The past year has been a roller coaster ride for the venture capital market. After a period of irrational exuberance, the markets have suddenly shifted to a state of scarcity and stagnation. Everyone is now wondering what the future of venture capital will look like in 2023.
Although we don't have a crystal ball to peer into the future, we're sharing our own PropTech expectations for 2023 below.
Startup valuations have seen a significant drop in 2021, leading to reduced transaction volume across the board. However, certain sectors have been more resilient than others. At LAB Ventures, we prefer to invest at the earliest stages, where valuations have not been as inflated, and consequently have not had as far to fall. Real Estate Tech startups have been particularly hard hit due to the current high interest rate environment, but Construction Tech has held up comparatively well. In fact, according to BuiltWorlds, early-stage (pre-seed to series A) deals in ConTech hit an all-time high of over $500M in Q3 of 2021. This demonstrates that even in difficult times, investors are still seeking out opportunities in the Construction Technology sector.
For years now, commentators in the PropTech industry have been convinced that a consolidation of individual point solutions is necessary and that they must be replaced by platforms that can automate entire value chains. As many startups are set to run out of money in 2023, this is the year we expect to see consolidation pick up steam. Although the IPO window is closed and trade buyers are wary of spending, there will be opportunities for the more aggressive players to make strategic mergers and acquisitions (M&A).
Enterprise sales will be more difficult. Although a recession could be a catalyst for technology adoption as profits in the sector come under pressure, operators will be cutting discretionary spending while scrambling for ways to improve efficiency. Now more than ever successful PropTech startups will have to show a clear ROI - the days of “nice to have” apps are over. In fact, a recent European Real Estate Association (EPRA) survey highlights the challenge - 45% of respondents already using 3 or more PropTech solutions were hesitant to implement additional tools due to a lack of return on investment (ROI).
Despite the changes in market sentiment, the bottom line for founders is the same: build a product that customers really need, love to use, and will pay for. And pay attention to unit economics - growth is important, but not at any cost. We continue to seek out strong founding teams working to solve big problems in large markets. The underlying fundamental drivers for PropTech deployment have not changed - the industry is still facing low digitization, low labor productivity, labor shortages, supply chain challenges, a housing affordability gap, and ESG concerns. We strongly believe that the PropTech industry will continue to gain investment and be unstoppable in its advance.
What in PropTech are we most excited about?
Innovative financial models - businesses that depend on transaction volume in the residential space (ibuyers, mortgage brokers, etc.) will suffer in the near future. But those that are building creative new ways to solve the housing affordability problem for buyers (we recently invested in Acre Homes), or to help homeowners tap into trapped equity, should flourish.
Creative repurposing - the commercial real estate market is being upended by post-Covid changes in demand. We expect the proliferation of new uses for real estate (co-living, pop-ups, flex space, office-to-resi conversions, etc) to continue, and there will be a need for more tech solutions to address these new ways to use space.
PropCo / OpCo - both of the above are about more than just software, and typically require investment in real estate. As valuations in real assets settle down, we think 2023 will be a good time for real estate investors, and businesses that facilitate investment in these new models should do well (e.g. Lumi, Acre).
ESG / Climate concerns are here to stay, and investment in tech solutions that address them will likely continue with strong growth even if the economy turns to recession. Being in Miami, we are particularly attuned to the dangers of sea level rise and interested in solutions to help mitigate its effects.
Construction automation - most of the digitization of the built world has been on the front end (design, planning, project management), but the real potential is for tools to help front line workers doing the actual physical act of construction. We’ve seen some very innovative technology and believe that deployment is likely to expand exponentially soon.
Digital/Self-service everything - today’s consumers are used to having everything at their fingertips with just a few clicks, whether it’s UberEats, Amazon Prime, or specifying the configuration of their new Tesla. This ethos has still not played out in PropTech - but it’s coming. Whether it’s touring, transacting, or managing, digitally based self-service solutions will threaten intermediaries and bring lower costs and faster / more reliable service.