With the global economy in a rather precarious situation, entrepreneurs in nearly every industry are expecting to weather what may be a turbulent 2016. If for nothing else, poor market conditions have made venture capital a commodity of sorts. Not to say that it wasn’t already, but seed money could be harder to come by over the course of this year. There simply aren’t enough venture capitalists willing to take unwarranted risks. Their lending practices will be, for all intents and purposes, contingent on a market that has seen better days. However, that’s not to say raising money in a down market is impossible. In fact, it’s quite the contrary – at least for real estate investors. Real estate venture capital looks to remain promising – if you know how to attract it that is.
Not surprisingly, venture capitalists are forced to work within the parameters of today’s economy. No surprise there; we all are. There isn’t an industry on the planet that isn’t contingent, in one way or another, on the health of respective benchmark indices. That means lending patters, not unlike borrowers, must adjust to what the markets dictate to be acceptable. As a result, venture capitalists are now more likely than ever to look for specific conditions, or criteria if you will, to be met before they consider lending money. Seeing as how those criteria are directly correlated to the state of the economy, I can assure you they are currently looking for a more risk-averse investment vehicle.
It just so happens that U.S. real estate is well on its way to becoming one of the most sought after investment vehicles. In fact, if it isn’t already, it won’t take long until it is even more attractive than it is now. On top of countrywide appreciation and a demand that is intent on growing, global investors have set their sights on America. With everything that has recently happened in China and a handful of scenarios continuing to play havoc with the global economy, investors have turned their attention to the United States; in particular, the real estate sector.
Investors are aware of the nature of today’s global economy, it’s fragile to say the least. Now, more than ever, is the time to invest in security. That said, we have already seen a mass exodus from China’s declining market. People want to place their money somewhere it can be safe. It just so happens that investors are starting to look at U.S. real estate as the “safer” alternative. Those familiar with the industry expect to see an influx of money from foreign investors into the U.S. housing sector.
But why am I telling you this? The answer is simple: the domestic real estate landscape is expected to do very well in the coming year. Naturally, the industry’s health bodes well for those looking to receive funding. With the U.S. real estate market quickly becoming one of the most attractive investment vehicles in the world, venture capitalists are more inclined to lend their money to those procuring real estate.
At the very least, I would expect real estate investors to have an advantage over subsequent industries in receiving venture capital, if for nothing else than the state of the industry they work in. Venture capitalists are more than aware of how well real estate is expected to do this year, and I can assure you they want a piece of the pie. That said, only one questions remains: how can you be the one to give it to them? How can real estate investors and likeminded entrepreneurs maintain their advantage over the competition, and stay at the forefront of venture capitalists’ minds?
How To Attract Real Estate Venture Capital
My partners over at CT Homes and I believe real estate investors should have no problem attracting venture capital. Let me explain:
Real estate venture capital can really help startups. But to even stand a chance at attracting venture capital, you must first understand the current state of the market. While real estate continues to shine, the global economy has certainly seen better days. In fact, January bore witness to one of the poorest starts by the S&P 500 in recent history. Expectations are, for the most part, tempered and cautious. The sooner you can wrap your head around this, the better.
With the current market environment being the way it is, it isn’t enough for entrepreneurs to simply have a sound funding plan; they must also come to terms with what is likely to be lower revenues. Again, we must temper our expectations, or at least come to grips with what the market is willing to offer. Broadening your customer base and retention is likely to get a little harder this year.
Venture capitalists know this, and are thus looking for companies who are prepared to bunker down and weather the storm.
“We do not want to see companies on the hamster wheel,” said Blair Garrou, who is a managing director at Mercury Fund, “where there needs to be large amounts of money raised on a frequent basis. Rather, we are looking for entrepreneurs who show that they can be lean and capital efficient. We want to make sure that the money can last 18 to 24 months.”
Not surprisingly, venture capitalists are looking for companies with staying power. They want to know you can work on a restrained budget. In other words, how far can you stretch your money?
That said, don’t discount the little things. Instead of buying a luxury desk, feel free to peruse the isles of IKEA. Instead of working from a corner office in a high-rise building downtown, perhaps you can establish a home office. Remember, everything you do has an impact on your bottom line. Just be sure that you are conscious of where every dollar is going, and how you can maximize its return.
“For every dollar you raise, how much value are you creating?” asks Andy Vitus, who is a partner at Scale Venture Partners. “One way to do this is to get more efficient with software development, say with offshore capabilities. But there are also very creative approaches. For example, one of our portfolio companies hired ten interns to write daily blog posts. It turned out to be an effective way for marketing and thought leadership. We like to see leverage points.”
Get creative with the way you go about your business, and please – for your own sake – create systems. There is perhaps no better way to maximize the efficiency of your company, and thus enable every dollar to go that much further. Dedicate a specified amount of time to evaluate the systems you already have in place, and proceed to improve upon them. Leave no stone unturned. I really want you to reevaluate how you do everything in your business. Whether it is restocking office supplies or closing a deal, everything can be broken down into a system. The key, however, is to refine each system until it is efficient and predictable. You need to know how things will turnout before you even start them if you are to have any hope of receiving venture capital for your startup.
In fact, while we are on the subject, there is no reason you shouldn’t have a system for attracting venture capitalists. Hone your skills and be prepared for the next time a potential funder comes your way. I can assure you the extra effort you put into your next pitch won’t go unnoticed. It may be the one thing that lands you the capital you need to fund your business. At the very least, they will come to appreciate your attention to detail. Who knows; perhaps they will even come to like the systems you have put in place to ensure efficiency and proven results. There are few things venture capitalists covet more so than a proven track record and results. Don’t hesitate to show them what you have in place.
I could also argue that the diversity of the housing sector and the many exit strategies real estate investors have at their disposal bodes well for those looking to receive venture capital. For the same reason investors aspire to diversify their portfolios, venture capitalists will appreciate the diversity the housing industry has to offer. There is essentially a viable exit strategy for nearly every market cycle. In other words, there are always chances for them to realize returns on their investment. Not every industry can provide the same stability, making real estate investors that much more attractive to venture capitalists.
Above all else, real estate investors will want to remain disciplined and practice sustainability. Only then will they truly be able to capture the attention of those that can provide startup venture capital.