Real estate & property tech

Recently Public Real Estate Startups Shed Over $42B In Value

Illustration of credit card, house key and card reader on smartphone.

American homebuyers have largely done well in the past couple years, with average house prices up sharply.

Sadly, the same does not hold true for those who put capital into newly public real estate startups. There, the reverse applies, with shares of many housing-focused companies hitting new lows this month after an already rocky year.

Overall, venture-backed U.S. real estate-focused companies that went public in the past two years are down an average of 85% from their offering price, according to a Crunchbase analysis. None are above their offering prices.

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Some of the worst performers are down 90% or more. This includes i-buying platforms Opendoor and Offerpad, as well as Doma, a homeowners insurance upstart. 

For a broader sense of how venture-backed real estate companies have performed on public markets, we assembled a chart of seven below that debuted in the past couple years:

Altogether, it’s a pretty staggering decline. A total of more than $42 billion in post-debut market capitalization has been wiped out as of early this week.

To put that in perspective, $42 billion is well above the combined market caps of the second- and third-largest U.S. homebuilders. (Those companies, Lennar and Pulte Group, have a combined market cap of around $31 billion.)

It’s the kind of decline that usually has some pretty obvious causes. In the case of newly public real estate players, we can point to four:

1. Valuations were too high at first: Markets were bubblier when companies on our list debuted, with valuations more reflective of sunny futuristic presumptions than present fundamentals.

Take Opendoor. When it debuted on Nasdaq in December 2020, after completing a SPAC merger, it commanded an initial valuation around $18 billion.

That’s an ambitious value given that for the three calendar quarters prior to its offering, the company had $2.3 billion in revenue, and a net loss of nearly $200 million. Even for a SaaS company that’s a lofty valuation based on the earnings. But Opendoor’s business—buying and selling properties—has much lower gross margins than software.

Or consider Compass, the fast-growing real estate brokerage. The company, also a comparatively low-margin business, posted a $270 million loss for the year preceding its 2021 IPO. Nonetheless, it managed a post-debut valuation around $8 billion.

2. Companies underperformed expectations: Many companies on the list also haven’t met investors’ performance expectations.

Compass, for example, posted a larger net loss than analysts expected in three of the past four calendar quarters. It’s also been making cuts, including most recently reportedly laying off roughly 50% of its 1,500-person tech team.

WeWork has also underperformed. In its last quarter, the workspace provider missed analysts’ projected earnings estimates by a wide margin, pushing shares lower.

Opendoor, meanwhile, is facing all kinds of troubles. The company paid $62 million this summer to settle an FTC charge that it pitched potential home sellers “using misleading and deceptive information.” The company also faces multiple shareholder class action lawsuits with allegations including that its algorithm has failed to adjust to changing market conditions.

3. Investor preferences changed: A year ago, money-losing growth companies were in. Now, they’re out, with public investors preferring profits, dividends and old-fashioned value stocks. That leaves our crop of unprofitable, newly public real estate companies largely out of favor.

4. Real estate markets shifted: Then of course, U.S. real estate markets are shifting rapidly. Today, the average interest rate on a 30-year mortgage is hovering around 7%. That means buyers can no longer afford to finance homes at last year’s prices, when rates were half that. Inventory is sitting. Prices are deflating. And demand for new mortgages has cratered.

While such changing conditions aren’t necessarily catastrophic for newly public players in the real estate space, they will require some adjustment, and, in some cases lowered expectations.

Where does that leave startups?

Even as public valuations have tanked, venture investors continue to fund real estate-focused startups at a good clip.

So far this year, investors have put around $4.6 billion into seed through growth-stage rounds for U.S. startups tied to real estate, per Crunchbase data. That puts 2022 on track to come in lower than last year, when $7.95 billion went to the space. But considering that venture funding is down sharply across most sectors year over year, it’s not a bad showing and indicates a sturdy level of investor confidence.

The totals include some very large rounds. The biggest financing went to Veev, a construction technology company focused on the homebuilding sector. It raised $400 million in a February Series D led by Bond. After that came Flow, the Adam Neuman-founded home rental upstart that snagged $350 million from Andreessen Horowitz in August.

Another big round went to Roofstock, an online platform for investing in rental homes, which pulled in $240 million in a March Series E. And Knock, a home financing startup aimed at making it easier for people to buy a new home before selling their old one, nabbed $220 million in a June financing.

The overall picture: While public investors might not find much to like among recently public real estate companies, private markets still see a lot of upside in the space. We’ll be keeping watch to see if their enthusiasm persists.

Illustration: Dom Guzman

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