How Blackstone Picks Proptech Firms To Fund And Where It Will Be Looking Next

Every quarter, Blackstone gathers heads across its portfolio companies and asks them something simple: Where are all the challenges in the business? 

“We look at commonalities, whether it's building entry, tenant engagement, construction management, whatever it may be, and we start kind of distilling down to ‘OK, these are the biggest challenges we're seeing across our portfolio,’” John Fitzpatrick, Blackstone's chief technology officer of alternative asset management technology, told the audience at CREtech this week.

“We start mapping which companies solve those particular challenges, and we have a proptech database that we share between Blackstone and our portfolio companies,” said Fitzpatrick, the lead technology executive across Blackstone's real estate and private equity businesses. “I think in the last three months alone there have been 500 entries.”

That is the first step for investment, he said: trying to ease the pain points Blackstone hears from the companies it owns.

For some proptech firms, it has already borne fruit. Blackstone’s strategic investment in acquisitions manager Dealpath, announced in February last year, came about that way, he said, after portfolio firms started using it.

“Three of our major U.S. platforms are asking for this, there’s probably something there,” Fitzpatrick said. "Let's go and spend some more time with that particular company, we looked at, it made sense."

Blackstone’s proptech investments in the past have also included funding for cloud-based leasing and portfolio management system VTS and rental platform Zumper.

Across the board, investment in the space ramped up significantly in recent years, and it shows no sign of slowing down. Proptech companies drew $9.7B in funding in the first half of 2021, the strongest start to a year on record, according to JLL. The industry rebounded after a pandemic-induced dip in funding between 2019 and 2020. 

Commercial real estate firms, in particular, are funneling money into the space at a rapid clip; several companies that have in the past just focused on property investment have invested in funds that back proptech startups, and several major initial public offerings have bolstered investor confidence too.

For Blackstone, Fitzpatrick said data management — which he considered part proptech and part tech — has been first and foremost, but the company is now looking at more traditional proptech to address certain sets of issues for which the industry is trying to find solutions. Building improvements, such as construction and facilities management, and ESG solutions are areas of interest. Blackstone is also focused on the tenant experience, tenant engagement and the short-term rental space. 

“Probably the biggest one on asset management and accounting and tools to better, you know, support the portfolio and make better decisions. So those are the broad trends and a lot of sub-trends within those,” he said. “[But] if we had this conversation a year from now, it's going be three or four more pillars, because a lot of those didn't exist a couple of years back.” 

Fitzpatrick was in conversation with Brad Greiwe, the co-founder of proptech-focused VC firm Fifth Wall, who said that founders should be broad-minded in where they search for funding.

“There are conversations I have with prospective founders who only view the financing realm as being VC or bust, like, the only way I can fund my business is if I’ve got that VC logo on my cap table, or else I'm going to fail,” he said. “For a lot of these companies, I think the VC dollars is the wrong capital." 

Fitzpatrick’s advice to proptech founders is to look at the companies that have been successful, and where they sourced their capital.

“Proptech doesn't, at least not right now, it doesn't really translate exactly like regular technology," he said. “I think you're gonna get way more value with a true sort of real estate-backed company or real estate-backed [equity] shop that understands the space much better.” 

That struck a chord with The Real Link founders Emily and Lara Casano, who have created an online transaction closing platform, which they launched this week and are bootstrapping as they seek investment.

“There's a lot of money coming into this space and a lot of opportunity, and it's very much needed, because it's so far behind the residential boom in tech,” Emily Casano said in an interview at their booth at CREtech. “Now is a great opportunity, because people are looking for solutions, they're looking for ways to make their business more efficient, or workflow more efficient. And we're just one piece of that puzzle.”

Her sister and co-founder, Lara, said they are now shifting their thinking on how to seek funding to scale the business.

“It’s not always the VCs per se, but for a company like ours, focusing on partnering with somebody in [traditional real estate] … Because they have more of an understanding of the actual real estate fundamentals,” she said.

For those who have raised money, it wasn't always an easy road, given the uncertainty in the past 18 months. NaviatorCRE completed its latest investment round in July, scoring $17.2M in Series A funding, and its Chief Operating Officer Kevin Shtofman said there times leading up to the raise where he wondered if they were going to have to be flexible to close the deal.

“There were a few months in there, where I thought, ‘Oh, we're gonna have to get more creative with the terms we offer, or the structure we use,’ but we ended up getting a great partner [after] we met with a lot of investors who weren't at all excited about what the space is gonna be,” he said. “I think a lot of real estate companies are now finally admitting to themselves, they are real estate companies first, technology companies second, if at all.”

Seattle-based NavigatorCRE is a cloud-based data management and data visualization software program for the commercial real estate industry, which counts Blackstone among its clients. 

Shtofman said the labor crisis is the biggest thing looming over the proptech industry right now and could cause a wave of consolidation.

“The hardest thing to do right now is to hire, finding good talent that has the experience you need, the subject matter expertise we need at a reasonable market rate price is extremely hard,” he said. “So I think that's going to force like-kind companies and entities to merge together so that they can bring loads of talent together to grow their business."