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Thomvest Ventures Real Estate Tech Review, Fall 2019

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Thomvest Ventures Real Estate Tech Review, Fall 2019

  1. 1. 1 The Real Estate Technology Landscape October 2019 Understanding the market, business models and investment opportunities in real estate tech Thomvest Ventures Research
  2. 2. 2 I. Why should we care about the real estate sector?
  3. 3. 3 Real estate is the largest asset class in the U.S. — the current value of the U.S. housing 
 stock exceeds $33 trillion, and more than 6 million transactions occur annually There has been a historical lack of investment in technology in the real estate sector — creating opportunities for new software-enabled businesses Transactions are inefficient, expensive and involve multiple parties — thus creating an opportunity for new buying models Real estate is one the few industries where brokers have not been dis-intermediated — commissions exceed $80 billion annually 1 2 3 4 Things to like about real estate
  4. 4. 4 Sizing the residential real estate market in the U.S. — our largest asset class 6 million Annual residential real estate transactions in the U.S.4 $1.4T Aggregate value of annual U.S. home sales5 $33T Aggregate value of existing housing stock in the U.S.2 122 million Occupied housing units across 
 the U.S.1 $1.6T Annual mortgage originations (purchase & refinance)6 1.2 million New residential construction starts per year3 1. As of 2017; Source: American Housing Survey 2. As of 2018; Source: Zillow Research 3. As of 2018; Source: U.S. Census Bureau 4. As of 2018; Includes both existing and newly constructed home sales; Source: NAR & U.S. Census Bureau 5. As of 2018; Source: National Association of Realtors 6. As of 2018; Source: Mortgage Bankers Association
  5. 5. Intermediaries lead to slow & expensive transactions Realtor Mortgage 
 Broker Mortgage
 Lender Title & 
 Insurance Appraisal & Inspection InvestorsConsumer Today’s buying process takes 90+ days and intermediaries capture 6%-12% of home value 30+ days to close a transaction10-30 days to secure a loan30-90 days to find a homeTime Annual Market 
 Size ($B) $80B $15B $35B $10B $25B $20B Market
 Participants 1M agents 300K brokers 100 major lenders 20K total 4 major title cos 2 GSEs 10 major investors Cost 6% transaction 1% transaction 2% transaction 0.5% transaction 1.5% transaction Source: National Association of Realtors, Mortgage Banking Association, Zillow Research, and Thomvest Research 5
  6. 6. 6 Why is now the right time to enter the space? A few macro tailwinds… Consumers prefer digital experiences Rapid generational acceptance and use of digital devices Percent of Buyers Using Internet in Home Search Process (Source: National Association of Realtors) 2010 2016 67% 15% % of Originations by Non-Bank or Small Lenders (Source: Inside Mortgage Finance) 1 Banks no longer dominate in mortgage Originations have shifted to smaller, non-bank lenders 2 ‘06 ‘10 ‘12 ‘14 ‘16 ‘18‘08 37% 95%
  7. 7. 7 Why is now the right time to enter the space? A few macro tailwinds… Property & buyer data has been digitized Startups can access & analyze rich real estate data Case-Shiller HouseCanary 20,000 200 Number of data points used 
 for market forecast (Source: Forbes) Case-Shiller National
 Home Price Index (Source: S&P CoreLogic) 3 Rising prices require new financing models Home affordability inhibits growth in first-time buyers 4 ‘08 ‘10 ‘12 ‘14 ‘16 ‘18 138 212
  8. 8. 8 These macro trends create opportunities for startups There are tremendous opportunities 
 for new entrants in real estate Prefer digital experiences Rise of non-banks Data drives efficiency Affordability crisis
  9. 9. 9 II. Defining the technology landscape
  10. 10. 10 We’ve seen a proliferation of technology companies across every aspect of real estate Click here for high-res version
  11. 11. 11 We’ve seen a proliferation of technology companies across every aspect of real estate Click here for high-res version
