It’s been a rocky year for investors across all sectors. In 2023, commercial real estate investment experienced its fair share of dislocation, and CRE investment is down as much as 60% this year. But real estate isn’t the only space where investors have become skittish. Venture capital investors have also dramatically reduced funding for innovation and startup endeavors. Proptech organizations began the year with an understanding that funding rounds would look much different than in years past, with more discerning VC investors concerned about capital burn and longevity.
In 2023, the bearish outlook on VC investment in the proptech market mostly held, but at the end of the year, as the economic outlook improved and no recession arrived (as so many expected), VC investors opened up their wallets once again to proptech companies. The turn reveals the tremendous appetite for the proptech sector and an optimistic long-term outlook, even under the shadow of economic uncertainty. The only thing holding new proptech investment back, it would seem, is higher capital costs and the potential for widespread economic turbulence.
Here’s a closer look at proptech activity and investment in 2023, and a look ahead into 2024.
Slow Proptech Activity in 2023
Proptech spending experienced an expected slowdown in 2023, beginning with a pretty dismal start to the year. The first quarter had the lowest levels of proptech funding since the industry started tracking the market, according to investment bank Houlihan Lokey. Funding fell 76% compared to 2022. Year End numbers have not been released yet, but overall, the first half of the year had sluggish investment activity. At the midyear, proptech funding fell to an average weekly spend of $198 million, critically lower than the $545 million average weekly spend in 2022 and $512 million in weekly proptech funding in 2021. Sluggish economic activity has been largely credited for the decline, and as noted earlier, most investment sectors have seen a similar decrease in investment appetite.
In addition to reduced funding, VC investors also transitioned investment strategy. There has been a flight to quality. Startup companies that are solving operational challenges or enhancing the bottom line for users are winning the most funding dollars. Northspyre is a prime example. The platform infuses efficiency into real estate development project management by automating 80% of administrative tasks, managing contracts and invoices, and tracking budgets and spend, the latter resulting in reduced overages by up to 66%.
The quality of the program has not only helped developers streamline operations but has also attracted investment dollars. Although Northspyre was not in the market for funding this year, it secured $25 million in series B funding in 2022, showing strong investor enthusiasm.
VC Investors Increase Spending in the Second Half
While proptech investors were slow at the start, activity began to pick up in the second half of the year. In July several optimistic economic reports reversed initial predictions of a recession, the Fed began to take its foot off of the proverbial pedal on interest rate hikes, and inflation modified. Each of these factors helped to renew economic confidence and revitalize investment in the proptech space. As a result, last September, investor confidence increased to 6.1 in mid-year 2023 from 5.4 at year-end 2022, on a scale of 1 to 10. The renewed confidence came with an improvement in VC funding activity, which increased by 11% in the third quarter. While still lower than activity in 2022, the uptick illustrates the relationship between economic concern and VC spending, not disinterest in the proptech market.
“Over the summer, it became pretty clear that deal activity has begun to meaningfully pick up, pricing has been resetting, ask spreads have meaningfully narrowed, and more companies are needing to come back to market as investors are increasingly being well compensated for putting fresh capital at risk,” Zak Schwarzman, general partner at MetaProp, told the Commercial Observer. The fourth quarter numbers have not yet been released, but the second half of the year showed a clear improvement over the first half, and even VC firms have announced an increase in lending activity. Still, the recent momentum isn’t a return to record funding numbers achieved in 2022, but proptech companies and start-ups offering core technology and authentic solutions for property owners are going to find available funding.
Diversification Will Take the Spotlight in 2024
As investors sought to mitigate risk in 2023, they targeted late-stage startups and mature proptech companies. In 2024, investors will diversify funding rounds, focusing on a wider spectrum of companies at every stage of development. A survey from The Center for Real Estate Technology (CRETI) and Innovation found that industry leaders expect a 15% increase in seed funding and a 20% increase in Series A and B funding rounds next year. In addition, a survey from MetaProp found that 43% of investors expect to increase proptech investment in 2024, up from only 22% at the end of 2022. Market diversification should be welcome news to proptech leaders who can expect more funding available as well as more opportunities for companies at every stage of development.
The activity in the second half of the year is expected to carry into 2024. Industry leaders expect the market to continue to evolve and mature in the coming year with investors remaining focused on supporting companies offering critical business solutions through technology. William Sankey, the CEO of Northspyre, expects AI and automation to be the dominant trend in 2024. “The industry is still in its AI infancy, with only a select few providers possessing true AI capabilities,” he says. “Next year we will witness fierce competition among proptech companies, each striving to perfect their AI models to emerge as pioneers in the market.” CRETI research also expects an increase in funding for AI technologies, predicting a 15% increase in AI, machine learning, and IoT investments as well as a 25% bump in large funding rounds for established proptech companies.
The proptech market remains a favorite for VC investors. As the economic outlook recovers, the proptech market can equally expect improved funding activity in 2024.
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Real Estate Development