t have an answer to how technology is going to influence, enable or disrupt your business, you’re going to be in trouble,” Wallace warns.

Wallace and his co-founder are betting that technological trends will only accelerate, as real estate plays catch-up to finance and other sectors that began evolving years ago.

“It’s in our humble opinions that in 10-15 years from now, there will be no discernable difference between a technology company and real estate company,” Greiwe says. “If you’re still just a real estate organization, you’re going to be losing to your tech-enabled competitors.” Greiwe and Wallace share backgrounds that prove their thesis about real estate enabled by technology. Both came from real estate families and started at real estate investment banks before working with some of the largest private equity real estate companies. Later, Wallace co-founded two companies: a workforce optimization company that raised $33 million of venture capital and was acquired in 2014, as well as the largest ridesharing service in Latin America. Greiwe co-founded a Blackstone platform that relied on technology for deal sourcing and asset management: Invitation Homes, which would become a $12 billion single-family rental company.

With those backgrounds, the pair identified not only massive underinvestment in real estate technology, but also a need for corporate buy-in. An in-house corporate VC arm, however, was not an appealing option, since they had seen too many fail across industries for lack of the right talent, incentive, operations and other problems. On the other hand, corporates offered sizable portfolios in which VC-backed companies could immediately scale; deep industry knowledge and relationships; and the power to sway peers’ technology adoption.

For the best of both corporate and private VC funds, the co-founders put together a hybrid vehicle, which they claim has no equal across industries. Half of the fund’s limited partners are financial: Ivy League endowments, other university endowments and pensions that are investing out of a VC bucket, not out of real estate.

The other half – which invest under the same terms as financial investors – are corporates acting as both capital partners and portfolio company accelerators. These real estate firms, chosen to represent facets of real estate – Hines for office, CBRE for property services, among others – work with Fifth Wall’s advisory team to evaluate the startup landscape and adopt what the groups deem the best technology. Some technology fits with just one strategic partner, but others, such as energy efficiency, can be broadly applicable, which helps widen the potential distribution funnel for the portfolio companies across the fund’s investors.

Fifth Wall’s proposition partly rests on these marquee names – Hines, Equity Residential and others – adopting the VC fund’s portfolio companies’ technologies, making them the industry standard.

Both types of investors benefit from the hybrid model, the co-founders say.

“A generalist VC fund looks at their LPs every three years and says, ‘I lost money on a large portion of my deals but made a very high return on a small subset.’ This is in large part because most generalist VCs are forced to speculate if certain technologies will be adopted by the market incumbents,” Wallace says.

“By contrast, if Fifth Wall’s losing money on a large portion of its deals, that means we’re almost not doing our job, because we’re in the business of not just trying to speculate or guess what the future of built world technology will be; we’re tasked with knowing it or making it happen. When we invest in a company, we don’t just cross our fingers and hope it grows. We’re often pre-engineering growth for our portfolio companies with contracts with our strategic partners that can immediately boost revenue 4-5x. This is broadly what we mean when we use the phrase ‘Kingmaker.’”

From construction to micro-mobility

The firm is making progress on its second fund, closing on $101 million against a $400 million target for Fifth Wall Ventures II in June, according to a filing with the Securities and Exchange Commission. The firm declined to discuss fundraising.

Both funds invest in Series A, B and C companies – startups that have some proven technology. By category, Fifth Wall is investing in the overall “built-world environment.” That overarching term can encompass anything touching real estate, from construction materials to building systems to micro-mobility – a term used for Lime, one of its portfolio companies that offers shared bicycles and electric scooters. The firm’s most recent public investment was follow-on capital for Blueprint Power, a company that helps landlords sell buildings’ excess energy.

No matter the portfolio company, the firm follows standard VC underwriting practices to examine a target’s financials, leadership and other elements. In addition, Fifth Wall considers three areas: asymmetric information, which often comes through corporate relationships; access, to avoid being squeezed out of funding rounds – though that has not yet occurred; and a unique ability to influence outcomes, typically based on partner relationships and the firm’s embedded business development team.

At its outset, dealflow came from the firm or its corporate partners. Now, however, VC funds seeking out Fifth Wall have become the greatest source of deals. Wallace says relationships with generalist funds, which now look to Fifth Wall for anything built-world-related, are among the firm’s strongest assets.

‘A less risky endeavor’

Houston-based Hines, which oversees $111 billion in assets, works with Fifth Wall to identify opportunities for its office-focused portfolio. Even if its fund investment does not perform well, the Houston-based firm gains knowledge and partnerships, says Charlie Kuntz, the firm’s head of innovation.

Blueprint Power, Fifth Wall’s most recent investment as of press time, is betting it can bridge the landlords that generate excess energy through sources such as solar panels and the entities that could buy power. The New York-based startup, which raised a $3.5 million Series A financing round in late July, has built technology that uses machine learning to both manage the use of generated energy and to predict consumption needs and sell excess energy.

Claiming a $400 billion opportunity, Fifth Wall joined a group of investors for the Series A including proptech-focused MetaProp Ventures, sustainability VC-focused Congruent Ventures and two partners at VC firm Union Square Ventures. The startup also overlaps with Fifth Wall corporate partner Lennar: Blueprint Power co-founder Robyn Beavers came up with the idea while working at Lennar, the company acted as a founding investor and Lennar’s president sits on the startup’s board.

