Want to pitch me an idea? Here’s what you need to know.
In the world of startups, so many people ask me what I’m looking for when I invest as a PropTech VC in (mostly) early stage startups—Seed and Pre-Series A. Below, I’ve outlined the main priorities that I look for in my conversations with startup founders.
Disruptive Idea
I’ve been very fortunate in my business life; I’ve had the luxury of being able to support all kinds of enterprises. Now, I choose to support companies who are going to change the world. When people ask me what I’m doing with my prior success, how I’m participating in and giving back to my industry, this is what I tell them. It doesn’t matter how outlandish the idea sounds. Often, the crazier the better. In the end, it matters what the idea will bring to a society or an industry that will change the game completely.
In my journey as a founder, I remember repeatedly trying to explain to my peers and potential investors how the world could be different based on the ideas and vision in my head. I also remember being dismissed by those who couldn’t see what I saw. That initial vision that I fought for became the genesis of in-app ads and went on to disrupt the gaming market and change the lives of game developers across my industry. I could see that this future was fast approaching, and that in order to maximize revenue, I needed to hustle like hell to be the one to bring it to fruition. I understand how frustrating it can be when people can’t see or share your vision of the future; I vowed that, when I was able, I would be an encouraging voice for early founders trying to bring their visions of the future to life.
Passionate People
In the early stages of development, the founders are the ones who determine the momentum of the company. It’s 100% about the people. In my investment conversations, I’m looking for transformational leaders; founders I think could be the next Jeff Bezos or Elon Musk. These are the type of people who have the passion to change the world, and who will be able to inspire, cajole, manage, and carry the vision on their shoulders as they set out to do just that.
Technical Expertise
I launched my company without personally having the expertise to build what needed to be built. Since selling my company, I’ve been learning full stack development with a focus on machine learning so that I can have more intelligent conversations with entrepreneurs in my network. Because I’m investing in PropTech, which is heavily reliant on the ever-changing software world, I want to see a passion for and focus on technology somewhere in the team in which I’m investing. I prioritize cultures in which those technical skills are highly valued by the founders and their team.
Fiscal Prudence
Investing is a balancing act. Just as I want to buy in to the visions of these transformational leaders, the ones who are obsessed with solving the world’s unsolvable problems, I also want to make sure that money won’t go to waste.
There is a time to invest in strengthening a business—adding expertise, enhancing product features, spending capital to build market demand—but there are also times when it pays to be more frugal. I look for companies that have at least eighteen months of cash reserves and founders whom I feel will spend the right money at the right time.
PropTech Relevance
In addition to my work as a PropTech VC, I also invest in real estate. When a startup supports activity in other areas of my portfolio, a special symbiotic relationship begins to develop. While it’s not my main focus, it’s an added benefit when I can use my portfolio of properties, or those of my partners, as testing ground for a new product or service. It allows us the chance to get feedback from property managers and other members of my team, and we can experience first-hand the benefits that the product or service is providing. That extra due diligence de-risks my investment and gives me an added sense of comfort that the team is worth supporting. I’m always excited when I come across a team that I can test across another touchpoint of my portfolio.
Product Market Fit
Along with doing our own due diligence, as I described above, I also want to see that the startup can prove product market fit of their own. Tangible metrics like pre-orders or current revenue offer more ways to de-risk an investment. At Vungle, our quantity of early pre-orders was a metric that served a large purpose in many of our investor relations. The stakes are too high to make empty promises; show me your product market fit.
Platforms are Preferred
I prefer B2B software companies that are redefining how work gets done. Software as a service companies (SaaS) tend to have higher valuations. Tech-enabled companies that offer direct sales, or IoT companies that solely sell hardware, simply don’t command the same valuation. In this market, a hardware vendor has to be discounted against the inconsistent revenues that come from hardware fees and one-time sales. One of the companies I invested in was focused on selling a devise that enabled quick access to offices via facial recognition technology. Shifting their business model from a direct sale to a subscription model added valuable predictability, increased their customer LTV (lifetime value), and strengthened their long-term prospects considerably.
Market Size
There’s a saying in the industry: ‘niche to get rich.’ That’s a sentiment I value. My startup, Vungle, was laser focused on in-app gaming adds, a fairly specific marketplace. I think that specificity had a lot to do with our success. Still, there has to be enough demand to support the company. The total addressable market, TAM, is an important metric to consider. This is one of the reasons I like PropTech so much; real estate makes up the largest component of GDP, and so many people stand to benefit from a great PropTech idea. The sector has a realistic chance to be reach $23 billion. While it’s not easy to calculate market size, the core concept stands: the more people who need what you have to sell, the stronger your likelihood of success.
Sustainability
In the world of real estate, sustainability is an increasingly important topic. I’ve written extensively on the subject, particularly given the recent challenges and complexities created by COVID-19. Climate change is the twin-crisis of our time, and buildings are a large part of the problem. I want my investments to be a part of the solution; a focus on sustainability is crucial to my consideration.
Portfolio Construction
In any portfolio, it’s important to be strategic when it comes to asset types. Naturally, I don’t include direct competitors in my portfolio; the confidentiality of company information and methodology needs to be maintained. Beyond that, I want to invest as broadly as possible. The goal is to cover the many paths that PropTech will take in the future, and expand across all sectors that may stand to benefit—office, single family homes (SFH), etc.
Scope
It’s really fun to invest in companies that are serving industries in a broad-brush manner. I was given advice to look for trends instead of individual solutions—the broader the better. I think of this maxim often: invest in the company that is selling shovels instead of the company that is digging for gold. I get excited when I see a company who operates with that understanding.
I also look for companies that can go global. I’ve invested in many companies who are based in Europe but looking to expand into the United States. I believe that’s an area where I (along with my partners) can provide strategic value. We can help them get to the U.S., find their place in this huge market, and sell their shovels at scale.