Fifth Wall + VTS: The future of tech in the built world
At VTS Accelerate, the leasing and asset management platform’s annual conference, VTS CEO and cofounder Nick Romito sat down with Vik Chawla, principal at venture capital firm Fifth Wall, to discuss the rise of property technology, how it’s grown, and what they envision for the future.
The two companies have been in the spotlight recently with VTS raising $90m to scale-up, and Fifth Wall claiming to have raised the largest proptech investment fund to date, with a second fund of $503m (£403m).
Here are our main takeaways from the chat
Chawla said that one of the primary issues with real estate was the distribution risk problem, “if you can’t sell to the largest owners and managers, you’re almost likely to be dead in the water.” He said that’s why Fifth Wall was created, in order to “pair [the company] up with these owners and managers of real estate, and influence the outcome of your business so you’ll be much more likely to succeed.”
One of the issues Fifth Wall came across early on was mass deployment of technology company wide, and how they became more of a call advice centre than a VC firm. Chawla explained to combat this pain point, they “set up an internal consulting group, a technology transformation group, which works with our limited partners and real estate firms to help with integrations and implementations of technology in their business. It worked far better than we thought as the real estate industry really opened up and were willing to take advice from the outside.”
“We’re now beginning to see them get outside expertise on change consultation. Now businesses like CBRE and Prologis all have been using these services to retrofit their businesses with the latest and greatest technologies.”
Romito said that one thing they’ve found at VTS is that when it first launched, “there wasn’t a whole lot of technology that was focused on the business teams. As more technology companies have opened up, I can see there is a bit of a lag to focus on business teams.”
Chawla explained: “Historically, when real estate teams were using technology, they were so skittish about changing anything, because they had something that worked. But now we’re seeing the integration of change in other related sectors to such an extent that for those in real estate, if you’re not willing to innovate, then you’re actually falling behind year after year.”
In the past few years there has been a growth in venture funding. Chawla said that this is down to two reasons: “The first, a lack of adoption was choking innovation. Large real estate firms weren’t leading the charge, and the real estate industry suffers from herd mentality. What we saw starting in 2014 was the beginning of the realisations of business owners who saw the success of Google and Amazon, and retrofitted their own technology.”
He went on to say that this adoption was furthered by “placing real estate owners in a place where they can participate in the outcome, which further incentivises them to invest.”
Romito said that since the success of Fifth Wall, he’s seen owners create their own funds, and he doesn’t see that slowing.
Chawla said that whilst internal investment is great, “independent funding is better as you see a better deal flow. It also allows you to focus on running your business, while we operate the venture fund.”
What has also grown is the global market for funding. Fifth Wall’s second funding round was raised from 50 of the world’s top real estate players in the US, UK, Japan, and the Middle East.
“Globally the fund came together in part because of inbounds that came from work we did on our fund one and from our proactive outreach. We saw three key themes around international real estate tech. The first was taking large companies in the US and localising them in other countries. The second theme that came about was taking businesses that were working really well in one market, but were too operationally intensive to just have as a satellite office elsewhere, so we helped them find a local player. The third theme was the burgeoning proptech scene internationally, where we saw an opportunity to be a part of and invest in businesses to help them grow in the region and then internationally.”
Even with the growth of proptech, and no signs of it abating, the industry is still in its relative infancy. Romito explained that the systems in place have been rapidly developed, and the industry is now dealing with “problems borne out of proptech solutions such as the uncommunicative, bifurcated systems in the US that have only just started talking to each other”, he added these problems are “ten times worse in Asia”, where their market is even younger than the US.
Chawla believes there are two successful business models: “A full stack end-to-end company, where you go all the way down from one end of the value chain to the other. The other type of business model we’ve seen work really well is the retrofitting. A lot of customers can’t rip out their entire system to integrate new technologies, and that’s really the larger cross section of the two.”
For both Chawla and Romito, they see the immediate future focussing on how to use machine learning and data analytics to make better investment decisions.
Chawla said: “When machine learning and AI are deployed correctly they have great potential. Real estate owners should first adopt the latest technology systems that retrofit your business, and then look at other areas of your business where you can invest. Data collection is a driving force behind the creation of new technology in real estate, and businesses that provide bigger returns to their customers through better data and analytics insight are seeing a lot of adoption.”
However, the collection of data from numerous sources comes with its own problems. Romito explained: “The market is so opaque, there is no single database to help give you answers. We’ve had to clean up our customer’s information before they can use our product, whereas in residential you don’t have that problem.”
Chawla said: “There’s a combination of problems we’re now trying to solve with the mass of data we have. You have to be careful about data overlap. We’re likely to see one platform that dominates different sections of the business, so there’ll be one or two platforms that dominate in different sectors across your portfolio. Stakeholders will want a main platform for information.”
Chawla and Romito concluded the chat by saying the most important advice they could give to companies is that it’s important to remain focussed on the customer.
Chawla said: “You need to prioritise the customer experience above all else and realise that there are key technologies that you can embrace to do that. Focussing on these technologies will put you in a better position to incrementally grow your business.”
Romito went on to say that “what we’re realising is that [proptech] is a mix of art and science, but there just hasn’t been a whole lot of science.” This means that more data needs to be a part of the creative initiative to help decision making.