The funding market for PropTech companies is experiencing a positive shift, making it easier for businesses to access capital, according to an expert.
After 12 months of weakness in the tech sector, sentiment is now starting to turn around and funding from venture capital is returning to the sector.
Portfolio Manager and Entrepreneur in Residence for the REACH Australia/New Zealand program, Tom Ellis said the tide is turning for PropTech companies and other startups after the rapid increase in interest rates initially made funding harder to come by.
“We’re starting to see a lot more activity,” Mr Ellis said.
“One of our companies, Tapi, recently raised an investment round in 10 days and because they’re highly backable it wasn’t a problem for them.”
He said that the property maintenance software provider had experienced rapid growth, had a clear plan for expansion and provided very clear communication on why they were seeking additional funding, which was appealing to venture capital firms.
Mr Ellis said one of the main reasons venture capital is becoming more available is because valuations have come back down to more reasonable levels.
He said companies that had previously been valued at 10 or 12 times earnings had now come back to a more realistic eight times earning multiple, which offers more value to investors.
“I think there is still definitely valuation compression,” Mr Ellis said.
“People are having to be more realistic about the value of their businesses.”
According to Mr Ellis, good quality businesses are still getting funding, but they need to be able to demonstrate that they can operate efficiently in the current market.
“For funding to make sense, they need to be looking at 18 months of runway because there is still ambiguity, so there needs to be a really clear path,” he said.
Mr Ellis said that if PropTech firms are in need of funding they should start having those conversations early.
He said it is important to engage in early discussions with investors, as leaving it too late can make securing funding more difficult.
“The process for investors is taking longer, so keeping them informed about the company’s performance and needs can help avoid surprises,” he said.
Another key factor is preparation and Mr Ellis said it was vital to have accurate forecasts and a believable business plan.
“If a company’s numbers don’t make sense, it can erode trust with potential investors,” he said.
Additionally, companies should demonstrate a clear understanding of their key differentiators and why they are best positioned to solve a problem in the market, he said.
Mr Ellis also said investors put a lot of weight in the value of customer-generated capital.
“Growth from sales is always looked favourably upon by investors, so it’s crucial for companies to show there is demand for their products or services,” he said.
“This can help demonstrate why funding is necessary for growth.”
Mr Ellis said PropTech companies should be confident the funding tide had turned and while there were still a few challenges, there were also plenty of opportunities.
He said that great businesses can be formed during difficult times and that those willing to adapt and persevere can have a big impact in the current market.
“Being part of a business that is striving to make dynamic change at this time is really where people are going to make those substantial shifts in the market,” he said.
“And we’re quite excited about that.”