Kim founded Formation 8 and was previously a General Partner at Khosla VenturesRead more...
Fifth Wall's LPs include 50 of the largest owners and operators in the real estate space
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed!
While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Brendan Wallace is Co-Founder & Managing Partner at Fifth Wall Ventures.
Prior to starting Fifth Wall, Wallace co-founded Identified, a workforce optimization data and analytics company that raised $33 million of venture funding and was acquired by Workday in 2014. He also co-founded Cabify, the largest ridesharing service in Latin America, and has been an active investor, leading more than 60 angel investments including Bonobos, Dollar Shave Club, Lyft, SpaceX, Clutter, and Philz Coffee.
He started his career at Goldman Sachs in the real estate, hospitality, and gaming group before joining The Blackstone Group’s real estate private equity practice.
Wallace is from New York City and currently lives in Venice. He graduated from Princeton University, where he received his BA in political science and economics. He received his MBA from the Stanford Graduate School of Business.
VatorNews: What is your investment philosophy or methodology?
Brendan Wallace: Fifth Wall is the largest and most active venture capital fund focused on real estate technology. So, we invest in broadly defined technology that is strategic for the real estate industry and major owners, operators and developers of real estate in the U.S. and globally.
We have a unique model, actually, both in how we invest, and in how we’ve structured the firm. While we’re the most active investor in real estate tech, what’s unique about our fund model is that our largest investors are actually the largest owners, operators and developers of real estate, so we’ve actually raised our capital from the most sought after customers and partners and users of the companies we’re investing in. It’s kind of a different asset management and venture capital paradigm, which has implications both for how we invest, but also for how we engage with our LPs. So, to the question of how we invest, Fifth Wall will look for technologies that we think can be uniquely strategic to our strategic limited partners, or can solve a particular technology pain point. The way we assess that is we have an advisory team of all former consultants that sit within Fifth Wall, work with and engage with and intimately understand the business of our strategic investors, and then they will identify technologies that they think can meet those pain points. Fifth Wall will fun RFPs and we’ll find companies in the venture ecosystem that we think can serve those needs.
VN: What are the opportunities you see in the real estate space right now?
BW: We look at both pure play real estate technology, as well as B2B enterprise software for the real estate industry. We do look at some confuser-facing technology that is relevant to the real estate industry, and we’ll also look at what we call, ‘industry strategic adjacencies,’ so infrastructure, hospitality, construction and mobility, where certain technologies can be uniquely influences by the real estate industry.
It’s a massive opportunity and one of the reasons is that real estate is the largest industry in the U.S.; it’s 13 percent of U.S, GDP, it’s the largest asset class and it’s the largest lending category and it’s the largest store of consumer wealth. However, anyone who works in the real estate industry can acutely appreciate that it is tech laggered, meaning it has been a late adopter of technology and is, generally speaking, a low spender on IT. What’s happened, really in the last four years or so, and especially in the time that Fifth Wall has been around since its Fund I and Fund II, is you’re seeing owners of real estate in the U.S., and now globally, recognize that technology is increasingly strategic to their business. That's both offensively, in the sense that they can use technology to generate additional revenue and/or cut costs, but also defensively, insofar as they want to stay abreast of the thematic technological trends that could be disruptive to them. You want to stay abreast WeWork if you’re a large office owners, or stay abreast of AirBnb if you’re in the hospitality industry, because technology has created this sea change that is now starting to impact what I would call a very old world, asset-heavy, incumbent-heavy industry like real estate. Real estate owners never really had to have a point of view on technology previously and now they do. So, one way to frame the opportunity is that real estate is this massive industry and the dam has broken on technological innovation, so there is so much new technology that's now available to real estate owners and operators to improve their business. However, they have struggled to identify ways to access and integrate and partner with those technologies. That’s why Fifth Wall’s solution, which is building this consortium of now of the 50 largest owners, operators and developers of real estate in the world, and its $503 million fund, why that model has been so attractive to those owners.
VN: What's the big macro trend you're betting on?
