20VC How LPs Can Add Strategic Value To Portfolio Companies & Why Real Estate Is On Every Whiteboard In Silicon Valley with Brendan Wallace, CoFounder @ Fifth Wall

Summary Notes


In a conversation with host Harry Stebbings on the 20 minutes VC podcast, Brendan Wallace, co-founder of Fifth Wall, discusses the venture capital landscape and the strategic advantages of thematic specialization. Brendan's background includes co-founding Identified, a data analytics firm acquired by Workday, and Cabify, a major ride-sharing service in Latin America. Fifth Wall, his current venture, specializes in real estate technology, leveraging a network of strategic investors from the real estate industry to provide both capital and market access to portfolio companies. Wallace emphasizes the importance of specialized funds that can offer unique value beyond capital, such as industry-specific insights and connections. He also explores the potential impacts of autonomous vehicles on real estate and the necessity for the industry to adapt to technological advancements.

Summary Notes

Introduction to the Podcast and Host

  • Harry Stebbings is the host of the 20 minutes VC podcast.
  • Harry is active on Snapchat and encourages listeners to connect with him there.
  • The podcast focuses on venture capital (VC) and features interviews with industry figures.

You are listening to the 20 minutes VC with me, your host Harry Stebings on Snapchat at h stepbings with two b's.

This quote introduces the host and the podcast, providing a platform for listeners to engage with the host on social media.

Thematic Specialization in VC

  • The VC market is increasingly competitive, requiring differentiation.
  • Thematic specialization is suggested as a future strategy for VC firms to stand out.
  • Fifth Wall, co-founded by Brendan Wallace, is an example of a fund specializing in real estate technology.

...with the ever increasing need for differentiation in the vc market today, many are suggesting that the future lies in thematic specialization.

The quote highlights the current trend and need for VC firms to differentiate themselves through thematic specialization to remain competitive.

Brendan Wallace's Background

  • Brendan Wallace is a co-founder of Fifth Wall.
  • He has a background in both traditional real estate and technology.
  • Brendan was previously a co-founder and CEO of Identified and co-founded Cabify.
  • He is an active angel investor with numerous investments in various companies.

Now, Brendan is a cofounder of Fifth Wall, the fund announced yesterday that specializes in technology for the built world and real estate tech.

This quote introduces Brendan Wallace, his role at Fifth Wall, and the fund's focus on technology for the real estate sector.

Fifth Wall's Genesis

  • Brendan and his co-founder shared experiences in real estate and technology.
  • They observed a gap in the real estate industry's adoption of technology.
  • They saw an opportunity to create a VC fund focused on real estate technology.

So we kind of came up with the idea for fifth wall. Me and my co-founder, we both had this hybrid experience of having worked in the traditional real estate industry, but then having also worked in tech.

Brendan explains how his and his co-founder's combined experience in real estate and tech led to the creation of Fifth Wall, recognizing a unique market opportunity.

Real Estate as an Industry

  • Real estate is a significant part of the US economy and the largest asset class.
  • Despite its size, real estate has been slow to adopt technology.
  • There is a substantial opportunity for tech innovation in real estate.

...you have real estate, which is the largest industry in the US, it's 14% of the US economy, it's the largest asset class, it's the largest lending category, it's the largest store of consumer wealth.

The quote emphasizes the magnitude of the real estate industry and its potential for technological innovation, given its slow adoption of tech.

Real Estate Technology's Value

  • Real estate and hospitality tech have produced large enterprise values.
  • Companies like WeWork and Airbnb are examples of successful real estate tech unicorns.
  • There is a significant market for real estate and hospitality tech companies.

...it still produced enormous amounts of value. So if you just look at two of the three largest unicorns today are real estate and hospitality tech. We work in Airbnb after Uber...

Brendan highlights the success stories within the real estate tech sector, demonstrating the potential value that can be created in this space.

Real Estate Tech Investment Focus

  • Fifth Wall observed a lack of focused funds in real estate tech.
  • The industry's idiosyncrasies require a specialized investment approach.
  • Fifth Wall aims to build a platform to address the unique opportunities in real estate tech.

...we couldn't really find many focused funds on this particular category. And real estate is a fairly idiosyncratic industry.

