COMMENT Until about three years ago I genuinely did not know what the word proptech meant, writes Nick Leslau, chairman of Prestbury Investments.
I had certainly never considered investing in it. I knew technology was dramatically impacting our daily lives, but when it came to the industry in which I have been immersed for more than 30 years, I considered proptech a potential threat.
I was pretty sure that property technology was for super smart young things with PhDs in some exotic maths-related area. I had visions of them working in co-working spaces in Shoreditch designing incomprehensible algorithms with the ultimate game plan of making me redundant.
I thought I was too old, too late to the game and while I was happy to lease space to these guys, I dismissed much further involvement. I simply didn’t think I possessed the intellectual bandwidth to understand what they were doing.
During a meeting around that time I was embarrassed when I was questioned on why I hadn’t looked at investing in proptech. After all, I had – on many occasions – invested equity in businesses I didn’t really understand. I thought about it and reasoned with myself that being scared of investing in steam-related technology at the start of the Industrial Revolution would have rendered me a complete idiot. And so, on the assumption that I might be missing a similar opportunity, I decided to take a closer look.
Clever people
Recognising my serious limitations (barely scraping a maths GCSE), I sourced some very clever people in the proptech world, who specialise at investing in early-stage companies and through them I started learning about property-related technologies and meeting some very interesting people on the journey.
My traditional property skills gave me an appreciation of what some of the proptech businesses were trying to achieve without me having to understand the technology behind them. Others would have to assess that for me.
I was absorbing so much information it was fantastic. Until it wasn’t. I began to realise that there were increasing numbers of companies doing vaguely the same thing with zero knowledge of their competition; that many companies were creating products for which the management thought there would be demand but had never tested it and in some of those cases had tested it but never asked what a user might pay for the technology.
Bizarre valuations
Many techies are appalling salesmen and many salesmen cannot explain the technology. But the thing I found more bizarre than anything was the valuation companies were adopting for the purpose of fundraising.
I come from the traditional world of YP, PE or EBITDA multiples in arriving at value whereas your typically early stage technology company’s management don’t. They will tell you that they need £600,000 of investment to start producing the product they are not sure they can sell and that they are only prepared to dilute their equity holding by a maximum of 20% to get that money thereby valuing the business at £3m.
It’s total insanity to value a business with an idea and no product and usually very little track record on that basis and yet that’s how it worked in so many instances.
I met some terrific and highly intelligent people along the road and tried very hard indeed to make sense of forecast revenues and earnings but I felt trapped in some Goethe-like valuation nightmare.
In the end, I decided that there must be something there, but I just couldn’t figure out the good from the bad.
I decided that to deploy some capital, I need to back people who look they do know what they are doing and so I invested in a Pi-Labs fund.
I hide behind their vastly superior knowledge but I do get to discuss the sorts of companies in which they are investing so I learn a lot but without the stress or fear of investing directly.
Proptech is simply any technology which falls under the massive real estate umbrella.
This is not to be feared but embraced as, of course, it’s the future, albeit for an old fart like me the valuation model needs some serious rethinking.