Blueprint Power envisions buildings of the future serving as next-generation power plants, with smart energy management systems, onsite generation and energy storage.

“We’re trying to utilize our own capital for strategic reasons in this area. It’s much less about creating substantial returns. The amount of capital we’re talking about that we’re focusing on in this space compared to our broader real estate portfolio is quite small, but the effect that those kinds of investments and partnerships can have on our portfolio could be much greater than the investment we’re making into the tech itself.”

Fifth Wall opened access to the full startup ecosystem, which Hines could not access on its own. Without Fifth Wall as an intermediary, engaging with startups is “a risky endeavor for us,” Kuntz says, noting Hines’ background is not in venture capital. Startups benefit from the partnership, too. Engaging with Hines directly without the Fifth Wall intermediary would be “way too cumbersome for these startups” because of Hines’ institutionalized nature.

Hines identifies what problems it wants to solve or what it wants to create, then liaises with Fifth Wall to create a request for proposals. Hines evaluates respondents based on operations and quality, while Fifth Wall evaluates candidates from a financial perspective. Once the firms agree on the best candidate, Hines works on implementation.

“It’s incumbent on us not just to enable our strategic partners by identifying technologies that allow them to do their existing business better, but it’s also to challenge them, in terms of bringing them ideas that might disrupt, dismantle or even re-invent some of their existing business lines or open up new business opportunities altogether that they may have never considered before,” Greiwe says. Kuntz adds that the partnership also benefits Hines’s investors, which are increasingly focused on technology.

“It’s coming up more and more with our capital partners,” he says. “I think that more and more investors are frankly trying to decide for themselves whether they want to be proactively engaging in real estate tech or if they want to lean on their operating partner to figure it out. We’re seeing some institutions that are interested in what we’re doing because it makes them feel more confident in partnering with us. Others are interested in what we’re doing because they’re thinking about getting into it themselves.”

Fifth Wall’s Wallace sees ever-increasing interest from investors, not just from those that manage their capital, in technology. “If you’re an asset allocator, seeing these trends and frankly being at the forefront of them is increasingly important to you because you have an increasingly competitive real estate capital market,” he says. “So being forward-looking gives you an edge, especially as it relates to the creation of these new tech-enabled real estate concepts.”

Working with fund managers

Fifth Wall’s model benefits more than solely its investors, its co-founders say. They have been approached by all the largest private equity real estate managers interested in technology and insights, including what the next big technology-enabled real estate investment opportunity, like Invitation Homes, could be.

As traditional managers have these conversations, the lines between a private equity real estate fund and a VC fund are already blurring. Blackstone, for example, invested $3.3 million in portfolio management software VTS in 2015, using capital from its eighth opportunistic fund. In a $15.8 billion fund, that investment barely registers – but it indicates a shift in strategy from a traditional fund mandate.

Fifth Wall is also investing in portfolio companies with heavy real estate needs, which could lead to opportunities for managers to provide what they already know: buildings. Clutter, a company that raised Series C financing last year from Fifth Wall and generalist tech VC firms such as Sequoia Capital, is one example. The firm transports customers’ items from home to a remote, underutilized industrial property, rather than a purpose-built self-storage building in a city center.

Homebuilder Lennar’s investment management subsidiary, Rialto, also found an opportunity beyond Series D financing to work with portfolio company Opendoor, which buys single family homes from individuals. Rialto provided a mezzanine capital investment, which created an inventory line for Opendoor to buy housing stock at lower capital cost.

Expansion plans

As Fifth Wall continues expanding its startup reach, the firm is also broadening its investor base, looking to grow both the number and the caliber of strategic investors.

Adding strategic investors internationally should help broaden portfolio companies’ reach, because the bulk of Fifth Wall’s investments to date have been North American-based startups that are now looking to expand abroad. The firm is also working with real estate investors for the first time in its strategic investor pool. Wallace says his team typically talks with both the head of real estate and the chief investment officer for such groups.

“The bigger the asset allocator, the more important this collision between real estate and technology seems to be for them,” he says.

“This is very, very top of mind because anyone that’s allocating billions or tens of billions into real estate capital markets recognizes that they cannot be caught short-handed when the first true real estate assets or real estate portfolios tokenize and start to trade on blockchain. That’s going to be something any asset allocator has a point of view on.”

Fifth Wall is also broadening the very definition of what proptech encompasses.

“Looking to the future, our investment strategy will both include the obvious opportunities that we can all agree on is real estate technology, but it will also include situations where we can accelerate the growth of any business through real estate distribution and relationships,” Wallace says.

The duo is confident that value proposition will be even more important if and when the market turns.

“I think in the next downturn, most real estate organizations, knowing full well that trend has taken hold, are going to be looking to double down on technology or enter the space for the first time with the intent of coming out of that downturn stronger, faster, leaner, more tech-enabled by accessing this space in ways they hadn’t before,” Greiwe says.

Even though the firm hasn’t yet turned three years old, Fifth Wall plans to be the trusted advisor to help these firms weather those storms.

For now, just like any fund manager, its focus is on raising capital and putting it to work. Rather than buying, fixing and selling buildings, though, they’re planning to shape the future of real estate and technology as they go.

