How To Start A Real Estate Tech Company: Do’s and Don’ts (Part 1)


Nearly every day I see at least one new real estate technology idea come across the transom.  So, I thought I would share some thoughts about best practices for starting a real estate technology company. 

Here is my list of do’s and don’ts…

Do: Talk to multiple people in the real estate industry about what their daily pain points are and try to solve them.

This may seem like an obvious thing to do, but you would be shocked at how many real estate tech entrepreneurs don’t bother to do this...even entrepreneurs who have worked in some aspect of real estate before starting a new venture. Because real estate technology is still so nascent, and real estate is still predominantly a “pen and paper” based business, there is a huge opportunity everywhere.  Nevertheless, you still need to be diligent about finding that pain point and making sure that the particular sub-market you are going after is large enough. 

Go and talk to as many people as you can about how they could use software to do their jobs better.  This will accomplish many things: it will help you better understand who your end customer is, how the sales cycle might transpire, and what areas of real estate are the most ripe for disruption. Three years ago, I might have told you that leasing management for commercial and residential landlords could have used a technology solution to make that process better. However, as VTS, Hightower, and Nestio have quickly gained market share, today I would most likely tell you to focus on another pain point of landlords, like energy management and utilities. 

For example, one of our jobs as commercial landlords is to bill back utilities to tenants who have “triple net” leases. There is a huge opportunity for software (and potentially connected devices) to help us manage this process more efficiently. An outsider to the industry, or even an industry insider who works in a different part of real estate, might not even understand that this is often a challenging and cumbersome process that could be potentially mitigated with a software solution. However, a quick conversation with a commercial landlord who handles this will provide you with a path worth exploring.  

Don’t: Take it upon yourself to build a real estate technology company because of a real estate problem that you have had personally.

Many technology entrepreneurs have heard that real estate is the new hot thing (it’s only been around for tens of thousands of years) and now they want to build a real estate technology business.  Many of these entrepreneurs have had personal issues with real estate that range from the benign (“my broker was late to show me an apartment”) to the also benign (“I had trouble finding an apartment once”).  I do sympathize with these problems and understand that there is a huge opportunity to fix them with software.  However, before building a tool that just makes it easier to find an apartment, please consult with professionals in the real estate space, ideally brokers and landlords, to understand how to make a product that will be truly differentiated in a very crowded landscape.  Don’t believe that just because you have an amazing technical team that you can build a real estate tech product.  You need to talk to people in the industry, even if it’s ultimately a consumer app that you are building.

Do: Create something that helps me make more money or save money.

It is very difficult to pitch new hardware and software solutions to landlords. We have short attention spans and we care a lot about saving money. The thought of paying you for your software every month out of our hard-earned rent roll makes us squirm.  So, in order to really get our attention, you need to build something that saves us more money monthly than we are paying you, or makes us more money monthly than we are paying you. Otherwise, we are not interested.  For example, last week I spoke to an entrepreneur who has developed an innovative new electric car charging station for garages.  I was definitely intrigued because it looked new and cool, but I was excited about the fact that it seemed like it could save us money on construction and operations costs.  

Don’t: Create something that a landlord or broker will just think is cool.

In the tech world, people sometimes purchase things because they look and feel cool.  In real estate, that almost never happens.  I often see teams developing sensors for commercial buildings.  Some of these teams lead with the pitch of, “wouldn’t it be cool to see heat maps of clustering of people in your buildings with these sensors?”  Other teams lead with “I can save you a lot of money by installing these sensors on your condenser unit”.  Of these two pitches, which one do you think will most make a landlord’s ears perk up? 

So, in summary: talk to landlords and brokers, figure out where the pain is and get a clear picture of what makes us tick.  Build something that can save us money.  If you do that, you will build a successful real estate tech venture.  Avoid us at your own peril.

Basement Tech

If you are a landlord, there is something going on in your sub cellar.  Don’t worry.  It’s here to help.  I call it basement tech.  This is one of the areas of real estate tech that interests me most right now.  As a landlord, you want to have as much information as you can about what is going on in the building and the basement is where all the vital organs of the building typically reside; so you want to make sure that everything is copacetic with both your equipment and your team.  Until very recently, no one really used much software or hardware to track what was actually happening in a building...this has begun to change.

