This is a question that many new to venture capital members, including myself, ask. The short answer is YES. However there are some major caveats to this statement. To understand venture capital’s place in the real estate market, one has to understand what the goals of venture capital are and how they differ compared to the goals of traditional real estate investing.
Different Markets, Different Goals
Although variation exists between different firms, VCs generally wish to invest in potentially risky, startup companies or products that will then yield a huge return of 10-30 times investment within a relatively short period between investment and exit. Additionally, these investments typically have a huge market potential with a disruptive product or service. Although obviously not exactly so, VC are the “get rich quick” investment strategy that is intended for very high and very fast returns on investment. Real estate on the other hand is generally on the opposite side of the spectrum. Real estate investors look for long term appreciation, in stable markets with steady, moderate cash flow with an exit comings years or decades later. Their market generally is non-disruptive, old school and stable.
These differences demonstrate why VC does not have a place in traditional real estate investing. So where DOES it have a place within the RE realm?
Where VC meets RE
Innovation and technology are the main drivers for successful startup companies. However, these aspects are not exclusive to industries outside of the startup investing. They exist in all fields and where they are, potential venture capitalist will follow. Currently in the industry of real estate, very new, exciting, and innovative things are taking place. With technology use on the rise, this age old industry is getting a shake up as entrepreneurs look for way to make money on real estate without going into traditional, brick and mortar, real assets. Those entrepreneurs that can successfully bridge the gap of technology and hard real estate assets are poised to disrupt the market. Enter real estate startups old and new: AirBnB, Zillow, OnTarget, hOM, Knock and many more early and late stage startups. What these companies do is create innovative ways to easily solve common RE problems and access previously undiscovered markets using a technology interface.
This is where VCs have a place in the real estate market. There are several examples of very successful startups including the obvious economy sharing site, AirBnB which is currently worth some $30 billion, large brokerage interfaces such as Redfin, and smaller but successful property management innovators such Cozy which has secured over $18 million in funding. There is money to be made and with a historically lagging technical savvy, the real estate market is poised and hungry for investment in innovative companies.
Where to Next for Your VC?
If your firm is interested in investing in a real estate startup, there are few things that the leaders in this emerging segment recommend. Firstly, and most importantly, look for companies that are solving an issue that exists in the market. For example, Apartment List is an interface to help landlords advertise, find, and screen tenants without the hassle of multiple vendor, agent and marketing avenues. Secondly, look for companies that are fiscally efficient and willing to weather the storm. Real estate is historically a technology late-bloomer and getting consumers to adopt your product will take time. You will want to invest in companies that understand the consistency, efficiency and patience needed to allocate your money well. Thirdly, make sure the company in question is legally responsible and forthright. This may seem to be a “no-brainer” but real estate law is particularly fickle and not to be trifled with. Make sure your investment understands privacy, zoning, contract, regional and financing laws related to their particular niche. Finally, look for startup solving issues in broad markets. It is risky to invest in startups that are specific to a very small or regional issue unless significant market need can be demonstrated.
So to answer the question of whether VC has a place in real estate, the simple answer is yes. Although venture capitalists have little interest in actual real estate acquisition, they have interest in real estate innovation. This is where the disruption in an old industry is and where the opportunity is never small.
About the Author
Logan Brown is has a Bachelor of Science (BS) focused in Kinesiology, Exercise Science and Pre-Medicine completed at the University of Nevada-Las Vegas.
After finishing undergrad, Logan returned to UNLV to get his MBA to further his interests outside of medicine. Logan has developed a keen interest in real estate investment, investor engagement, and venture capital.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of RVF or UNLV. In addition, thoughts and opinions are subject to change and this article is intended to provide an opinion of the author at the time of writing this article. All data and information is for informational purposes only.