By: Cat Zakrzewski, WSJ

Uber Technologies Inc. and Alphabet Inc. were among the investors vying to back on-demand scooter company Lime as it raised funding at a billion-dollar valuation earlier this summer.

Joining the technology heavyweights in the round was Fifth Wall Ventures, a Venice, Calif., firm founded two years ago.

Lime Chief Executive Toby Sun said Fifth Wall’s investment was just as strategic as the checks written by the big tech companies. Uber could feature Lime scooters in its app, and Fifth Wall could use its deep real estate connections to help Lime find parking for its bikes and scooters in high-density areas. Lime struck a deal with one of Fifth Wall’s limited partners, Macerich Co., which will help the company stage and park scooters in Scottsdale, Ariz.

“We immediately see their vision and their priorities as very much aligned,” Mr. Sun said.

Fifth Wall Ventures Managing Partner Brendan Wallace said the firm believes it can determine which scooter company will win through real-estate partnerships.

By working with large, established real-estate players such as Macerich, Fifth Wall aims to identify the startups that could shake up the real-estate industry while shepherding legacy property-owner firms through the sector’s digital transformation.

Through partnerships like the one Fifth Wall brokered between Macerich and Lime, the firm expects to give startups a leg up against the competition while helping older real-estate firms keep up with the latest technology trends.

Real estate startups aren’t necessarily technically complicated, but it can be challenging for them to gain distribution, Mr. Wallace said. He said institutional real-estate companies often determine which companies succeed or fail.

“You have this massive dependency on what a very small number of real-estate corporates are doing,” Mr. Wallace said. “And at the same time you have that dependency, these corporates weren’t very good—like many corporates—at navigating and identifying the very best technologies.”

Fifth Wall has backed more than 30 companies, ranging from co-working startup Industrious to homeowner insurer Hippo. The firm has raised at least $100.8 million for a successor to its debut fund, according to a June regulatory filing.

Last year Fifth Wall’s first fund closed with $212 million. The firm is expanding its thesis with a new retail-focused fund that had raised at least $60 million as of May. Mr. Wallace declined to comment on the retail fund.

Fifth Wall’s retail investments to date include Cotopaxi, Foxtrot and Untuckit.

More direct-to-consumer startups that launched online are seeking out a street presence. Partners of Fifth Wall Ventures say these companies are countering the narrative that retail is dying.

“Well-located retail real estate is not dying, and I don’t think it will die in any way, shape or form,” Mr. Wallace said.

Foxtrot Chief Executive Mike LaVitola said he connected with Fifth Wall about a year ago to see if the firm could accelerate his company’s real-estate expansion.

“We see having a bricks-and-mortar presence as an important marketing channel, distribution center and a way to increase customer loyalty and repeat purchases,” Mr. LaVitola said.

Fifth Wall is raising new capital following a record year for deals in real-estate technology, as the industry braces for a digital transformation. In 2017, venture capitalists invested $5.33 billion in the sector, up from $1.6 billion in 2016, according to PitchBook Data Inc. The number of deals increased slightly, to 122 from 114.

“We wanted to build a fund,” said Managing Partner Brad Greiwe, “to capture and encourage that innovation, and figure out ways to build the connective tissue between this burgeoning tech ecosystem and the largest incumbents, who could ultimately help influence the outcome.”

On this episode, Brad sits down with Robyn Beavers, co-founder and CEO of our portfolio company Blueprint Power, following the announcement of the Blueprints's Series A raise. They discuss incubating and building a business from scratch and Blueprint's vision of turning buildings into virtual power plants. For more information on Robyn and Blueprint Power, please visit www.blueprintpower.com.

Fifth Wall Ventures, a California-based venture capital firm that manages dedicated property technology funds, is seeing growing interest from Hong Kong and Asian property developers seeking to access new technologies.

Its second fund, targeted at US$400 million, is anticipating investments from “a handful” of Hong Kong developers, according to market sources.

Co-founder and managing partner Brendan Wallace refused to comment on the firm’s specific fundraising plan.

However, he did tell the South China Morning Post in Hong Kong that Asian developers have been exploring how the proptech introduced by the 27 start-ups invested by Fifth Wall’s first fund, at US$212 million, can help deliver higher efficiency, cost reductions and in turn higher asset values.

Amid the growing interest from Asian developers, Wallace also said Fifth Wall is now exploring opening an office in Asia by the end of this year.

According to filings made to the US Securities and Exchange Commission in June, Fifth Wall’s second fund has raised US$100.8 million.

Sources say one Hong Kong and three Asian developers are now among some of the investors in its fund II, joining a group of nine leading US real estate owners and brokers including CBRE, Prologis, Lennar, Hines and Equity Residential – Fifth Wall’s anchor investors in its first fund.

Proptech, or technologies used in the “built world” as Fifth Wall puts it, could involve anything from artificial intelligence, Internet of things (IoT), data analytics, robotics and financial modelling software.

Much like fintech, the financial world’s equivalent, there is an element of how these technologies can redefine how property builders, owners and operators manage and record their workflow.

“Chinese developers today have opportunities that American developers did not, with respect to innovation and technology,” said Wallace.

“Most US cities were built on existing topography and infrastructure... in contrast, in China, assets are built from scratch which means developers have an amazing opportunity to build faster and deliver smarter, more energy-efficient buildings.”

