Controlling the Real Estate Software Canals (Newsletter #289)

Written By: Nima Wedlake

[Adapted from What's Interesting in Real Estate Tech? From The Appraisal]

Vertical software companies have proliferated over the last decade. Across real estate and construction, there are now specialized products for roofers, commercial kitchen operators, pool service companies, and even flooring retailers.

Venture firm Tidemark has published a great series of posts on how vertical software businesses can reach venture-scale (loosely defined as scaling to $100m+ ARR). Core to their investment strategy is identifying control point businesses, defined as “the most important system, the last to be thrown out before an owner ceases operations.” Importance is a byproduct of three primary attributes: Workflow (the system other systems integrate into), Data (system that creates and holds the most critical information), and Account (system is used by key employees at the company).

Control point businesses tend to include CRM-like functionality in the front-office and accounting or ERP systems in the back-office. They are core to how businesses run and are often very difficult to displace (just last week American food processing company Lamb Weston reported over $135 million in lost revenue due to a buggy ERP transition).

In real estate, the property management system (PMS) has long been the primary control point for most firms. Several PMS vendors—Entrata, AppFolio, Yardi, MRI & RealPage—have reached $100m+ ARR scale (AppFolio is the sole public company in this list, valued at nearly $9B). These are the platforms that firms rely on as their primary system of record, and the systems are very sticky as a result—despite low NPS scores and frequent customer complaints. These companies also expand their platforms (often via M&A) to pull in multiple use cases—tenant screening, revenue management, asset management, and more.

So, do new entrants stand a chance? Gaining control is challenging, but there are ways to drive a wedge into the existing landscape.

WEDGE 1: TARGET “GREENFIELD” CUSTOMER SEGMENTS
High customer fragmentation, buyers lacking software budgets, and general lethargy around technology adoption are among the reasons real estate has been a historically hard-to-crack vertical. And startups need to overcome the distribution advantages legacy systems like PMSs have built over decades.

Fortunately, new approaches to monetization and new product experiences (enabled in part by LLMs) are unlocking “untouched” market segments that don’t have existing control point systems in place. A couple of examples:

• Baselane (a Thomvest portfolio company) targets independent landlords that have historically been difficult to acquire and monetize. The big unlock in its business comes from bundling operating tools like rent collection and tenant screening with banking functionality. In doing so, it becomes the primary control point for independent landlords, providing ample opportunity to monetize via payments, insurance lending, and premium features.
• ServiceTitan has scaled to nearly $500m ARR by building vertical software for the roughly 2.5 million home service companies in the U.S. In the past, many home services SMBs relied on pen and paper or spreadsheets to manage operations and customers. ServiceTitan has built an all-in-one platform for managing payments, accounting, scheduling, marketing, payroll and more—in doing so, it’s become the primary control point for thousands of long-tail SMBs.

WEDGE 2: WRAP AROUND THE CONTROL POINT
In cases where there is an existing control point in place, high switching costs and general inertia may make it challenging for new startups to compete. In lieu of replacing systems, can these startups build value around the control point? And in doing so, can they shift user activity to their platforms (i.e. become the “system of engagement”)? Our portfolio company Clari built sales forecasting and analytics on top of Salesforce, while Gong is a relevant example in the sales tech space.

Startups that have the best shot of scaling as a control point compliment tend to have the following attributes:

• New data. Companies must access or analyze data that provides value beyond what can be accomplished in the existing control point system. For example, products like OpenSpace and OnsiteIQ have become essential platforms for contractors and developers by capturing digital images and videos on construction sites. This puts each one in a unique position as a critical project tracking and analytics platform. Two great examples of products that sit alongside the primary control point (usually Procore) by creating unique, differentiated value. Another example: Convex (which was recently acquired by ServiceTitan) has built valuable lead enrichment and sales engagement functionality on top of CRMs used by subcontractors.
• New communication and workflow tools. Startups can create value alongside the control point by making their customers more efficient. This usually means workflow automation. For example, Forge and Factor streamline communication with suppliers, order tracking, purchase approvals, and more for their customers (which are primarily hardware manufacturers). They do so by integrating deeply with a customer’s ERP system. In real estate, Haven is building LLM-powered communication tools for tenants and real estate owners.

WEDGE 3: “SELL WORK NOT SOFTWARE”
Sarah Tavel from Benchmark shares a great perspective on startup opportunities enabled by LLMs. She encourages companies to complete entire tasks or processes for customers, rather than simply offering incremental software tools:

While there are fantastic startups innovating to improve employee productivity, LLMs create an opportunity for startups to look beyond this way of thinking and discover surface area that previously was out of bounds for selling software given the required GTM and pricing limitations of software. To do this, rather than sell software to improve an end-user's productivity, founders should consider what it would look like to sell the work itself. Selling work opens up new vertical opportunities that wouldn’t have otherwise supported a software company.

This is especially true in real estate, a sector where companies are more accustomed to hiring service providers (for example, third-party property management) than buying software. In these instances, the service provider becomes the decision maker when selecting control point software–all the while selling on terms a real estate buyer understands and values. And there are many labor-intensive or manual workflows that are ripe for automation, a dynamic Pilot has capitalized on in the accounting space.

While “tech-enabled services” aren’t a new concept, generative AI may enable a new level of automation and scale—selling a service while enjoying software-like gross margins and growth rates. We’re beginning to see this play out in other industries; for example, EvenUp creates demand packages for personal injury law firms, replacing time consuming and manual work typically completed by paralegals.

In the mortgage space, Maxwell (another Thomvest portfolio company) has built an AI-enabled “mortgage fulfillment-as-a-service” offering. Selling the work is particularly salient in mortgage, where cyclicality leads to constant periods of understaffing and overstaffing. Maxwell helps mortgage companies shift their overhead expense from a fixed to a variable cost, while also delivering a more consistent, higher-quality work product. APM Help and Rexera are also good examples of selling the work—in this case property accounting and HOA documents acquisition—in the real estate vertical.

PRYING OPEN THE LID
Inevitably, when navigating a maze of canals in search of the Promised Land, startups will face an incumbent controlling a bridge. Control is the name of the game. All three wedge strategies can work, but the wave of sell the work companies coming to real estate over the next year offer the most exciting prospects.

Image generator: DALL-E
Prompt: show canals separating multiple high rise office buildings, and a bridge over the canal with warriors standing on top