Internal Hamilton Updates; Family Offices; Blockchain Land Trusts; The Title Report; Construction Inefficiencies; Manufactured Home Lending; Funding News; and more...
Week of September 5th
Feast or Famine
“ Those who don't study history are doomed to repeat it. Yet those who do study history are doomed to stand by helplessly while everyone else repeats it.” - Tom Toro
It looks like most industry insiders didn’t expect the residential real estate market to change tack so drastically, going by the layoffs and the plunge in stock prices, whether it’s the residential brokerages, mortgage lenders or proptechs.
While I feel sorry for all those that have lost their jobs in this downturn, I’m a bit surprised that the industry was so flat-footed in its response - was the change really all that unpredictable? What did we learn from 2006, 2013, and earlier cases?
Return-to-sanity: slowly but surely?
Harley, Walt, Hans and I saw Instashowing in March 2021, at which time their valuation was $12M. All they had was an app created by a college senior with zero clients or traction. And a month later, their valuation jumped to $30M - all because they got an infusion from Pete Flint from NFX. Still no clients or traction. And all for an app that could be easily replicated by two half-decent software engineers. As Harley pointed out, there was “a rush to fill the void created by Zillow’s acquisition of Showing Time for $500M”. We passed on the deal but it didn’t matter - Instashowing’s round was oversubscribed.
We reconnected with Instashowing’s founder last month and discovered that he's moved on to start a home-equity lending business because “Instashowing hasn’t gotten traction since selling to the MLS’ is hard”. Indeed.
I also spoke with two VCs that were very active in the residential proptech space in 2020 and 2021- and both of them are nursing their wounds. One of them is backed by a publicly listed company, which reported a big hit on their 10-Ks.
Deal Flow
Traction is increasing - we had 42 inbound deals in August. We’re also revisiting some of the deals from last year that we liked but thought were rich. Among them, Ecomedes.
Pipeline
Close:
We’re closing on Kadence next week.
In diligence:
Follow-on rounds in Inhabitr
Theses
One of Hamilton’s focus areas is affordable housing, just given the depth of expertise we have in-house.
We are doing a deeper dive on proptech solutions to the affordable housing problem – and kicking it off with an internal discussion this Friday at 10am.
My Ask:
Survey: We have modified the survey so it’s relevant for all members (you can N/A if the question is irrelevant). Can you please fill this out – link here https://forms.gle/kQ5RJFgFu2AqC7g59
Let us know if you’d like to join the Affordable Housing discussion or help with DD on any of the deals in our pipeline
Enjoy the Reads,
Prashant
General VC/Macro:
Family Offices Investing in Venture Capital, Silicon Valley Bank & Campden Wealth, (9):
In 2021 FOs were ~5% of all venture capital
FOs are continuing to deploy capital into venture given market correction (great opportunity to invest in lower priced rounds)
FOs are re-upping with existing managers; there is a higher bar for new managers
Geopolitical risk and inflation are the biggest concerns for FO’s
North American FOs tend to show the following differences vs. the rest of the world:
More allocation to venture
More allocation to funds (vs. direct investments
Less exposure to ESG/Impact
FOs are looking to increase exposure to:
Specialized funds, thesis driven funds, and funds with diverse leadership
Climate change/ESG focused funds
Series A and Series Seed rounds
Secondary share purchases (a great opportunity to buy during the downturn)
-Summary by TJ Fleming
Real estate-focused fintech startups feel the heat, TechCrunch+, (8):
The economic downturn has indeed struck real estate-focused fintech as seasoned startups (6+ yrs) who made as much as $250M revenue in 2021 had to shed more than half of their workforces
Despite the market outlook, startups have to deploy a lean-and-mean mentality to increase their survivability
A very interesting angle that many fintechs are exploring is to create products to help nonprofits move capital, raise, and distribute capital more efficiently, hoping to create a significant social impact
-Summary by Zhi Zheng
The missing pandemic innovation boom, The Economist, (8):
