Record low confidence rocks outlook for startups

Six months after soaring to unparalleled heights, confidence in the proptech sector has collapsed to new lows among investors, according to MetaProp.

The VC firm’s latest Global Proptech Confidence Index recorded a confidence rating of 5.8 – down from 9.3 at the end of 2021. This was marginally below even the pandemic-era trough in mid-2020 (5.9).

MetaProp said the “abrupt decline” coincided with falls in the broader public markets, with the NASDAQ down 25% on its peak in 2021. But proptech companies have been especially hard hit, with stocks rising faster than the broader market and now falling faster, as well.

This is particularly true for companies that went public during last year’s surge in SPACs – blank cheque companies. Many of these companies are now trading significantly below their price at the time they listed.

According to MetaProp, enterprise value-to-sales multiples in proptech are down 40% among incumbents and 65% among new entrants from late-2021 highs.

Startup confidence has similarly fallen from its all-time high of 8.3 to 4.2 in the last year. Some 71% of founders believe it will be harder to raise capital in the coming year.

What’s the upside?

In a blog post, MetaProp co-founder Zach Aarons, said there are “favourable tailwinds” for real estate innovation.

He said: “The real estate recession during the global financial crisis of 2007-2010 saw some of the fastest growth rates for revenue of property management software systems like MRI and Yardi, as the recession forced CFOs to embrace technology as a means to drive efficiency.”

MetaProp expects a similar trend this time round, with “many” of its portfolio companies seeing record levels of revenue growth in the second quarter of 2022. At times of economic volatility, organisations pursue efficiency and the right proptech innovators should be able to provide that.

Quoted in the report, Raj Singh, managing partner at JLL Spark, said: “We expect to be as busy as in previous years [over the next 12 months], as the innovation engine driving entrepreneurs to deliver solutions hasn’t really gone away, and the need for our clients to improve their portfolios’ performance has increased.”

The downside for the startups that are trying to tackle these issues is that more than half (52%) have less than 12 months of runway unless they raise more capital. Combined with the widespread expectation that it will be harder to do so in the coming year, the outlook for a swathe of startups is grim.

The question for the coming year is which of these factors will come out on top. Will caution stymie the flow of capital? Or will real estate’s need for efficiency and innovation in the face of financial pressures prop up a nervous sector that potentially has solutions?