The quote describes the gap Fifth Wall identified in the VC market for real estate technology and their intention to fill it with a specialized approach.

Risk Profile in Real Estate Tech

  • Real estate tech investment involves different risks compared to traditional software.
  • Technical risk is often low due to the simplicity of the innovations.
  • The major challenge is go-to-market and distribution risk, particularly in selling to institutional real estate owners.

...the technical risk is oftentimes very low in real estate tech. Like, the innovations are oftentimes fairly lightweight. And here's the catch. The go to market and distribution risk is enormous.

This quote explains that while the technology in real estate tech may not be complex, the primary risk lies in effectively distributing and marketing these technologies to large institutional players in the real estate market.

Adoption of Technology in Real Estate

  • Real estate companies have been slow to adopt technology.
  • The industry is characterized by low technical risk but high go-to-market risk.
  • A few large incumbents have significant influence over who succeeds in real estate tech.

"It's actually very hard, in part because those companies have been also slow to adopt technology. And we saw that risk over and over again."

This quote underlines the difficulty faced by technology companies in the real estate sector due to the slow adoption rates by established real estate firms. It highlights the central challenge that Fifth Wall aimed to address.

LP Base and Fundraising Strategy

  • Fifth Wall aimed to include the largest real estate owners in their LP base.
  • The fundraising process involved targeting different segments of the real estate market to secure one major incumbent from each.
  • The first $110 million raised was almost exclusively from large corporates.

"We said, what if we could get all the largest owners of real estate in our LP base, which was a crazy idea, like, what if we could get all these big hotel companies, all these big office companies, all these big mall companies to become lps in our fund, just like normal lps."

This quote explains the initial fundraising strategy of Fifth Wall, which was to attract major real estate players to invest in their fund as limited partners (LPs). This novel approach was aimed at leveraging the influence and capital of these large corporates.

Benefits of Corporate LPs

  • Having corporate LPs provides asymmetric information about technology adoption and pain points.
  • Fifth Wall can influence outcomes for early-stage companies and act as a kingmaker.
  • The fund can invest opportunistically and claim stakes due to its ability to influence outcomes.

"We're going to have three main benefits that I think a generalist fund wouldn't by virtue of having pursued this strategy."

This quote summarizes the advantages that Fifth Wall believes it has over generalist funds due to its strategy of including corporate LPs, which provides unique insights, influence, and investment opportunities.

Balancing Corporate and Traditional LPs

  • The fund aimed to avoid competitive tension by having one major corporate from each sector.
  • There was a recognition of the financial opportunity in real estate tech, prompting the inclusion of traditional financial LPs.
  • Traditional LPs such as endowments and pensions offer stability for multiple funds.

"We wanted to bring in just strong financial lps that can be here for multiple funds."

This quote explains the rationale behind including traditional financial LPs alongside corporates, emphasizing the need for a stable and enduring financial base for future funds.

Risks of Industry Specialization

  • Specialization in real estate tech exposes the fund to market cyclicality.
  • Fifth Wall mitigates risk by avoiding competitive fundraising and controlling investment timing.
  • The fund has created a community of tech-forward corporates sharing best practices.

"When you're focused on one particular industry, you're exposed to kind of larger amounts of cyclicality."

This quote acknowledges the inherent risks of focusing on a single industry but also points out the fund's strategies to manage these risks, such as controlling investment timing and fostering a collaborative corporate community.

Response of Generalist VCs to Verticalization

  • Generalist VCs like Benchmark and Sequoia recognize real estate tech as a massive opportunity.
  • Fifth Wall collaborates with generalist funds, offering industry-specific insights and connections.
  • Generalist funds are increasingly referring deals to Fifth Wall for its specialized expertise.

"Real estate tech is a massive opportunity. I think on whiteboards all across Sandhill Road, real estate tech is written somewhere and double underlined."

This quote reflects the growing interest of generalist VCs in the real estate tech sector and their recognition of Fifth Wall's specialized value in this industry. It underscores the potential for collaboration between specialized and generalist funds.

