This blog is an expanded version of a presentation given by Ed Bartlett, Head of Innovation Advisory at M7 Structura, on March 3rd 2020 as part of ‘Unissu Connect’, a virtual event that was held in 13 locations globally. The talk happened during the COVID-19 UK outbreak but due to its 100% digital format was still able to proceed.
If any PropTech founders reading this article want to discuss their business or require any help or advice in these challenging times please do get in touch at firstname.lastname@example.org.
Hunting the PropTech Toothbrush
I’m going to propose to you that with real estate technology we shouldn’t be spending our valuable time hunting “unicorns” but instead building “toothbrushes”. Before I do that let me first let me set the scene as to why I believe this.
As chartered surveyor with 25 years’ experience in real estate, of which the last 10 have been building technology businesses, I have seen a slow but steady digital transformation happen. My journey started in 1997 where I experimented with the very early mobile devices for appraising and surveying properties, but the market or technology wasn’t ready. I then took the plunge in 2011 to co-found a PropTech business called Kykloud, a mobile surveying and capital planning solution, which was bootstrapped funded, scaled and then sold to a US PropTech business called Accruent, which in turn was sold to Fortive for £2bn. Having founded and sold one start-up and worked in one of these rare ‘unicorns’ in our market, I can first-hand understand what is required to scale a technology business. At the start of 2020, I took on the leadership of the innovation advisory function at M7 Structura. On top of this I also run a small family property business in the hospitality sector. I feel that this diverse experience across real estate technology, property, corporate innovation and the VC world gives me a unique perspective.
Looking at my role now, it’s fair to say that M7 Structura offers something unique within PropTech investing. We are a European-focused venture capital firms investing at the Seed to Series A stage. The team brings together deep expertise in the real estate industry, as well as extensive experience in running real estate technology companies and executing investments across venture capital, strategic and angel investing. The firm was established as a partnership with M7 Real Estate, and we aim to create value for our portfolio companies and investors by using our industry understanding and knowledge to connect real estate industry participants with transformative technologies. To further support this value creation, we offer an innovation advisory service to strategic real estate participants, which I lead.
Our Investment themes
What do we like to invest in and why? When I talk to PropTech founders or potential investors there is always a conversation around our focus which is anchored around three broad themes:
1. Construction enablement — for example solutions addressing environmental sustainability or health and safety in construction
2. Enhancing Investability of Real estate — for example solution data and analytical tools improving transparency and insight in real estate
3. Asset Optimisation — for example solutions meeting the increasing need for space on demand
We see the investment landscape in a holistic way as shown below:
Our wide “life cycle” of technology interest, for example covers:
- ‘Planning, Design & Construction’ e.g. BIM & digital twins;
- ‘Financing’ solutions e.g. lending & underwriting platforms;
- ‘Investment Management’ e.g. investor reporting;
- ‘Investment Acquisition & Disposal’ solutions e.g. automated valuations;
- ‘Commercial / Residential Sales & Lettings’ solutions e.g. VR/AR/3D visualisation;
- ‘Real Estate & Asset Management’ solutions e.g. real estate as a service enablement; and,
- ‘Facilities Management’ solutions e.g. Hardware tagging.
Success on a stick
This brings me back to the toothbrush or what I like to call “success on stick”.
With over 7000+ software applications in our market covering the whole lifecycle I have set out; how do you define “success”?
I have always used one simple test:
“The toothbrush test”
This is a test that Google uses to define success. Google won’t invest in a business that doesn’t pass the test: if a product becomes so essential you need to use it at least twice a day without fail it’s a success, irrespective of the wider macro-economic market context.
What springs to mind in our industry may include:
- A mobile app your surveyors use 8 hrs a day
- A valuation tool that is used for every valuation you do
- A mapping tool used for every planning application
- A health and safety tool used on every construction site you operate
You can also call this “product market fit” or one step beyond that “business model fit”. Within our industry today there are very few unicorns and even less toothbrushes. How do I suggest we change this?
Firstly, by embracing failure.
Failure is Inevitable
Success will not come before some level of failure in its many forms and in many cases initial failure leads to a pivot or change in direction. This type of failure is critical to learning.
There isn’t one entrepreneur who hasn’t pivoted their business in some shape or form, and that’s healthy.
