What is the biggest opportunity for proptech founders? How should they think about competition, strategic investment versus top-tier VC firms and how to build their board? What about navigating regulation?
We sat down last week with Brendan Wallace, co-founder and general manager of Fifth Wall, and Hippo CEO Assaf Wand for an episode of Extra Crunch Live to discuss all of the above.
Extra Crunch Live goes down every Wednesday at 3 p.m. EDT/noon PDT. Our next episode is with Forerunner’s Eurie Kim and Oura CEO Harpreet Rai, and you can check out the upcoming schedule right here.
In the meantime, dive into the wide-ranging conversation we had with Wallace and Wand. You can find the full video, including the EC Live pitch-off, below.
Investing in the board
The first step in running a useful and beneficial board is determining who should be on that board, and that starts with the first round of capital investment and carries on forever.
One of the strategic benefits of Fifth Wall as an investor, according to Wallace, is that the firm was built specifically with strategic LPs in the real estate realm, allowing the firm to connect portfolio companies with massive incumbent players in the industry. Incumbents get access to new tools and software, portfolio companies get big customers, and Fifth Wall gets to reap the benefits of both. It’s a rare win-win-win.
We asked Wand about how he chose his investors, and how to weigh the value of a top-tier VC firm and a strategic angel investor, for example.
He explained that there is no right answer to a question like that, but it should always be thoroughly discussed by the team. One of the benefits of having a top-tier VC firm on board is that it has a signaling effect, helping you to recruit early team members and open doors.
“But the weight you should give that is actually not that high, at the end of the day,” said Wand. “It’s up to the founders and employees to get traction and build the company. I have yet to see a VC that will step in the trenches and build a company on my behalf.”
The same is true with a strategic investor. Someone that can step in and open up a door is helpful, but it’s not the most important thing.
“You should try to get investors that can give you leverage and that have the same values that you do,” said Wand. “People that are going to be there in the trenches with you that are resilient. Many times, investors that were entrepreneurs tend to have more empathy.”
Wand also reminded us that the initial conversations with VCs give both parties incredibly valuable insight into how the relationship will work going forward. The first month or so, during fundraising, is essentially a negotiation, and negotiations are emotional rollercoasters.
“We have a full relationship crammed into a month of high intensity, and once we come out of the other side of it, the level of trust was very high,” said Wand, recalling his earliest conversations with Wallace. “We spoke 15 times a day and had to go through highs and lows in a very condensed time. How they react over that time is what gives the foundation of how conversations will go moving forward.”
Wand says that one of his personality traits, for better or worse, is being very direct. He doesn’t sugarcoat things, and he does what he says he’s going to do. This gives him the opportunity to really digest the reactions of those around him, which is a strong signal of how interactions will go moving forward.
He’s also very conscientious of adding a new member to the board, working to acclimate them to the methodology of how that group works together.
“It’s really really important when adding another board member to have discussions around how we work,” said Wand. “For example, you don’t speak unless you have a high conviction around what you’re saying. We don’t speak just for the sake of speaking. The more you feel you can actually have a trusted place to share ideas, the good and the bad, the more you’re going to share and the better the board will be to the outcome of your company.”
Competition
Founders often struggle with how to approach competition. The balance between understanding the landscape and obsessing over a nemesis can be a hard one to strike. Wallace and Wand had important insights into this.
Wallace explained that Fifth Wall was actually specifically designed to help its portfolio companies eliminate competition. Because proptech is such a ripe industry for disruption, with very low spending on IT and myriad problems to solve, the firm gets a look at six or seven companies per problem, giving it a wide range of view across potential investments.
The second piece is that Fifth Wall’s LPs are incumbent players in real estate, such as Lennar, one of the biggest home construction companies in the country.
“I would say very explicitly, we’re trying to make the landscape anti-competitive on behalf of our portfolio companies by virtue of connecting them to these large real estate incumbents,” said Wallace. “Obviously, we think about competition. But what’s so unique about real estate tech is that it’s one of the few industries in venture where these corporates can be so deterministic.”