Fifth Wall is invested in Built Robotics, for instance, a proptech start-up that innovates technologies that retrofit sensors used in self-driving cars onto excavators used in earthmoving.

It is invested in a variety of companies whose technologies are employed in the real estate, hospitality and construction sectors. These technologies are often deployed in building management systems, construction workflow, guest management systems used in hotels, and real time portfolio analytics used by commercial real estate interfacing with landlords, agency brokers and tenants.

In the US, Fifth Wall often invests in proptech start-ups alongside generalist venture capital funds such as Sequoia, Khosla Ventures, and Andreessen Horowitz.

One such example is Lime, a start-up that offers dockless mobility solutions for electric scooters and bikes. In June, it completed a US$300 million series-C financing that includes investors such as Google and Uber.

“We are actively investing in smart city technology and are particularly interested in the impact of two transport trends that will profoundly impact the real estate industry: autonomous vehicles and micro mobility,” Wallace said.

China and Hong Kong are becoming global heavyweights in the emerging ‘proptech’ field

“We were influenced deeply by the exponential growth of Chinese bike sharing companies such as Ofo and Mobike.”

Energy efficiency is another area driving Fifth Wall’s activities. It is invested in is Entics, which makes use of IoT to measure and monitor energy consumption by buildings to help property operators enhance utility savings. Its clients include leading hotel groups such as Hilton, Starwood Hotels and Resorts, and private equity investor Blackstone.

Fifth Wall typically invests between US$5 million and US$25 million per investment. It is also in the process of opening an office in Europe as its investors network expands.

Following our 2018 investment in Industrious, we’re pleased to share CNBC’s coverage of Fifth Wall Anchor LP Macerich and Industrious’ strategic partnership announcement, which will integrate flexible workspaces to Macerich malls around the country (the alliance makes Macerich the first major mall owner to introduce co-working on their properties).

The unique partnership came about during Fifth Wall’s investment process with Industrious, when we approached Macerich pre-investment about the concept of co-working in high-density urban retail. Our team recognized that there was a natural fit between the two organizations, given overlap in locations and desired customer base. Post-investment, Fifth Wall worked with Macerich to identify a handful of locations that would be ideal and coordinated with Industrious to shortlist properties and align on the partnership structure. From LOI to final agreement, Fifth Wall has remained actively engaged with the Industrious and Macerich teams to see this groundbreaking partnership through to the finish. We believe this is a watershed moment in retail real estate and is indicative of the type of work we can do with our Strategic LPs and our portfolio companies post-investment.

Industrious currently boasts 50 locations in 33 cities, providing flexible workspace for companies ranging from SMBs to Fortune 500 brands, with clients including Lyft, Hyatt, Pandora, Pinterest, Pfizer, Freddie Mac and more. Under the terms of the partnership, Industrious will operate co-working locations at select Macerich properties around the US, complementing retailers including Apple, lululemon, Sephora, Tesla, Nordstrom and more with a hospitality-centric workplace experience.

“Macerich is on the cutting edge when it comes to adding exciting, traffic-driving new uses to our market-dominant retail properties across the country,” said Art Coppola, CEO of Macerich. “With time-limited marquee attractions like Candytopia, luxury fitness/wellness concepts, destination restaurants and appealing first-to-market digitally native brands, our well-situated centers are high street, town square locations where shoppers, retailers and brands absolutely want to be. Our settings deliver top-tier, built-in amenities for today’s professionals, which is why a partnership with experience-focused Industrious makes so much sense.”

The first Industrious location in the Macerich partnership is set to open in January 2019 at Scottsdale Fashion Square, a marquis Macerich property housing luxury brands such as Gucci, Cartier, Bottega Veneta, Bulgari, Prada, Salvatore Ferragamo, Burberry and more. In a press release issued by Macerich, the company noted that the “decision to partner together was ultimately was based on two factors: a shared commitment to high-end experiences and Industrious’ proven track record of strong financial performance across its nationwide network of locations.”

“Our relationship represents a bold step that combines our vision for the future of the workplace with Macerich’s vision for the future of the retail experience, and allows us to jointly deliver superior programming, services and amenities beginning at Scottsdale Fashion Square,” said Jamie Hodari, CEO of Industrious. “We look forward to Scottsdale Fashion Square being the first of many successful collaborations between our two companies.”

When Jamie Hodari started looking for funding for his New York-based co-working startup, Industrious, in 2012, he didn’t even bother talking to venture capital firms.

“We were just so confident that VCs didn’t fund real estate that it wasn’t worth trying,” he said.

Instead, Hodari and his co-founder, Justin Stewart, went to anyone they knew — parents, siblings, aunts, uncles, friends — who had money and pitched them on investing in individual locations. While they managed to raise $8 million, it was tedious. They couldn’t sign a lease or get going on a project until they had every dime they needed in advance.

Then, all of a sudden, VCs started paying attention to real estate tech.
Between late 2016 and early 2017, Industrious raised $62 million in a Series B fundraising round led by Riverwood Capital, a private equity firm focused on high-growth tech companies.
When it started looking for another round of capital, it had a lengthy list of venture funds to talk to.

