- SPACs are taking real-estate tech companies public, and real-estate companies are raising SPACs.
- It's partly timing: Proptech companies are maturing at the same time as the SPAC boom.
- VCs said proptech, which brings new business models to an ancient industry, is well suited to SPACs.
Between 2020 and 2021, almost 500 special purpose acquisition companies were filed. In 2019, there were only 59. This tidal wave is due to a combination of low interest rates, big public-market valuations, and large financial incentives for SPAC sponsors and private investors. And now this surge is coming to the vast field of real-estate and construction startups known as property technology.
SPACs from real-estate incumbents and generalists alike are on the hunt for deals, offering an attractive route to public markets for young real-estate tech companies.
It's been quite a streak.
Opendoor, Porch, smart-glass company View, and smart-home company Vivint have all used SPACs to go public, while more traditional real-estate firms, such as CBRE and Tishman Speyer, have also raised their own SPACs and are hunting for deals.
Meanwhile, smart-access-control company Latch, digital closing company Doma, and digital imaging and virtual-tour company Matterport have all announced SPAC deals that have yet to close. And proptech investors are beginning to jump in, too, with the largest proptech fund, Fifth Wall, also raising its own SPAC.
"With public-market valuations being as high as they've been, many investors are finding discounts today in private markets and are quickly adding value by taking those companies public via SPAC," said Eli Randel, the chief strategy officer at Crexi, a commercial real-estate marketplace and data provider.
Why the SPAC spate now? As with any courtship, the relationship between SPACs and proptech is marked by timing, compatibility, and at least a little bit of downside risk.
Let's unpack what's happening.
The right fit for going public
In funding, as in life, timing is everything.
"What's happened is that the emergence of SPACs is happening to coincide with this wave of proptech companies that are ready to hit the public markets and have their big liquidity events," said Travis Putnam, the cofounder and managing partner of Navitas Capital. He was an early investor in both View and Matterport.
And proptech, unlike a lot of tech tech, is connected to the physical world. The traditional targets of venture capital are software companies, where the "move fast and break things" ethos allows for quick progress and relatively low downside when companies make a mistake.
The same doesn't apply for proptech, where even proptech software companies have to navigate laws and regulations related to real estate and the fact that their work is tied to real assets.
This is even more so the case with companies — such as Opendoor, which buys and sells homes, or View, which makes actual building materials — that are directly involved in the physical world. So proptechs often require long runways and lots of capital before reaching the kind of finances that would do well with the traditional disclosure guidelines of an IPO.
"One advantage of SPACs is that you can talk about where a business is projected to be in the next 3 to 5 years," Dave Eisenberg, a founding partner at Zigg Capital, said on a Clubhouse chat with Insider in February. "You can't make these forward-looking projections for traditional IPOs."
Eisenberg said that proptech shares a similarity with deep tech, or companies that are building advanced, science-fiction-worthy technology such as robotics and quantum computing without a short-term, commercial application. In both cases, investors are focused more on the possibility of exponential growth than on current revenue and profit.
The looser disclosure requirements may provide the boost that novel business ideas need to catch on. Of course, this also means that their initial disclosures are less detailed than the traditional S-1.
That's part of the risk: SPAC investors don't get the information they need before investing, potentially putting public investors at the same levels of risk that private investors take when they invest in new companies.
"You can practically substitute a seed-stage pitch deck as an S-1," said Zak Schwarzman, a general partner at MetaProp, highlighting how different the reporting requirements are.
SPACs have seen trouble in recent weeks, with the IPOX SPAC index falling 20% from its peak in February, a sign that they're entering a bear market, Bloomberg reported. JPMorgan analysts said earlier this week that we may be near the peak of this SPAC cycle.
Case study: Opendoor
SoftBank-backed Opendoor is the most notable and instructive of the proptech SPAC deals thus far. It was taken public by investor and financial influencer Chamath Palihapitiya's many SPACs, in what was maybe the buzziest proptech SPAC deal.
At that same Clubhouse event, Merritt Hummer, a partner at Bain Capital Ventures, said Opendoor doesn't "have the attributes" of a classic software company, and that it might not have been able to go public for a long time "if it had not been for the SPAC mechanism."
Since going public, it's been a bumpy ride.
In Opendoor's S-4 filing, the company projected that it would reach a positive EBITDA, a common measure of profitability, in 2023, by more than doubling its 2019 revenue and total number of homes sold in 2019. The company came to these projections even after projecting that 2020 and 2021 would see less revenue and homes sold because of the coronavirus crisis.
Opendoor's stock closed at $31.25 on its first day of trading after the SPAC merger closed, but opened at $22.52 on March 10. Still, the company's roughly $13 billion market cap is a major premium to its last private valuation round in 2019 at $3.8 billion.
Opendoor announced its 2020 earnings during the first week of March, and exceeded the projections it had set for the year in its S-4. This occurred even though the company announced that revenue fell 80% in Q4 of 2020 after the company paused home purchases earlier in the year.
Investors who bought shares in the company because of its projections about changing the home transactions are now experiencing the challenges of the pandemic reality.
That acquisition pause has mostly worked its way through the system, but the company is now facing rising mortgage rates, which could lower home-price appreciation. Home-price appreciation was a major factor in the firm's higher margins in 2020, helping to offset its lower volume in home sales.
In a research note, Ygal Arounian and Chad Larkin from Wedbush Securities said that "while real-estate tech stocks have been under pressure as Treasury yields have been rapidly rising with inflation fears strengthening, there is no change in our outlook that iBuying will take significant market share over time, and that Opendoor's market leadership positions it well."
Which is to say: Opendoor may continue to see short-term challenges, but the company's long-term story, as the leader in the iBuying segment it helped to create, has analysts expecting the company to outperform the market over time.
The SPAC has helped Opendoor raise the money it needs to turn its S-4 revenue projections into reality: It already had $1.5 billion in cash before raising an additional $860 million with an equity raise.
On the firm's most recent earnings call, Eric Wu, Opendoor's CEO and cofounder, said that those funds would be used to both deepen the company's penetration into markets where it already operates and to double operations to 42 markets by the end of the year, up from 21 at the beginning of the year.
"Long-term, we plan on being live in more than 100 markets and servicing over 70% of the homes in the US," Wu said.
The future of SPACs and proptech
While the SPAC boom in proptech has accelerated over the past six months, it is already shifting. Michael Rudoy, the CEO of insurance-technology company Jetty, said in the Clubhouse chat that some SPACs are starting to invest in private rounds.
"Certain SPACs are investing in private rounds seemingly as a way to build pipelines for themselves," Rudoy said. "Given how competitive the market has become to find and attract scaled proptech companies, this may prove to be a savvy strategy for SPACs with longer-term time horizons."
Zigg Capital's Eisenberg added that this new exit option could lead to some unexpected, "less elite" companies going public over the next two years, as the boom in SPACs looks through a dwindling field of companies.
Schwarzman, of MetaProp, put it more sharply: There are only so many unicorns to go around.
He said, "It does feel like: 'How can there possibly be these many quality targets?'"
