Impact of Covid-19 on Real Estate Industry and PropTech (Part 1 of 3)
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All right, Zain, thanks so much for joining us today at Harvard In Tech. We're very excited to have you. This has been a highly anticipated conversation about the real estate/tech market and what's changing in real estate for our guests that will be joining us in this webinar and conversation.
Zain is both an investor and an entrepreneur who started his first company at the age of 14. He's the owner of Zain Ventures, which invests across a variety of asset classes, including startups, real estate, stocks, fixed income, hedge funds, and private equity.
Zain also runs a foundation which leverages the power of video marketing to raise awareness for some of humanity's greatest problems, and I'm sure we'll talk a little bit more about that during this conversation today. Like I said before, he started his first company at the age of 14 and sold his last company, Vungle, to Blackstone for $780 million in late 2019.
So, a very highly accomplished investor and entrepreneur … we're very excited to have you today, Zain, and welcome to Harvard In Tech webinar/podcast.
Thanks, it's good to be here.
❯ Impact of Covid-19 on Real Estate Industry and PropTech (Part 2 of 3)
❯ Impact of Covid-19 on Real Estate Industry and PropTech (Part 3 of 3)
Awesome. So, just to jump in here, and maybe just start by telling us about Zain Ventures, your focus on real estate and what you're seeing, as well as why you're deciding to focus on real estate in the PropTech market.
Sure, so Zain Ventures is my family office. I'm sure your listeners will appreciate this: when you run a start-up, it's terrifying because your entire net worth is tied up in one illiquid stock. One day you think you're going to take over the world and next day, you're worried you're going to go to zero and all your effort was for nothing.
So, when I saw other people making money at the same time and they were in real estate, I was so envious, because I'm running a startup, and I'm not even taking a paycheck. Here are other people buying real estate, seeming like all they have to do is buy it, hold it, and the real estate appreciates, and they also get income coming in in the form of all these lease profit (rents). So, I thought to myself, "Damn, I wanna be doing that one day." You know, it feels good to be able to sleep at night. So when I had my big exit after the $780 million acquisition, I decided to start diversifying and investing, and that's when I started to really focus on real estate.
I did it through many different outlets, starting off as an LP in a bunch of funds, investing in many real estate funds from Blackstone, RXR; I did Opportunity Zone projects, I did hard money lending, I tried to do some financing of properties, to be the first position as a mortgage and realized, "Wow, these guys are making so much money, and I'm just making fixed income on debt; I want to go into the actual real estate side now."
So, I became a JV partner in a couple of projects, and then eventually started to buy my own assets and bought about five buildings in Texas. And then as COVID hit, I was an LP in a fund called Blue Field Capital. And the Blue Field Capital guys were telling me, “it's way too risky to be buying real estate right now. You know, we're actually trying to sell our portfolio” (this is just before COVID, right?). They managed to sell about half a billion dollars of their portfolio, and I was like, "Wow, they timed it so perfectly."
As COVID hit, some of my real estate started to suffer. I was having a hard time collecting rents, so teamed up with Bluefield and had them, you know, partner with me. I decided I'm gonna also team up with Blue Field, join their fund, and do a lot of my real estate investing with them. So, now I do all my real estate investing with Blue Field as joint ventures as a big LP in Blue Field Capital. And we also set up a venture fund. I mean, I'm a tech guy, so I can't help but cause trouble being in real estate and seeing all the opportunities.
That sounds awesome. And so, with this partnership with Blue Field, my understanding is that you all have made around three investments so far. So, where along the PropTech space has that been?
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Yeah. So, just to clarify, Blue Field is quite established. Most of what they do is to buy real estate. We've just set up a brand new venture capital fund. Just for context on Blue Field, we have about 4,500 multifamily apartments throughout the U.S. We have senior care homes; we own hotels like Marriott's and Hilton's.
We've been building a lot of industrial space which is a huge theme, and we're building almost 10 million square feet of industrial space right now. In the midst of all of that, I decided, “Let's launch a venture capital fund.” You know, when you're an established entrepreneur, a lot of startups come to you and they're like, "Hey, can you be an advisor? We'll give you a board position. We'll give you lots of equity; we just wanna get your advice from time to time.” I thought, you know what? I’d better actually turn this into a process and set up a fund to invest in.
