I have a fantastic idea to sell to corporates. I’m going to develop a tool that uses APIs to scrape social media platforms, deploying Artificial Intelligence to build a profile of what employees most enjoy doing in their time off. I will then use automated robots to mix up the associated smell, pumping this mix into the airflow closest to their desks and thus improving employee’s happiness, wellbeing and productivity. Boom! As productivity enhancement is hugely beneficial for business, my new venture idea is already worth £2.0m and I will seek seed funding based on that valuation to build the system. The business may be worth even more if I can get some funding to qualify for a SEIS tax scheme – which basically means that private investors can overpay by 50%.
Whilst the above is a cynical pitch, the real estate industry is being disrupted by the Proptech revolution from all sides, whether in asset selection, construction or occupation – with many ideas focusing on just a small part of the entire value proposition. So how do you value these emerging businesses, especially given that some are just a single idea whilst most will ultimately fail?
As a real estate investor, the traditional mindset of applying a value to a tangible asset or a multiplier to an established EBITDA does not work, as it may be that neither exists. Instead, investors are being asked to apply a valuation multiplier to revenues or just on projected revenues once a product has been established. In some cases, where there has already been a seed fund raising, the valuation methodology is even more basic, being along the mindset that “if the first fundraise was off a value of £Xm, and we have spent all that cash, then the second fundraise must be off a valuation that is 2x £xm”, even if the business is still loss making.
It seems to me therefore that there is an element of the “emperor’s new clothes” at the moment, with the mere muttering of the buzzwords of proptech, blockchain, Artificial Intelligence or machine learning being used to justify valuations – even if there is no actual technology in the product. The reality is that many initiatives are still in the data aggregation phase, whether collecting publicly available information or private data from a held portfolio.
Whilst it is undoubted that the emerging Proptech will therefore have a far reaching impact on our industry, it is important to ensure that any investment made (whether at the corporate or user level) is on the leading edge and not the bleeding edge. A rush to invest in a new startup company, or to adopt their software, is high risk and disruptive to everyday business after all.
So in the meantime it is worth recalling one of Steve Jobs most famous quotes that: “You’ve got to start with the customer experience and work back toward the technology – not the other way around.” I.e. don’t get sucked into an idea that sounds wonderful. If you can’t see yourself being the end customer of the product then you shouldn’t be making the investment…