BW: There are two macro trends that I can comment on. One is, within the venture ecosystem, real estate technology is commanding both more attention and more capital. $12.9 billion was invested into real estate technology in the first six months of 2019, and that is actually more than all of 2017, which is the year we started Fifth Wall, which saw $12.6 billion invested. So, you’re seeing an acceleration of the amount of funding to, interest in, and attention on real estate technology broadly. Fifth Wall is obviously a big part of that ecosystem.
The second trend you’re seeing is that real estate owners have now had a realization and a greater level of self awareness that they need to look to technology to improve their business. Oftentimes they lack a viable solution to do so on their own, and so why I think Fifth Wall occupies this very unique position in the real estate industry is that the real estate industry has, historically, not been a very collaborative industry. However, our first fund, which we launched in 2017, was $212 million with eight of the largest real estate owners, operators and developers, so it was CBRE, Equity Residential, Host Hotels, Hines, Lennar, Macerich and Prologis. During the course of those two years, we expanded the number of strategic real estate investors that we work with from eight to 50, and the number of countries that are represented in those strategic LPs from one to 11. So, you’re seeing both an expansion of the interest in real estate technology from large real estate corporations, and you’re seeing an internationalization of that interest.
The last theme that might be relevant here is that, in many ways, Fifth Wall’s Fund II validates this unique consortium-based venture capital paradigm, which is aggregating all of the largest customers for a particular sector’s technology into a single fund. That gives us an edge as it relates to sharing insights and access and information with our strategic investors, but it also gives an advantage to the portfolio companies for whom we can open up distribution lanes in the U.S. and now globally for their products and services.
VN: You just raised your $503 million fund. How many investments do you typically make in a year?
BW: Fifth Wall will probably, on average, make about 10 investments per year, and we will likely make 25 out of our Fund II.
VN: What stage/series do you invest in and how much is that in dollar amount for you?
BW: We invest in the Series A, B and C stage of venture, and we typically invest between $10 and $25 million per investment.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
BW: We’re looking for companies that have a certain level of maturity from a product development, team development and go-to-market sophistication perspective, meaning we’re not looking for seed investments where there are very high levels or existential and technological risk; instead, we are looking to invest in mature companies that have some product market fit, some reference customers, and have a stronger sense of how to price and take that product to market.
Because Fifth Wall’s strategic investor base represents a who’s who of potential customers for real estate technology companies, we’re looking for situations where we can bring to bear our access and our distribution to offer a significant advantage to our portfolio companies. So, during the course of our Fund I, we’ve structured a number of partnerships that have dramatically accelerated the growth of our portfolio companies. For example, we invested in Opendoor, which is a programmatic buyer of single family homes, and structured a large and impactful strategic partnership with Lennar, which is the largest home builder and one of Fifth Wall’s strategic LPs. We also structured a partnership between Industrious, which is a co-working company, and Hines, which is one of the largest owners and operators of office buildings in the United States, and also one of Fifth Wall’s strategic LPs. So, our model is to identify companies that we can leverage our strategic relationships and bring those relationships to bear, to either add strategic value or partnerships or specifically revenue and contracts to our portfolio companies.
I would not say we’re looking for specific numbers, but one thing we do look to understand is specifically how much revenue we think Fifth Wall can deliver itself through its strategic investor base. For example, about a year ago Fifth Wall calculated the amount of revenue that we had brought into our portfolio companies through our strategic investors, and we found that Fifth Wall brought in $100 million of direct revenue into our portfolio companies. That number is likely higher today, though we have not done a new estimate of it, or recalculated it, but it speaks to the unique value proposition that we can offer, which is we can accelerate the revenue growth of portfolio companies in a way that generalist VC often can’t because they lack relationships in the real estate industry.
VN: What other signals do you look for? Team, product, macro market?
