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.
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.
...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.
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.
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.
...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.
...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.
...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.
...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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.
"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.