  12. 12. 12 Real estate technology companies have evolved to “own” more aspects of the transaction process ValueCaptured Complexity of Offering COMPANIES DESCRIPTION STAGES OWNED Companies manage the end-to-end transaction process, from property search to financing, closing and ongoing management. These companies take a more “asset heavy” approach to the market than their predecessors by taking on some purchase or leasing risk. As the name implies, these companies seek to manage every stage of the transaction. COMPANIES DESCRIPTION Solve specific problems, usually for a single party in the transaction flow. STAGES OWNED Single stage, such as payments COMPANIES DESCRIPTION Sites aggregate real estate listings. Visitors who indicate interest in a specific property are passed on to agents. STAGES OWNED Typically the upfront search process COMPANIES DESCRIPTION Companies building digital-first experiences that streamline many of the workflows associated with brokerage, financing a home or property management. STAGES OWNED Begin at search, but also take a percentage of transaction revenue The Point Solution Era The Lead Gen Era The Tech-Enabled Era The Full Stack Era The Four Phases of Real Estate Technology
  13. 13. 13 Multiple transformative business models are seeing success in the real estate sector SaaS-Enabled 
 Marketplaces Networked
 SaaS Pure
 Marketplaces Asset-Light,
 Tech-Enabled Examples: BuildingConnected, Eden, PeerStreet, Zumper Examples: Blend, CompStak, Procore, SnapDocs, VTS Examples: Airbnb, LiquidSpace, Porch, RadPad, Roofr Examples: Compass, LoanSnap, Mynd, Hippo Demand Demand Supply Supply SupplyMarketplace SaaS Product Marketplace SupplyDemand SupplyMarketplace SaaS Product
 Enables Transactions Demand Tech-Enabled Service Provider The real estate sector requires collaboration amongst multiple stakeholders, which enables network-driven business models
  14. 14. Venture activity in the category has increased dramatically… U.S. Real Estate Technology VC Investment by Year
 (in Billions, USD) Source: Pitchbook; as of 9/30/2019 $1B $2B $3B $4B $5B $6B 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD 2019 $5.54B $3.95B $5.39B $2.25B $4.22B $1.65B $485M$509M $251M $56M$66M$83M 20 21 23 41 65 98 165 182 211 223 262 191 Deal Count Through first 9 
 months of 2019 14
  15. 15. 15 And round sizes are trending upward VC Investment Distribution by Financing Amount
 (% of Total Capital Raised) Source: Pitchbook; as of 6/30/2019 20% 40% 60% 80% 100% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 H1 2019 67% 49% 81% 49% 81% 60% 41% 46% 8% 14% 3% 17% 3% 9% 29% 29% 12% 12% 5% 10% 6% 7% 19% 6% 12% 13% 25% 10% 23% 11% 25% 52% 24% 42% 100%100%100% $0 - $25M >$25M - $50M >$50M - $100M $100M+ $1.8M $1.2M $900K $1.0M $1.1M $1.0M $1.2M $1.5M $1.2M $1.6M $2.3M $4.4M Median Deal Size WeWork & Airbnb raised $3B and $1B in 2017, respectively
  16. 16. 16 17 companies have raised between $100M and $250M in cumulative financing Cumulative Financing of U.S. Real Estate Technology Companies
 (in Millions, USD) Source: Pitchbook, as of 6/30/2019; Note: this analysis is inclusive of debt capital raised $100M $200M $300M $400M $250M $229M $217M $180M $161M$160M $150M$145M$142M$137M$133M$131M $106M$104M$104M$103M$100M
  17. 17. 17 18 companies have raised more than $250M in cumulative financing Cumulative Financing of U.S. Real Estate Technology Companies
 (in Millions, USD) Source: Pitchbook, as of 6/30/2019; Note: this analysis is inclusive of debt capital raised $2B $4B $6B $8B $10B $8.39B $4.4B$4.35B $2.42B $1.14B$1.11B$1.09B $837M $573M$433M$410M$335M$326M$314M$307M$306M$305M$270M
  18. 18. 18 Median valuations for real estate tech companies are also on the rise Source: Pitchbook, as of 6/30/2019 Median Post-Money Valuation by Company Stage
 (in Millions, USD) $10M $20M $30M $40M '14 '15 '16 '17 '18 '19 $12M $11M $10M $8M $7M $5M '14 '15 '16 '17 '18 '19 $30M$30M $19M $18M$18M $19M $75M $150M $225M $300M '14 '15 '16 '17 '18 '19 $126M $113M $69M $89M $48M $58M '14 '15 '16 '17 '18 '19 $280M $227M $200M $215M $179M $57M Seed Series A Series B Series C
  19. 19. 19 Venture deals in the category are trending later stage Source: Pitchbook, as of 6/30/2019 20% 40% 60% 80% 100% 2012 2013 2014 2015 2016 2017 2018 H1 2019 19% 8%9%10%8%8% 4%3% 23% 14% 6% 17% 11%8% 7%6% 21% 34% 30% 22% 27% 27% 27%31% 37% 44% 55%50%55%57%62%60% Seed Series A Series B Series C or later VC Investment Distribution by Stage
 (% of Deals) 84 136 212 217 243 267 292 125 Deal Count
  20. 20. 20 There are several active real estate technology investors Source: Pitchbook, as of 6/30/2019 Firm HQ Stage AUM Notable Real Estate Technology Investments Investments in 
