Why do proptechs in emerging markets fail? How to win instead

Just like startups that seek to fuse enterprise SaaS and data are hard, so is attempting proptech in an under-funded, under-sized, business unfriendly market. Is it impossible? No. but it will be easier if you know the pitfalls upfront, and can plan for them
Catch 22 Proptechs in emerging markets
“Everyone has a plan until they get punched in the mouth”

Mike Tyson

We’re fortunate to get a firehose of common advice from Silicon Valley thought leaders…

The question: is this applicable to niche startups? More specifically, proptechs in emerging markets?

My view – no.

By way of background, a Chartered Accountant by training, I have been in the CREtech industry in Africa for 13 years, long before it was cool, long before the buzzwords. We are post-revenue, pre-profit, and have closed one external funding round. Our 22-strong team service Africa’s best brokerages, and most innovative property funds.

And to be honest, I’ve been punched in the mouth. Repeatedly.

As the saying goes:

“Good judgement comes from experience, and experience comes from bad judgement”

My hope with this? By sharing my experiences, I help you either make better decisions, or grow your self-belief, or both. Certainly, if you learn just one thing and can change course for the good, my pain will not have been in vain.

This clip is the esteemed Marc Andreessen, Silicon Valley venture capitalist, giving a different take on the common advice. When I heard these 3 gems of wisdom, talking to the niche of enterprise SaaS … I felt like he was talking to me about proptech.

Why enterprise SaaS is different

Here is gem one, what do you think?

(If the angels at YouTube do their thing, the above should start at 46m31 with a tall, bald guy in his mid 40s saying the words ““By the way, the thing worth highlighting is”, and should end, 31 seconds later, with the same guy saying “the customer actually needs the full product when they first start using it” by 47m02. If it doesn’t end at the time, please press pause)

A low cost MVP is not applicable

Hopefully the above insight answers why so many of us proptechs in emerging markets are feeling frustrated or ashamed why it’s taking us so long to get to a minimum viable product.

Why? Our product is much like a 2,000 km railway line. It’s only useful when a carriage can carry a user from point A to point B. Therefore, until then, it’s a lot of hype and blood, sweat and tears going into the ground – for not much obvious good. Buffett kindly calls this a defensive “moat”. To those in the trenches building it, it’s an agonising project.

You “want some more” (pain)? Okay, here’s data

Another uncomfortable fact. Commercial property (and property in general) runs on data. So, in a proptech startup, you have the added complexity of developing a SaaS tool … PLUS … a data solution.

Thus, not only is a) your product only usable by (enterprise) customers later in the development cycle, but, b) because of complexity, your product’s development lifecycle is longer than normal.

Longer development means one thing: more funding required.

How about more (pain)? Product maturity vs user value

Expanding on Andreessen’s point 1, and applying the railway line metaphor, here are two realities affecting the beloved user metrics:

  1. For the first 50% of development of your product, customers are worse off using your product. I.e. it is better customers don’t use your product.
  2. For the next 20% of the same development journey, while using your product is better than not using your product, the bad news: they are still worse off than using existing pen and paper / Excel solutions.

This, explained by the SaaS chart of pain, is a hard problem to solve.

The “ticket to the game”

Gem 2 of 3 from Andreessen – from 47m03s to 47m10s:

“And so the company actually needs to raise $5 or $10M dollars to get the first product built” 

This image unpacks the egg-and-chicken predicament for proptechs in emerging markets:

Proptech chicken and egg

Unfortunately we’re not in Silicon Valley, Boston or London. We’re operating in Mumbai, Bucharest, Santiago, Manila, Nairobi.

$5M is a huge number for local VCs. Secondly, the proptech ask of $5M for a business with initially no users, a long development roadmap and an initially small addressable market is dripping with risk for investors.

Catch 22 for proptechs in emerging markets

Third point by Andreessen, from 47m06s to 47m09s:

“But in almost all those cases that’s going to be a founder who has done it before”

Catch 22 CREtech Africa

While the above are hyper rational criteria for VC investments, it’s a catch 22 for niche startups.

Firstly, how many tech home runs can you name out of emerging economies?

Secondly, the road of proptech innovation is littered with the burnt-out carcasses of failed tech startups. The most common reason, and we see these guys come and go every couple of years: teams who have tried to attack proptech “from the outside in”.