So, we've made three investments, and we're about to close on one or two more. They range through the whole spectrum of PropTech.
Got it, got it. And if you could just give me an idea, I mean, for the sake of our listeners, you know, PropTech is based, or it has so many different sub-segments. I'll let you elaborate on some of them.
But, you know, you could be anywhere from co-living spaces to software for the real estate industry and contact construction technology in that space. There are definitely a number of other segments. Where are you and Blue Field laying your head? And what you see are where the opportunities exist? What would be this?
You know, really this real estate is the world's largest asset class. And anytime you talk to an institutional investor, there isn't much differentiation. When you ask a private equity or institutional investor, “How do you guys win in the real estate game?” You hear the same nonsense. You hear people say, "Well, you know, we have vendor relationships. You know, we're friends with a broker who gets us access to off-market deals.
And we've done a few deals and so people come to us when they're about to sell a property. We have access to debt, or we create really nice spreadsheets with crazy assumptions." Really, there's no differentiation, and all of these assets, relationships, or intuition, it's not sustainable. Blackstone will crush you every time.
So, when I looked at the whole spectrum of how a real estate fund operates, I realized there are so many opportunities from how you identify potential real estate to buy, how you analyze the deal beyond the spreadsheet or whether you can pull in data from other sources.
When it comes to deciding what you do with the real estate, which I would say, is alternative use of land, what do you? Do you do knock that building down? Do you renovate it? Do you put an industrial warehouse to build a co-living space? Do you build a parking lot? How do you decide what to do? Often it's just the intuition of the chief investment officer. And it's crazy to me because I came from a very tech background, right? And so that's one theme.
And then ultimately, how do you manage and operate the real estate? So, in that case, it might be things like, you know, bringing amenities or finding ways to really smoothly operate the real estate and the way property management works. And then ultimately, you know, how do you extract more revenue, improve on the operating income, and potentially sell or refinance. So, that's where I'm focused, because it makes sense given that, you know, Blue Field is an institutional investor that has invested in well over $1.5 billion of real estate since 2014, when they started.
I was amazed when I joined them, I was amazed that they built this great business with really high returns on the back of spreadsheets. I'm a good tech guy; I initially thought, let me go hire a tech team, right? Because that's what I like to do. Let me go hire some engineers, let's go bring in great talent so that we can automate what we do.
And I realized at that point, it's probably better just to partner with startups. And when we started talking to startups who could help us withhow we operate, they're way more motivated, right? When you've got a founder who wants product-market fit, they will work endlessly. And they know that if they do well, they'll have a great case study.
And you know, they'll have to start off, you know, product-market fit, whereas if you're trying to hire an engineer from a different industry, and you're trying to motivate them, and you're trying to pay them on a salary, you know, the progress isn't likely to be as much as you'd like, especially with our portfolio. It's so diverse. It's so geographically spread out across the U.S.
And so, yeah, we started partnering with focused startups. And that's when we realized,”Wait, we can become a major customer for them, and we can add a lot of value. In some cases, we can open up our portfolio, we can open up our network of other real estate owners, so we should take an equity stake.
And that's sort of how the genesis of the venture fund started. So that's one of the themes around how we make our investments. I'm happy to dive into three investments if you'd like to.
Yeah, absolutely. It sounds like it's almost like a verticalization model where you have economies of scale by bringing in or taking an equity stake in these startups and then having a $1.5 billion investment portfolio. We can pretty easily implement those technologies to see what works and what doesn't.
I’d love to jump into those different investments. But before that, I think that it's good to set a tone for understanding, you know, what are the pain points that exist within the real estate industry that you've seen? Definitely VC land has, (our industry, I should say), has invested in real estate tech companies in the past. It's gone through sort of a cycle before the likes of Zillow and Redfin taking off.
And there was a little bit of bust in the real estate, tech focused market. And so, with the sort of proliferation of mobile, the proliferation of, or coming out of the recession, where there are a number of different transactions happening or people investing in real estate, Zillow really took off and then obviously, you have the Airbnb’s of the world. And then WeWork as well.
