The built environment is responsible for nearly 40% of carbon emissions worldwide, according to the International Energy Agency. While a portion of that is from the energy and materials required to construct buildings, the lion’s share — nearly 90% on an annual basis — comes from their use. Decarbonizing the grid could go a long way to address that, but oftentimes it’s easier, and more profitable, to simply reduce emissions.
That’s where proptech can step in. By cutting carbon emissions on the operations side, it can save building owners and managers money while also enhancing the experience for occupants. We asked three venture capital firms investing at the intersection of proptech and climate tech about how a focus on reducing emissions can trim a building’s carbon footprint and offer new opportunities for returns.
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Challenging market conditions, though, mean that returns are anything but assured. But for category leaders, there’s potential for significant upside. “This economic environment will continue to test a lot of companies,” said Jake Fingert, managing partner, and Lionel Foster, investor, at Camber Creek. “Those that survive will have an opportunity to expand market share.”
And the potential market is enormous. Spending on getting the world’s real estate to net zero will require $1.7 trillion every year between now and 2050, according to McKinsey. “This is the single largest capex supercycle any industry has ever seen,” said Othmane Zrikem, chief data officer of A/O Proptech.
We spoke with:
- Jake Fingert, managing partner, and Lionel Foster, investor, Camber Creek
- Anja Rath, managing partner, PropTech1 Ventures
- Othmane Zrikem, chief data officer, A/O Proptech
Editor’s note: To build a complete picture of this sector, we’re examining proptech from three different angles. This survey examines the environmental impact of proptech and what startups are doing to minimize their footprint, and we’ll soon publish another covering upcoming tech in the space. The first part of this survey covered proptech startups solving financial problems.
Jake Fingert, managing partner, and Lionel Foster, investor, Camber Creek
There’s a lot of overlap between construction tech and proptech. What would you say is the difference between the two? Where do they overlap?
We hear people make this distinction between proptech and construction tech all the time. However, we see a lot of overlap between the two categories and think it is beneficial to be deep in both areas. For example, we self-identify as a proptech company and co-led the Series B round for Bridgit, which identifies as a construction tech company.
The built world is massive and hugely consequential to everyone’s quality of life. Technology that improves how much we can utilize and enjoy these spaces at any stage of a building’s lifespan is relevant and valuable. That’s what matters. In fact, we would argue you need more ideas that stretch across a building’s life cycle, which lasts decades.
What is your investment thesis for proptech in 2023? What sort of growth are you expecting in the sector?
Our approach has always been to invest in and support the growth of companies that are true category leaders or well on their way there. This economic environment will continue to test a lot of companies. Those that survive will have an opportunity to expand market share.
So we expect to see more opportunities to invest in the best companies at prices that are more closely tied to current performance and reasonable growth prospects. Also, when transactions slow down, real estate groups tend to focus more on internal operations. This usually involves technology, and we expect some companies that are helping real estate groups drive margin to have a strong run in the coming period.
A deeper look at proptech
Commercial real estate has taken a hit during the pandemic. How has that affected investor interest in climate-friendly proptech?
Many of our portfolio companies offering sustainability solutions also save customers money and improve operational efficiency. That value proposition is irresistible. It’s just a matter of getting that information in front of the right decision-maker.
When you combine that with companies who increasingly want to lead on sustainability and are being encouraged to do so by their stakeholders, we don’t expect to see a slowdown in the rate of adoption of these technologies.
In the intersection between proptech and climate tech, where do you see the biggest opportunity?
Approximately 50% of the CO2 emissions from a building’s life cycle are created during the construction phase, so the more we do to lengthen the useful life of a building, the less carbon associated with that site. This dovetails with investor and tenant interest in spaces that can accommodate multiple uses, sometimes simultaneously, sometimes over time.
There will be increased activity around retrofits, renovation and data-driven site selection that helps people discover non-obvious spaces that can meet their needs. We are also spending significant time in areas like IoT and sensors, where innovations can have a potentially big impact on the climate.
The Inflation Reduction Act offers significant tax credits for energy retrofits. Has that changed the type of startups your firm considers? If it has, in what way?
The Inflation Reduction Act is arguably the most consequential piece of climate legislation in U.S. history. There are the incentives for retrofits, which you mentioned, but experts like those at our portfolio company Arcadia also anticipate a “solar rush” — a big uptick in clean energy production, connectivity of clean energy supply to a more resilient electrical grid and development of clean energy assets in low- and moderate-income communities.
We have had many conversations with companies working on sustainable building and renewable energy solutions, but we expect to see even more activity in this space and a broader range of creative solutions.
Buildings represent a third of U.S. carbon emissions. What will it take for climate to become an integral part of every proptech investment?
