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Real Estate Venture Capital: What It Is and How It Works

Real estate venture capital is shaping the future of real estate tech.


[Updated: Apr 15, 2021 ] Sep 09, 2020 by Liz Brumer
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Venture capital has been around for quite some time, but it has mostly existed in the tech space. Most investors don't immediately think of real estate when they think of venture capital, but it's a growing industry with real estate venture capital being a viable way for startups and small businesses in the real estate industry to receive the funding they need to grow.

If you're a real estate entrepreneur or business owner or simply someone looking to gain a better understanding of real estate venture capital, continue reading to learn what it is, how it works, and a few examples of real estate venture capital firms today.

What is real estate venture capital?

Real estate venture capital is a form of private equity that provides capital to newer businesses that have high growth potential in the real estate industry. Those investing in the company are called venture capitalists and can be institutional investors, hedge funds, or investment firms. These venture capitalists provide the necessary capital to help the company grow and expand in their designated field, giving them the push they need from small startup to big company.

How real estate venture capital works

Real estate venture capital comes in many shapes and forms providing capital to almost any asset class in real estate including commercial real estate, residential real estate, or real estate technology. Venture funds or VC funds pool money from accredited investors, who are high-net-worth individuals designating a single fund manager or group of fund managers to identify emerging businesses that have growth potential to invest in. The venture fund may enter into a joint venture with the chosen company, gain a portion of the company shares in exchange for capital, or work out other financing terms, but it often receives a large payoff if the company does in fact succeed.

What types of companies do venture capitalists invest in?

In today's technological era, the majority are focused on real estate tech. Fifth Wall, one of the largest venture capital firms to date, invested in Opendoor when it was just a startup, helping it become one of the leading iBuyers in the marketplace. Real estate technology can encompass a variety of things, from virtual reality, virtual interior design, and 3D showings to automations in offers, closings, property management, and beyond. It's simply using technology to create solutions to common problems in real estate or improve and simplify how things are conducted.

Some venture firms will invest in companies that focus on purchasing and managing real estate investments, but it's not as common because these types of real estate businesses can be difficult to scale. A venture capital firm is looking for businesses that can be systemized and have room to grow, expand, and add value to the company and the firm's investment, which can be difficult to achieve in a traditional real estate portfolio. This is one reason syndication or other alternative financing like crowdfunding is a more popular method for raising money for a real estate asset acquisition.

The bottom line

Venture capital has taken thousands of startups and turned them into household names, proving it's value in the marketplace both for investors and companies. If you are a real estate company, especially a tech company, real estate venture capital can be a worthwhile option to gain the necessary financing and capital to grow. Just make sure you're doing your due diligence on the venture capital firm and fully understand and are comfortable with the terms of the financing before agreeing to receive any money.

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