BW: Obviously we’re looking for entrepreneurs that have a really bold and ambitious vision for their products and services. Something that is probably more specific to the Fifth Wall model is we’re looking for a certain level of self awareness and humility among those entrepreneurs in how they understand the challenges of distributing technology into the real estate industry. One has to understand that the real estate industry has historically been one of the lowest spenders on IT, and have historically been late adopters of technology, and the real estate industry is not seen by many entrepreneurs, or by many venture capitalists, as a particularly progressive industry. With that said, it’s obviously changing; Fifth Wall is now a three year old firm and we have $1 billion under management from many of these large real estate owners and operators, so there’s clearly an interest in changing and in becoming more progressive.
In particular, what we’re looking for is an entrepreneur that truly understands the potential of their product, but is really willing to work closely and collaboratively with the strategic investors to integrate their product or service in their business, and understand the challenges of the bureaucratic, structural, and the integration challenges of having a dialogue between an early stage, IT-driven technology company and a real estate partner, which is typically a hard asset, low IT, cash-flow driven business.
One of the things that’s unique to Fifth Wall is we have this nine-person advisory team, which is a big part of our 33 employees today, who work with our strategic real estate investors to identify pain points and identify opportunities where technology can impact their business. Then, when we structure a partnership, and when we contemplate a particular integration, they will help shepherd that through to success. So, it’s one thing to contemplate a partnership, and to envision a future contract between a portfolio company that we’ve invested in and one of our strategic partners, but we really have to roll up sleeves and work in a highly integrated, high trust fashion with our investors to achieve the outcomes we want, and entrepreneurs really appreciate that.
VN: What do you think about valuations these days? What's a typical Seed pre-money valuation and Series A?
BW: Real estate has this very particular advantage, which is that it’s the largest industry and it’s the largest capital market in the United States. So, one thing that we rarely encounter, which I think other generalist VCs do typically encounter in other industries, is that the market is not big enough for the opportunity. When you’re talking about an industry that’s 13 percent of U.S, GDP, nearly everywhere within that industry you’re going to find billion dollar, and multi-billion dollar, opportunities. Oftentimes, these are industries that have, to date, seen little to no innovation and are, for the first time, becoming technologized in a way they haven’t for decades. Real estate is a very large cash flow generative industry that, more or less, sat out two decades worth of innovation; it kind of ignored almost the entire internet and all of mobile. Something really changed around 2016, where they started to look to technology and to adopt it, so what’s happening is you’re seeing pretty torrid growth, especially among our portfolio companies; if you look at a company like VTS, which is leasing asset management software, and which Fifth Wall invested in, that company has grown now to a $1 billion valuation in a very short period of time because they weren’t really competing with an incumbent tech stack inside real estate corporates. The real estate industry really had this slingshot effect of going from virtually no technology in the industry to truly modern, next generation, cloud-based, mobile-enabled technology, with the span of a very short timeframe. The result of that is that both the revenue growth of companies in the real estate tech industry, and the ROI, the actual strategic benefits that are realized by corporates, have been far higher than anyone anticipated. To see that more empirically, you can look at the number of strategic LPs that want to participate in venture; if you look at Fifth Wall Fund I, we were the first institutional fund focused on real estate technology, and when we went out to raise our second fund, one of the reasons we raised it so quickly, and it was so oversubscribed, was that, within the span of those two years, from 2017 to 2019, the landscape of the real estate industry changed so much, and there was now enormous demand for solutions that could give a real estate corporate access to the innovation economy.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
BW: When we would talk to real estate corporates, the eight that came into our first fund, what we saw was that a real estate corporate has three approaches to participating in venture capital and the innovation economy: one is to ignore it, the stick your head in the sand model, which basically had been the real estate industry’s model for 20 or 25 years. The second approach is the do-it-yourself model, which is broadly defined as corporate venture capital, and what we saw was that corporate venture capital in the real estate industry typically under-performed and really didn’t deliver the strategic value because it’s very hard for an organization that is used to buying and selling real estate assets to suddenly investing in venture capital. The third model was the approach we pioneered at Fifth Wall, which is could we build a consortium of real estate owners and operators across different sub sectors of the industry, share insights, have the benefit of almost bulk distribution, where we would go to one startup and offer so many distribution channels to help accelerate their growth, and where we could actually encourage our real estate partners to share ideas and insights and learnings and best practices amongst themselves.