Why the failure? Property is a relatively unstructured industry riddled with complexity, and stacked with secret handshakes and landmines – it has a massive domain IP moat. It truly is a jungle. Therefore, without the 10,000 hours in property, you’re in unknown, and unforgiving, territory.

With Silicon Valley’s enterprise SaaS bitter medicine out of the way, I am now going to share with you unromantics from operating at the coalface here. In summary, what’s different about proptechs in emerging markets, and, then, what are the solutions.

Any of the following sound familiar?

Imagine you, one member of a team of bright and ambitious industry insiders, are founding a proptech startup in an emerging economy. Everything seems perfect. All parties love the cheap dollar cost to build code assets. The VCs love the founders’ ambition, desperation, hustle and work ethic. The founders in turn back their access to Silicon Valley tools, and low threat of competition from overseas.

The future looks rosy.

The emerging market mouth punches

1. Underfunding

Punch 1 for emerging market proptechs: your costs and complexity of the project is underestimated, by all parties. This is due largely to the naivety of first time founders, followed by funder capacity, and hidden inefficiencies implicit in this geography.

In other words, your ambitions do not match funding.

So, immediately, your endeavour is on the financial back foot.

2. Operating environment

Punch 2: unaccounted-for tougher day-to-day operating environment

Basic things that should work, don’t work. For example, in South Africa, and we are not alone, we have to deal with electricity outages, internet outages, water outages, low service provider and public sector competence levels, “brain drain”, and crime.

Maslow hierarchy of needs tech startup

As the image unpacks above, niche proptechs are dealing with a whole bunch of noise their competitors overseas are not. The result, high opportunity-cost-of time founder team members waste hours fighting fires at the bottom of the “startup needs pyramid”, and miss the important stuff higher up.

In addition this combination of “helicoptering” up and down the needs hierarchy and the higher levels of stress introduces brain fog. This lack of clarity results in poor decisions. Poor decisions will kill you faster than anything else.

3. Smaller markets

Punch 3: different customer characteristics, smaller market size

  • Your B2B customer base is smaller – significantly so. So even at very high levels of market penetration, you’re short on revenues. Unfortunately these fewer customers still require at least the same size feature set.
  • The data from guys who have broken out of emerging economies and into overseas markets is interesting. Leaning on their wisdom and experiences on their time in less mature markets:
    • While smaller, our emerging economy customers are less divisionalised or niche, and more “Jack of all Trades”. I.e. they do more with less.
    • Of lower importance, our internet is bad/erratic, and hardware is weak.
    • What this means? In order for your product to be a sufficiently compelling solution, customers need and demand both wider and extra functionality
Innovation in CRE tech startups
4. Customer appetite for “new”

Punch 4 is summarised by the image above. Your average emerging market customer is not mandated to be innovative, and is generally distrustful of tech. Further they are budget strapped, underestimate the complexity, and is less receptive to Silicon Valley customer development programs.

Further, much like you, they are “too busy being busy” surviving.

However, let’s assume you are a strong counterpuncher. And we can fast forward to the best possible scenario.

You have executed on your product development, are on track to product market fit, and are post-revenue and climbing steadily.

(By the way, anything else … you’re dead).

How does this story play out?

Inevitably, the under-funding catches you, and your plane starts running out of runway.

Enter the “white knights”

Can the the VCs save you?

The bad news, in emerging economies, it’s incredibly hard as a proptech to raise decent cash. This is why:

  • Corporate venture capitalists, the traditionally niche-focused domain experts who can evaluate opportunity and have a vested interest in seeing proptechs fly, don’t exist for proptechs in emerging markets.
  • Next up, proptech is out of mandate for the local big money. VC mandates exist for fintech, insurtech and B2C. Proptech, because of the domain barriers to entry, requires high levels of education. And VCs, because the spread of opportunity is so wide, can’t really be industry sector-focused. Consequently it’s hard for them to distinguish between the good and bad proptech opportunities.
  • Because of the reduced local market size
    • VCs are not seeing the business metrics from you that their counterparts in the Valley see
    • Thus, despite the tech costing the same to build, it’s hard to justify proptech funding value asks
  • Because no local home runs are available to reference to potential investors, VCs struggle to raise funds. Further, because the money is from investors who are private equity minded, VCs (often new to tech) are forced to think like PE players. As a result, VCs want audited financials, management accounts, future budgets, balance sheets and cash flow statements, variable and fixed costs analyses etc.
  • Lastly, because of demand and supply issues, there are strong incentives for the V in VC to be swapped from venture to vulture.