“You say, ‘here are the 64 funds I want to speak to’, and you do everything you can to [get] a warm introduction to those 64 funds,” he said. “You go to events. You have all of your key employees go on LinkedIn and figure out if they went to business school or college or grew up next door to someone who worked at one of them.”
Those efforts paid off, and in early 2018, Industrious landed a $80 million Series C round co-led by Fifth Wall Ventures, a venture fund focused entirely on real estate.

“It’s shocking how quickly the shift has happened,” said Hodari, who noted that it took the same amount of time to raise more than $140 million from institutions as it did to raise the initial $8 million.

Industrious is just one of hundreds of real estate startups that have benefited as real estate venture investment — once a neglected backwater of the VC world — has exploded. In 2012, venture investment in real estate tech firms totaled just $44.7 million nationwide, according to research firm Pitchbook, which tracks public and private equity markets, including venture capital. In 2017, that jumped to a massive $5.7 billion.

Giants in the space, like Japanese conglomerate SoftBank, have made national headlines for pumping billions into the industry (see chart). But sources say an even more remarkable trend is the emergence of VC funds exclusively devoted to bankrolling real estate startups. In addition to Fifth Wall, MetaProp, Camber Creek and others have all launched to capitalize on this sector. And JLL and RXR Realty have all also recently started funds.

Meanwhile, numerous family real estate companies have created their own venture capital vehicles, and existing VC firms that had long focused on other industries are now tripping over themselves to get in on the action.

“I don’t think there’s a whiteboard in San Francisco or the Valley right now that doesn’t have ‘real estate tech’ written on it,” said Ryan Simonetti, co-founder of office services startup Convene, which has itself raised $280.5 million.

But it’s the startups — which are announcing fundraising rounds at a dizzying pace — that often get the press attention. Less attention is paid to those bankrolling the ventures and to what it all means for the industry, which is now on the fast track for disruption.

Brad Hargreaves, founder of the co-living company Common, said the money that startups are getting is “the most expensive capital you will ever find.”

Early-stage venture investors, he said, “are not going to be happy with less than a 10-times return.”

“You need to be prepared as an entrepreneur to take a big swing,” he said.

The VC blitz
The venture capital firm Andreessen Horowitz made a name for itself as an early investor in Twitter, Facebook, Airbnb and dozens of other spectacularly successful startups. But with the exception of Airbnb, it paid little attention to real estate for years.

Then, in November 2016, the Silicon Valley-based firm invested in PeerStreet, a lending platform that allows laypeople to invest in real estate loans. And last year it led a $65 million Series C round for Cadre, the Kushner-backed company that invests in commercial properties and makes stakes available to investors. This year, it followed that up with big investments in home-selling platform Opendoor and blockchain startup Harbor.

For many investors, real estate is attractive because it’s littered with antiquated systems with room for improvement — whether the focus is on rental transactions, listings management, mortgage underwriting, data collection or services like co-living and co-working.
But without real estate backgrounds, many VCs have only recently started to understand this reality, especially when it comes to more complicated business-to-business commercial real estate products.
“The more esoteric the category, the harder it is for investors to get their arms around it,” said one venture capitalist, who asked not to be named.

The source said he’s increasingly interested in real estate investments — partly because there are more promising startups with more ambitious business plans out there than before and partly because rival VC firms are ramping up investments.

“If we go invest in a company in a Series A, part of what we’re betting on is that the company will do very well and that another firm will come along and put more money in,” he said.

In other words, these investments are creating something of a snowball effect: The more VC firms invest in real estate startups, the more likely it is that valuations keep rising and that VC firms can sell their stake for a profit. That, in turn, makes them more likely to invest in the first place.

“It actually helps the ecosystem dramatically when there are more players investing in it,” the source said. “That’s part of what I call the primordial soup, these conditions that need to exist in order for there to be this explosion of startups.”

Andreessen Horowitz is obviously not the only traditional venture capital firm that’s taken to real estate within the past few years.
Sequoia Capital, a VC giant in Silicon Valley, has invested $3.08 billion in real estate startups, including Airbnb and WeWork’s Chinese competitor UCommune, according to PitchBook. The Chinese venture firm GGV Capital and the European firm Lakestar have also invested more than $2 billion each. In addition, traditional asset management companies like T. Rowe Price and Wellington Management have also made giant investments in the space — though generally in late-stage companies.

And then there’s SoftBank.

While the company has been quietly backing real estate startups for several years — in 2014, for example, it gave the data platform Reonomy $3.7 million — its $100 billion Vision Fund has made it a kingmaker in real estate startup circles.

Within the past year alone, the fund — which launched in late 2016 — led a $865 million funding round for construction company Katerra, invested $450 million in the residential brokerage Compass and led a $120 million investment in rental and housing insurance startup Lemonade.

Clelia Peters, president of Warburg Realty and co-founder of real estate accelerator MetaProp, described SoftBank as a complete game changer.

“It cannot be overstated as a factor in terms of what’s going to transform the real estate landscape,” she said.

SoftBank’s $4.4 billion investment in WeWork last year — at a $20 billion valuation — was by far the single largest venture investment in a commercial real estate company. (It also led another $500 million round for WeWork last month.)

The valuation made some early WeWork investors a fortune and proved that backing real estate companies can lead to a big payday.
Knowing that hungry funds may be waiting in the wings has created a sense of urgency for investors to get in now.