In some ways, to our surprise and to the industry’s surprise, when we launched our first fund people had never seen a venture capital model quite like that, where you had all of these industry titans, from all these different sub sectors, now working together to invest in technology. The financial and strategic success of our Fund I really accelerated that over the course of Fund II in two respects; one is that we were able to bring in more strategics from those same sub sectors. For example we have CBRE, which is the largest commercial brokerage, and Cushman & Wakefield, the second largest commercial brokerage in the U.S., in the fund. We have Host Hotels and Marriot, we have Prologis and GLP and SEGRO in the industrial real estate category. We now have multiple strategic LPs across different sub sectors. Also what we saw was that international owner operator developers in Western Europe, in particular, and Asia were also looking to technology solutions to enhance their business, in very much the same way that U.S. investors were nearly two years earlier. That’s why we targeted the largest owners in Western Europe with British Land, the largest owner in the U.K., with Gecina, the largest owner in France, with Merlin, the largest owner in Spain, and with SEGRO, one of the largest industrial owners in Western Europe. Then in Asia we targeted Mitsubishi Estate and Kenedix, the largest owners in Japan, Temasek and Keppel in Singapore, and major owners and operators in China and Hong Kong as well. So, we saw this an internationalization of interest in real estate technology as well.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
BW: I imagine Fifth Wall’s answer to that is almost existential to how we built the firm. Fifth Wall can say to an entrepreneur, “Our strategic investors are the largest game and most game-changing customers for your business, and we work with them every day to integrate new technologies to enhance their business.” It’s kind of as simple as that, in some respects.
What I would say also is that generalist VCs also recognize that Fifth Wall can be a particular value-add to real estate technology companies into which they’re investing, so a lot of our deal flow comes not just from our corporate investors but also from generalist VCs who want Fifth Wall to validate one of their investments by virtue of structuring a partnership to accelerate their growth. I think about Fifth Wall’s deal flow channels as being threefold: one is obviously we’re the largest and the most active investor in real estate technology, so we get a lot of inbound, organic deal flow; secondly, we receive a lot of deal flow horizontally from generalist VCs who want to leverage Fifth Wall’s strategic investors to accelerate investment they’re making; thirdly, we now have 50 corporate investors who are integrating new technologies and receiving inbound pitches every day. So, Fifth Wall is able to uniquely triangulate both access and information to early stage technology companies. We see everything in our category.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?
BW: We invested in a company called Blend, which is digital mortgage technology, and we structured a partnership between Blend and Lennar. We invested in Lime, which is a scooter and bike-sharing startup, and we helped structure partnerships and deals to distribute scooters and bikes and charging stations to many real estate owners throughout our portfolio. Fifth Wall invested in Hippo, which is a digital home insurance company, which we also structured a partnership with Lennar to help accelerate the distribution of their insurance product. We’re also investors in States Title, which is a digital title insurance company. We’re investors in VTS, which is a leasing and asset management software that’s used by many of our strategic partners.
VN: What are some lessons you learned?
BW: My background was somewhat unique in the sense that it was a hybrid of both real estate and technology. Right after Princeton I worked at Goldman Sachs doing real estate investment banking, and then I traded commercial, mortgage-backed securities at Goldman. Then I went to Blackstone and I was in real estate private equity. When the financial crisis came along I actually went to business school at Stanford and started a technology company called Identified, which was in the data and analytics space, and which then sold to Workday in 2013. I also helped co-found another company called Cabify, so I had this hybrid experience of having worked in both traditional real estate capital markets and real estate investing, as well as technology.
My co-founder, Brad Greiwe, had a very similar background as well; he was at UBS doing real estate investment banking, and also Tishman Speyer and Starwood Capital in real estate private equity. He was a co-founder of a company called Invitation Homes, which was a platform that Blackstone used to acquire single family homes during the housing crisis and turn them into rental properties. Brad was the CTO there, so he was intimately involved in building out that technology stack, so he had also been on the front lines of the convergence of real estate and technology. So, Brad and I were in this unique position of having one foot in the real estate industry and one foot in the technology industry.
