How digital is the real estate industry?
It is one of the least digitized industries and ripe for disruption. While other industries such as banking, retail or media already have undergone massive changes, the pressure to innovate in real estate, historically, was very low, because it was very easy in the past 30 years to make money. But the market disturbance due to the coronavirus has been a wake-up call for the industry. The golden years might come to an end, and the pressure to innovate will rise.

Why invest in PropTech?
The market potential is enormous. Real estate is the biggest asset class in the world. Transactions that amount to hundreds of millions of euros or more are the norm. Now, if a startup can improve such transactions, the added value is incredibly larger than, for example, in the case of e-commerce, where your shopping basket might just be, say, 80 euros. This doesn’t mean you should only invest in PropTech or that e-commerce isn’t attractive, diversification is a good thing. But I think that there is also a cultural element that makes PropTech more accessible for investors from Germany or Switzerland.

Why?
Wealthy persons often own and invest in real estate because it is a defensive and solid investment, that’s why it’s also called “concrete gold” in German. If you combine this topic that is close to the heart of many investors with the topic of innovation, and the very large potential of the market, you get a mix that is attractive even to conservative investors. We see ourselves as conservative as well, and jokingly call what we do “Swabian Venture Capital”. This prudence is a mindset that many in Germany and Switzerland share. We hear it in discussions. People say, look, I don’t understand how this meal kit startup can be worth several billion, this is just hot air. You don’t have this kind of exaggerated valuations in proptech.

“You don’t have this kind of exaggerated valuations in proptech.”

What about WeWork?
WeWork isn’t a technology company. Renting space, redecorating it, and providing the tenants with fruit water isn’t PropTech. It is a typical example of the inflationary investments that are the hallmark of US venture capital. In all comparisons, people always lament how much money startups get in the US, and how difficult it is to raise capital in Europe. Rarely do people talk about the downside of this: Investors step on each other’s toes, companies burn through dozens of millions in marketing, founders get the wrong incentives, and startups get sums of capital they can’t handle in a sane way. The conservative funding environment in Europe, even if there are some exceptions, should also be seen as a virtue that shields startup from burning too much cash inefficiently. We’ve looked at several co-working and co-living startups. We didn’t invest because we couldn’t understand their valuation expectations.

What are the subcategories of PropTech that you do find interesting?
When we launched the fund in 2018, we analyzed the whole value chain from planning, development, construction, to brokerage, and renovation to better identify the added value that digitalization can bring. And one topic stood out which is simply the replacement of very inefficient processes by modern IT methods. This is a segment in which our recent investment Archilyse is also active.

Can you elaborate on the processes that are replaced?
The status quo of the industry is that many documents are still only available on paper and stored in folders. Think of floor plans, for example. Every time a transaction or financing is envisaged, people have to get these documents. To convert them to a digital standard is a no-brainer. The same goes for real estate portfolios that are still tracked in excel, which makes no sense. Digitalization is the first step. The second step, which is based on this digitalization and which Archilyse also offers, is optimization.

What does that mean?
Let’s take the use case of an office building that is being planned. On every open floor, the architect needs to think about where to place walls and other elements, keeping in mind all the regulations that exist. The traditional approach is to let a few interns develop a handful of different layouts and then decide which one looks best. This is a very arbitrary decision, and it is one that can be significantly improved by software. Archilyse’s software can calculate millions of possible floor plans and optimize across hundreds of parameters such as light, noise, and especially now, also according to hygiene rules. This is the reason why we invested because what we have here is a superior intellectual framework to go about this problem. It is expert knowledge made into software.

Does that only apply to new buildings?
No. Transactions are a very important part of the real estate market. Some players specialize in developing and selling real estate, others buy and hold and might sell later, in between are the brokers as intermediaries. Now if you are able, like Archilyse, to speed up the process of a transaction and improve the price, because the valuation is based on mathematical methods, the value created is not only large but also very obvious. And owners of real estate portfolios will use software that has a clearly visible return on investment. We already invested in Archilyse’s seed round, and with the series A, we have invested significantly more because we see the universal application of this tool kit.

In the Series A, which PropTech1 led, Constructive Venture Fund was a co-investor. Is there no competition between funds with a similar investment focus?
There are 3 steps in an investment decision for a venture capitalist. First, you want to identify an interesting topic and a big market. Second, you want to find the best team in this space. And third, you want to have the best syndicate of co-investors and board members to address the challenges the startup will face. In this regard, investing together with others means not only allocating the investment among several parties but also combining networks that can help the startup with its go-to-market and other challenges. We’re primarily based in Berlin, Constructive Venture Fund in Zurich, these are geographically different networks. That Verve Ventures is joining the round and bringing along more sophisticated private investors is also positive. In the next funding round, it could be interesting to bring in a US VC to further amplify the network. But for now, the company is comfortably financed to bring it to the next level, key hires have been made, and the board is full of top-notch experts.

Let’s finish with an outlook for the PropTech industry. As you said in the beginning, PropTech is, compared to FinTech, still in its early stages. How rapidly will it mature?
The investment universe is still relatively young, compared to FinTech, but already large enough for a dedicated investor such as us. We’ve looked at over 500 companies already, and many more interesting startups will be founded in this space. Bringing the immense real estate industry into the digital age will take at least 20 years. But that doesn’t mean that investors will have to wait that long for an exit. We’re already seeing signs of consolidation, driven by private equity firms. Partners Group, for example, bought the energy metering company Techem two years ago, and I imagine that they’ll actively look for technology startups to make their business more efficient. And since June, there are two real estate companies in the DAX index of the 30 largest German businesses, Deutsche Wohnen and Vonovia. Historically, they’ve been compared to each other by counting their respective number of properties, which honestly doesn’t tell you much about quality. In the future, these companies will differentiate themselves from each other by the innovation agendas they pursue. These and many other factors will cause a boom for PropTech.