A combination of policy, inspiration and innovation. Each can propel the others. The Inflation Reduction Act is a great example of this. Community solar, which involves smaller, subutility-level energy generation, has been around for years now. But billions of dollars in federal incentives will spur much more activity in this sector and, over time, result in trillions of dollars in social and economic benefits. America has an unlimited supply of ingenuity. Enormous programs like the IRA help people decide how and where to channel it.
How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?
A warm introduction from someone we trust is always valuable, but it is not at all a requirement. We appreciate seeing a pitch deck in advance. That helps us go deeper more quickly during the first conversation.
The startup should be prepared to talk about fundamental metrics like revenue and number of customers. We want to understand as quickly as possible what it is that sets up this company to outperform everyone else in the space. Founders can also always email Jake.
Anja Rath, managing partner, PropTech1 Ventures
There’s a lot of overlap between construction tech and proptech. What would you say is the difference between the two? Where do they overlap?
To put it simply, construction tech, for us, covers the planning, building and renovation of real estate. In many cases, this also includes physical elements like material science. Proptech encompasses the areas of financing, sale, valuation, operation and management of real estate and spaces. Right in the middle, construction tech and proptech overlap heavily, which is why we focus on both subsegments in a single fund.
What is your investment thesis for proptech in 2023? What sort of growth are you expecting in the sector?
The transformation of real estate was massively accelerated by various factors, such as the macroeconomic environment, a change in customer expectations and requirements, and the green transformation, which affects the real estate industry more than virtually any other. There’s a plethora of good solutions that tackle these factors directly.
In addition, as an underlying basis for all of that, the industry needs digitalization to become ready for them. Startups can come to the rescue in all cases.
Commercial real estate has taken a hit during the pandemic. How has that affected investor interest in climate-friendly proptech?
Commercial real estate has probably not taken such a big hit, but the priorities have shifted away from development of new buildings, which is indeed in the gutter because of rising interest rates.
But this frees up resources for new usage patterns and green transformation, which have moved into focus. In this respect, climate-friendly proptechs have shown that they are absolutely recession-proof. It is precisely these kinds of startups that will enjoy a boost in the coming decades.
In the intersection between proptech and climate tech, where do you see the biggest opportunity?
Often, when people think of the real estate environment and climate tech, they think of new green, wooden buildings. Of course, it is right and important that new buildings are produced in a sustainable fashion. But we definitely see the greatest leverage of this trend in the optimization of existing buildings and their sustainable operation, because existing real estate accounts for the vast majority of the built world.
In general, the topic of making entire cities and infrastructure more climate-resilient will become increasingly important, as the planet is getting hotter.
The Inflation Reduction Act offers significant tax credits for energy retrofits. Has that changed the type of startups your firm considers? If it has, in what way?
What the Biden Administration has set in motion with this Act is the light version of EU regulation (EU Taxonomy, Fit for 55, Green New Deal). In this respect, we have been ahead of the curve in Europe for several years. We already anticipated this development five years ago, when we started thinking about our venture fund PT1, and have built one of the first SFDR Article 8 compliant funds in our investment sector.
That is why we see some obvious winners in the energy (retrofit) area. But the basis for this, the digitalization of the industry, also offers many, many opportunities.
Buildings represent a third of U.S. carbon emissions. What will it take for climate to become an integral part of every proptech investment?
Again, EU regulation is a preview of what’s to come for other parts of the world. A significant share of real estate will become “stranded assets” in the next year. Being compliant with climate goals is no longer a question of “nice to have;” it’s a must-have.
For the U.S., due to the tightening CO2 budget (see the Paris Climate Agreement), the same development is absolutely foreseeable — just with a few years’ delay. When we started with this topic in 2018, proptech and construction tech were still niche areas for industry experts. Today, some of the best serial founders have decided to tackle this sector.
How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?
It sends the best signal if an entrepreneur gets a warm intro through one of our portfolio founders or venture partners. However, we process every request that comes in via e-mail of all or our employees. The easiest way is probably to send us a pitch deck using our pitch form.
Othmane Zrikem, chief data officer, A/O Proptech
There’s a lot of overlap between construction tech and proptech. What would you say is the difference between the two? Where do they overlap?
We are asked this question quite a lot, and we view proptech as a broad overarching category covering a diverse set of stakeholders across the built environment.
In our opinion, construction tech is a category within the broader ecosystem of proptech, or as we prefer to call it, “Built World Technologies.” While the construction industry has its own set of stakeholders and structural characteristics that are distinct from the real estate sector, in a circular view, it is the stage that connects the beginning and end of life of buildings.
The decisions we make around building design impact how and what we build with, which ultimately impacts the end product, which is the building. So, construction tech is focused on the planning, manufacturing and assembly components that encompass everything from machinery, equipment, robotics, building planning, worksite monitoring and project management.
