When most people hear the word technology they think of hardware gadgets and software hacks. But those are only the most recognizable iteration of what technological advancement can be. Sometimes, technology is doing something everyone else is already doing in a new and different way.
Today, Fifth Wall Ventures is announcing what might be the biggest built environment technology specific fund ever. They have raised $212 million and have already, silently invested in 7 companies to the tune of $60 million. This is a huge deal for a new VC firm. But, I would argue that they are not a pureplay VC. During an interview with founders Brendan Walllace and Brad Greiwe, I found out that their unique approach to everything from focus to LP communication would, by my previous definition, make them a technology company in their own right.
Brad and Brendan seem to have done things differently from the start. They both used technology to reinvent a standard practice when creating their first companies. Brad’s was Invitation Homes. After the housing crisis, everyone was talking about buying distressed properties. His background in private equity made him realize how institutional funds could play a role in getting these homes up for auction back into the mainstream market. The hard part would be convincing them that it was worth their time to purchase these relatively tiny assets one-by-one. He created a technology that would allow scalability for the purchase and management of a large national portfolio of single family homes for rent. Blackstone provided funding for the company, but it was the technology that allowed it to scale dramatically. After a recent IPO, Invitation Homes is now worth about $6.7 billion.
Brendan started down the traditional path going from Princeton to Goldman Sachs real estate division and then to Blackstone’s real estate private equity group. But, when he went to Stanford for his MBA he caught the startup bug. His first company, Identified, was a way for recruiters to find low-skilled labor using Facebook’s API and that company was acquired by Workday to become the backbone of their new recruiting software. He also co-founded Cabify, the largest ridesharing service in Latin America.
So, when the two decided to focus on investment in the real estate space, one they both understood intimately, it comes as no surprise that they did not go the traditional route of jumping straight into VC. Instead, they started leading syndicates on AngelList where they became one of the most active investors in real estate and hospitality technologies (sometimes these syndicates were under an LLC called “Grey Wolf”). Using their network and by harnessing the connective power of AngelList, they were able to make a name for themselves long before they ever had to take on a limited partner making angel investments in companies like Roofstock, Point, Common, Tripping, Clutter, Clara and others.
“With Grey Wolf, we were able to prove our investment thesis and learn a lot about what we thought the best fund structure would look like,” Brendan told me. “What entrepreneurs cared about was access to major institutional property owners across all asset classes. Everything hinges on a small number of contracts but there weren’t venture funds that could open those doors for them.”
So, as is their nature, they decided to do things differently by creating a venture fund that is uniquely designed for real estate related technology. “Most generalist funds take a bottom-up approach. They look at the teams, the product, the technology, the market size, and they then speculate on if major corporates will adopt that technology. We instead take a top-down approach, starting with the corporate partners we have and looking at their pain points to then identify potential solutions where a commercial partnership can be game changing for an early stage company.” These partners are LPs in Fifth Walls fund and include one player in every major real estate vertical. The list reads like a who’s-who in corporate property utilization. Partners include CBRE, the largest commercial brokerage, Prologis, the largest industrial REIT in U.S., Lennar, the second-largest home builder, Macerich, one of the largest mall owner, Hines, one of the largest office developers in the U.S., Host Hotels, largest hotel room owner, Equity Residential, largest apartment owner in U.S. along with companies like Lowes Home Improvement and the Rudin family.All of these investment partners were hand chosen. Since they decided to not have competing organizations in the fund they wanted to make sure that they had buy-in from partners. “We chose the one corporate in each category that we thought was the most philosophically committed to innovation,” Brendan explained. “We wanted to see dedicated working teams that were committed to finding and adopting new technology.” He knew from experience that even though a company might make a bet on a technology, if it is not supported from the highest levels, then it had a good chance of getting orphaned. They had also seen that once one of their LPs started adopting a given technology, their competitors would likely be forced to adopt and that solution would often become “industry standard”. In real estate, only a few companies want to be the first to adopt technology, but none of them want to be the last.
Having investors that can also be first adopters of a technology is not new. But, Brendan and Brad have used technology to change the nature of the relationship between fund and partners. They have created an architecture that allows all of their investors to access the huge database of company info and industry insights that they are constantly compiling. This networked hierarchy makes the due diligence process infinitely more scalable and allows LPs to actively find companies that they think could help improve their processes. It also allows the partners to collaborate with each other as well as with the fund itself. Brad put it this way, “we invest in a company because we know that powerful partnerships will be formed. The only way to do that is to build an architecture of engagement and collaboration between all the LPs in our fund.”
The types of companies that they look for fall into two buckets. One is what they call the “enablement tech”. These are companies that help alleviate some of the problems that plague the real estate process. “There are a lot of companies that fall into this category because real estate is still so inefficient and new technologies are competing with Excel spreadsheets and paper ledgers,” Brendan joked. An example of investments in these types of companies is leasing broker CRM and data company VTS alongside Trinity and Insight Venture Partners. Another would be Notarize, a digital notary service where they invested alongside Founders Fund and Polaris.
Notarize was their first investment and I think it shows how broadly the Fifth Wall team views built environment technology. While notaries are not a real estate specific process, property transactions do make up the huge bulk of all notaries done in the United States. They have been able to provide massive traction by facilitating partnerships with all of their LPs who sign a large volume of notarizations in leasing, mortgages, title insurance and other aspects of their business. In addition, Fifth Wall’s LPs have been able to influence regulators to allow digital notaries to be recognizable by state and county clerks.
The other bucket that they are interested in has to do with companies, much like their fund, that use technology to reimagine real estate itself through technology. A great example of that is B8ta where Fifth Wall co-led the Series A with Khosla Ventures. In order to provide a viable brick-and-mortar option to many digitally native products, B8ta leases two-foot by two-foot sections of their stylish retail stores. To provide these producers with the analytics that they are used to from e-commerce sites they have cameras that record everything from how many customers look at the product to how long they spent using it before buying or moving on. Fifth Wall was able to help B8ta expand from a single store in Palo Alto through a partnership with Macerich to many of its malls, including Santa Monica Place, and also into Lowe’s Home Improvement for a creative store-in-store partnership.
Other examples of transformational companies that Fifth Wall has invested in include OpenDoor, a brokerage that gives home sellers a competitive cash offer in as little as one day, and Clutter, an on-demand storage program.
Fifth Wall also has a unique sourcing model for the deals. A large portion of their dealflow comes from the top-tier generalist VC funds, who are typically protective of their portfolios and usually don’t share allocations with other venture funds. However, because Fifth Wall often represents the ‘must have’ contracts for some of their portfolio companies, Fifth Wall has become the first call for many VCs to invest in their prospective or existing built environment technology companies. Fifth Wall has now led deals alongside Sequoia Capital, Khosla Ventures, Founders Fund, GGV, Norwest, Google Ventures, and others.
Today’s announcement is another vote of confidence for the innovations that have yet to come out of the built environment. The proptech sector has long been underfunded and slow to adopt. Part of that might have to do with the oligopoly that seems to exist in almost every segment. The few big, incumbent players have staked out their market share and don’t see many threats from new entrants. But, they are starting to realize the threat that exists when their whole industry gets shifted due to technology. To be part of that shift they need to instill a culture of innovation in their company, actively hunt for new technologies and network with leaders in other sectors. Luckily for the chosen few, Fifth Wall is designed to help them with all three.