 Last 24 Months * Metaprop New York Seed $40M BetterView, Bowery Valuation, Morty, Reside, Spruce, WhyHotel 17 Y Combinator Mountain View Seed $770M AlphaFlow, Disclosure.io, Openland, RealtyBits, REZI, Riley, SmartAlto, Starcity, 17 Fifth Wall Ventures Los Angeles Early-Mid $377M Blend, Convene, Eden, Enertiv, Industrious, Lyric, Notarize, Opendoor, VTS, WiredScore 11 Moderne Ventures Chicago Early $42M Agentology, Envoy, GeoCV, Homebot, HomeSnap, LeaseLock, Preclose 10 Revolution Washington DC Late $1.9B Convene, Habito, HomeSnap, IdealSpot, Quilt, WhyHotel 8 Khosla Ventures Menlo Park Early-Mid $3.1B Bungalow, Cape Analytics, Opendoor, Roofstock, WanderJaunt 6 Founders Fund San Francisco Early-Mid $3.2B Bungalow, Cadre, Compound, Home61, Notarize 6 Andreessen Horowitz Menlo Park Early-Mid $7.1B Airbnb, Cadre, Divvy, FlyHomes, Opendoor, PeerStreet, Point 6 Greylock Partners Menlo Park Early-Mid $5.6B Blend, REZI, Ribbon, Sonder 5 Ribbit Capital Palo Alto Early-Mid $710M Figure, Goodlord, Habito, Juniper Square, LendingHome 5 * Only includes investments in real estate technology companies
  21. 21. 21 III. Where do we see compelling opportunities?
  22. 22. 22 In which categories will the next unicorns be formed? “House of Debt” 
 Alternatives Certainty 
 as a Service Space
 Arbitrage Better with 
 Software Companies improving the home buying & selling experience Companies developing novel housing finance models Companies utilizing space in novel ways to meet changing demand Companies leveraging technology to improve the transaction process
  23. 23. Certainty as a Service Companies improving the home buying & selling experience - The buying process takes 90+ days - Intermediaries capture 6%-12% of home value - There average consumer takes 4.3 months to buy and 2.8 months to sell a home - The average transaction cost is $20K Pain Point — The buying and selling experience is expensive, time consuming & stressful Why Now? The majority of homes purchased are found online Availability of data to accurately price homes Percent of home buyers that found their property online Source: GeoPhy and MSCISource: National Association of Realtors - Abstract the complexity associated with real estate transactions by acting as a single platform for buying or selling - These platforms revolve around a few core concepts: search, inspection pricing, financing & closing, which make up the ecosystem of certainty as a service ‘06 ‘10 ‘12 ‘14 ‘16 ‘18‘08 11% ‘04 50% Traditional Appraisal GeoPhy AVM 6% 13% Median absolute percentage error (MdAPE) of home valuation 50% Lower Error
  24. 24. Founded: 2013 Employees: 1,000 Total Funding: $2.8B Last Financing: Series E2, 3/19 Receive an instant offer to sell your home Opendoor offers an online home-selling service that aims to streamline the sales process down to a few days by presenting home sellers with an instant, all-cash offer for their property. Certainty as a Service Companies of Note Potential Challenges - These models have not been tested in a negative housing environment; for instance, if home-buying demand falters due to higher interest rates and stock-market volatility, the trend toward instant offers from institutional homebuyers could face a serious test Founded: 2017 Employees: 48 Total Funding: $229M Last Financing: Series A, 10/18 All-cash offers to ensure successful transactions Ribbon enables home buyers to bid with cash backing, earn discounts, guarantee a move-in date and secure financing before or after the closing. Founded: 2015 Employees: 129 Total Funding: $158M Last Financing: Series B, 8/19 Brokerage combined with all-cash offers The company operates a brokerage that offers home buyers the ability to advance payment in cash to a seller, increasing the likelihood of successfully closing a transaction. Companies improving the home buying & selling experience
  25. 25. “House of Debt” 
 Alternatives Companies developing novel housing finance models - Availability of credit has tightened: the average FICO score for conventional loans in July 2018 was 751, more than 100 points higher than average scores from 2004 to 2006 - Following the housing crisis, the home ownership rate fell to 62% in 2015, down from 69% in 2005 - The home ownership rate is particularly low among millennials — only one-third of Americans under 35 own a home Pain Point — Current housing finance models don’t meet the needs of many homebuyers Why Now? Record home prices prevent many potentials buyers from transacting For existing homeowners, wealth is concentrated in their home value Source: Housing Finance Policy CenterSource: ATTOM Data Solutions 72% 28% Over 60% LTV $3.1T Below 60% LTV $7.9T - 58% of U.S. adults say they would have trouble finding a home they could afford in their city or county. - An average wage earner would not qualify to buy a median-priced home in 368 of 440 counties analyzed * - Authors Atif Mian and Amir Sufi argue that the financial system must move away from its reliance on inflexible debt contracts * Based on a 3% down payment and a maximum debt-to-income ratio of 28% Housing wealth by loan-to-value ratio
