With Real Estate Technology Ventures (RETV), John Helm is sitting at the fulcrum between emergent PropTech startups and the multifamily REITs and owner-operators seeking both first mover advantage and a hedge from disruption by directly investing into the technology innovations RETV funds and helps bring to market.
Billed as the first industry-backed, early-stage venture fund connecting emerging real estate technology companies with a network of multifamily influencers and their portfolios, RETV was successful last year in raising $108 million from limited partner investors, including Aimco, Boardwalk, Essex, MidAmerica, UDR, Starwood Capital Group, and Cortland, to fuel its Fund I.
In total, 23 LPs representing over 1 million multifamily units signed onto RETV’s debut fund, hoping to gain competitive advantage from early access to technology while managing the risk of deploying unproven or even antagonistic solutions across their properties. In return, the LPs serve as a proving ground for RETV technologists, offering up portfolios for product testing and development, providing direct feedback to tech company innovators, and ultimately serving as a catalyst for systems to quickly scale across a portion of the fund’s units.
“It’s a safety in numbers sort of thing,” says Helm, the former Marcus & Millichap chief financial officer turned entrepreneur who successfully piloted both AllApartments/Springstreet and MyNewPlace from fledgling startups to pay-dirt exits. (Homestore acquired AllApartments in 1999 for $150 million, and RealPage acquired MyNewPlace in 2011 for $74.4 million.) “The pace of technology is speeding up, innovation is speeding up, and the mainstream VCs in Silicon Valley see real estate as the last, big, wide-open opportunity for investments. A lot of capital is flowing into real estate technology whether the industry participates or not, and we think it is much better for them to have a horse in the race.”
While it may have been first to the stage, RETV certainly isn’t alone in offering a vehicle for multifamily operators to invest directly into emergent PropTech companies. In July, Los Angeles–based Fifth Wall announced the close of a $503 million fund backed by firms such as Cushman & Wakefield, D.R. Horton, Equity Residential, Hines, Lennar, and The Related Cos. Lennar is also running a pilot program as an LP for Chicago-based 94 Ventures, which will likewise seek to connect multifamily operator investors with early-stage tech companies for product development and deployment.
Over $14 billion in venture capital was invested globally into emergent PropTech companies across the first half of 2019, according to a midyear report by CREtech.com. That’s a 309% increase in funding over the first half of 2018, with the report noting a continued trend toward larger deal sizes and an increase in corporate venture capital as real estate companies turn to PropTech for solutions to help with streamlining processes and optimizing operations.
“You could certainly invest to make money off of the fund or you can also become an LP to find products to enhance the customer experience, and I think we go for the latter,” says Jerry Davis, president and chief operating officer of UDR, an early signatory to RETV Fund I and a major supporter of the fund’s investment into SmartRent, a smart home technology solution for deploying and controlling smart locks, thermostats, light switches, and leak sensors.
Deployed across 20,000 UDR units, SmartRent is part of the REIT’s strategy for enhancing the prospect and resident experience with a self-guided touring platform and self-service control of in-unit smart technology and voice-command devices. “We have chosen to go early in multiple investment situations because of the prospect of enhancing the portfolio and moving UDR closer to where we want to take our operations from both a resident experience and cost mitigation standpoint,” Davis says.
Busting the Multifamily Tech Vendor Paradigm
The mechanics of RETV Fund I allows LPs to do just that: Sign on as passive investors and gain visibility into emerging tech, or act as a testing bed for new technologies to gain disproportionate advantage to solutions that eventually scale across the industry, as early-stage corporate venture capitalists typically enjoy deep pricing discounts not afforded to the general market.
The test bed model is likewise embraced by Nine Four Ventures, a similar real estate technology fund in pilot and co-founded by Laramar CEO Jeffery Elowe and venture capitalist Kurt Ramirez. “It’s really a land and expand approach that allows the tech companies to play in a sandbox,” says Ramirez. “Aside from just building relationships early on to get opportunities to scale, the pilots are an interesting way to provide honest two-way feedback that could otherwise be challenging under a traditional vendor-client model.”
Steve Lefkovits is a partner with RealtyCom Partners and the executive producer for the Joshua Tree Conference Group, which launched the Multifamily Technology and Entrepreneurship Conference in 2013 with the same thought of connecting early-stage technology entrepreneurs with C-suite multifamily owner-operators and venture capitalists, partly in an effort to break away from the vendor-client mentality that had spawned plodding and combative sales and deployment cycles in apartment tech.
“These funds are an investment-level reason to get together and talk about technology and align as partners to finance innovation. It’s a much better conversation than the adversarial process of a vendor selling to a suspicious buyer,” Lefkovits says. “Investors/multifamily owners are investing to capture the benefits of large-scale growth in the multifamily industry among their peers and competitors while drastically shortening the time from idea to development to scale to deployment to the benefit of the tech startup.”
For SmartRent, the acceleration has been remarkable, progressing from a $3 million seed round in September 2018 and a $5 million Series A allotment in November 2018 to a Series B funding of $32 million in July, which included direct investments from UDR, Essex Property Trust, Starwood Capital, and Bain Capital Ventures in addition to RETV capital. In terms of unit count, the company has installed into 40,000 units in just 15 months, with another 66,000 units under agreement for 2019, representing a year-over-year increase of 149%.