Service Delivery Failure
Failure in achieving product market fit shouldn’t be confused with a failure in service delivery. This photo shows a pothole in a road that has been beautifully repaired, joined and white lined, but the adjacent road has been left untouched. This type of failure is common within our industry and presents a huge opportunity for technology solutions to improve customer experience in all areas of property and real estate.
Build > Measure > Learn
How do we manage such uncertainly and failure? Through measured experimentation.
In 2019, I was lucky enough to have taken part on a programme mentored by the Lean Start-up team led by Eric Reis. We managed to build and launch a brand-new data analytics product called “Accruent Data insights” in less than 6 months. This was not without a lot of experimentation and some pivots along the way. I learnt to accept that failure is part of the process of innovation and experimentation is the tool of choice for seasoned and successful innovators.
The innovation model followed was “Build — Measure — Learn”. For it to really work you start with deciding what you want to learn, how you will measure success and only then build and start by building experiments. But not every experiment is a success, by its nature there are failures and we learn from those failures in search of product market fit. We need to focus on the risky assumptions around:
I’d like to drill down into these three areas and illustrate with real examples from the property technology world.
With desirability, we are talking about the customer’s willingness to buy. Most start-ups expect to build and sell an end to end enterprise solution from the very start — the “if we build it, they will come” scenario.
The areas where assumptions are the most challenging are:
1. The target customer and ‘jobs to be done’ (JTBD)
For example, if you are selling facilities management software, there are multiple customers or buyers. They are the FD/CFO, the head of FM, FM operatives and the building user — each one has different drivers behind their decision making. The drivers are SOCIAL e.g. “I must appear to be on top of managing my facilities budget”, EMOTIONAL e.g. “help me feel in control of my team”, FUNCTIONAL e.g. “help me get the updated reports to my manager every month on time every time”. Each JOB has to be tested and extracted ideally through ‘voice of customer’ interviews.
2. The problem being solved
This is about testing the value proposition and proving the problem is worth solving in terms of the problem’s intensity (a mosquito bite vs. a shark bite), its frequency (daily or yearly occurring) and its density (one customer impacted vs. the whole property market).
3. The outcomes desired
To illustrate, I recall when in the early days in the marketing of a new surveying solution, we firmly believed that the outcome desired was giving surveyors tools to survey faster and our strapline was “survey in half the time”. In fact, the speed of surveying on site wasn’t the outcome the customers wanted to solve; they wanted to spend the same amount of time on site. The outcome desired was a higher quality of the survey report and a reduced time it took to generate the report. A subtle but critically different outcome.
4. Behavioural change needed
In my experience understanding the change management process associated with technology adoption is more difficult to manage than the technology itself. One example I recall is around a property surveying application that allowed the customer to survey 10+ data points about a building asset. Historically this involved two separate teams of surveyors gathering 5 data points each. One would look at the current condition of the asset and the other would take a view on the future capital replacement works needed. We developed a solution that could do both. What we didn’t appreciate was the challenge of having the two teams adjust their working practices. The software implementation failed as result.
Viability is perhaps the area of most interest to me when scaling a technology business.
The main assumptions to be tested and experimented with are around:
1. User acquisition challenges
User or customer acquisition challenges can maybe best illustrate with the online residential estate agency market. This is a market that’s seen never ending experimentation with numerous online and hybrid online models, but you could argue the none have been proven or deliver a viable product market fit. Some commentators believe the online agency can only achieve 10% of the property market despite having spent £100’s of million on acquiring market share. The CAC (cost of customer acquisition) is high in a market where 1 million houses sold per year and there are many high street and online agents pushing fees downwards. The ongoing fighting for paid Google results from searches have pushed up the cost of ‘clicks’ from £2 to over £50 a click.
2. Gaining referrals
Testing assumptions around a referral-based model should be made as early as possible. A business that can show referrals generate business is an immediate green flag as the customer becomes your sales team. And when you can show your customers selling you to their customers, then you have a virtuous circle. Sometimes you have to test which is the best initial route to market to build this circle, for example many successful solutions are targeted at real estate consultants as the long term the strategy is for the consultant to demonstrate a product’s benefits to their clients, the property asset owners and operators.