  26. 26. “House of Debt” 
 Alternatives Companies developing novel housing finance models Companies of Note Potential Challenges - These new financing models require significant consumer education, which may impact adoption - There is a less robust universe of institutional investors for novel financing products, especially in a negative housing environment Founded: 2005 Employees: 151 Total Funding: $90M Last Financing: Series B, 7/18 Sell a fraction of your home Unison opens the door for more people to buy and own the home they want with less debt through its HomeBuyer and HomeOwner programs. Founded: 2017 Employees: 40 Total Funding: $37M Last Financing: Series A, 10/18 Lease-to-own home buying platform Provider of a home ownership platform intended to allow renters to build equity credits as they rent, enabling clients to close the housing affordability gap. Founded: 2018 Employees: 13 Total Funding: $12M Last Financing: Seed, 7/19 A debt-free home buying solution Instead of taking on a mortgage and debt, homeowners and aspiring buyers can partner with Haus to buy what they can afford. With this co-investing model, payments are 30% lower on average. Founded: 2017 Employees: 53 Total Funding: $18M Last Financing: Series A1, 1/19 Smart loans designed with borrowers in mind* The company's mortgage services help consumers in buying or refinancing a house by analyzing financial situations in seconds and providing simple, tailored financing options. * Note: LoanSnap is a Thomvest portfolio company
  27. 27. Space 
 Arbitrage Companies utilizing space in novel ways to meet changing consumer demand - Limited housing alternatives often tie individuals to a location and a job, which limits geographic mobility — adults in the U.S. are moving at an annual rate (10%) that is at its lowest since the US Census Bureau began collecting the data in 1946 - Cap rates are decreasing amidst rising asset prices, driving landlords to identify opportunities to increase revenue per square foot Pain Point — Consumer preferences have changed, and traditional rentals are insufficient Why Now? Consumers spend more time renting prior to purchasing a home Consumers are facing a growing rent burden Source: Pew ResearchSource: Zillow 2015 Home Buyers Survey 1975 2015 6.0 2.6 - In 2015, nearly 43 million American households lived in rental units, an increase of 9.3 million since 2004 - Since 2001, gross rent has increased 3% a year, on average, while income has declined by an average of 0.1% annually - The rise of home-sharing models enabled property owners to better utilize their asset and provide renters with more flexible living options - This is true of both short-term stays and long-term living arrangements Median years renting prior to home ownership
  28. 28. Companies of Note Potential Challenges - Many startups in this category take on master lease risk; while this limits their exposure relative to total property value, there are still some concerns around the “inventory” requirements for scaling these businesses - There are untested questions around long-term sustainability of companies in this space — is there existential risk if market conditions change rapidly? Flexible term co-living units in large complexes The company rent out rooms in furnished and shared apartments on flexible lease terms for a members-only community without any broker fee. Founded: 2016 Employees: 99 Total Funding: $29M Last Financing: Series B, 3/19 Residential units converted to corporate housing Furnished homes for business travelers in urban areas. The company leases properties from homeowners, and makes them available to corporate accounts. Founded: 2015 Employees: 154 Total Funding: $65M Last Financing: Series C, 12/17 Carefully curated living communities Designer of community homes intended to provide an optimized layout, fully-furnished private rooms, shared living spaces and included utilities. Founded: 2011 Employees: 406 Total Funding: $66M Last Financing: Series A, 3/19 Space 
