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startup economics

Commercial Real Estate Investors Struggle to Understand Startup Economics

“There’s a big problem on your financial projections. Call me.”

That’s only a slight paraphrasing of a recent email from one of our angel investors. I had just sent this person a copy of a presentation I was working on, asking for feedback. As the Co-founder & CEO of an early stage tech startup in commercial real estate, a lot of my job is casting, and recasting, the vision of what my company will accomplish, and keeping everyone driving in the same direction. I called this angel investor later that day.

“You’re projecting negative operating income through Year 20XX. Why would investors at the next stage let that fly?”

Now we were getting to the root of the issue. I explained to this investor that the negative operating income was by design, as we would leverage further investment to grow faster and expand our product, not to profit in the short term. In reality the operating loss would be driven by hiring more software engineers, in order to execute on our ambitious product roadmap. I cited tech company examples like Amazon and Uber as companies that recognize and purposefully take a loss in order to expand to new markets, hire top talent, and change the game rather than just play ball. Those examples helped it click, and we had a productive conversation about our growth plans.

I don’t fault the initial response to our plan at all – this angel investor does a lot more investing in commercial properties than he does in tech startups, and while the goal of both is to put capital out in order to collect more later, they follow vastly different strategies.

In a real estate project, you never want to risk losing money. Success in real estate investing is a portfolio full of cash-flowing investments, a healthy IRR, and little to no losses. Doubling your money is great, but losing your money is unacceptable.

Success for a tech startup, even one dedicated to the real estate industry, has a very different measure. Entrepreneurs (and their early investors) are shooting much higher, usually for 100x+ gains, and they accept two truths:

  1. There’s an outsized risk of failure (otherwise anyone would do it).
  2. There’s a longer lead time to profit (so it takes exceptional patience).

It makes all the sense in the world for real estate investors to participate in the burgeoning real estate tech scene. These are people with rich experience, connections, and know-how, and it gives them another way to capitalize on those strengths besides acquiring that next property. It’s smart diversification, and when done well, angel investing can net huge returns. But don’t be fooled, investing in real estate tech startups is nothing like investing in real estate. You’ll need to shift into a completely different mindset.

Real estate tech startups would kill to have you on board, investing in their startups and helping them learn and grow. Just recognize what you’re getting into – these investments are risky but hugely rewarding when you get it right. And as with everything else in life, make sure to enjoy the journey while you strive on towards the destination.

I have the privilege to represent my startup StackSource and the entire real estate tech ecosystem as the only real estate startup presenting at the SXSW Accelerator Pitch event next week in Austin, TX. Many of the nation’s top venture capitalists will be there, and I’ll fight a very different battle with those seasoned tech investors, who probably don’t understand the real estate industry. Their questions will be different, their perspective will be different, but I know I still have the same goal: cast the vision of what the future of real estate can be, and invite others along for the journey.

Propmodo is a global multimedia effort to explore how emerging technologies affect our built environment.

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