Proptech Has Taken A Step In The Right Direction But Needs Far More Than Diversity Clauses To Diversify, Leaders Say

Proptech, one of real estate’s most successful but least diverse sectors, is attempting to address its racial and gender inequality gaps by going directly to the source: money and how it should be invested.

In the midst of real estate’s racial reckoning, a group of nine U.S. venture capital firms publicly committed in late August to bringing more diversity to the table in future deals with the use of "diversity riders."

These riders, with which venture capital firms affirm they will give their "commercial best efforts" to steer investment dollars toward partnerships with more diverse investors, are now being challenged by some proptech leaders who say they are concerned the initiative is flawed and doesn’t match the moment.

Because of the crucial role venture capital plays to proptech companies' success, these riders have the potential to give a large swath of new investors access to the $31B and growing real estate tech sector. 

"On the one hand, you need VCs and venture capital money to bet on a very early stage startup that might not even have any product," said Simon Abboud, a real estate and construction venture associate at Plug and Play, a global seed and early stage venture capital company. "Without venture capital money, it’s very difficult to actually push innovation."

The diversity rider commitment is by a group of prolific lead VC investors — Fifth Wall being the most prominent real estate specialist — and that caliber has some proptech experts particularly excited about the initiative's potential.

“If a startup is raising, let’s say $15M, their dream, at least in real estate, would be having Fifth Wall Ventures [involved], for example, or any of the big VC firms," Abboud said.

"If those leading investors are starting to invite smaller, diverse investors, this is where it’s going to be very interesting because finally those big rounds will be more open to more types of investors."

The rider initiative is a direct outgrowth of this year's societal awakening to stark racial inequalities in industries across America. Alejandro Guerrero, a principal of Act One Ventures, one of the firms using the rider, has said the death of George Floyd was the impetus for his creation of the clause. 

"What we created, and what dozens of firms and founders have already committed to, is a call to action that is abundantly clear, and by signing up for it, committing to the language, you know exactly what you’re getting into," Guerrero said in an email to Bisnow.

The venture capital industry lacks diversity and proptech investors say their specific sector has the same shortcoming, which has limited the opportunity for wealth creation and entrepreneurship among diverse founders.

Data on diversity within the U.S. proptech sector in particular is scarce, but information for venture capital as a whole depicts a stark imbalance. One percent of VC-funded startup founders are Black, according to nonprofit Transparent Collective. The sum total of U.S.-based, venture-backed Black founders is less than 400, according to People of Color in Tech, even as more than 10,400 companies received venture funding last year. 

The investor side is noticeably more lopsided, according to Adam Demuyakor, managing partner at Los Angeles-based venture capital firm Wilshire Lane Partners. Demographic info gathered in 2018 by Richard Kerby, a partner at Equal Ventures, shows that 3% of the venture capital industry is Black (an uptick from 2% in a 2016 tally) and 18% is female (an increase from 11% in 2016).

Because of the size of the problem, some venture capitalists, while praising the diversity rider initiative, told Bisnow they had concerns follow-through wouldn't necessarily occur because the rider isn't tied to results. The term "commercial best efforts," which roughly equates to leaving no stone unturned, doesn't force enforcement. 

Andrew Ackerman, a managing director focusing on real estate and construction tech for early stage venture fund Dreamit Ventures, said he found the goal laudable but questioned the use of the term commercial best efforts.

Demuyakor said it has been his experience that "there is a fairly low bar to prove you've put in commercial best efforts."

"I find it really interesting in a lot of ways, partly as a statement of principle, but the devil is kind of in the details," said Ackerman, who is based in New York. "It's an absolutely laudable goal, but in certain industries it's going to be hard to find specialists who will also be led by diverse investors."

Guerrero said of the lack of enforcement, "This is the criticism I’ve heard the most, but it misses the big picture. Sure, the rider does not have the teeth to force enforcement but that was never the point.

"Both flexibility and an understanding that all funds are different are baked into the rider. But the commonality all venture investors share is the term sheet. This is the one moment in time when we are all doing the same thing no matter the size of our funds."

That position leaves some proptech investors in the space cautiously optimistic.

"I was happy and elated and still am," Demuyakor, who is Black, said of the firms’ announced use of diversity riders. "I’m extremely hopeful that it will result in the type of change that I think everyone is trying to look for in these respective industries.

"That being said, I say cautiously optimistic because you want to definitely see that there's follow-through."

The leading commercial real estate specialist announcing it is going forth with the rider, Fifth Wall Ventures, didn't respond to a request for comment. Leading proptech specialists like MetaProp and JLL Spark declined to comment.

Shawn Hill, an African American partner at Chicago-based Moderne Ventures, which invests in tech companies serving a variety of property types, said he thinks of the diversity rider as a "great step" but one that needs to be paired with other internal ones. He said the initiative is comparable to the National Football League's Rooney Rule, which required team owners to interview at least one ethnic minority for every open senior position and which saw early success after its 2003 establishment since fade over what the NFL ascribes to an embrace of the letter but not the intent.

"You can have the rule in place, you can have everybody behind it and you can have all those things. There are just ways to get around it," Hill said. "When it’s not inherently cultural to what you do, then it doesn’t become practice. It’s a box that has to be checked."

For Hill and others, a lot of progress will depend on leadership makeup and networks.

Moderne Ventures was founded by Constance Freedman, who launched and managed the National Association of Realtors' venture fund, Second Century Ventures, in 2008. Thanks in large part to Freedman being at the helm, Moderne Ventures is rather diverse for the industry, according to Hill, who is, alongside Liza Benson as partners, joining Freedman in the firm's leadership.

"You’ve got to start by your own team page. If I am a minority founder looking for a venture fund and I go to a team page and no one there looks like me, I’m going to be discouraged," Hill said.

"Many people are saying there just aren’t that many companies, right. That’s, I think, the lazy response that I keep hearing. We look for the same people in the same place — your networks don’t really change."

In that respect, Hill cited another finding of Kerby's: about 40% of his sample of about 1,500 venture investors came from either Stanford or Harvard. 

For Wilshire's part, Demuyakor said it has developed a standard where at least half — but ideally more — of its portfolio founder teams or management teams have either a woman or an underrepresented minority. On top of it being right to give underrepresented groups more opportunity, he said studies by McKinsey & Co. and others linking diversity with better performance mean venture capitalists have a fiduciary duty to improve the level of diversity in their investments. 

The same goes for diversity within venture funds themselves, an arena in which Hill said he and others are taking a wait-and-see approach.

"I think everything is a great step," Hill said. "I think if you talk to a lot of other minority investors, the proof is always in the pudding."