Wand, perhaps because of his partnership with Fifth Wall, spends less time thinking about competition, instead opting to focus on the customer. A big part of his more relaxed mentality around competition is that his space, home insurance, is not only a growing industry, but it’s big enough and fragmented enough to leave plenty of room to play. In fact, being the top dog with a huge market share may even be a bad thing.
“Because we’re dealing with risk, you don’t want to take all of the risk,” he added.
Wand does like to keep a close watch on adjacent industries, such as mortgage and titling services, to understand the evolution of proptech and insurtech. Perhaps his most interesting insight was around the notion of copying the competition.
“Context is everything,” said Wand. “You can see that people made this defining decision, but you don’t have the hours of discussion or the A/B testing around it. So if you copy based on the final product, the chance of executing on it well is very, very low.”
Proptech success
For many of the reasons outlined above, proptech is a high-risk, high-reward industry. There is so much money and opportunity in the market, but it takes a lot of early work and resilient investors to make it happen.
Wand shared that there is no such thing as an MVP when it comes to insurtech, for example. The entire company has to be built before launch. He even revealed that the only piece of the business that wasn’t built before launch was policy renewal — “we have a year.”
But those early hurdles eliminate a lot of competition right out of the gate. Very few entrepreneurs want to do the up-front work without any guarantee of success, especially in an industry that is so highly regulated. But Wand has an interesting take on regulation.
“Regulatory risk is something people put too much weight on,” said Wand. “I actually love regulatory risk in many ways because I can quantify it. I can go to the best lawyer and ask what it takes to file in Illinois, for example, and they will say that it takes nine months and $150,000. I plan for 12 months and $200,000 and it’s probably going to be somewhere in that range.”
He compared that to building other types of technology, where it’s usually double the budget, and you need more people on the team, and the tech sometimes doesn’t work.
“Regulation is not a bad thing if you are aware of it,” said Wand. “You need to operate from Day One with that mindset and if you understand that you need capital and that it’s a risk game, you can control it.”
Wallace added that one ingredient to that success is an entrepreneur’s ability to relate to the world of real estate.
“A hallmark of the really successful proptech entrepreneurs that we’ve seen are that they can relate to people in the real estate industry,” said Wallace. “Compared to the tech industry, you’re speaking a different language. It’s just a different persona that you are interacting with.”
He noted that Wand has a particular flavor of “EQ dexterity” that allows him to work well with giant real estate companies.
We ended the interview with Wallace’s thoughts on the biggest opportunity in proptech.
There are so many pain points yet to be solved in real estate tech, but I’ll just give one which is kind of staggering when you think about the macro. Real estate is 13% of the U.S. economy, the largest industry in the U.S., and as I said, one of the lowest spenders on IT. The real estate industry is responsible for 40% of all CO2 emissions. So just let that state sink in. The real estate industry is almost half of the world’s carbon emissions. It’s also 40% of all raw materials consumption and 30% of all energy consumption. So the real estate industry is this climate culprit that has been hiding in plain sight. What that means is, as we move toward a carbon-neutral economy, the real estate industry is definitionally, with absolute certainty, going to be the biggest spender on climate tech of any other industry. There’s a lot of talk about electric cars and electric transportation and that pales in comparison to the amount that’s going to have to be spent on decarbonizing the real estate industry. It’s estimated right now that roughly $15 trillion is going to need to be spent by the real estate industry to reduce its carbon footprint to zero over the next two decades. So entrepreneurs looking for a big market, just put that in perspective. That’s 7x, the internet, right. So that will be my simple answer. I just don’t think you encounter that many opportunities like this in a generation. And I think it’s profound. And I hope that a lot of entrepreneurs build really compelling solutions for the real estate industry because they desperately need it.
Wand and Wallace also gave their feedback on live elevator pitches at the end of the Extra Crunch Live episode. To hear their feedback and check out pitches from the audience, hit the 35-minute mark in the video below.