Expert Insights From a Panel of Investors
by Tom George | Constellation Real Estate Group | Aug 3, 2020
Earlier this month, we hosted a panel of investors specializing in three types of capital investments: venture, growth, and buy-and-hold. Moderated by Michele Conn, SVP of Mergers, Acquisitions and Research at T3 Sixty, I was joined on the panel by Dave Garland of Second Century Ventures and Mike Sekits of Strandview Capital.
As you may have noticed, the real estate software investment market is a friendly one. The industry is relatively small, and everyone knows each other, so deal flow is often shared.
Below are key takeaways and detailed follow-up to some questions we didn’t get to answer on the call.
Engaging investors is a courtship
The traditional process of building relationships, visiting companies and understanding their culture has been interrupted by the pandemic; an invitation to take the initiative and connect is always welcomed.
The investment landscape is not transactional. It’s fluid and requires a long-term relationship before the knot gets tied. Whether an owner is looking for capital or looking to sell, the courtship will span years.
Dave encouraged listeners, “Do your homework on investors. Know what types of companies they’re interested in to understand what they invest in”.
While COVID might affect market perceptions, it only impacts value if its directly impacting a company’s top and/or bottom line. Some companies are even showing improved margins and revenue growth.
ROI is central to any valuation, regardless of the type of investment. All investors are looking for an attractive return, but with varying measures of success. Some investors value immediate returns and short-term potential, where others invest in the long-term.
Startups are traditionally hard to value because they lack operating income in their early stages, the conversation then becomes about an investors ability to forecast value for a return.
The common thread among investors: adding value post-acquisition. Whether leveraging best practices, providing strategic assistance or resources, it’s all about value-creation and priming companies for increased growth and profit margins.
Constellation is unique in that it has a buy-and-hold investment strategy, meaning it buys companies outright, building a robust portfolio of vertical market software with no plans of consolidating to sell. Where venture and growth capital investors might be more involved in the setting the strategic goals of its companies, Constellation businesses run independently.
While we provide strategic guidance and financial security, leverage operations and best practices, we leave the day-to-day to each general manager, trusting that they know the ins and outs of their business best—empowering them to remain in control.
Technology: what is most exciting on the horizon
One undeniable impact the pandemic has had globally is the acceleration of technology adoption. Dave noted that real estate is one of the oldest and largest industries in the world and technology has the ability to completely drive it.
The acceleration of technology adoption is changing the way companies grow and the way consumers are serviced, thanks to COVID.
Webinar Q&A Follow-Up
1. Predictions on consolidation of PropTech and CRE Tech, Q3-Q4 into 2021?
Both PropTech and CRE Tech are fragmented markets, so the investor landscape today is an active one. With any downturn, increased consolidation is a possibility and ultimately depends on individual businesses, how they are affected by the changing environment, and the customers they serve. The normal inertia of any software vertical is to consolidate over time and PropTech and CRE Tech are no different.
M&A should be seen as a win/win, benefiting both investor and investee. If the market presents an opportunity to buy, sell, or consolidate, all parties are benefiting.
2. What can companies do now to prepare for future investors, mergers and acquisitions?
Operationally, make sure you understand the economics of your business and focus on quantifiable goals to grow top and bottom line. Maintain a relationship with potential suitors even if you have no current plans to sell.
Mike called out the importance of investing in strong financial controls, reporting and budgeting. Assess and audit your business frequently.
Don’t try to be all things to all people; focus and rally around that focus while broadening distribution, strategic partnerships and integrations.
3. COVID is shining opportunity on tech that has been around years. Do you see momentum or still skepticism?
Momentum, 100%. In industries traditionally slow to innovate, COVID has accelerated adoption. One example is our e-sign technology that has grown at an accelerated pace during the pandemic.
“COVID forced change, immediately,” Mike added.
4. Are real estate agents going to go the way of stockbrokers or will they stay relevant?
Consumers today have unprecedented access to resources. The dynamics between consumer and agent might change, but technology won’t render agents obsolete the way it’s disrupted other industries.
Real estate is unique in that technology can enable agents to better serve consumers. Consumer response to technology has impacted search behavior, but skepticism around purchasing remains and studies continue to show a preference for working with agents over self-serve or iBuying programs.
I have written more on the role of the real estate agent and why they are here to stay here.
5. Does a company’s age impact your view of a company’s potential?
Constellation prefers companies who have invested the time to build and fine-tune their operations and finds that this often happens over time. Where startups tend to lack operating income and seek early-stage investments to grow, Constellation is interested in companies with established customer bases and revenue—factors that are often directly correlated to years in business. Potential is determined by ongoing returns rather than short term revenues.
Mike notes, “Sometimes it makes one wonder what took so long and allows more time for hidden liabilities to develop. When working with an older company, more due diligence is required, and transactions tend to be more complicated.”
If you missed the panel last month, you can watch the recording on-demand here >> https://bit.ly/3iEVe8G
As the investor landscape continues to evolve, post-pandemic, we invite you to connect and are always interested in sharing insights. If you’d like to discuss any of the above or learn more about Constellation Software, please don’t hesitate to reach out.
Hope you are all staying well and we look forward to connecting soon.
President and Managing Partner
Constellation Real Estate Group