There are now software platforms and connected devices that can give property managers, engineers, and landlords a much better idea about how things are going below grade.  For example, software platforms like Ravti can help you manage HVAC procurement and maintenance.  LogCheck can help your property managers and engineers keep track of daily maintenance on equipment.  Senseware and other connected building sensor platforms can help you learn where the bulk of your energy output occurs and software like Aquicore can help you track and manage that energy output.  SiteCompli can tell you when you have an elevator inspection coming up, or something in the cellar that you need to fix and have re-inspected for compliance. Managed by Q can ensure that basements are spic and span and well managed.  These components serve to enhance what is the heart and mind of any building: the basement.

We are now entering an era where all of these platforms will begin to collaborate and talk to each other through a series of APIs (hopefully).  Within a few years a landlord will be able to open one dashboard and understand virtually everything that’s going on in the sub cellar of buildings.  Software will provide up to date readings on how equipment is doing and what needs to be fixed.  Predictive analytics will let you know when it’s time to upgrade equipment before the machines break down.    

Within ten years buildings themselves will be connected to technology in completely new ways. Sensors and connected devices will ultimately become woven into the curtain wall of newly constructed buildings.  This will enable tenants and landlords to save immense amounts of money on energy output.  A completely connected building would be able to sense motion and heat, sending signals about which parts of a building were more occupied than others, informing the HVAC solution whether to blow hot or cold air to different parts of the building.  Energy savings would be immense because you would only cool or heat a specific area of a building that needed it, no “zones” as they exist today would be necessary.  New connected HVAC solutions like Keen Home are now working to make this type of technology a reality.  

When people ask me what my strategy is for investing in real estate technology, I jokingly tell people that I want to own the basement of every building.  Since I can’t go around buying physical basements, I might as well invest in the future of what every basement will be using in five years.   If you control the heart and mind of something, you can control everything.  Although I am happy investing in software that helps the top of the building, I believe that the real money is to be found below grade...kind of like gold and oil.   

Why is Airbnb Worth $24 Billion and What Does it Mean?

The recent announcement that Airbnb was raising a new round of financing at a $24 billion valuation left many people outside the start-up and technology communities scratching their heads.  In fact, some of my friends in the real estate and hospitality communities emailed me when the news broke thinking that the press must have made a mistake and missed a decimal place somewhere.  They just couldn’t wrap their heads around the idea that a real estate company with no tangible real estate assets could command that kind of valuation from investors.  How does a platform for sharing real estate demand a much higher revenue multiple than a company that owns real estate?

I am not going to bother opining on the exact revenue multiple that Airbnb should have.  I am certainly happy that they are worth $24 billion (two of my investments, Localmind and Fondu, were both acquired early on by Airbnb).  However, I will let the far more sophisticated growth equity investors doing the deal set the valuation for me.  I am happy to be along for the ride. 

Nonetheless, I can say this with certainty: the fact that experienced, late-stage investors are willing to place such a growth premium on Airbnb shows that we are in the midst of a tectonic paradigm shift in the real estate industry.  Moreover, I believe that we are only in the third inning of a nine inning ball game.  The crux of this paradigm shift exists in how people conceive and inhabit physical space, and how people are able to maximize the efficiency and financial opportunity of that space, driving prices down for “tenants” while simultaneously creating more profit for “landlords.” 

This may seem like a contradiction but it’s not: when space is used more frequently and more efficiently, landlords can earn more money while charging less money to tenants.  This is the “holy grail” solution that exists when you merge collaborative consumption, on-demand services, and the shared economy with real estate.  This is the genius of Airbnb and it has galvanized an entire industry in its wake.  People can take unused real estate and turn it into occupied real estate.

In the olden days, the perception of space was rather rigid.  People lived in houses, tenements, or apartments, and they worked in office buildings, factories, or stores.  When they traveled, they would stay in hotels or hostels.  Airbnb was the first company to flip the script on this model, and more change is coming.  Because of technology, social networking, on-demand services, and collaborative consumption, all of these spaces can be used by people when they need them

Imagine a world where you can use a specific type of space only when you need it and you can pay for it by the hour or by the day?  This was the major innovation of Airbnb.  People thought to themselves: “I am going away for the weekend and no one is going to be in my apartment.  Why don’t I earn some money and rent it out?”

