What's changing in property and the thought process behind working with a couple of startups in the recent program

The accelerator finished last week and my latest cohort of startups has flown the nest. Insert shedding-a-tear emoji here. I'm super proud. And a personal milestone: that makes 20 startups I'm connected with, either directly or via R/GA Ventures.

Campaign magazine did a great write-up and video of pitch day. Campaign noticed that five of our nine startups were pitched by women founders. A shift towards normality after last year's male-skewed cohort, but still not representative of the real world: ignore the presenters themselves and look at the companies in their entirety. Only five of the nine startups have women in the founding teams. It should be all nine. There's work to be done.

Here's a puzzle. What connects these two startups, both in the 2018 program:

  • Beringar which measures and helps optimise productivity in commercial real estate (like offices and hospitals) using sensors on the ceiling and a machine learning back-end. The business model is hardware-enabled SaaS.
  • CupClub which is on a mission to eliminate single-use food packaging, starting with coffee cups. Initial customers are businesses with internal cafés, and they pay a competitive per-drink price for reusable cups and a wash/return service.

The rationale I gave to the R/GA Ventures investment committee was the same in both cases.

The logic goes something like this...

Commercial real estate is changing. The days of the 25 year lease are over. We're seeing the WeWork-isation of everything. By which I mean, instead of long leases, we see not 5 or even 3 years, but companies moving to annual or month-by-month leases. This provides flexibility (reduced risk, ability to grow) plus access to pooled services normally only available to much larger firms.

Why is this happening? We can guess. My hunch is that it's to do with Ronald Coase and the internet. In 1937 Coase asked why firms exist. If the free market is so great, why bundle together everything from finance to marketing to tech inside one company; why not do everything by contracting out to the market? The answer is that the free market isn't free. There's a cost associated, and firms exist to make everything inside them cheaper.

But then the internet happened. Transaction cost dropped precipitously. Now firms can be smaller than ever before. Consider startups: everything is outsourced except core activities. Finance, HR, marketing operations, customer support, etc. Tons has been taken over by software (or rather, by the people at external firms who provide the software).

(Here's me rambling about Coase in 2014.)

So firms are smaller and more nimble than ever.

Aside: I think the same dynamic is responsible for the fact that some firms are more_gigantic_than ever. There's a bimodal distribution. Another effect is the growth of freelancers as a mode of employment, and what is either called the sharing or gig economy depending on the class of the worker: "sharing" if it's rich people renting out their homes on Airbnb; "gig" if it's working class people renting out their bikes and their sweat.

These firms pop into and pop out of existence. They don't want 25 year leases. They don't want to do fit-out, or manage their own office services.

This trend (here's my guess) is only going to continue.

Assuming this is true, what are the implications?

One shift I think we're seeing is that property owners are no longer planning (as much) on making their profit from rent. Instead rent should get them merely to break-even. Profit comes from selling services to their tenants.

These services have healthier margins than property, and they're charged on a recurring basis. Services like the usual ones: gas, electricity, cleaning, security. Then also higher-level services... like office productivity, and coffee. Bingo.

The shift is parallel to what happened in the consumer space. FMCG (fast-moving consumer goods) used to sell to consumers via supermarkets, unit by unit. Marketing was focused on keeping consumers loyal to the brand. We're in the middle of a shift to subscriptions--look at my oft-referred-to purchase of subscription shaving supplies co Dollar Shave Club by trad FMCG giant Unilever for $1BN. Marketing is now focused on customer acquisition, and highly targeted.

As it is in the consumer product space, and as it happened in the software space (from boxed software to SaaS) and also media (from DVDs to Netflix), so (I believe) it's happening in the property space. A shift to a services model.

What Beringar and CupClub have in common, for me, is that they are both beneficiaries--and will continue to be beneficiaries--of this property trend.

  1. They are both services targeting businesses, charged on a recurring basis
  2. They are likely to be resold by property owners to their tenants. That is, for both startups, landlords are channel

There were other reasons to invest, to be sure, but I made this same argument for both of them, and I get a kick out of that.

Is this all correct? Honestly? Who knows. It's a hunch.

It's useful to have a hunch about the bigger picture, because then my hunch-making muscles get some feedback. I have a similar hunch about all of the startups I've worked with. Sometimes it's obvious, sometimes it's not. Once you have a hunch you can build models and do research to check assumptions. Hopefully over time my hunches will get better.

I'm guessing that to proper investors (I just play one on TV, as they say) this kind of thinking is painfully obvious, so apologies for talking about how to suck eggs.