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Burning through cash and nothing coming in: 7 VC investors share where real-estate tech portfolios are hurting the most

Constance Freedman, founder and managing partner, Moderne Ventures
  • Real estate technology has seen various impacts from the coronavirus, with some companies seeing massive booms, and others seeing revenue totally cut off. At least one startup, Stay Alfred, closed permanently at the end of May. 
  • We spoke to seven venture capitalists about what kept them up at night about their portfolios. 
  • A well-capitalized company, with a long cash runway, has a much better chance of surviving than a company that needs to raise money in the midst of the crisis. 
  • Business models that are ill-suited to the specific conditions of the coronavirus crisis will need to adapt to those conditions in order to survive. Those that can't will be in danger. 
  • Visit Business Insider's homepage for more stories.
Real estate tech was coming off of a year of record investment. Then the pandemic hit. 
For some businesses whose products promote hygiene or social distancing, this time has seen massive increases in demand. For others, like the slew of coworking and short-term rental companies that have had to layoff workers, this period has put these businesses through extreme financial stress. 
When we spoke to seven VCs about the state of real estate tech and proptech during the crisis, they told us that it was also accelerating interest in themes that were already gaining steam, such as the digitization of parts of real estate transactions and advanced data analysis tools. 
For this acceleration to stick, companies need to survive the crisis moment. Last month, short-term rental company Stay Alfred permanently closed after a decade of operation.
To that end, we also asked these VCs about their own portfolios: Where were they spending their attention? What was keeping them up at night?
While they declined to discuss specific investments, their comments all coalesced around two categories of concern: a startup's cash runway, and the extent to which a company's business model was affected by coronavirus.
Startups that came into this period well-capitalized and without out too large of a balance sheet have a better opportunity of lasting, even if their business model has been gravely affected. Similarly, some businesses are seeing as much, or more, demand than ever, which could allow them to overcome any balance sheet difficulties and access new investments. 

"Cash is king"

To keep a business running, there needs to be enough cash on hand and access to debt facilities. It's a simple idea, but in the era of large venture-funded businesses running at a major loss, it's not a given. It's probably the most important dimension to a startup's continued success. 
"The first dimension is the company's vulnerability, considering things such as cash balance, level of cash burn, fundraising needs, and durability of revenue," Bain Capital Ventures investor Allison Xu and partner Merritt Hummer wrote to Business Insider.
Bain Capital Ventures invests in a wide range of companies, including real estate tech companies like SmartRent, which provides smart-home tech for multifamily rentals and design material marketplace Material Bank.Allison Xu Merritt Hummer Bain Capital Ventures
Constance Freedman, founder and managing partner of Moderne Ventures, which has invested in companies like security deposit insurance company LeaseLock and digital mortgage company, said it even more simply.
"Cash is king, that's the bottom line," Freedman told Business Insider. 
Kitty Sullivan, an investor for JLL Spark Global Venture Fund targeted a 12-month runway as ideal. She suggested that businesses that don't have it, need to find ways "to conserve cash and stretch existing capital to provide at least 12 months of runway." 
JLL Spark is the venture arm of JLL, one of the world's largest real-estate services and consulting firms. The firm has invested in office sensor company VergeSense, facilities management company Eden, and tenant experience startup HqO.
Read more: Here's which real-estate tech startups will soar and which will flop in the new normal of how we occupy space, according to 7 top proptech VCs
Businesses have been conserving cash in a range of ways during the coronavirus, but most notably by laying off their workers.
"Any investment that has under 12 months of runway keeps me up at night, no matter what category it is in, whether they've shown me accelerating sales or decelerating sales," Zach Aarons, co-founder and general partner of MetaProp, said.
This challenge is intensified for later-stage startups with large balance sheets that expect large amounts of revenue, Nima Wedlake, a principal at Thomvest Ventures, told Business Insider. Thomvest Ventures generally invests in fintech, but has invested in real estate specific companies like all-cash offer startup Ribbon and real estate loan marketplace PeerStreet.
If early-stage companies have raised money at the right time, they should be able to reduce their expenditures and last through the crisis.
"Early-stage startups don't have a ton of revenue associated with them, so their cost structures are lower," Wedlake said.
For those that need to raise money, they might have a challenging time unless their business is well-suited to the specifics of the coronavirus crisis.
"Unless you're showing accelerating traction and real tailwinds, we probably won't make new investments," Aarons said. Aarons and his co-founder Aaron Block wrote a book, published last year, that provided a far-reaching glimpse into the world of proptech. He has invested in a wide range of real estate tech companies, from security deposit startup Jetty to the aforementioned companies VergeSense and HqO.
Read more: Silver Lake just added to a string of bets in the struggling travel sector by leading a $108 million investment in vacation property startup Vacasa
Some companies are retooling their business for the current moment, and have taken time to reevaluate their businesses to meet the crisis. They're put their fundraising discussions on "pause" until they can come back with new products or solutions, Chris Yip, a partner at RET Ventures, which typically invests in companies that serve the multifamily market like SmartRent, said. 
Chris Yip, partner and managing director, RET Ventures
"Companies have said 'Let's pick this up in a couple of months," Yip told Business Insider. 

"No one modeled out that these markets to go away"

It is important to keep cash on hand but a business model that can continue to make money during an unprecedented economic shutdown also stands a much better chance of survival. Businesses that can't, will see their revenues drop precipitously. 
While a wide range of companies have been affected by the pandemic, as seen in our previous reporting on our conversations with proptech VCs, some models have been especially hurt. 
"If we had a coworking portfolio company, I'd be concerned about what their future looks like," Ryan Freedman, general partner at Corigin Ventures and CEO and chairman at Corigin, said. Corigin Ventures, the venture arm of builder, owner, and operator Corigin, has invested in real-estate and non-real estate startups, from brokerage Compass to fitness company ClassPass. 
Another model that the VCs highlighted as especially challenged are any models that rely on transaction volume. Real estate transaction volume traditionally slows during times of uncertainty and during economic downturns, so unlike some businesses that may jump back when travel restrictions and other lockdowns are lifted, transaction-based businesses may see a longer tail. 
"No one modeled out that these markets to go away, whether in lending or real estate," Thomvest Ventures' Wedlake said. "Those are the ones we're spending a lot of time on."
Wedlake noted that contractual business models fare better in the longer term, though they may have to deal with clients asking for new payment plans or forbearance. 
Read more:10 CEOs from Coldwell Banker, JLL, Cushman Wakefield, and more lay out a post-pandemic future of how we'll buy, build, and use real estate
Venture capitalists are giving these businesses more attention, and honing in on how they can work with businesses to adapt to the now-cliche "new normal."
"Our advice to those most affected is to reevaluate your value proposition and find ways to recalibrate in this new environment while conserving cash flow," JLL's Sullivan said.
While proptech appears to be a mixed bag, with some high highs and low lows, at least one investor is concerned that the negative headlines will affect all businesses, even those that are thriving. 
"What I would say more of my concern, what keeps me up at night: we don't want to have the baby thrown out with the bathwater," Yip said.
SEE ALSO: Silver Lake just added to a string of bets in the struggling travel sector by leading a $108 million investment in vacation property startup Vacasa
DON'T MISS: Here's which real-estate tech startups will soar and which will flop in the new normal of how we occupy space, according to 7 top proptech VCs
SEE ALSO: Companies need to add contactless-entry tech to safely reopen offices. Here are 7 firms ranging from startups to huge conglomerates that are set for a surge in business.
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