With Funding Down 42%, Proptech Startups Struggle To Hang On

The once-booming proptech sector needs a lifeline to keep it going.

Proptech startups spent the previous several years raising billions of dollars from investors hungry to get in on the ground floor of the next sector-disrupting idea. 

But as 2023 draws to a close, it has become clear that investors are now far more cautious about proptech than they were in years past, as many of the big-ticket startups were unable to meet their lofty goals for growth. With the flood of funding drying up, startups are finding themselves in dire straits. 

Running out of money and options for survival, some proptech firms have been forced to either go out of business or lay off large portions of their staff and recapitalize debt to extend their runways as long as possible. 

This year, the proptech sector raised $11.4B in venture capital funding, a 42% drop from the $19.75B invested last year and well below 2021's $32B, according to the Center for Real Estate Technology & Innovation.

"Venture capital has become a lot more scarce to come by, even for companies that have relatively strong business models rather than a track record of execution," said William Sankey, co-founder and CEO of Northspyre, a cloud-based software engineering proptech company. 

Since Northspyre's Series B, its latest round of funding, closed in early 2022, he has been able to extend the runway of his company's investment by spending sparingly. Some peers in the industry haven't been so lucky, he said. 

"Investors are saying … I'm not happy with the numbers, growth rate, your level of cash efficiency and profitability,” Sankey said.

More than 3,000 private venture-backed U.S. companies have closed their doors this year, according to PitchBook data reported by The New York Times. While the data isn't an exact total because some companies quietly shutter, the ones whose closures were reported publicly had previously raised a collective $27.2B in venture funding.

Some of those companies that closed their doors did so because they found themselves out of funding and struggling to find a path forward after previously raising money at sky-high valuations. 

"Valuations for frothy rounds have become more scrutinized, and quite candidly, the companies that are folding or are in trouble are pre-pandemic-valued companies," CRETI founder Ash Zandieh said. 

Short-term rental operator Zeus Living reportedly shut down in November and laid off all employees. The company had raised over $150M from investors during its eight-year run, including its 2019 Series B round that included backing from Airbnb.

Veev, a unicorn apartment proptech startup, was reportedly on the verge of shutting down late last month. After a $400M Series D round in March 2022 that valued it above $1B, the company struggled to raise additional funding this year, leaving it facing closure. 

Smart glass provider View was valued at $1.6B when it went public in 2020, two years after raising $1.1B from SoftBank, but it has struggled to keep its doors open this year. It laid off 23% of its staff in March and moved out of its Bay Area headquarters in October. 

And WeWork, one of the most stunning cases of a proptech company flying too close to the sun, filed for Chapter 11 bankruptcy protection in October after going public in 2021 and capital raises from the likes of SoftBank that valued it at $47B in 2019. 

The sector's headlines were quite different from 2019 to 2021, the golden years for proptech funding. 

"It was a frenzy, you know. You had a zero-interest-rate environment, which was causing people to go further out on the risk curve," said David Eisenberg, a proptech founder who sold his business to CBRE in 2017 and now runs VC firm Zigg Capital.

In 2020, 425 proptech companies took in $23.8B in investments, and in 2019, the sector received $31.6B in investments, according to CRETI.

"The industry has now adjusted to a more disciplined underwriting, more disciplined investing and more thoughtful entrepreneurship in this business, because quite candidly, the cost of capital has become extremely expensive across venture debt and all other financial vehicles," Zandieh said.

Last year, the Federal Reserve began steadily raising interest rates in an effort to curb inflation. In March, the collapse of Silicon Valley Bank and Signature Bank sent the venture capital sector into chaos and created new headwinds for proptech funding. 

Startups that had banked with Silicon Valley Bank were forced to tighten up books, review their capital standings and come up with strategies to stay afloat. Companies across the board braced themselves for more caution from investors and lenders moving forward, especially with skyrocketing interest rates.

"We had a banking crisis in March that caused a lot of fear in the overall environment, and then rates kept rising. … Less people wanted to go farther out on the risk curve because safer investments became more in demand," Eisenberg said. 

Investors this year have changed the way they approached backing proptech companies, becoming more hesitant to fund startups, Zandieh said.

"I would call it cautious capitalism," Zandieh said. "Everyone's waiting on the Fed to see how they react in 2024."

The types of proptech companies that have been impacted the most are those seeking later-stage funding, said Chris Yip, partner and managing director of RET Ventures, a proptech-focused venture capital firm. 

Companies that have previously raised large funding rounds are finding this year that investors have become pickier, Zandieh said. They are now holding the keys to a company's success and have been analyzing their investments to see if the proptech unicorns they were promised in 2021 are sprouting a horn. And many of them aren't.

"The reality is that the ventures that did not succeed are the ones that received general funding and had no proptech or real estate," Zandieh said. "That's not to say that all of them didn't succeed, but a good number of them did not." 

Some of those that have managed to stay alive are making drastic moves to keep the doors open, such as widespread layoffs. In addition to Veev, Zeus Living and WeWork, Tishman Speyer-backed Latch slashed nearly 60% of its workforce, and fix-and-flip startup Stoa reduced its headcount by 80%.

Sankey said some founders have resorted to recapitalization or debt restructuring to stay afloat, and growing quickly after that is "almost impossible," he said.

Looking ahead, Zandieh said investors will be disciplined in their funding, and the startup landscape is shifting in reply as founders realize they must have rock-solid pitches and clear paths to profitability to get backing.

"As we enter a new era of proptech, we're seeing less companies enter the space, more disciplined and qualified companies pitch creating ventures," Zandieh said. 

To survive through next year, startups will have to make tough decisions like laying off staff, Sankey said. He said proptech executives are grappling with myriad emotions, but the most prevalent one is anxiety.

He said they are thinking: "Are they going to be able to raise again? When will they be able to raise again? Do they have enough runway to get to that point where they can raise more money? Because things don't seem as certain as they would have been in the past."