Collaborative Financing Approach

  • Harry Stebbings and Brendan Wallace discuss the collaborative nature of their financing strategy.
  • They aim to partner with companies without competing with established firms like Benchmark, Sequoia, and Lightspeed.
  • Their expertise lies in assisting built world technology companies in growing and scaling.

"This is a collaborative financing approach." "And we're not going to compete, obviously, with Benchmark and Sequoia and Lightspeed."

These quotes highlight the non-competitive stance of Brendan Wallace's firm and their focus on collaboration with companies they invest in. The strategy is to complement rather than compete with the major venture capital firms.

Impact of Autonomous Vehicles on Real Estate and Infrastructure

  • Autonomous vehicles are anticipated to disrupt the transportation industry significantly.
  • The real estate industry is reevaluating its traditional business models due to technological advancements.
  • Airbnb's impact on the hotel industry serves as a precedent for the potential disruption autonomous vehicles could cause.
  • There is uncertainty about how autonomous vehicles will affect asset values, location importance, and logistics.
  • The form factor of cars may change, allowing for activities like sleeping and eating to occur during travel.
  • The cost and inconvenience of commuting are expected to decrease, which could influence the expansion or contraction of urban and suburban areas.
  • Real estate investors are concerned about the potential for cities to become more expansive and the implications for retail, residential areas, and central business districts.

"I think the real estate industry has come to recognize that it used to be [...] We don't have to worry about technology." "I think what's unknown today is how does that change things? Like what are the shifts in asset values, in the importance of location, in the importance of logistics and infrastructure around assets that's going to be driven by autonomous cars?"

Brendan Wallace emphasizes the shift in the real estate industry's perspective due to technology's impact, using Airbnb as an example. He discusses the uncertainty surrounding the changes that autonomous vehicles will bring to the industry, particularly in terms of asset valuation and locational significance.

Urbanization vs. Suburbanization Debate

  • The millennial generation's preference for urban living has led to a reurbanization trend.
  • Economic factors, such as lower earnings compared to previous generations, have influenced living arrangements, with more millennials renting in cities.
  • The rise of new living concepts like micro-apartments and co-living spaces reflects this trend.
  • There is a debate about whether the convenience of autonomous vehicles will lead to further suburbanization or reinforce the current trend towards urban living.
  • The future of urban environments is uncertain, with various sociological and demographic factors at play.

"Our generation, I assume our generation, the millennial generation, is the first generation to earn less than our parents." "I think there's an inherent tension there, which is when it becomes easier to commute, do you just want to live someplace further afield that's prettier?"

Brendan Wallace discusses the financial realities of millennials and how these have shaped living trends towards urban centers. He poses the question of whether improved commuting options provided by autonomous vehicles will encourage living further from cities or if the attractions of urban living will prevail.

Technological Innovation in Real Estate

  • The real estate industry is looking to technology innovation to form a view on the future impact of autonomous vehicles.
  • The assumption that daily commutes define the structure of urban planning may change with the advent of autonomous cars.
  • The transformation of the car could have a profound effect on where people live, work, and engage in various activities.

"What I do think is they're looking to technology innovation as a way to form a view on that."

This quote by Brendan Wallace suggests that the real estate industry is actively seeking insights from technological advancements to predict and adapt to the changes that autonomous vehicles will bring.

Drivers of Autonomous Vehicle Adoption

  • The future of autonomous vehicles is influenced by technology capability, price point, and regulatory factors.
  • The technology for fully autonomous cars is expected to mature.
  • The affordability of autonomous vehicles is crucial for widespread adoption.
  • Regulatory challenges include road infrastructure, ethical considerations, and liability in accidents.
  • The timeline for the adoption of autonomous vehicles is uncertain, with estimates ranging from 2025 to 2035.

"So I think it's really three drivers that will dictate the future of autonomous vehicles." "I actually think that is the biggest unknown."

Brendan Wallace outlines the three primary factors that will determine the adoption rate and success of autonomous vehicles. He emphasizes the regulatory aspect as the most significant unknown, indicating that it is a complex and unresolved issue.

Impact of Technology on Real Estate Values

  • Real estate values are likely to be affected by technology advancements sooner than mass adoption occurs.
  • Investors take into account the long-term implications of technology when valuing assets for purchase.
  • Technology's influence on real estate could rapidly change the landscape of the industry.

