Launched just over a year ago with $22 million in seed capital from investors including Cisco Systems, the Investment Group of Santa Barbara, and BV Capital, Santa Barbara, Calif.-based AppFolio is looking to take a big market share bite out of the property management software business. How big? The company and its investors estimate that about 30,000 users are spending $500 million annually on property management software, and they think there is an opportunity to capture a 20 percent share of that spend. Their goal: Focus on middle-market multifamily firms that have been isolated from either a service, product, or cost standpoint from current providers. While the company won’t yet release the number of users that have signed on, CEO Brian Donahoo notes an additional $8 million capital influx from its investment group has AppFolio exceeding expectations on the company’s growth trajectory.
Donahoo sat down with Multifamily Executive this week to share his thoughts on launching a start-up in the multifamily tech space:
MFE: What’s the first step in making an impact in the multifamily technology arena?
Donahoo: The property management software space is a really tough one, and we knew that going into it. We looked carefully at the products and services currently available and sought out the opinions of hundreds of users before we even wrote a line of code or began designing the software. We wanted, in particular, to understand the market landscape, the differences between fee-based managers, owner/operators, and the needs of smaller multifamily companies versus a large REIT. That process took about seven months.
MFE: What were some of the key discoveries you made that were implemented in AppFolio’s system architecture?
Donahoo: To get into this business, you need a very robust core accounting system. A lot of software companies like to first attack peripheral applications and solve the core platform as they develop a user base. There’s no easy way around that in multifamily. Accounting is at the core of most of the software, and there is a desire for it to be more Internet-centric. At the same time, there are a lot of niche needs in multifamily that off-the-shelf accounting software does not provide. We see an opportunity there.
MFE: And thus far, those niche applications at AppFolio include online maintenance requests, e-payments upstream to property owners, and Web site design and hosting?
Donahoo: That’s correct. We’ll follow a one-stop shop model and try to fulfill as many needs of our customers as possible. We’ve covered the basics, and we’ve recently expanded into Web design and e-commerce possibilities.
MFE: A number of AppFolio principles were involved with the development of GoToMeeting at Citrex Online. How has that experience transferred to launching multifamily property management software?
Donahoo: Typically, when you look at software verticals, you see needs that are very common. In the multifamily space, it was the diversity of needs that was interesting. When we developed GoToMeeting, we became aware of how licensing models often inhibit use rather than encouraging it. What any software provider wants is for people to use the product throughout the organization and licensing needs to enable that. When we looked at multifamily, it seemed that for many of the companies in the markets we were focusing on, additional software licenses were a luxury. Hands down, we sought to change that, so our licensing model is based on the number of units that you manage, not the number of users accessing the software.
MFE: What does the typical AppFolio user look like?
Donahoo: Our target market right now is what we define as the middle market, somewhere between 1,000- to 7,000-unit range, although we certainly have customers that are both larger and smaller than that. We have a pretty equitable mix among fee managers and owner/operators, and while most customers are multifamily, we do have some clients with a mix of both multifamily and single-family management needs. From a market perspective, we’re not centralized to any specific geography.
MFE: AppFolio also runs a comprehensive blog for on-site managers at PropertyManager.com. Why is social networking important in multifamily?
Donahoo: We feel that participating in a marketplace and working to educate people in a marketplace is absolutely the best way to build a community of users. PropertyManager.com is a pure content community and our attempt to be a thought leader in this market. It is provided by AppFolio, but it is not a direct marketing vehicle for us.
MFE: Finally, can you talk about your investment capital raise and how you’ll use the additional dollars?
Donahoo: The economy is not great for software start-ups, so getting capital right now is pretty awesome: Strong backing means longevity in the space, and we definitely want people to know that we are well-funded and have plenty of operating capital. Our operating plan has not changed radically with the additional investment. We’re growing our sales and service teams a bit more aggressively, but essentially no other changes, just making sure our software is competitive and helpful to the user, not in their way.