The end game

Predictably one of the following three things happen:

  • Startups flame out on the runway before lift off
  • Desperate tech startups take smaller money at low valuations, on unrealistic expectations of success. The result: diluted-down, disincentivised founder teams
  • Tech startups bootstrap. This defocuses them and slows development. As a startup you’re still alive, and you’re still making meters, but slower than if you were funded. You definitely stop looking at Crunchbase!

This concludes our attempt at unpacking the painful realities of a proptech startup in, say, South Africa vs your average tech startup in Silicon Valley. Now for solutions…

Context and angles

What is the playbook for these niche proptech startups to win against the massive odds, and have a Hollywood ending?

Note: Not being a VC, I am going to graciously pass on trying to solve the challenges mentioned for local PropTech VCs.

Some housekeeping…

For starters, guys. During your journey, you’re personally going to acquire and get a lot of well-meaning, largely theoretical advice. It’s all coming from a good place. The challenge is that the advice givers don’t know what they don’t know about proptechs in emerging  markets, and the other is that some advice is excellent. You need, somehow, to figure out the difference!

Then, making peace… The famous “struggle” is one … the second is around Silicon Valley VC funding. Unless things change or you are extraordinarily lucky, you ain’t going to get it early. Chasing it locally is a very time consuming and low probability process, and your time is better spent finding higher probability way to finance your series A.

So, how do you finance your A round?

Let’s look at defense… One thing we have done at Gmaven to reduce the cash burn? Team salary sacrifice schemes. This has the positive effect of aligning everybody, and is fair. If your team mates have put their blood into the business, they deserve a chunk of the business.

Six solutions for proptechs in emerging markets

After offense there is defense – how we brought in money…

Funding tech startups in Africa
1. Grant / soft funding, or 2. Side gigs

The obvious levers here are a) grant or soft funding, or b) the Holy Grail of an existing revenue stream. While the latter gives you the ability to keep the lights on, nothing is for free. It’s defocusing at best. Remember the adage “chase two rabbits, lose them both”.

3. Going “all in”

Selling assets. Cash is needed, and, in this fly or die environment, you need to be all in. If you believe in your product or solution and ability to execute on it, it should beat the ROI of your other assets.

4. “With a little help from my friends”

A friend, family and business network round. VCs can’t be expected to judge your character accurately. They simply don’t have enough data. But friends, family and business associates do have that data, and they can make smaller-sized bets. Y Combinator’s elegant SAFEs or similar country-specific convertible instruments are simple ways to get funding, with a reduced risk of parties being wronged (intentionally or otherwise) in the near-impossible task of trying to value an early stage business.

5. Spread the love

Partner with companies that do complimentary things to you in the same niche. Don’t fall into the trap of thinking you can build it all. Yes, this means leaving economics on the table and relinquishing control. But you don’t have other choices. The good news: not only can complimentary businesses with like-minded partners be personally fulfilling, but, done right, they activate elusive synergies, and potentially grow the pie bigger, for both parties.

6. Formal consulting to larger clients

Until the huge mass of invisible features are built, this can be tricky. If your product is mature, and you are not at risk of burning credibility and networks, this “selling hours” for a consulting led startup is a strong option. The benefits to you: deepened domain IP, and partial funding of development. The benefits to the corporate: 1) avoiding big capex costs and risks, 2) they get features they have a hand in defining, in the sequence they want, and 3) they get to see efficiency impacts in their business for relatively low TCO.

The negatives to make peace with: corporates operate at a slower cadence to tech startups, and new projects are risky (so under-promise and over-deliver). Consulting clients may want features in a different sequence to other customers.

The non-negotiable: it is a terrible, terrible idea for both the corporate or tech startup to build custom features into the core product set.

On the positive front, two things make this journey meaningful and purpose-rich:

  1. Without you, people are in pain – your solutions are helping them
  2. The once-in-a-career opportunity of making positive and industry-wide-level change.

Most importantly, if your product is something your customers truly need, you are solving a real problem and you have tenacity, you will succeed.

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A hopefully refreshing read (with supporting images and videos) for battle-hardened SaaS businessmen, new SaaS entrants and aspiring VCs alike. We answer the questions: “why is enterprise SaaS so hard”, and “why is the common tech startup guidance sometimes plain wrong”. We also sprinkle in some wise words from the dudes who know.

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