"You'll start to see impacts on real estate values much sooner. Right. Because most investors that are buying real estate are buying it for five to ten to 15 years, and so they're going to include this in how they value these assets."

This quote emphasizes the forward-looking nature of real estate investors who consider the long-term impact of technology on property values, even before widespread adoption of new technologies.

Real Estate Investment Strategies and Technology

  • Real estate investors have varying attitudes towards technology, from ignoring it to actively integrating it.
  • Companies like Macerich see technology as central to the evolution of physical shopping spaces.
  • Physical shopping will persist, but technology will redefine the experience and utility of spaces like malls.

"Other investors are much more committed to reinventing their business. In particular, one of our partners, Macerich... They see technology as the future of that."

Brendan Wallace points out that while some investors may disregard technology, others, like Macerich, are proactive in leveraging technology to transform their business, particularly in the retail sector.

Brendan Wallace's Favorite Book: "Accidental Superpower"

  • Brendan's favorite book is "Accidental Superpower," which discusses the decline of globalization and the rise of populism.
  • The book is noted for its foresight, having predicted events like Brexit and the election of Donald Trump.
  • The book's insights into global trends make it a compelling read for understanding current geopolitical shifts.

"I love this book called Accidental Superpower. It's an amazing book about kind of the decline of globalization and simultaneously the rise of populism."

The quote highlights Brendan's recommendation of "Accidental Superpower" for its accurate predictions and analysis of significant global events, offering valuable perspectives on the changing political and economic landscape.

Desired Changes in Venture Capital (VC)

  • Brendan advocates for more differentiated sources of capital in VC, providing specific value to companies.
  • Specialized capital could offer targeted advice, industry expertise, or operational focus.
  • Differentiation is key to gaining a competitive edge in the crowded VC space.

"What I would love to see, and what I hope fifth wall is about is that we believe more differentiated sources of capital should emerge."

Brendan expresses a desire for VC to evolve by offering more than just funding, suggesting that capital paired with specialized expertise or industry focus can be more beneficial to startups.

Challenges in Fundraising for Fifth Wall

  • Differentiation was the most challenging aspect of Fifth Wall's fundraising.
  • The team worked to establish an edge by aligning with strategic partners committed to technology.
  • Building relationships with the right strategic partners was a rigorous process involving numerous meetings across the industry.

"The most challenging element of our fundraise was... building something differentiated."

Brendan reflects on the difficulty of creating a unique value proposition for Fifth Wall during its initial fundraising phase, emphasizing the importance of differentiation in the VC industry.

Brendan Wallace's Preferred Source of Insights: CB Insights

  • Brendan values CB Insights for its data-driven content and visual infographics.
  • The platform provides a quantitative approach to understanding trends in technology and venture capital.
  • CB Insights brings analytical rigor to the VC industry, which is often dominated by qualitative analysis.

"I love CB insights... they're very quantitative and kind of data driven in how they position themselves."

The quote indicates Brendan's appreciation for CB Insights' data-centric approach to providing insights, which contrasts with the more common qualitative news sources in the tech industry.

Investment in VTS and Its Significance

  • VTS is a significant investment due to its dominance in leasing, property management, and portfolio management for the office industry.
  • VTS competes against traditional methods like spreadsheets, not established software giants.
  • The company's cloud-based software suite represents a major shift from offline to online management in the real estate industry.

"They are competing with spreadsheets... They do that computationally in the cloud, dynamically."

Brendan explains the disruptive nature of VTS's business model, which replaces manual spreadsheet management with cloud-based software solutions, thus modernizing a significant segment of the real estate industry.

Closing Remarks and Product Endorsements

  • Brendan expresses his pleasure in discussing his perspectives and Fifth Wall's journey.
  • Harry Stebbings provides personal endorsements for products that have impacted his life, including the Eight Smart Mattress and Full Contact contact management.

"Brendan, it was such a pleasure to have you on the show... And if you enjoyed the show today and would like to see more from us, then you can follow me on Snapchat at htebings with two B's."

Harry closes the interview by thanking Brendan for his participation and sharing his personal product recommendations, which he believes can enhance productivity and organization for his listeners.

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