“WeWork definitely set a precedent in the marketplace,” said Ashkan Zandieh, who runs RE:Tech, a startup research firm that tracks the venture money flooding into the industry.

The SoftBank effect goes beyond money: It’s increasing the number of tech entrepreneurs entering real estate. In New York — where not long ago real estate was considered a stodgy, impenetrable industry occupied by a tight-knit group of families — that’s leading to a noticeable demographic shift that’s making the industry look more like the tech world.

And the availability of venture capital gives real estate startups an incentive to take on the outward trappings of a tech company, so as to better land Silicon Valley cash.

On the residential front, Compass has raised nearly $800 million by casting itself as a hybrid of a tech company and a brokerage. Since launching in 2012, it’s built a Silicon Valley-like operation — with sleek offices along with titles and hires that come straight from the tech world.

Maëlle Gavet, the firm’s COO, came from travel giant Priceline Group, while Madan Nagaldinne, the company’s chief people officer, came from Facebook and Amazon. Compass also has a chief creative officer and chief growth officer. Even Leonard Steinberg recently changed his title from president to chief evangelist.

Adam Meshekow, a former executive at advertising data startup SITO Mobile, recently joined rental insurance company Leap as chief growth officer.

Meshekow said he was initially hesitant about joining a real estate insurance tech startup because he had reservations about the ability of startups to raise money, but seeing the amount of money being poured into the industry reassured him.

“The biggest change for me was seeing not just our competitors raise [money] at certain valuations, but also SoftBank’s big play into the real estate space,” he said. “The $450 million in Compass and the $150 million in Lemonade was a big deciding factor in me coming on board here.”

And there’s more cash on the way.

SoftBank CEO Masayoshi Son is reportedly eyeing a second $100 billion fund along with a third and fourth.

Seeing companies like SoftBank invest billions in startups makes it more likely that others will follow suit. Sequoia, for example, is reportedly raising an $8 billion fund.

Talia Goldberg, a principal at Bessemer Venture Partners — which has invested in Blue Apron, Pinterest and others — said VC firms collectively see the potential to pour a lot of capital into real estate.
“VCs often have a little bit of a herd mentality,” she noted.

The rise of proptech funds
When Peters and Zach Aarons started pitching investors on MetaProp back in 2015, specialized funds were few and far between.
The two ping-ponged between meetings with some of the top real estate firms in the city.

But the industry players they met with were skeptical that real estate tech was the Next Big Thing.

“Generally, people listened to us, effectively patted our heads at the end and said, ‘Great to meet you. Say hi to your dad,’” said Peters, whose father, Frederick Peters, is Warburg’s CEO. (Aarons’ father is Philip Aarons, a co-founder of Millennium Partners, which owns and operates a $4 billion portfolio around the U.S.)
“There was very little belief that the vision we were describing was anywhere near coming to fruition,” Peters said.

Within 18 months, she said, those contacts were calling to ask for advice and partnerships. “This sector is moving unusually quickly,” Peters said.

The proptech VC craze was pioneered by Navitas Capital and Camber Creek, which launched their first funds in 2009 and 2011, respectively. But others have since rushed into the space, creating something of a new brain trust for the industry. (See sidebar).

The turning point came in May 2017, when Fifth Wall, which is based in Los Angeles, raised a $212 million real estate tech investment fund from the likes of CBRE, Prologis, Hines, Lennar Corp., Host Hotels, Equity Residential and Macerich Properties.

By partnering with established real estate firms, Fifth Wall was suddenly marrying money with end users.

Brendan Wallace — a Blackstone Group alumnus who co-founded the company — touted the fund’s ability to offer “an early-stage company more distribution than any single corporate [investor] on their own.”
In January, for example, Fifth Wall led a $135 million investment in Opendoor. It then helped establish a partnership between Opendoor and Lennar, the Miami-based homebuilder with $12.6 billion in revenue last year. Under the deal, owners of Lennar homes can buy and sell their properties through Opendoor.

Fifth Wall is currently raising $400 million for its second fund.
Meanwhile, in June, MetaProp raised a $40 million fund from investors including RXR Realty, Cushman & Wakefield and CBRE to back early-stage startups.

But despite the existence of these proptech funds, several said that raising money from established Silicon Valley firms is still the ne plus ultra.

“I want someone on my board who went through 2008, who went through 2000, who supported their companies through thick and thin,” said Common’s Hargreaves. “And you’re not really able to get that with a lot of the real estate investors who have come in, because they weren’t around doing venture investing in 2008.”

For proptech funds, the preference among startups for big-name VCs can become a nagging issue, said Shaun Abrahamson, managing partner at the urban infrastructure-centric VC firm Urban Us.
If startups prefer generalist funds, proptech funds often are left to battle over smaller investments, he said.

Urban Us combats that by focusing on seed investments — the early-stage fundraising rounds where competition from big VC firms is less fierce.

