Proptech prepares for more M&As and the first European unicorns
European proptech is changing rapidly from a shoal of minnows to some seriously big fish, with 2022 set to be a year of further consolidation. But there are still no whales in sight. Yet.
A new report by Sifted, sponsored by Pi Labs and Shoosmiths, says that while many more firms will fail over the next 12 months, successful players will start to pull smaller start-ups together.
James Dearsley, founder of proptech procurement platform Unissu, is convinced that the market is ripe for M&A. “The biggest challenge the tech industry has at the moment is solving problems that don’t exist,” he says. “Or realising the problem they are solving isn’t big enough to make a sustainable business.”
European proptech is changing rapidly from a shoal of minnows to some seriously big fish, with 2022 set to be a year of further consolidation. But there are still no whales in sight. Yet.
A new report by Sifted, sponsored by Pi Labs and Shoosmiths, says that while many more firms will fail over the next 12 months, successful players will start to pull smaller start-ups together.
James Dearsley, founder of proptech procurement platform Unissu, is convinced that the market is ripe for M&A. “The biggest challenge the tech industry has at the moment is solving problems that don’t exist,” he says. “Or realising the problem they are solving isn’t big enough to make a sustainable business.”
To survive and thrive, small-scale solutions will start to aggregate into larger-scale businesses. “Proptechs should look for some similarities with other businesses and work with them to create a much bigger entity that solves multiple problems,” he says.
It echoes recent comments by Pi Labs founder Faisal Butt.
“In the near-term future, we expect more and more companies to undergo later-stage funding rounds and M&A activity to join the likes of AirBNB, Zoopla, Causeway, and Purplebricks as proptech unicorns and/or listed companies.”
European proptech’s first £1bn unicorn
He reckons that it will not be long before some of those minnows have become fully grown whales. A quick back-of-an-envelope projection based on Plentific’s recent valuations shows it growing at a daily rate of 0.175% for the 693 days between its series B and series C announcements. If that were to continue, a hypothetical series D round at some point in late 2023 could reveal Plentific to be European proptech’s first £1bn unicorn. “Now we all know that valuations are never as linear as this,” says Butt. “But without being too imaginative, there is a clear direction of travel here.”
He argues that we will see a number of late-stage European rounds in the next couple of years. “This new ‘growth capital’, is going to act as the fuel that will help European proptech cross the chasm from toddler to adolescent.”
And it will then mature in a number of ways. “A steady rise in IPOs, of the SPAC and traditional variety, of exits both large and small, and of European unicorn start-ups going global.”
As the report notes, this is already starting to happen, with HqO buying Office App to expand into Europe, and Dutch-based PFM Intelligence buying the UK’s CoreTech Solutions.
“We are starting to see some of the main players partnering up,” says Stephen Macdonald, co-founder of the Proptech Connection. “That is a natural progression – to dominate your space in two or three countries and then partner up with the big guys to feed into their network. That is the pathway to global expansion.”
Partner up or scale-up to succeed
But those that fail to partner up, or scale-up, will simply fail in this next phase of the sector.
It is already littered with casualties. Last year, the SoftBank-backed US outfit Katerra filed for bankruptcy, cancelling its 82 projects and laying off 8,000 employees after burning through $2bn in funding. Social Construct, another US company, aimed to streamline planning and assembly, but shut down last August despite raising $17m. In the UK, Movebubble, which had raised over £3m to disrupt London and Manchester’s private rental sector, appears to have gone offline, perhaps echoing the collapse of hybrid estate agency group Emoov in 2018, which was bought out of administration for just £300,000 a mere eight months after being valued at £125m.
According to figures by Unissu, around 10% of proptechs are inactive.
Andrew Knight, global data and tech lead at the RICS, says many start-ups have simply failed to fulfil their potential. “A proptech firm will have done something very neat and clever, but it has been built with one market in mind and it is not that transferable – both from a technical and a sales and marketing perspective.”
Expanding to cover new territories can mean starting from formula, as regulations and pain points vary wildly across different jurisdictions.
Lack of property industry experience
Another issue is that founding teams have the requisite technical knowledge but lack the property industry experience to find a great fit in the market. “Then they are building technical solutions that are in search of problems,” he adds.
A lack of previous experience can also mean there are not the pre-existing relationships that make expansion possible. “Real estate is very relationship-driven. It’s not easy to get in front of the right people,” says Proptech Connection co-founder Ivo van Breukelen. “But what we have seen is those companies that make it through to series B or C have a very high likelihood of making it all the way through.”
And it is bureaucracy from banks, rather than governments, that is limiting the potential of proptech, says angel investor Paloma Cabello. “Banks are being very slow in the adoption of technologies such as blockchain that would make life much easier.”
Europe also has a long history of losing start-ups to the US when they are looking to scale. Across sectors, an estimated 44% of scale-ups launched in the EU leave the region at their series B or C phase. Many go to the US, where, according to European Commission figures, venture capital funding for later-stage scale-ups is 34 times higher than in the EU.
But that is starting to change, with US money increasingly coming to European shores. Last year, Spanish start-up Clikalia secured $518m in debt and equity funding, led by Los Angeles-based Fifth Wall. But while the funding may have originated in the US, it came to the business in the form of Fifth Wall’s $159m fund dedicated to the European market. Plentific’s £100m series C raise last year attracted funds from San Francisco VC Brookfield Growth among others.
“So money is here,” says Eurazeo investment director Robin Rivaton. “Four or five years ago, proptech was not funded at the right level but now it’s not a money problem.”
Most attractive to investors
As the market begins to coalesce, some areas will emerge as far stronger propositions than others. Solutions targeting ESG, construction and data are already proving most attractive to investors. “I think there is effectively now a race to see who can capture data the earliest in the project process and apply those insights across portfolios,” says Macdonald. “Because that’s where the value is.”
Increasing ESG regulation will also fuel the desire for more proptech solutions. “The regulation is crazy,” says Rivaton. “Real estate owners and property developers are being asked to produce tons of data and so far they are unable to do it.”
Other areas, such as the housing crisis, the ageing population, the uses of blockchain and the metaverse are also seen as potential growth areas.
But just because we are entering a tougher time for start-ups, that is no reason for proptechs to lose heart, says Cabello. “My message to start-ups would be: if you don’t do it, others will do it for you. Someone will prove the model in another market, jump in and they will be unstoppable.”
And the sector should not be afraid to make the most of a good crisis. Coronavirus has opened new niches and accelerated existing trends, the report states, noting the growth of virtual viewings or office space “matchmaker” platforms during lockdown – built at a time when both were considered fringe.
Other areas could also be tapped as the tech stack continues to evolve. “The flowering of the API ecosystem, driven by open banking, is allowing end-users to stitch together different proptech software, ensuring interoperability and fostering collaboration,” the report states. “Virtual reality, immersive content and the metaverse have decent use cases in areas like property viewings and building design.”
And blockchain. “Property looks like one of the few sectors in which blockchain is actually solving a problem,” it notes, pointing to applications in areas such as fractional ownership and retail investment platforms.
The full report, written by Adam Green and Emma Shepherd, can be found here.
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Image by Gerd Altmann from Pixabay