A dilemma that the US or global economy is facing is that productivity hasn’t increased as recent investment rose
Although some optimists think that benefits from investment usually come 3-5 yrs later, others worry that the pandemic innovation boom may never arrive
One contributing factor is that investment did not accrue towards initiatives that lift productivity (i.e., due to supply chain constraints, companies spent nearly 10% of total investment building up inventories, which has nothing to do with productivity)
Additional factors include working from home, which introduces inefficiencies, and money spent on cleaning and other measures to ensure safety. This money should/could have been spent on R&D to increase productivity
-Summary by Zhi Zheng
Proptech:
Real Estate Tokenization + Lofty, PitchBook, (9):
Tokenization has clear value proposition and multiple drivers for adoption (i.e. low barriers to entry, no long processes of paper documentation, more liquid and efficient, and better security)
Some of the hurdles include large capital required to increase consumer awareness and increase adoption, unproven business models, and financial market tailwinds that constantly drive investors for alternative investments
Lofty, one of the market participants who raised $4.5M, is creating some differentiation by emphasizing the selling process and creating a robust secondary market. With its coin pricing model, Lofty’s platform enables users to purchase and trade properties entirely via cash, increasing scalability by encouraging more non-crypto natives to use its platform.
-Summary by Zhi Zheng
Zain Ventures Describes Their Investment in Fabrica, Zain Ventures, (8):
We passed on Fabrica in 2021 based on the conclusion that a) it would be difficult to overcome regulator/ compliance/ legal/ historical barriers that have prevented alternatives to title insurance in the past and b) ICE/MERS has a better chance of consolidating the industry/process than a startup like Fabrica.
That said, here are some reasons Fabrica might be successful:
Cryptos and NFTs are becoming regulated, which will help drive their adoption, not hurt it.
Propy recorded a Burlington, VT deed on the Ethereum blockchain this year
Fabrica is NOT claiming they will entirely replace title insurance - which bodes well
Still some barriers: While it's probably just a matter of time before the more efficient, more secure blockchain technology gets adopted in the property records/title space, it could take decades vs. 5-10 years. Fabrica might just be too early.
-Summary by TJ Fleming
VTS Bucks the Funding Trend, WSJ, (8):
CBRE puts $100M in a $125M round for VTS at a $1.7B post-money valuation
This is an “up” round from VTS’s $1B valuation in 2019
CBRE still develops much of its new technology in-house. But the VTS investment reflects a recognition by CBRE in recent years that it is sometimes better to invest in startups than develop technology internally.
-Summary by TJ Fleming
A Sign of the Times: Reali Shutting Down, Bisnow, (8):
The shutdown comes just one year after Reali raised its $100M, Series B round led by Zeev Ventures in August 2021. The company has raised more than $290M in debt and equity funding since its 2016 founding.
Management attributed the shutdown to the current challenges in the real estate and financial markets and the unfavorable capital-raising environment.
-Summary by TJ Fleming
Housing:
Racial Bias in Manufactured Home Lending, Urban Land Institute, (8):
Manufactured home have a huge role to play in the affordable housing crisis: The average sales price for new manufactured homes, excluding land, was $108,100 in 2021, according to the US Census Bureau. For comparison, the average price of new site-built homes, excluding land, was $365,900.
Chattel financing accounted for 63.9% of all manufactured home purchase loans to Black households and more than half of manufactured home purchase loans to Hispanic households. Among white borrowers, the chattel share was only 36.9%.
This racial discrepancy is notable because chattel loans generally have 2x higher interest rates, shorter term options, and much higher denial rates than manufactured home mortgages. There are only 5 lenders that write ~85% of all chattel loans.
As the FHA and Ginnie Mae explore ways to increase manufactured housing’s accessibility, they must remember that these inequities, if left unaddressed, could widen the racial homeownership gap.
