Start it up, keep it up... Money, money, money

Start it up, keep it up

Every year a few many new companies are founded of which approximately 90% won’t survive. Around 10% will face their downfall already in the first year, but the biggest group of start-ups (approximately 70%!) will collapse between year 2 and 5. The number one reason for failure, affecting an astonishing 42% of all start-ups, is misreading market demand. The second reason, covering 29% of fallen businesses, is running out of funding or (personal) capital. *1

In the Proptech industry, funding is an essential part of driving business, although we firmly believe that Proptech is much “stickier” than over verticals (we have data to prove). It’s much more likely that a Proptech going into a Series B/C round will make it all the way through, than in Fintech as an example (due to of a number of reasons). In 2021, venture-backed companies in the real estate + property tech raised nearly $21 billion. Standout areas for investments were construction, data (centralized platforms with key integrations) and the property management space. Construction tech start-ups alone raised more than 3.8 billion USD in funding in 2021.

Let’s have a closer look at the funding environment.

Money, money, money

It is definitely worth a deeper investigation if raising funds is the biggest reason of failure... Why are many start-ups not able to raise enough capital in time? How much runway should there be in between rounds?

The conventional answer is 12 to 18 months. However, recent research demonstrates that this might not be accurate, especially during volatile market conditions, encountered earlier in the year. The study evaluated 13,916 materialized financing sequence events and determined the time needed from one funding round to the next.

The outcomes of this research indicates that the average time needed between funding rounds is much bigger. The data demonstrates that entrepreneurs should count for at least 18 to 21 months, and in some cases even up to 35 months! The time needed between investment rounds increases with each round, and reaches its maximum from Series B into Series C, and starts decreasing from Series C into Series D. The conventional wide-spread belief of 12 to 18 months is one of the key reasons for start-up failure... .*2

Taking into consideration that the time needed to collect the next funding round takes much longer than expected, it’s worth taking a look how this affects failure rate(s). Study shows that the failure rate is very high from Seed to a Series A. After that, there is a significant drop in this percentage. Once you’ve been able to raise a series A your chance of raising a Series B successfully is 50% approximately! From there it will become more difficult to raise again. *3

A great success story, recently, is UAE-based Proptech start-up Huspy, whom raised 37million USD in a Series A. The funding round was one of the largest in the MENA region and was led by VC firm Sequoia Capital (India). *4

Where is the Exit?

The more mature a company, the more likely it will exit. A company that is in its seed stage has a 97% (!) probability to fail to exit. When we compare the exit failure rate with the funding failure rate, we can see that from a Series F the likelihood of raising your next round of capital is just as high as the chance to exit. After that the chance of being acquired is higher than the chance of finding sufficient investments to go into the next round.

Recently we’ve also seen a very successful Series F funding round led by KKR & Co. The Singapore-based Proptech LivSpace was able to raise 180 million USD, bringing its valuation over $1 billion. *5 The Series F round also attracted existing investors like Ikea, Jungle Ventures, Venturi Partners and Peugeot Investments. *6

To summarize, failure rate is not always 90%. When you’ve made it to a Series G stage, your company has 26% of succeeding in comparison to only 3% in the seed stage. The further you get, the more likely you succeed. Reason enough to not give up!

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1 https://www.embroker.com/blog/startup-statistics/#:~:text=03-,Startup,About%2090%25%20of%20startups%20fail.&text=10%25%20of%20startups%20fail%20within%20the%20first%20year.&text=Across%20all%20industries%2C%20startup%20failure,be%20close%20to%20the%20same.&text=Failure%20is%20most%20common%20for,70%25%20falling%20into%20this%20category.

2 https://medium.com/journal-of-empirical-entrepreneurship/how-much-runway-should-you-target-between-financing-rounds-478b1616cfb5

3 https://medium.com/journal-of-empirical-entrepreneurship/dissecting-startup-failure-by-stage-34bb70354a36

4 https://www.arabianbusiness.com/money/wealth/money-wealth-real-estate/uae-based-proptech-startup-huspy-receives-37mn-in-series-a-funding-led-by-sequoia-capital-india

5 https://news.crunchbase.com/public/proptech-startups-vc-investment-forecast-2022/

6 https://aimgroup.com/2022/02/09/singaporean-proptech-livspace-raises-us180m/

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