Big real estate firms and funds should follow the lead of big players in other industries and commit time and resources to nimble early-stage ventures in their field, says Dominic Wilson, co-founder and managing partner of Pi Labs
The real estate industry is facing some stark questions. What used to be a pretty linear investment run characterised by financial engineering and the prevalence of cheap debt has been disrupted by the 2008 global financial crisis and subsequent recession.
The emergence of China and India, as well as other major emerging markets, as consumer economies has undermined the notion of cheap imports. We are now in a growth environment of lower for longer. E-commerce has changed the face of retail completely, along with the viability of retail assets.
The provision of housing and the issues facing Generation Rent are now hot political and social issues. Registered providers are under pressure to provide better and/or more affordable housing while having the rents they can charge capped. At almost every level, whether financial or social, there are fundamental challenges posed. And that’s before we even consider Brexit and its impact.
This is the environment that an industry that is slow to change or innovate finds itself in. Innovation tends to be a needs-based movement, which partly explains the rise of fintech and the support it has enjoyed from the major financial players.
After the global financial crisis, financial institutions could no longer carry on as they did before 2008. With increased regulation and competition, they need to innovate. To do this, they need to partner with ideation hubs and entrepreneurs.
Barclays’ relationship with Techstars is an excellent example of this. Similarly, British Airways has launched Hangar 51 to support travel and aviation start-ups.
From a needs-based point of view, this is where the real estate industry now finds itself. It faces extreme challenges that it cannot overcome on its own with yesterday’s methodologies. It needs fresh ideas from the outside that it can incubate, test and nurture.
Pi Labs’ recent tie-up with CBRE is a huge step in the right direction but we are still dismayed by the general lack of corporate activity in this space. Tech pioneers such as Zoopla are active in their support of start-ups, but the overall level of corporate engagement remains low.
A common misconception is that participation in early-stage ventures requires heavy investment. But this is not the case. The idea is to commit a small amount of capital – either as investment or corporate sponsorship – to enable an organisation to get close to the new ideas and entrepreneurs in the sector. The amount of investment is small – probably a fraction of the cost of sending a mass of corporate staff to MIPIM – but the exposure to ideas, the testing of new innovations and incubating them in house with nimble start-ups can generate huge upside.
However, the central challenge is one of focus and resources, not necessarily capital. How does a corporation get the key decision makers involved in the process early, so that progress on a new product is rapid? Similarly, how does a business or fund achieve this while also maintaining focus on its day-to-day activities?
This is where creating the right internal processes is essential. It is no use bringing time and money to the start-up ecosystem if ideas and momentum are strangled by internal bureaucratic hurdles. Early-stage companies execute quickly, so larger corporate stakeholders need to reciprocate this practice internally for the relationship to be mutually beneficial.
If done correctly, the benefits for start-ups can be enormous. They get a testing ground for their ideas and real-time feedback. They can scale and establish themselves quickly, and they can get introductions to other partners and clients. If they are good, they may even get some custom out of it. If they are excellent, a corporate partner may even want to become an investor.
From a corporate perspective, the exposure to new ideas – even if they are bad ones – is valuable. Ideation will prompt internal reflection and review of strategic decisions. If you partner with an investor/operator that knows how to uncover good entrepreneurs, the corporate can engage with this new breed and learn from them. This can also be a good recruitment and HR retention tool as most young employees/graduates want to work with innovative ideas.
By engaging early with the right start-up, a company is in a position to tailor the product to its own personal systems. And it will have access to an investment opportunity or early-stage acquisition target if it aligns itself with the venture in the right way.
This creates a virtuous cycle between corporate activity and early-stage venture. A symbiosis can develop where both parties balance out the other’s weaknesses and enhance each other’s strengths. This requires vision for the long term and a top-down approach.
Perhaps this approach holds the key to answering the difficult questions now facing the industry.