There are a lot of different subsets, sub-segments of a business model. So, those solved pain points. That being said, you know, what pain points do you feel like are needs to be solved for real estate, you know, small players to large players today, that aren't just ‘nice to have,’ but are absolute need to haves in either this environment and COVID or beyond?
I mean, there's so much opportunity, I could have started another company, every entrepreneur has an itch to start another company. And when I analyzed the space, I saw so many opportunities. In my last company, which was in the marketing field, I identified maybe three or four areas, you could build a great company in.
And being an entrepreneur, you have to throw stuff against the wall and wherever it sticks, you have to build a company around. And in our category, which was very narrow, right? It was in that video, of all the marketing technology areas we could focus on, we decided to do a video advertising platform for mobile apps with video, very, very focused. And we built a business that was almost worth a billion dollars.
And you know what, three or four of our largest competitors were also worth so much. And the other three or four areas identified outside of my area also did well. So, sometimes I'd wonder if I'd picked another area, would I build a bigger company? I mean, I can't complain, you know, it's a great outcome.
When I looked at PropTech, and real estate, there are like 20 different areas, and I thought to myself, wow, you know, the best way to play this isn't to just be a PropTech entrepreneur. And if you are a PropTech entrepreneur, that's amazing, because you can build, the market size is way larger than the market size I targeted, and I had a pretty good outcome. But yeah, I saw so many different areas.
So, you can go back to the problems I outlined and see that I had to focus. So, even with our focus, we're focusing a lot more on how PropTech benefits institutional real estate investors, because ultimately, you can either live in real estate, or you can look at real estate as an asset class.
And I like the idea of looking at as an asset class because it's very rational. It's very B2B focused. A lot of startups we sell to are going to be B2B focused or create SaaS products. Some of these are tech-enabled services or tools or platforms--a lot less marketplace activity. There is some hardware and IoT as well that we're looking at and we're excited by.
Ultimately, the core of it is this, okay, how do you unlock more NOI (which is net operating income)? If you can operate real estate more efficiently, you're going to be able to extract huge profits and make investors a lot of money. Right now, there's very little differentiation between real estate owners and operators.
You know, even though you look at the level of algorithmic trading going on in hedge funds, and you compare that to real estate, there's hardly any. This industry in real estate seems to be ancient and so far behind. And the holy grail is, if you can buy any building, right, even be very specific, whether it's retail, or whether it's a single-family, residence, or vacation rental, if you can just crack one of these asset classes and you prove the model works, you can go replicate that at a far larger scale.
You know what's great? Look around, you open the window, you just see buildings everywhere. And if you can make an asset operate well in downtown San Francisco or Los Angeles or New York, or even in Montana, or Utah, hell, you could do it anywhere.
You know, you can take this company global, you could go to India, you could go to emerging markets like Africa or Brazil. So, that's what's really exciting here is if you can figure out how to make real estate operate more efficiently, boom. And for us, because Blue Field as a private equity firm, we're buying real estate, I don't just want to buy real estate like everyone else.
Anytime we come in and we want to buy real estate, I want to have a toolkit. I want to firstly make sure that I've got access to deals other people don't (ideally through tech). And when we analyze a deal, when we underwrite a deal, I want to have technology being used there which is, more superior than spreadsheets and can fine-tune assumptions carefully. And then ultimately, how do I operate that real estate? What amenities am I gonna bring in? What tech startup is somebody going to bring in?
If you think of me as having a toolset of different products, if each product I implement can improve my NOI, it can either cut costs or improve revenues, boom, you know, we're able to bid more for that property.
And because of real estate, and the fact that there's a lot of leverage involved, the cash-on-cash returns, the yields, can be great. So, that's really my focus. And I've seen thousands of startups. Since I started doing this, I've talked to 200 startups myself. We've been very selective in the startups we've invested in, but in each case, we felt like this is a company that can generate a venture star return and ultimately change PropTech and real estate.
This is the PropTech VC podcast. We give you unique insights into how innovative technologies are disrupting real estate. We interview top entrepreneurs, investors and knowledgeable experts to share the inside scoop in this fast-moving industry. It's hosted by PropTech VC Zain Jaffer.