This piece stemmed from a session at NMHC’s OPTECH Conference, “Partnering with a VC firm on PropTech? Different Goals, Different Strategies”.

Historically, innovation in multifamily has been said to be slow and plodding, and many argue that is still the case; however, new Venture Capital funding is changing the face of technology startups and creating interesting dynamics in tech adoption within the industry.  Some of this funding is unique in that the source of funding is also coming from within the industry, as owners and operators utilize VC funds as a vehicle to both invest in PropTech startups, as well as vet the myriad of options available to them.

The surge in technology startups in multifamily has created an exciting opportunity for improvements across the board in multifamily operations and development, but it also has created a new challenge of sifting through the noise.  Enter firms like RET Ventures, Nine Four Ventures, and Moderne Ventures, VC firms who serve both as investment vehicles as well as strategic advisors when it comes to PropTech adoption.  Through these funds, owners and operators can indirectly invest in startups within multifamily, but also gain market research and clarity on which startups to initiate pilot programs.  Kurt Ramirez, General Partner at Nine Four Ventures, indicated the multifamily industry has been very slow moving from a tech adoption perspective, and as a venture fund, they can speed that process along and improve adoption of new technologies.

On the flip side, PropTech startups gain advantages when it comes to access to owners and operators who are invested into the funds, the Limited Parters, or “LPs”.  Alec Page, Vice President RET Ventures, indicated the industry is under-resourced from a tech adoption perspective, and new tech vendors have struggles with long sales cycles and a high cash flow burn rate as pilot programs mature.  Because of this drain on funds, LPs then have the added worry that the new technology provider they are piloting may not have the financial stability needed to scale, or even continue as an ongoing operation, which then creates a stalemate of sorts when it comes to rolling out these new technologies, as owner/operators then have to evaluate both the technology being provided, but also the financial viability of each startup.  PropTech startups also have other challenges, such as property management software integration, which can be a major hurdle for adoption.  Therefore, Page indicated funds like RET can assist beyond just capital injected into startup ventures.

Terry Danner, Chief Executive Officer at SightPlan, who is an RET Portfolio Company indicated RET was unique in how they were structured and what they were trying to achieve.  While most VC firms offer money, tech guidance, and the knowledge on how to make an exit, Danner said these elements were not their biggest need.  Instead, RET offered potential customers.  This group of owner operators who were now LPs at RET were not obligated to purchase, but the alignment with RET opened doors with these owner operators which might not have existed previously.    

Stacy Valentine, Senior Vice President of Operations, Laramar Group, saw her company’s investment into Nine Four Ventures fund as a dual benefit:  The primary driver was investing in PropTech companies, with a secondary benefit of operational improvements from working with the companies.  She noted that the ability to do pilot programs with these startups offered the fund more intimate knowledge about a company on which to make an investment decision.

Although funds like these are investment vehicles, Jeff Barber, Senior Operations Manager at Olympus Property, indicated that the biggest benefit he sees in the concept is help vetting all the new technology options available to them, although his company has not yet made an investment.  This echoes Page’s comments that an ideal investor in his fund is ideally an early adopter or tech savvy, as they act as a sounding board for potential new portfolio companies.  The LPs as a whole then seem to act as a collaboration, sharing knowledge within the investor group on experiences within each product or service category.  Through a yearly summit, LPs can meet in person to discuss these types of sourcing questions.  Similarly, Ramirez indicated their ideal investor can provide more than just funds, but rather meaningful value in both knowhow and act as a potential customer. 

While this investment strategy appears to help technology adoption and capital infusions into PropTech startups, it does not come without detractors.  The primary concern is whether this circular process creates barriers to entry for other startups in the industry that are not aligned with these types of funds.  In other words, as owner operators are now investors into these startups, does it block outside startups who are not within the fund’s sphere, as now the decision to do business has both an operational and investment aspect?  At least one supplier who was not aligned with these funds shared that they felt that this created a barrier to entry, especially for new startups who didn’t understand the ownership dynamic already in place.  Selling to an owner/operator who has a financial stake in their competitor could be an additional obstacle in an already difficult sales environment. 

When posed this question, Ramirez of Nine Four Ventures shared that the investment an owner operator has in a fund is still dwarfed by the operational impact of working with any particular supplier, so their decision will be primarily fueled by operational benefits rather than investment benefits.  In this same vein, Barber, although not a current investor, shared that the investment question would still be secondary to the value of finding better suppliers.  Time will tell whether the operational benefit continues to outpace the investment benefit.

Regardless, it appears this type of funding will only increase in multifamily, providing further capital into the startup community and driving unique relationships in the process.