Still, funds like Moderne Ventures — which has backed the chore wizard Hello Alfred and LeaseLock, which offers insurance in lieu of security deposits — bill themselves as a way into real estate investing for nonindustry players. Founder Constance Freedman said only about half of Moderne’s capital comes from real estate investors. And she looks to invest in startups that touch several industries — a move she says helps differentiate the firm in an increasingly crowded field.
Fifth Wall, MetaProp and Camber Creek, meanwhile, don’t just raise money from real estate firms — they also advise them on investments.
Rudin Management’s Michael Rudin, who oversees the family company’s VC investments, said he invested in Fifth Wall’s first fund but also used the firm as a sounding board for his own deals.
“If we saw something compelling but didn’t have time or resources to look into it, we could talk to them,” he said.

But while advising firms on how to invest is a booming business now, it may not be sustainable once these firms can act independently.
“The more successful I am, the more obsolete I get every day,” MetaProp’s Aarons said. “That makes us nervous, but what other job do I have?”

Refusing to get sidelined
After dabbling in insurance tech and investing in other real estate tech funds, the Lightstone Group launched its own fund, dubbed Torch Venture Capital, in February.

And the developer is not alone. More traditional players — from landlords to major brokerages — are investing in tech.
Sources say that’s partly because their companies can use the tech to stay ahead of the curve, but also because they’re afraid that if they don’t invest a competitor will, and they’ll get left in the dust.

Shragie Lichtenstein — whose father, David, is Lightstone’s chairman —said when he pitched the concept of launching a third-party fund to the company, he drew a graph of the public firms and REITs he believed were ignoring the tech scene.

“It was obvious to everyone in the room that none of these guys were going to make a focus on tech investment,” he said.
Lichtenstein, who is 25 and previously worked at the hedge fund Point72 Asset Management, said the goal is not to just be “waving a checkbook.”

“It’s about real, strategic value-add,” he said. “If you come to us, we’ll integrate you across our national property management platform.” While Lichtenstein declined to say how much Torch was looking to deploy, he said it will focus on startups in the late seed or Series B stage.

JLL Spark — the $100 million fund launched by JLL in June —was founded in a similar vein. A standalone division within JLL, it is headed by co-CEOs Mihir Shah and Yishai Lerner, two Silicon Valley veterans.
But most traditional real estate players in the VC space don’t have dedicated proptech teams, and they’ve limited investments to startups that can help their business.

For example, the Durst Organization, an early entrant into the space, has invested around $80 million since 2000. But unlike many VC funds that get returns of five or 10 times their initial investment, it’s seen moderate results — more on par with the S&P.

Alexander Durst, the company’s chief development officer, said he gets investment proposals daily, and he looks at all of them — whether for five seconds, five minutes or five months. But the company only invests when doing so adds value to its core business. “It’s just always been this side aspect to our business,” he said. “If we’re going to make an investment, there has to be some sort of relation to our core business so that we can gain market intelligence that we otherwise wouldn’t get.”

Being on the front lines and being able to test new concepts is a key advantage real estate companies have over other VCs.

Realogy Holdings — the residential giant that owns the Corcoran Group, Sotheby’s International, Coldwell Banker and a slew of other firms — has recently invested in tech that benefit its agents and customers.

For example, it’s working on an artificial intelligence house-hunting assistant, and last year it participated in a $20 million round for digital notary startup Notarize.

But picking winners is not easy.

Carlos Serra, a managing director at JLL, said his team was recently introduced to a startup that builds construction site canvassing robots that provide intel on things like how much drywall has been installed.

“When we got the initial pricing for this technology company, it was over $10 million just to [test] this service, so it’s very much in its infancy,” said Serra, noting that he passed on it.

But within the proptech space, investment in construction tech is rising. Last year, the sector’s funding hit $1.05 billion — a record high and 30 percent more than in 2016, according to JLL.

Still, despite that investment spike and Katerra’s splashy investment, it’s been “one of the slowest industries to adopt any level of technology,” Serra said, explaining that the vast number of stakeholders and variety of jobs makes it hard to standardize.
Companies like JLL, Rudin or Lightstone can offer themselves as investors, customers and advisors in one. While that can be a competitive advantage, it can also create problems, sources say.
Some startups, particularly data companies, balk at raising money from companies that compete with their other customers. “It can paint the picture with other clients that they will be privy to private information from their competitors,” said Reonomy co-founder Richard Sarkis.

And some observers worry that real estate companies lack the know-how to make profitable venture investments.

“There’s probably nothing more diametrically different” than investing in cash-flow-producing real estate and investing in tech startups where risks are high and returns might not been seen for years, said Fifth Wall’s Wallace.

“You need to truly understand venture investing,” he added. “That is typically the shortfall of a lot of the corporate venture funds that are out there.”

RXR’s Scott Rechler said he’s very aware of that reality, which is why he’s bringing on MetaProp as an advisor for a $50 million fund he’s launching. But, he said, investing in tech products that his company can use is a no-brainer. If RXR and other real estate players are creating demand for products, “we might as well align ourselves and profit from it,” Rechler said.

As more companies launch proptech funds, sources said, it will become even easier for startups to raise large sums of money.
And not just from Silicon Valley. The Vision Fund — which is backed by the Saudi Arabian government — could just be the beginning. Sources said sovereign wealth funds could be the next to emulate what SoftBank has done. The China Investment Corporation and the Abu Dhabi Investment Authority have already been active in financing other industries, like ridesharing, but they soon could turn toward real estate startups.