3. Aligning product to buyer strategy
Testing the customer’s intent is critical. Most solutions that came to the market in 2012–2018 were aimed at making existing paper based or MS Office based processes more efficient. We now see solutions pushing the boundaries into deep tech using AI, machine learning and robotics, all assuming the market is ready to automate processes. The reality is somewhat different. I have seen many AI backed technologies that claim to reduce the cost of real estate processes. Great technology, but if the client has already offshored the process and can deliver that process at a fraction of the software equivalent cost, you are fighting an uphill battle unless you focus on data analytics and the value that can be gained from the data.
4. Dealing with competitive solutions
Every pitch deck we see contains the 2×2 competitor chart with the solution in question positioned in the top right quadrant. I like businesses that are not in the top right, yet. Many of the markets’ leading solutions have faced severe competition in their journey, for example take the ‘unicorn’ VTS who had to fight off Hightower through merger, as well as make some product pivots along the way. I recall many competitive battles with Kykloud; they are a heathy part of the process.
5. Generating revenue
How will you generate sufficient revenue to build an attractive and viable business? Most PropTech businesses in the UK are sub £1m annual revenue. Even the ones achieving viability may take 4–5 years to get to £5m in revenue. It’s a reality that our market is still in its infancy.
Assumptions around feasibility or deliverability will often impact how a solution continues to be used at the stage you move beyond the MVP (minimal viable product):
1. Technical / engineering challenges
Looking at technical assumptions, let’s take BIM (building information modelling) which is now mandated for all major UK government projects, with most private developers following suit. With BIM you typically build a digital model of a building and this can require as many as 5 separate digital models using aggregation platforms on top. An average 3D model includes millions of data points and models can be many GB in size. The aggregated models are simply huge. Data compression and viewing tools have had to be built to allow the data to be accessed, but data volumes still present a significant technical challenge which impacts adoption of the technology.
2. Regulatory challenges
Regulation can be a barrier but also an aid. Many property industry regulations have yet to catch up with technology. For example, if we look at AI based property valuations, AVM models have been used in the residential sector and increasingly in the commercial sector. The technology is excellent but is it feasible when regulatory bodies have yet to change valuation standards to allow its use? On the flip side we see regulations such as FASB/IASB in lease accounting, which encourages adoption of compliant lease management platforms.
3. Internal policy hurdles
Many traditional property businesses apply the same procurement rules to buying software solutions as are applied to buying office laptops or stationery. These checklist based RFI and tendering processes are often a barrier to innovation and you see many leading early adopters of technology, businesses like CBRE or HB Reavis, accepting that if you want to work with start-ups you need a different ‘modus operandi’. We live in a business culture where corporates increasingly want to operate like start-ups, but most start-ups want to be corporates, the two cultures often clash and don’t understand each other. It’s clear that buyers who understand the differences between a start-up and corporate and adjust their policies accordingly get the most value from the relationship
4. Leadership supporting adoption of a solution
We see an ongoing issue within technology buyers in property where a solution is being bought by team leaders who are invested into buying a solution, but the users on the ground are not willing or struggle to invest their time. Understanding and testing this dynamic is critical to success and adoption.
5. Where is the funding coming from?
By early 2020 there were many investors and corporates ready to back this sector, with over $20bn invested in 2019. Understanding the funding landscape is key to feasibility but it’s also driven by external factors and wider global events, as we have seen in recent weeks. The positive assumption to make is that real estate is essential to our economy and underpins the value of every GDP and balance sheet. We will see a temporary adjustment in the funding market and some change in how we use real estate, and this presents a bigger mid to long term opportunity for technology in my view.
6. Having the right team
Assuming you have the right team is one of the most risky assumptions in any technology business, but in real estate there are things I look for, namely experience of the sector and ideally having team members who have already successfully built and exited a tech business. A rare commodity still maybe, but one that makes a business significantly more investable. The other critical factor is having the right spread of skills, namely development, support, customer success, product management, UI/UX and increasingly data science. Not necessarily a person for each but coverage.
To conclude, I’d say that building and backing “the toothbrush” is the ultimate prize, even more so today where we feel there will be a renewed focus on ‘essential’ software and tools in every walk of life.
Taking an idea that starts on paper through to business model fit is hugely rewarding, as it gives technology investors and founders what they really seek, which is the execution of a business model to a successful conclusion. It takes many leaps of faith and much experimentation, which for me is the enjoyable part of the journey.