SPACs and Proptech - What We Learned From The Recent Boom

Technology has been trying to pave its way in the real estate industry since the revolution in the late 1990s, but in the last decade, we witnessed a boom in proptech. Leading the digitization of a historically traditional market, proptech turned into a multi-billion dollar industry in a few short years.

Naturally, individual and corporate investors got excited by the opportunity—seeing a possibility to generate returns from being at the forefront of the democratization and automation of real estate, billions of dollars were poured into proptech startups. 

Covid changed the face of the real estate industry, which paved the way for a rush towards technological advances, making possible an explosion of real estate SPACs. Both 2020 and 2021 witnessed a record-high level of SPACs and raised funds, for better or for worse—and we learned a few lessons along the way.

Recent Growth in Proptech SPACs

The history of SPACs (Special Purpose Acquisition Companies) has been relatively short, though highly dynamic. Created by David Nussbaum in 1993, the use of SPACs started picking up a couple of years ago. The uniqueness of SPACs as a vehicle for going public is that they allow companies to go public without executing their own IPO, through an acquisition. The practice has been under fire due to challenges with transparency, high cost to investors, and poor regulation. However, for proptech companies, it’s an enticing fast track to funding and growth.

While the pandemic slowed down many markets, it accelerated SPACs at an unprecedented rate. The number of special purpose acquisition companies reached 250 in 2020, marking an increase of over 320% from 2019. 2022 witnessed yet another nearly three-fold increase to 715 SPACs.

Some of the most prominent examples of proptech success stories include Airbnb, which went public through a traditional IPO in December 2019, and Opendoor, which went public via the Social Capital Hedosophia Holdings II SPAC in September 2020.

Proptech Growth: The Good and The Ugly

The pandemic challenged the real estate industry in a positive way. Historically low interest rates, the shift to secondary and tertiary markets, and the demand for virtual services and operations created the perfect environment for existing proptech companies to grow and new ones to emerge. Entrepreneurs and investors were quick to recognize the opportunities established by these circumstances.

On the other hand, the unstable market and the increased risk in other, more traditional investments pushed investors in favor of SPACs. As the conditions for IPOs worsened during the pandemic, this had a positive impact on proptech SPACs.

However, the recent boom in proptech SPACs has not been unproblematic. In many cases, investors sponsored immature companies which were not able to grow at the pace required for receiving a massive cash injection and going public—all on blind assumptions about a promising, rapidly growing industry.

The Failure of Proptech SPACs

Opendoor’s success with going public via a SPAC has been mostly due to the size, maturity, uniqueness, and market share of the company. Unfortunately, many more proptech companies have experienced less optimal outcomes.

A perfect example of a proptech SPAC failure is, which accrued a loss of over $300 million last year and laid off more than 900 employees over a single Zoom call. After subsequent layoffs, the number of employees shrank from about 10,000 to 5,000 over the course of five months.

As a result of this wake up call, this year we’re already seeing a slowdown in the total number of SPACs to date amounting to only 106.

Amid increasing interest rates, rising inflation, and the economy generally heading towards a recession, less VC investments are expected to be made, including in proptech. Nevertheless, this is not necessarily a bad thing, as the stronger competition for limited funds will ensure that only mature companies with a unique value proposition get investments.

Lessons Learned from the Proptech Boom

The fast expansion of proptech SPACs has been a tremendous learning opportunity for retail and institutional investors alike, who should be cautious about investing in SPACs in the future. Here are 3 major lessons we can take away from the proptech SPAC boom:

1. Don't Get Swept Up in the SPAC Hype

While the promises for hands off, rapid returns can be enticing, investors need to proceed with a level of caution. SPACs offer you less control over where your money is invested, at a higher cost. If you want to invest in proptech companies, it’s best to find your own opportunities. You can get exposure to up and coming companies by finding an investment syndicate or rolling fund—a great place to look is Angellist. Getting exposure to VC funds is the best way to get started, if you can.

SPACs will charge high fees, and they’re highly incentivized to invest in any company they can—not necessarily the best ones. That’s because a SPAC will typically hold investor funds for a set period of time with the promise of sourcing a promising company (or companies) to invest in. And if they don’t meet their deadline, they are required to return the funds, which sets the stage for last minute “rush” investments that aren’t as carefully reviewed. 

In these cases, the SPAC keeps their fees, and the investors end up pouring funds into a less than ideal startup. The combination of potentially poor company selection and high fees means minimal returns for investors in most cases.

2. Careful Investment Will Advance the Industry

Despite the failure of SPACs, there still exists a lot of room for investment in proptech. However, when evaluating which proptech companies to back, investors have to focus on the value proposition and the competitive advantage of candidates. Important questions to consider are whether the startup offers a unique solution to a major problem and whether the idea is something that competitors can replicate and outpace relatively quickly.

In other words, the highest potential for return lies with proptech companies that are defensible and will not be easily outperformed by better funded and better connected enterprises.

I predict that the industry will benefit from a correction in proptech investment—less SPACs, and less VC funding. That doesn’t mean funding will stop completely, however. Pouring resources into only the most promising candidates will allow them to grow faster, and the industry will reap the rewards.

3. Real Estate Still Needs Innovation

It’s important to note that the real estate industry remains relatively traditional and undisrupted despite the major breakthrough over the last decade. The pandemic accelerated the need for innovation in real estate, and that need has not yet been satisfied. Whereas areas like access to data and property management have experienced major digitization and automation, other aspects of real estate continue to need disruption.

For instance, the way the MLS works and how we get access to real estate listings are some of the most underfunded and least disrupted segments. In addition, real estate agents and investors use conventional, inefficient, and outdated methods for lead nurturing and conversion, marketing, and other repetitive daily tasks. The tokenization of real estate assets and democratization of real estate investment is another exciting pathway that still needs to be refined and innovated. 

These areas create major opportunities both for proptech startups and investors looking for the next big thing. And the most exciting part is to think that we’re still in the beginning stages of revolutionizing real estate. Despite the negative backlash proptech SPACs have received, there are still plenty of profitable opportunities to invest in real estate technology companies, meaning investors shouldn’t feel deterred in any way—rather, they should take the lessons learned and apply them moving forward.

The recent boom in proptech has been interesting, to say the least. However, just like any other sensation, it has to be tackled with care, especially when there’s millions at stake with each deal. As long as investors don’t get swept up in the hype, proceed to invest with caution, and cash in only where the biggest opportunities for innovation lie, the growth in proptechs is far from over.