8 Tips for Property Firms Investing in PropTech
As the PropTech juggernaut speeds along, it should come as no surprise to see an increasing level of investment activity in PropTech businesses by property industry incumbents. Whether it is CBRE with Floored, Qube with Engage or – more recently – LSL with YOPA, the number of transactions and the amount of money being spent is increasing.
However, investing in a technology business couldn’t be further from the day-to-day experience of running a property company and so we thought we’d offer a quick eight-step guide for property companies considering embarking on this journey.
Tip 1 – Set out an attractive stall
You are probably a very well capitalised and respected firm in the property industry. However, don’t assume that this will mean much to your target acquisition or investment candidate. Investments in good PropTech businesses are in high demand by venture capital and private investors and valuations reflect this. Founders have often been on completely different journeys to those entrepreneurs behind the traditional businesses you are familiar with and may not find your approach appealing at all. Make sure you are happy playing at the kind of valuations they will expect and give deep thought to outlining the strategic benefits of accepting investments from you.
Tip 2 – Strategise first, act second
It would be wonderful if one or two PropTech investments were enough to protect your business from threats to its business model but I’m afraid to say it won’t be. Understand how investments will sit alongside transformation the culture, human capital and value proposition of your core business. Are you hiring the right people to get the best out of investments? What will your existing team think of the deal? Answer these questions before you start.
Tip 3 – Invest in a strong business, not an IPO moonshot
If you haven’t developed your strategy but are investing anyway, it’s probably because you’re under pressure from shareholders to show some leadership and deliver what they can consider quick wins. It might appeal to them to invest in a business that has a story that takes it to a swift IPO, business dynamics – read profitability – be damned. This should make you deeply uncomfortable, not excited. Most of these businesses will never make it to IPO and, even if they do, may never show you any ROI. Keep your money in your pocket and leave the moonshots to the experts.
Find businesses with strong fundamentals, particularly if those are to do with the Lifetime Value of a customer. Forget about basket size. It shows no customer loyalty. What could be more important in a market (like the property market) with infrequent transactions than frequent, repeat business?
Tip 4 – Skill up your tech knowledge
Don’t know your API’s from your Python or your pen testing? If not then you have no credibility with you potential investee. Learn what they mean and make sure your team understand them too. Now.
Tip 5 – Move quickly
Tech startups build their products in an agile manner, make business decisions in real time in response to what they learn from their customers and are always ready to leap on the next opportunity or close an opportunistic funding round.
If you allow your corporate approach to leak into dealing with startups, you are dead and so are your investments. Get the deal done in 6 weeks from term sheet to completion.
Tip 6 – Make investment management a defined job function
You should be sponsoring these projects if you are the CEO and empowering a dedicated point of contact within your firm to get the deals done. You’ve got way too much on your plate and probably have no interest in understanding the nuances of technology businesses so focus on providing leadership to those below you and inspiring the Founder you want to back. When the deal completes, make sure your Investor Director has the right skills and experience to protect and maximise your investment.
Tip 7 – Hire an external law firm
I know what you’re thinking – “but we have in-house counsel!” Do not, for one second, allow in-house counsel to manage a venture investment process. They will not have any knowledge of standard terms for such investments and will simply drag the process into the long grass or have rings run around them by the professionals. Hire an expert venture capital lawyer and allow them to guide you on market norms. They will work with your in-house counsel and guide them through the investment. Your prospective investee will be doing the same. This will help you close your deals faster and on better terms.
Tip 8 – Never EVER seek control
Unless you are taking a majority stake (and based on the valuations of most PropTech businesses, you probably aren’t) then this is a fundamental golden rule. Don’t try it by the front door or back door. Some matters should be reserved for you when it comes to issues such as the role of competitors, but the moment you seek to assert rights over any material changes to the business, your well-advised investee will close the door on you. Don’t waste your time.
PropTech Consult partner Eddie Holmes has acted for a range of corporate property firms during their investments in PropTech businesses and for PropTech businesses raising investment from property firms. If you require assistance with any of the issues outlined above, please contact us to find out more about how we can help.