“The idea of the fund has been in the back of my mind since MyNewPlace and Rent.com,” Helm says. “Quite a few large REITs had invested in Rent.com, and when I raised capital for MyNewPlace, Essex, UDR, Lane, and ConAm were all investors, and it proved to me the value in having operators on board for proof of concept and scalability—the value of having some guys on the same side of the table so I wasn’t just a vendor, I was an investment, which opened their organizations up.”
Preferred Technologies, Preferred Assets
While the altruistic vision of nurturing tech entrepreneurs into the historically luddite arena of multifamily operations is a laudable one, there is also a defensive posturing built into owner investment in PropTech. By moving from client to influencer to investor, REITs and owners participating in funds like RETV are playing a decisive role in electing the technologies that are offered broader access to the nation’s apartment communities, and buffering themselves against the kinds of industry disruptions that Airbnb and Uber exacted in hospitality and the taxi industry, respectively.
“Honestly, disruption is putting it mildly,” says Ramirez. “Technology has begun to enable every part of every facet of the industry, challenging owners to play more offense, get smarter on leasing and marketing, use analytics to target the best renters, and differentiate properties to offer something that makes people want to stay there more than somewhere else. What we are seeing is increased pressure for operators to apply tech solutions to their business, and they are doing it because renters are demanding it and investors are demanding it. They are getting squeezed on both fronts to operate at peak performance.”
For the winners in that endeavor, Ramirez sees the kind of portfolio-wide income enhancement that catches institutional investor interest and follows a logic that where the technology goes, the capital investments into development and large-scale acquisitions and dispositions will follow.
Operators like UDR see PropTech funds, particularly those steered by multifamily industry veterans like Helm, as a way to clear through the white noise of technology offerings and move forward with point solutions that have been vetted, tested, and show promise of scaling to bona fide, long-term service providers that can boost elusive net operating income increases.
“The amount of competing technology solutions for one business line can get confusing, and a lot of times those options are close in capability,” says Davis. “RETV goes through the vetting process pretty extensively, and some innovations we have jumped into and reaped a big benefit. Sometimes those solutions are more suited for another LP or we may have already solved that problem, and as always there are only so many things you can roll out at one time.”
Likewise, the $108 million in RETV Fund I is probably positioned to deploy only a handful of technologies, hardly making Helm and the fund’s LPs the arbiters of ops future in multifamily, at least not yet. Other entrepreneurial startups can still benefit from direct, off balance sheet investments from firms, and the major property management software platforms—including AppFolio, Property Solutions, RealPage, and Yardi—continue to develop their own solutions or position themselves for acquiring the companies that find a niche and scale.
James Grady is the founder and CEO of Package Solutions, the maker of package management solution HelloPackage, which counts Gables Residential (among other apartment owners) as an investor and early adopter. “RETV is on our radar, and we have been in discussions with them,” Grady says. “The fund offers a tremendous opportunity to connect with forward-thinking apartment operators who are open to, and actively seeking, technologies that will best improve both their operations and the resident experience. Gables likewise has been intimately involved in developing and refining the software platform from both an operational perspective but also in how we bring the product to market.”
Like many tech entrepreneurs, Grady has given some thought to exit strategy in the multifamily space and thinks the most likely scenario would be an acquisition by a larger player. To that end, owner-operators who have either invested directly into startups or have become an LP in RETV or other funds will ultimately get the win-win from going all in on technology investment, by realizing not only the early access to technology and investor discount pricing, but by scoring on the multiple should a startup be acquired by a platform player or external tech company like eBay, Amazon, Apple, or Google.
“We’re looking for technologies that are going to transform an area of our client’s businesses,” says AppFolio senior vice president of investment management Nat Kunes, who points to the company’s January acquisition of conversational AI startup Dynasty as emblematic of where the firm finds acquisitive value in the apartment tech arena. “AI for leasing essentially replaces all the back and forth of scheduling showings and prequalification, but unlike the scripted response of chat bots, conversational AI gets smarter and learns from its interactions with prospects. That was very unique and different in the market, and those types of game-changing technologies are what we look to acquire in our business.”
At RETV, Helm is mum on the prospect of signing on LPs for a Fund II (the SEC strictly prohibits the marketing of funds in advance of filing a Form D notice of offering of securities), but to think the career entrepreneur is one and done with helping to bring a new model of technology deployment to multifamily is likely missing the greater point: that the disruption of RETV isn’t so much about bringing new, transformative technologies to multifamily as it is bringing the multifamily players (along with their deep pockets of capital) directly to best-in-class technologies as they emerge.
Count UDR, for one, as sold on the model. “We’re always excited to learn and have product being brought to us that enhances our platform,” says Davis. “As long as new technologies are being invented to make our operations and our residents’ lives easier, the funds create a more robust pipeline of innovation. That’s a format that works for us, and one that has become a preferred avenue for investing in technologies.”