In the last few years, PropTech startups have seen a huge wave of investment, raking in billions. But the big question is, has any of this really shaken up the property market? Is the market in for some major tech breakthroughs, or is innovation and change within the industry more of a slow burn, evolving rather than turning everything upside down at a rapid rate.

The three types of startups

McHale discussed that there are three classes of PropTech companies, these are:

• Enablement
• Replacement
• Disruption

Enablement refers to those whose products ‘enable.’ Their target customers are the existing industry, and trying to catch budgets that already exist. Replacement refers to those that are trying to replace existing players in the industry, perhaps trying to replace existing players in the industry, or replace a part of the value chain. Then finally those in the ‘disruption’ category are trying to create an entirely new category of customer, or an entirely new category of revenue altogether. Most PropTech startups fall into one of these three categories, which can impact how disruption they can make to the industry.

What is the realistic market opportunity?

“The VC business model is governed by what they call the power law. So essentially, that means that out of every 10 early-stage investments, around two create return,” he commented. “Those companies are going to have to reach an inflection point and that’s where their revenues are going to scale exponentially, or, as they say, reach hockey stick growth.”

McHale explained that the realistic market opportunity that can be captured is oftentimes overestimated. Why is this? Because smart buildings, and commercial buildings, are already expensive, take a long time to construct, and require a lot of upfront capital which is returned in decades, not months. Some of these companies who would be investing in new PropTech startups simply don’t have the resources at the time of constructing a building to be putting it into these startups. The rate of construction in the West is not fast enough to keep up and integrate products from PropTech startups.

Integration complexity

The next point that McHale mentioned is the issue surrounding the complexity of the integration of technology into builds.

McHale commented: “What the market is demanding is integrated technology and not more point solutions.”

The value of commercial buildings rises with the integration of new technologies. Technologies such as lighting control, and smart heating solutions, increases the value of the building.

“The commercial building technology landscape is one of numerous siloed systems that each perform a function to optimise some part of the operation of a building. Indivdually, that function should have a value, and at some point, that should be returned to the customer. But the value can be increased by integration [of technology].

“So take for example lighting control. It provides a measurable reduction in the energy cost of lighting. However, the data that it collects, shared with the building management system, can also help to reduce the energy cost of heating and improve operations by understanding how and when space can be used.”

Whilst integration increases the value of a property, building managers and planners have to consider the time it takes to integrate those technologies and decide whether the value increase is worth the loss in time.

Supply chain fragmentation

“Supply chain, the way that technology is specified, procured, and delivered in commercial buildings is convoluted and sub-optimal,” McHale noted.

“However, fragmentation of the supply chain may not be immediately obvious to companies who are entering the market.

“The lifecycle of how the new construction process works… It will be the design team that specifies the technology to meet the requirements of the owner or operator. Procurement decisions made by the design team will be based on their knowledge of available technologies. And as is human nature, they can choose partners that they've worked with before and will seek solutions that they trust.

“It can be challenging for new entrants to come into the business and actually influence their buying decisions. Many commercial building owners also prioritise net operating income above all else and may not be incentivised to invest in property technology.”

In this sense, the supply chain within the property industry can make it difficult for PropTech startups to thrive. Whether it be due to delays in the building process, or the amount of eyes that see a project and decide on the final tech that will be integrated within it, startups can often be overlooked for companies that are more established within the industry.

Selling!

Linking to the last point, the final point made in the talk was all about selling.

“Once you've identified who to sell to, how easy is it to close that sale, and how can you repeat it quickly enough to scale?”

Sales cycles in the industry can have a longer lifecycle than originally expected. Another point of this is that the landlord isn't always incentivised to invest in technology that won't see a rental yield increase. With so many factors going against PropTech startups within the industry, sales for those that may not yet be ‘disruptive’ can be fragmented, which can cause them to be one of the eight out of ten PropTech startups that are likely to fail.