When it comes to areas such as new building materials, material marketplaces or architecture/design software, some may categorize it within construction tech and others may classify them within proptech or even within their own separate standalone categories.
What is your investment thesis for proptech in 2023? What sort of growth are you expecting in the sector?
We will continue to focus on backing technology that matters. This is the key to delivering significant value. The larger the problem you solve, the greater the possible reward. It’s about going back to these basics and leaving the noise, headlines and the consensus behind to focus on building companies that have the potential to transform the world.
Success is measured in years and decades, not weeks or months, and that is precisely why backing mission-critical companies led by passionate founders is where we will find true success.
Commercial real estate has taken a hit during the pandemic. How has that affected investor interest in climate-friendly proptech?
In our perspective, companies focused on climate tech/decarbonization with real estate, or construction customer stakeholders are outperforming in the market from an investor-demand perspective.
While real estate owners are certainly feeling the impact of the broader macro environment on their property portfolios due to rising interest rates, lower occupancy rates for some, increasing cap rates and demand for shorter lease periods, the tailwinds for increased sustainability and decarbonization are tremendous.
Governments are providing subsidies and tax credits for certain retrofit technologies, regulators are enacting new legislation stipulating energy efficiency gains, electrification, and low-carbon materials, and large corporates/tenants are making net-zero pledges, which in turn is forcing property owners to meet their demands.
In addition, at a time when real estate is entering one of the most challenging periods of the last few decades, with capital values facing significant downside, the discount for non-ESG-compliant assets is now much bigger than what most anticipated, and this will drive significant liquidity out of those assets.
In the intersection between proptech and climate tech, where do you see the biggest opportunity?
Estimates suggest that almost $100 trillion will be required between now and 2050 to retrofit our existing stock of buildings to net zero. This is the single largest capex supercycle any industry has ever seen. Approximately 90% of buildings that will exist in the next 30 years are already here, and the average age of single-family homes in the USA is 30 years old. This is even more extreme in older parts of Europe.
So we see a huge opportunity in bringing scalable solutions and business models to the heterogeneity and data black holes that are buildings. While an entire sector of technology and building materials hopes to make new buildings vastly superior in their sustainability credentials, the sheer scale and complexity of retrofitting existing buildings to improve their energy efficiency and preparing them for electrification is a massive challenge.
The Inflation Reduction Act offers significant tax credits for energy retrofits. Has that changed the type of startups your firm considers? If it has, in what way?
We have been and will continue to support companies that can be category winners in increasing sustainability and helping the global economy change to a low-carbon economy. We do not like the idea of investing in business models that require solely regulatory capture to work, but instead like to focus on solutions that offer a clear ROI within a commercial/strategic lens.
That said, we need to acknowledge that many ESG-focused startups targeting the built environment are beneficiaries of a paradigm shift in the industry. Sustainability is now (finally) top of mind for stakeholders ranging from lenders to tenants, and as this naturally connects to cost of capital and rental yields, there has been a growing financial case for ESG tech within the built environment. Regulation has been both a general and specific catalyst, making some types of solutions more pressing than others and accelerating their adoption.
The IRA is one set of such regulations, albeit a large and well-defined set of commitments, that broadens market access to clean technology and energy transition across the built environment. We see this as an integral piece of legislation that will hasten the pace of market adoption for certain solutions.
While it does not strictly change the types of companies we look at, we think that the Act will make it easier for some businesses to scale in the short term, particularly business models that rely on hardware with lengthier payback periods. It will also improve access for retail consumers (homeowners), which has been a more difficult segment of the market to serve.
Buildings represent a third of U.S. carbon emissions. What will it take for climate to become an integral part of every proptech investment?
Climate is becoming a bigger part of proptech investment, but we do not expect that it will be integral to every case. The industry still has a long way to go in being transparent, data driven and efficient. In this respect, we expect that many investments will still focus on core digitization and automation, both of which we believe are equally as important as pure-play climate investments given how antiquated the industry is and the urgent need for it to become more fertile for innovation.
Additionally, as people spend as much as 90% of their time indoors, there are other ESG considerations beyond carbon emissions, ranging from health and well-being to access and affordability, that will continue to play an important role within proptech, as building health is human health.
How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?
Well, it depends if the company is contacting us cold or through a trusted source such as another VC investor, industry stakeholder, LP, portfolio company or founder/angel within our broader network.
We typically like to review an investor pitch deck before deciding to arrange an intro call with a founder, as we are time-poor, and we want to be prepared and informed for discussions with founders.
Before founders get on a call with us, or any other VC for that matter, they should know their audience. We are a built environment-focused specialist fund, so founders should know exactly how to communicate their value proposition to us and why this would benefit their ultimate customers within our network.