-Summary by TJ Fleming
A Housing Reset is Underway, John Burns Real Estate, (8):
Investor pullback: Rising borrowing costs have driven many investors, including fix and flippers, out of the market. 58% say that at least some of their acquisitions are no longer feasible
SFR pullback: Rising borrowing costs have also slowed the single-family rental market (American Homes, Invitation Homes, etc.)
Homebuilding industry pullback: homebuilders are dropping land deals or renegotiating terms and price to better reflect today’s market fundamentals, negatively impacting the current and future businesses of everyone involved in land and home development.
Apartment acquisitions pullback: While rising mortgage rates create increased rental demand, rising interest costs have cut into investor profits, causing asset buyers to pause and cap rates to rise as market uncertainty proliferates.
Remodeling pullback: Remodeling is also slowing as higher rates limit HELOCs and cash-out refis.
-Summary by TJ Fleming
New apartment construction to match 50-year high, Axios, (8):
2022 is expected to be the 2nd year in a row in which more than 400,000 apartments were completed, with 423,000 delivered nationwide in 2021, making a historic 50-year high in multifamily construction.
The new supply of units could eventually bring down rental prices, which have recently soared alongside housing prices.
-Summary by Claire Hu
CleanTech/ClimateTech:
Climate Tech’s Urban Clusters Might Not Emerge Where You Expect, Bloomberg, (8):
House of Representatives is passing the inflation Reduction Act, which includes $369 B for decarbonization, giving another boost to ClimateTech/CleanTech sector
However, to become the next climate tech cluster, like SF bay area or Singapore, this place needs to have some climate-specific elements (e.g. Favorable geology for long-term storage of carbon dioxide, large supply of feedstocks for making new net-zero-carbon materials, a significant market for selling clean power)
Knowing the characteristics of the next climate tech clusters can aid Hamilton to better source climate tech deals with a somewhat reasonable valuation.
-Summary by Zhi Zheng
Construction:
Why are there so few economies of scale in construction, construction physics, ZZ (9):
Economies of scale don’t typically exist in construction because all the cost controls are achieved via competitive bidding, not by taking advantage of any high-volume product method that's used for manufacturing or transportation
Another reason is that the construction industry is highly fragmented with the top 4 homebuilders in the US accounting for only 20% of the market share; the largest multifamily developer accounted for as little as 2% of the total market
There are also factors contributing to diseconomies of scale (i.e., higher coordination expense as company grow bigger, farther distance to travel to reach potential customers, increase demand effects, etc)
-Summary by Zhi Zheng
Title:
The Title Report: 08.29.22 Edition, The Title Report, (9):
Equity Real Estate Services focuses on IRA-funded transactions
The proptech company, through a partnership with Grid151, launched IRA Title Pro, a national title company powered by Invested United Title Corp. that focuses on real estate IRA closings.
IRA Title Pro provides an experienced contact well-versed in real estate IRA transactions and can close on average 11 days faster than a title company that doesn’t specialize in IRA real estate transactions.
The company also provides tools and resources for investors including closing cost calculators, a short-term rental estimator, and a property intel report
Zillow partners with iBuyer Opendoor
Zillow and iBuyer Opendoor Technologies Inc, announced a multi-year partnership that will allow home sellers on the Zillow platform to request an Opendoor offer to sell their home. Financial terms were not disclosed.
Milestones closes $10 million funding round
Homeowner portal Milestones raised $10.3 million in Series A funding.
Updater, a relocation technology platform, led the investment round.
Other strategic investors include Second Century Ventures (the strategic investment arm of the National Association of Realtors), Peerage Capital, McLaughlin Ventures, WAV Group Ventures, T3 Partners and Sellers Shield.
The raise comes after 3 years of product development in stealth mode and will help fuel a go-to-market strategy, according to the company. Milestones aims to deliver a homeownership portal with consumer offerings for managing healthcare, personal finance and education.
-Summary by Claire Hu