VC Funding of the Finance & Investor Sector in PropTech – A German Overview

by | Aug 20, 2020 | Digital Transformation

In the latest blogpost of our insight series on the real estate industry in Germany we took a closer look at the category Design & Build.

In this article, we will elaborate on the category Finance & Invest within the real estate industry, with a strong focus on the funding landscape and most dominating business models in this category. Moreover, we will give an outlook on upcoming Finance & Invest trends that incumbents should not miss out on.

Top trends discussed in this post:

  • Crowdfunding/investing startups are currently dominating the Finance & Invest segment in real estate
  • Tokenization via blockchain technology will dominate Finance & Invest in real estate
  • iBuyer startups in Germany are not as successful as in the US and our reasoning behind that

For this series, we analyzed PropTech startup data from Crunchbase and Builtworld on a timeline from 2013 to 2020. According to the collected Finance & Invest data, 24 startups were founded in total, with a peak of six startups founded in 2017 as shown in the chart below.

In order to better understand the category, let’s take a look at the total amount of funding invested into the 24 startups.

In total, 90.3m in equity was invested in the category Finance & Invest. However, only 8 out of these 24 actually received funding.

The top two funded startups were Exporo (real estate crowd investing) with $66m funding and Brickblock (digital fund management software in real estate) with $6m funding. In chapter II of this blog post, we will elaborate further on the most dominating business models of Finance & Invest.

How does that compare with US standards? For startups founded in 2013 and later within the American segment Finance & Invest, the total funding volume amounts to approximately $4.8bn, which is 55-56 times the German investment volume(!). Knowing that US investments are well ahead of other markets, the big difference to German investment amounts is nonetheless astonishing. Germany lags behind in terms of industry funding in comparison to other countries. Considering the large investment gaps between the US and Germany for example, one could argue that upcoming funding and hence disruptive business model trends are yet to emerge within the Finance & Invest segment. In the following, we will elaborate on its most dominating business models.

Crowdinvesting and Digital Sales Platforms in Finance & Invest

Based on our collected data, the most dominating business models in Finance & Invest in PropTech are real estate crowd investing/funding with Exporo ($66m funding volume) and Finexity ($2m funding volume); consequently, both outpace the other businesses models in terms of accumulated funding volume. In addition, the real estate crowd investing/funding subcategory with a total of 7 startups successfully founded since 2013 is the most dominant subcategory.

At its core, crowdfunding can be used to finance private projects, innovative products, real estate, start-ups, established companies and much more. The special thing about crowdfunding is that a large number of people support a project financially and thus make it possible. Real-estate crowdfunding is therefore a way of raising money for real estate investment by reaching out to a pool of investors to contribute a small amount of money towards a project.

Consequently, incumbents are confronted with alternative investment solutions for private investors. Smaller investment tickets, increased transparency and reduced risk allow startups to continuously take over market share. Nevertheless, some incumbents like Engel&Völkers with their digital invest platform have already noticed this development and therefore are also setting their foot into that area.

Tokenization in Finance & Invest | The New Wave of Blockchain in Real Estate

Besides crowd investing and digital sales platforms, business models related to the tokenization of illiquid assets on the blockchain are broadly emerging. Real estate tokenization is the process of digitally representing a single property or a portfolio of properties on a blockchain-based system (Alphapoint, 2020). The resulting tokens are most often used for ownership representations. The startup Brickblock has received a considerable amount of $6m funding in 2019. Brickblock’s mission is to digitize capital markets by allowing fund managers to raise capital and attract investors with reduced management effort. This is achieved with its funds-as-a-service technology platform that provides fund managers with a blockchain-based investment solution.

Meanwhile, the real estate industry lacks velocity in transitioning from paper-based to digital processes. Even though incumbents might still argue that the blockchain lacks use cases and regulation is obstructing technology adoption, none of those arguments stand true. In 2020 the BaFin started regulating asset tokenization. Asset tokenizations were taking place as early as March 2019, where a first real estate vehicle carrying an approx.

€2m property in Germany was tokenized by Brickblock. In order to not lose the connection to startups, incumbents have to react now.

Investment and Business Model Trends in Finance & Invest in the US

As mentioned earlier, the US often acts as a trend barometer for upcoming trends in Europe and Germany. Hence we took a brief look at current investment signals within the American Finance & Invest segment that may become highly relevant for the German real estate market. According to a recent Tracxn report published in May 2020, the most dominant investment signals occur in crowdfunding, Peer-2-Peer (P2P) lending, investors marketplaces and portfolio management. These general trend categories are already becoming visible in the German market.

However, a few disruptive models have not yet made it to the German market. Firstly, in the US so-called rent-to-buy models like Home Partners of America (founded 2012, $797m total funding). These companies provide tenants with the opportunity to lease residential properties with a right to buy in the future. Other examples are ZeroDown or Landis. In Europe, we could identify the exemplary British Wayhome. For the German market, we at Stryber recently launched MyHomely, which is a rent to buy business model and currently looking for institutional investment partners.

Secondly, online brokers like EasyKnock offer sale-leaseback programs in which homeowners can unlock their property’s value. This allows them to liquidate part of the estate and continue living in a mixed owner/tenant setting for as long as they would like, with the option to buy back equity or completely sell and move.

A third model that has made it to various European countries are instant Buyers (iBuyers). These provide a fast home sales process with instant cash offers (at a small discount), which in turn can be used by customers to make more compelling cash offers on future house purchases. US examples are Knock, Homeward and Opendoor and have attracted a staggering $2bn funding in total. Across Europe, examples are the Italian casavo, Spanish Tiko, French Homeloop, or Turkish Evtiko.

Some German companies offering those services are e.g. Deinimmokäufer or Homeday, but have not achieved a dominant market position. One of our personal hypothesis why this model does not run as successful:

The average German mind wants to rather own property, earn the highest amount possible for a sale and does not change homes as quickly as it is the case in the US.

For incumbents, this means to act now to not be left behind. Besides the already mentioned trends above, these two business models will contribute to shape the new norm of Finance and Invest in real estate.

Closing Remarks

Startups are and will continue to disrupt the Finance & Invest segment by challenging industry incumbents and the status quo across the value chain. Big beneficiaries will be customers and the startups themselves will slowly take over more market share. Industry players that manage to conquer these challenges by being open to adapt their own business models and step into unknown waters will survive this trend. Others however, will face severe problems and challenges in the future.

Written by Marc Seitz (Venture Architect) and Tom Taborsky (Venture Architect)

 

Marc
Written by Marc