The Real Deal New York

The VC vice: Why some in the industry see venture cash as a mixed blessing

While startups are gunning for money, it comes with serious pressure and pitfalls
By E.B. Solomont and Konrad Putzier | August 03, 2018 07:30AM

Venture investment comes with serious pressure and pitfalls (Credit: iStock)

The surge in venture investment has been a boon to real estate tech startups, nurturing hope that the industry can finally catch up to more technologically advanced sectors like finance. But some see the flood of venture cash as a mixed blessing.

For starters, raising millions of dollars early can make it harder to raise money later — that’s because the initial money can come with a high valuation that future investors may balk at.

Related: The venture capital gold rush

Ali Hussain, COO of Latch, a smart access system startup, said real estate entrepreneurs often benchmark their company valuations against “hypervaluations in Silicon Valley.”

And while it may be “exciting and you bring on a lot of money and on paper you feel very good, you start to see a lot of problems 18 to 24 months out.”

That’s if the startup is still around in 18 to 24 months.

Mihir Shah, co-CEO of JLL Spark — a real estate venture fund launched by the global brokerage JLL — pointed out that “most startups don’t succeed.”

An added challenge for real estate startups is how slow the industry’s been to adopt new technology. That, Shah said, is where funds like JLL Spark come in — to act as a bridge between entrepreneurs and real estate’s end users.

MetaProp’s Clelia Peters said some of the best-funded startups are being accelerated at an unnatural rate, eviscerating competing companies in the process and creating a “winner takes all” environment.

Related: Who’s holding the purse strings?

What’s more, while traditional real estate firms focus on the bottom line, VC-backed companies spare no expense in their quest to grow top-line revenue.

“That’s what allows venture-backed companies to be so disruptive,” Peters said. “They’re being paid to take as much risk as they can.”

Adam Meshekow of Leap, a startup that provides rent default insurance, said VC investors sometimes focus more on their own short-term profits than a startup’s long-term health, which can lead them to push for questionable business decisions.

“You should be doing what’s good to run the company, not what’s good for the VC company at that time,” he said. “The VC company is only looking to get that five-times return minimum on their money, and that’s it.”