Now, this type of thinking is getting applied to other asset classes within the real estate spectrum.  For example, if you are only in an office for a few hours a week, why not book a Breather instead of getting standard lease on an office space? (Full disclosure: Breather is a portfolio company) Schools are vacant from 5 PM-6 AM.  Why not have dinner parties and other events in schools provided people are respectful and responsible?  Why can’t a hotel turn into an office building during the day, and vice versa?  When no one is in our conference room at work why can’t I rent it to others for an hour to have a meeting (i.e. using LiquidSpace)?  I only use my vacuum twice per week.  What good is it doing sitting in my closet when it can be cleaning someone else’s home or office and potentially earning me some money?  The list goes on and on.

An old saying in the real estate business is that land is a great investment because they aren’t making any more of it.  Today, this rings more true than ever with real estate prices skyrocketing and people getting priced out of places where they have lived for years.  However, although the earth isn’t making more land, people are beginning to think about how they use physical space in different ways.  Instead of conceiving of space as an owned or leased quantity, they are beginning to think of it as a shared quantity.  This shift will ultimately prove the most financially viable solution to solving the affordable housing crisis, ensuring that people have reasonably priced places to start small businesses, and providing people with the ability to travel and expand their cultural views on a shoestring budget.

So, in summary, I don’t have any idea what Airbnb should be worth.  What I do know is that the investors who are valuing it at $24 billion, whether consciously or not, are recognizing Airbnb as the initial catalyst for the largest disruption in the history of the real estate industry since the invention of the skyscraper in Chicago at the end of the 19th Century.  At MetaProp NYC, it is part of our job to educate the entrenched real estate industry about this seismic shift and show them that they don’t have to resist it.  We can also educate the technologists and startup community about how to approach people in the real estate community and explain the new ecosystem in relevant, appropriate terms.  No one has to go into hand-to-hand combat.  In fact, if done correctly, everyone can create additional economic and social value in this new ecosystem.  It doesn’t have to be a zero-sum game.

Why Did We Start MetaProp NYC?

It’s clear that 2015 was the right time to launch a real estate technology accelerator in New York City. 

Steve Schlafman from RRE Ventures once asked if I thought 2012 would have been a better time to do it.  I pondered that question for a while and realized it probably would have been a financial windfall to work with the crop of high growth real estate tech start-ups that three years ago were just starting out (VTS, Hightower, Managed by Q, Compstak, Floored, Compass, Honest Buildings, SiteCompli, The Square Foot, Nestio, Reonomy, etc.).  All of these companies, and many more successful NYC based real estate tech companies, germinated at this time and we could have had the opportunity to accelerate a few of them.  Now, the best of those companies have gone on to raise substantial financing rounds and are building very successful businesses. 

After some reflection, I would argue that a world class real estate tech accelerator would not have been possible in 2012 and, furthermore, is only possible in 2015.  For a domain specific accelerator to work, you need a few things to coalesce.   First, you need technological talent.  Second, you need capital.  Third, you need mentors.  Fourth, your portfolio companies need customers and clients.  Finally, you need more mature start-ups in the ecosystem.

In 2012, one definitely could have put together the talent and capital but not a large base of clients and mentors.  The industry was simply too nascent.  Landlords worked with software for property management (Yardi, Timberline, and MRI, etc.) but used very little innovative software for leasing management, compliance, HVAC, marketing, or construction management. 

In 2015, not only do you have landlords learning more about software, they are clamoring for it.  Dave Eisenberg from Floored mentioned to me on a panel that a massive business breakthrough for him was initially suggested by a client.  The fact that a real estate professional is that in the weeds with a technology product is a massive shift for the industry.  This shift has been brought about by a meaningful dialogue for the first time commencing between software developers and clients in this industry. 

In 2015 you also have mentors who have been through that dialogue.  They now intimately know the dos and don’ts of selling software to landlords, marketing software, hiring, raising money, and many other critical business building concepts. 

We assembled an all star team of mentors and corporate partners (including Zillow Group, Warburg Realty, DLA Piper, EisnerAmper and The News Funnel) to launch MetaProp NYC because we thought that this was a unique opportunity in time to bring together new founders, old founders, clients, and financiers together to accelerate businesses.  While the industry has matured quite a bit in NYC from 2012-2015, we believe that the software disruption of real estate is just beginning and will continue to push forward into the next decade as technology changes the entire process of building, leasing, and operating a building from top to bottom.