But sources said that all of this cash comes with the risk of oversaturation. “The allure of raising capital can be somewhat intoxicating,” said PeerStreet co-founder Brett Crosby. Crosby — who is pictured in a wetsuit and carrying a surfboard on the company’s website — added that startups need to be “cautious and thoughtful” about raising money.

A harsh reality about venture funding is that VC firms usually buy large equity stakes in startups and have high expectations on returns.
Although the model works well for startups like software firms, which don’t usually require a lot of capital to grow, that may become very expensive for some cash-guzzling real estate startups, said MetaProp’s Aarons. Ultimately, he argued, the industry needs cheaper alternatives to venture capital — such as debt or more patient equity.
Tellingly, WeWork, which has a capital-dependent business model, recently went to the bond market to fund its expansion, raising $702 million in an April offering.

Still, VCs said they don’t worry about increasing competition. “For the past 15 years, there was an underinvestment in real estate,” said Camber Creek co-founder Casey Berman. “For us, it’s wide open.”

The transformation of the United States’ ancient power grid has given real estate owners and operators a prime seat at the table as their buildings become critical power nodes in growing energy marketplaces. Today, nascent energy technology already allows buildings to create their own electricity, store energy onsite, and sell excess energy into the grid. Buildings of the future, however, will take this even further, serving as power plants, complete with smart energy management systems, flexible loads, onsite generation, and energy storage. Energy intelligence at the building level is empowering real estate owners to partake in transactive energy marketplaces: easily selling power to neighboring buildings and properties. Although this was already happening on a small scale in personal dwellings, selling excess energy is a $400 billion opportunity that was previously untouched by the real estate community. Through recent innovation, real estate owners and operators see a clear path to partake in the broad transformation of the electric grid and resulting energy marketplaces, which represent massive incremental revenue streams.

Built for the real estate industry specifically, Blueprint Power is at the forefront of creating transactive energy marketplaces that enable real estate owners to become clean energy suppliers. Blueprint is redefining real estate energy consumption—the company’s technology uses machine learning to not only manage the use of generated energy (by solar panels and the like), but predict consumption needs and sell excess energy assets. Two notable strategic differentiations in the company’s marketplace software include price signals and the ability to dynamically match supply to the best source of revenue. Fifth Wall is pleased to join in Blueprint Power’s $3.5 million Series A, led by Congruent Ventures, MetaProp Ventures, Fred Wilson, and Brad Burnham.

Real estate owners have the incentive, scale, and management skills to not only reduce operational costs through better energy management, but also to generate new revenue streams by monetizing excess onsite energy—something that was historically considered a cost outside of their control. Blueprint Power is perfectly positioned to accelerate the transformation of buildings into intelligent power nodes. The company’s proprietary software helps real estate operators transform urban portfolios into producers and suppliers of clean energy. The potential for energy marketplaces far surpasses selling energy to other buildings. Down the line, other types of electricity customers (cars, buses, scooters, etc) will come online in meaningful ways, expanding the market opportunities as these customers look for opportunities to purchase energy from clean, intelligent power nodes. In the short term, buildings can use renewable energy to supply, manage, and control their own energy needs—onsite assets such as solar, battery storage, cogeneration, fuel cells, thermal storage and controllable loads. With Blueprint, this same software then allows real estate owners and operators to leverage expanding opportunities in energy marketplaces using data-driven, machine-learning tools that automate the management, aggregation, orchestration, and market transactions of energy assets.

Co-founder and CEO Robyn Beavers comes from a background at Google and came up with the idea for Blueprint Power while working at Lennar (a Fifth Wall LP — Jonathan Jaffe, President and COO of Lennar is now a board member of Blueprint Power). Rounding out the Blueprint team are co-founders Claire Woo, head of technology and formerly of Bosch and NRG, and Nicholas Squires, head of systems integration with expertise from time at Boeing. The company’s innovators and engineers include Nicholas Schmidt, VP of engineering (formerly of United States Air Force and Boeing); and Savannah Goodman, product manager (formerly of Tesla).

Through our deep relationship with Lennar, Fifth Wall decided to join as founding investors alongside Lennar. Now joined by a number of elite investors, Fifth Wall is thrilled to support Blueprint Power as it harnesses the true potential U.S. power grid and transforms millions of “dumb” buildings into smart power nodes. Participation in transactive energy marketplaces will allow real estate assets to increase their value by taking part in urban electric grid transformations. Rather than only being valued as physical real estate assets as they are today, becoming intelligent power nodes allows buildings to capitalize on their strategic physical positioning in next generation electric grids. By connecting Blueprint with our strategic owners and operators, Fifth Wall will accelerate the company’s trajectory with unparalleled access to enterprise relationships.

Blueprint Power, a New York-based startup, arranged $3.5 million in funding to develop technology that helps building operators sell power in competitive markets.

The Series A funding round was led by Congruent Ventures, MetaProp Ventures and individual investors Fred Wilson and Brad Burnham, said Robyn Beavers, Blueprint’s co-founder and chief executive officer. Other participants included founding backers Lennar Corp. and Fifth Wall Ventures, along with Hanwha Group unit 174 Power Global.

Blueprint’s software lets building owners manage on-site energy resources such as solar panels and then sell excess power to the grid. Recent regulatory changes in New York are opening wholesale competitive power markets to operators of smaller-scale generating assets, Beavers said.