 Arbitrage Companies utilizing space in novel ways to meet changing consumer demand
  29. 29. - Several companies have emerged that manage one or more aspects of the transaction process, including: data collection, appraisal, inspection, title, escrow, insurance, & notary Better with 
 Software Traditional real estate offerings utilizing technology for product & distribution improvements over incumbents - Despite many technology advancements, closing costs still represent a meaningful share of total transaction expenses in residential real estate - Much of that cost directly enriches incumbents; for instance, title insurers only pay around 3 or 4 percent of their premium dollars on claims, compared to upwards of 80 percent across other insurance products Pain Point — Legacy vendors waste home buyers valuable time and money Why Now? Consumers have expressed a willingness to use digital mortgage tools Source: Boston Consulting Group 2012 2017 $8,082 $5,137 The cost of producing loans has increased, impacting profitability Source: Mortgage Bankers Association - 79% of homeowners say they would consider completing the entire loan application process online - 81% of borrowers prefer online loan solutions, and 87% believe that those online solutions are faster than traditional processes Per-loan production expense amongst U.S. mortgage originators
  30. 30. Better with 
 Software Traditional real estate offerings utilizing technology for product & distribution improvements over incumbents Companies of Note Potential Challenges - In many cases, incumbents have lock-in to the agency channel which has historically been the primary source of referrals for services like title, escrow, insurance, etc. - State-by-state (or even county-by-county) regulatory hurdles may impede growth Founded: 2015 Employees: 226 Total Funding: $40M Last Financing: Series B, 10/18 Shared platform for managing closings Qualia develops cloud-based real estate transaction management software designed to simplify the real estate closing process. Founded: 2016 Employees: 85 Total Funding: $19M Last Financing: Series A1, 7/18 A digital-native title company Spruce integrates with lenders to provide title insurance and escrow services that radically simplify and enhance the closing process for borrowers. Founded: 2017 Employees: 13 Total Funding: $4M Last Financing: Seed, 5/18 A better way to complete disclosures* Glide has developed a simple and streamlined process for completing seller disclosures online and preparing a home listing for sale. Founded: 2012 Employees: 406 Total Funding: $314M Last Financing: Series E, 6/19 Enabling banks to offer digital mortgage tools* Blend has developed a digital lending platform enabling financial institutions to process loans faster, increase productivity and deliver exceptional customer experiences. * Note: Glide and Blend are Thomvest portfolio companies
  31. 31. 31 Real estate is inherently cyclical — most technology companies have not been 
 through a negative housing cycle Real estate is a capitally intensive asset class — scaling businesses requires lots 
 of venture capital (see WeWork) Real estate is operationally intensive asset class — yet to be seen if software 
 can drive meaningful efficiencies & automated labor-intensive processes The transaction process is inherently complex relative to other asset classes — 
 not all purchases can be brought online due to asset heterogeneity 1 2 3 4 What are some of the risks associated with investing in real estate technology?
  32. 32. Thank You! About Thomvest Ventures Thomvest is a cross-stage venture capital with offices in San Francisco and Toronto. Our firm has invested more than $500M since its founding, and we primarily focus on opportunities in the fields of real estate technology, financial technology, cybersecurity and cloud infrastructure. The capital we invest is our own, enabling us to be more creative, flexible and patient with our entrepreneurial partners. For more information, visit our website or contact the report’s author, Nima Wedlake. ‣ Market Map: 140+ Real Estate Tech Companies Transforming the $32 Trillion Housing Market ‣ Market Map, Part Two: 170+ Technology Companies Reshaping Commercial Real Estate ‣ The Evolution of Crypto and Blockchain — a VC Perspective ‣ Why FinTech? Additional Research from Thomvest

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