Now, having actively invested in so many real estate technology companies, what I've seen is that not a lot of generalist VCs either have experience or relationships in the real estate industry. Real estate is such a relationship-driven business, and it’s also such an idiosyncratic business, despite being so large, that I think you really have to have personal experience and domain expertise to truly understand how to invest in technology companies for that industry. In founding Fifth Wall, obviously Brad and I were able to bring to bear this unique experience, and we were able to accelerate that with all of the embedded experience at all of our real estate corporates, who have literally have hundreds of years of real estate operating experience, and hundreds of millions of square feet of real estate in their portfolios.
VN: What excites you the most about your position as VC?
BW: That’s a great question, and I’m curious to know how venture capitalists would think about that because the way we would answer that question is a little different at Fifth Wall, which speaks to the uniqueness of our model. Like probably all venture capitalists, I’m incredibly excited about seeing the success of our portfolio companies, accelerating their growth, seeing them through to successful partnerships, and seeing the growth of their teams and products and services. Obviously that is a great thing for Fifth Wall, so we’re incredibly excited to work for and support and serve the entrepreneurs that realizing their visions with our capital and relationships.
On the other hand, the thing that’s unique about Fifth Wall is where most venture capital funds do not talk to their limited partners, Fifth Wall is talking to its strategic limited partners on a daily basis. So, in addition to seeing the success of our portfolio companies, we’re also able to see the business improvement and the technology integrations that are adding real value to some of the largest real estate owners on Earth, whether it’s saving energy or adding incremental revenue or influencing a big strategic decision that a CEO is making because of information we’ve provided. So, Fifth Wall is not only having an influence in the venture economy, but we’re also having very meaningful impact in the real estate economy as well. We’re able to see that feedback loop in a way that I think creates a very virtuous cycle where the success of our portfolio companies is often highly correlated with the success of our strategic investors. In turn, the more strategic investors we’re able to work with, the value of the Fifth Wall consortium model grows as we start to have more network effects, where we can distribute out portfolio companies to more strategic investors. That’s a unique characteristic of this new venture capital paradigm that Fifth Wall pioneered.
VN: Is there anything else that you think I should know about you or the firm or your thoughts about the venture industry in general?
BW: What is so fascinating to me about the opportunity in front of Fifth Wall is that we’ve built an entirely new paradigm of venture capital whereby it’s not just a speculative venture fund, where we’re investing in technologies and hoping to see their success while trying to influence the things we can. Fifth Wall has built this consortium-based model where the real estate industry, which has not been an incredibly collegial or collaborate industry historically, has now banded together 50 of the world’s largest owner and operators, many of them large, public companies. They’re all invested in our $503 million fund and Fifth Wall is working with all of them, every day, to influence and change what the real estate economy means today and what it might mean in the future, from a technology perspective.
We’ve, in many ways, built more of an innovation platform for these real estate corporates, who can access what Fifth Wall has to offer, including all of our existing Fund I investments, all of the research and intelligence we’ve gathered over the last couple of years, and all of the investments we’ll make out of Fund II. I haven’t seen a venture capital paradigm quite like Fifth Wall. Obviously we’re focused on real estate but I think this model of having 50 of the largest owners, operators, developers as investors in the fund is so entirely unique that we’ve realized something that venture funds never really have the benefit of, which is actual network effects. Fifth Wall is in this unique position where it's easier and better for us to serve an additional strategic investor with more strategic investors already in our fund. So, we’re able to add more value to the entire ecosystem with each incremental strategic investor, and more value to our portfolio companies. I think that’s really, really unique within venture, where, oftentimes, venture capital funds face a limitation and when they get too big the model ceases to work. In Fifth Wall’s case, we’ve become this become the center of gravity for real estate technology innovation that seems to get better with time, with more investments and more strategic partners.
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