The Real Deal New York

Welcome to real estate’s tech graveyard

You might not hear about it, but there are plenty of industry startups dropping like flies

January 01, 2016
By E.B. Solomont


(Illustration by Chris Manfre)

UPDATED: 2:50 p.m., Jan. 22: The failure rate for startups is high — anywhere from 75 percent to 90 percent, according to industry estimates.

And if that weren’t enough, here’s another discouraging fact: Unsuccessful companies typically shutter within 20 months of being funded, according to venture capital database CB Insights.

So despite the enormous amount of capital being deployed to unleash a real estate tech revolution, the chances are strong that the real estate startups currently pushing themselves as the next big game changer will flop. 

There are currently 175 companies in the real estate tech space nationally, said Noel Fenton, a co-founder of Silicon Valley-based Trinity Ventures. “Some may go out of business, others will consolidate,” he said. “Ninety percent of them will not be around in five years.”

Trinity, one of the earliest and most prolific investors in the sector, has invested more than $725 million in startup companies, including $56 million in real estate ventures such as commercial listings platform LoopNet and the online transaction system Dotloop for completing paperwork associated with real estate deals.

Fenton said today’s crowded landscape is characteristic of the early innings of a tech boom. “There’s an excess of startups out there,” he said.

A “historical” look back supports Fenton’s early-innings theory.

Three-quarters of venture-backed startups that were funded between 2000 and 2010 didn’t return capital to investors, according to research by Harvard Business School lecturer Shikhar Ghosh.

Venture capitalists “emphasize the successes but they don’t talk about the failures at all,” Ghosh told the Wall Street Journal in 2012.

Ryan Masiello, co-founder of the office leasing analytics startup VTS, another company in Trinity’s portfolio, said when his company launched in 2011, there were few competitors. “Fast forward, there are [more than a hundred] companies that have raised capital in this space,” he said. “A lot of them have great ideas and great concepts, but they will not be billion-dollar businesses.”

One of VTS’s early competitors, 42 Floors, for example, started off strong but has since struggled. The company has raised an impressive $17.4 million to date, including a $12 million Series B round that closed in January 2013. But in March, it laid off half of its staff — shutting down a year-old brokerage business — and refocused on its core listings product. “We’ve got some new stuff to announce in 2016,” said founder Jason Freedman, who declined to elaborate at this time. “We listened to what brokers wanted and we think we have something they’ll love.”

Meanwhile, VTS, formerly known as View the Space, has raised $32 million to date, including a $21 million Series B that closed in July.

Nick Romito, VTS’s other co-founder, said startups will sink or swim based on who can reach $2 million in annual revenue, a threshold he said is a good predictor for whether the founders can get enough traction to build on early success. “We’re multiples of that,” said Romito, whose firm counts some of New York City’s biggest landlords, like SL Green Realty and others, as clients.

Many failed startups — even those that began with seemingly winning ideas — were simply not financially viable.

tech-Graveyard-feature-quoteIn June, San Francisco-based Campus, a startup that launched in 2013 and began renting mini dorm-type apartments in Manhattan and San Francisco, closed when it was unable to pay its bills. During its short run, 23-year-old CEO Tom Currier opened 30 co-living houses with 150 residents, garnering multiple headlines and attention from Silicon Valley’s startup community. “Despite continued attempts … we were unable to make Campus into an economically viable business,” Currier wrote on the company’s website at the time.

Similarly, New York City-based Retail MLS, a multiple listing service for the notoriously opaque retail market, shuttered in 2015 after five years because it failed to attract financial backing from investors.

“Because it was a free service, we needed investors to fund it until we could get to the point where we could charge people,” said founder Benjamin Zises, a former broker at Mogull Realty, who raised roughly $2 million in seed funding.

“For various potential reasons, we couldn’t get a VC firm to write us a check,” added Zises, who declined to expand on those reasons. Zises now works at a marketing agency, [L]earned Media, as a partner with his brother Sam, where he handles marketing for real estate clients among other roles.

Another New York startup, Clean Cube — which installs high-tech lockers in non-doorman buildings for laundry drop-off and pickup — is operational but the core founders have moved on, leaving the business in the hands of the cleaning operator.

Zach Aarons, a co-founder of MetaProp, a New York City-based real estate tech accelerator, which mentors startups, said he expects a wave of consolidation to occur in the real estate tech startup world as more companies go out to raise Series B funding and later tranches.

“As you see the market tighten, they’ll look to sell or combine to realize some synergies,” he said.

Of course, consolidation can bring mixed results. It can mean a big payday for company founders but may also be the end of the line for the startup itself.

San Francisco-based RentJuice, a rental broker service launched in 2009, was shut down in May, just three years after the startup was acquired for $40 million by Zillow. (In 2013, co-founder David Vivero launched Amino, where users can search for a doctor and book appointments.)

Similarly, BuyFolio — a New York City-based service that allowed residential agents and their buyers to collaborate on a shared database of listings — was discontinued after it was gobbled up by Zillow in 2012. The purchase price was not disclosed. Founders Susan and Matt Daimler were recruited into the Zillow fold: Susan Daimler is now general manager of StreetEasy, while Matt Daimler is Zillow’s vice president of strategic initiatives.

Fenton said established real estate companies such as landlords and management firms need to be careful about the startups they do business with to ensure their partner is around in five years, given the high failure rate among startups.

But Zises said he still believes the concept of a retail-only MLS is “inevitable” in the same way StreetEasy and Zillow were. “Part of it is, is the market ready for it and is there someone ready to make the investment you need to do it?”

Correction: An earlier version of this story erroneously stated that Vornado Realty Trust is a client of VTS.