The State of Proptech Exits
Unpacking Proptech: A data-driven series on advancing built world innovation
In Part 1 and Part 2, I reviewed proptech financing trends, sources of capital and investor types, scaling and fundraising lessons from the past five years, and potential conflicts of interest. That brings us to one of the most exciting topics — exits.
Diving into the Data
According to Pitchbook, there have been 390 exits in proptech between 2018 and 2022. For the purposes of this analysis, an exit was defined as either an IPO, M&A, buyout, or other (namely, a merger of equals or reverse merger). The definition of an exit excludes PIPEs (private investment in public equity), second public offerings, debt offerings, and secondary transactions. There are limitations to the dataset due to the sparseness of data on reported exit enterprise values, particularly for M&A and buyout deals. However, some of the insights below can help proptech founders think strategically through their fundraising and exit strategies.
Roughly two-thirds of proptech exits were characterized by M&A (260 deals); another 30% by buyout (115 deals); and just over 2% by IPOs (9 deals). These exits generated over $37B of liquidity, which is likely understated due to the aforementioned data constraints.
In terms of proceeds, $37B across 390 companies equates to an average exit of $96M per company (simple baseline). The nine IPOs represented more than $6B of total liquidity, so roughly $670M per company. When you analyze just M&A exits, the average per-exit value is approximately $111M. Per the Pitchbook data below, that number is consistent with the broader VC-backed company exit trends, where roughly 56% of all M&A deals are defined by exits of $100M or less.
That said, the M&A dynamic in proptech is unique. I’ve always argued the buyer universe is more finite than that of other verticals, consisting of a smaller pool of buyers with robust corporate development efforts willing to pay higher multiples. The data largely substantiates this view. Over the last five years, the most active proptech acquirers have been: RealPage (nine deals), Lone Wolf Technologies (six deals), Opendoor (five deals), MRI (five deals), Elm Street Technology (five deals), Compass (five deals), CoStar (four deals), Building Engines (four deals), Lightbox (four deals). While the rest of the list includes many other large, strategic acquirers, the acquisition activity by these players is predominantly defined by one or two deals over the last five years. What does this buyer concentration imply? For the average proptech, a dynamic that makes it challenging to both capture the attention of a likely buyer (i.e., founders are almost building their companies to be purpose-bought by a single strategic) and drive a competitive M&A process.
Due to data limitations, additional insights on per-company exit values on buyouts cannot be calculated.
Takeaways
If history is any indication and the above averages hold, proptechs can look to M&A as their most likely source of liquidity, and a $100M exit value as a reasonable goal. Anecdotally, and consistent with my prior analyses, many proptechs today are valued in excess of $100M post their Series A or B. I have argued that these valuations are unsustainable, and largely driven by the growing number of non-institutional VC-led financings in proptech (although institutional VCs are not free from blame).
Per Cooley, 21% of Q2–2023 financings were down rounds (compared to virtually 0% in Q4–2021) and “pay-to-play” provisions were up 2x relative to the 2021 market average (5.4% of all rounds vs. 2.6%). Furthermore, according to recent data from Carta, the percentage of rounds with structure, specifically greater than 1x liquidation preferences and participating preferred, are up over 4x and 3x, respectively, from the pandemic troughs. Arguably, given the general financing and valuation trends we have discussed in this series, proptech companies are more susceptible to facing (and having to accept) structure in future financings as a way to solve for valuation / dilution expectations for founders vs. derisk potential returns for the investors.
These data points are not hypotheticals — this is a reality for many companies today, proptech included. Many companies have “kicked the can” by raising additional bridge rounds through convertible notes and SAFEs from their existing investors and other strategics (who tend to be less valuation sensitive) to avoid repricing. But, with a VC market correction in full swing, that capital is due to dissipate in the coming quarters as companies burn through their runway. Furthermore, convertible notes and SAFEs (particularly when “stacked” at various caps and discounts) have troubling structural and signaling effects that often result in failed financings, exacerbating the tension between prudent valuation for a business vs. dilution impact to the founders. Some companies will achieve breakeven and ride out the venture market storm, but many will have no choice but to shut down or fundamentally recapitalize and restructure their businesses. The latter is emotional and hard, but, in my view, necessary. Effectively restarting a company takes willing founders, willing investors, and willing board members to “take the medicine,” and do so quickly.
For proptech founders who find themselves in this position, I would love to hear from you and be happy to provide counsel.
