For entrepreneurs and investors alike, a successful VC funding round involves both a financial transaction and a more comprehensive partnership. Most venture capital firms take pride in the way they accelerate the growth of their portfolio companies through a combination of strategic guidance, support services and an ability to open doors with other key stakeholders. With the collaboration of both parties, a successful startup will hone its product and gain traction among users, ultimately driving value for both the startup and its investors.
At RET Ventures, we use a formula that takes this approach to the next level. Take our work with SmartRent as an example.
One of the fastest growing proptech startups, SmartRent is the market leader in the smart home category and has become the sort of impactful technology startup that attracts investment from highly regarded generalist investors the likes of Bain Capital Ventures and Spark Capital. SmartRent’s position of leadership is not due to luck. That the company’s success is primarily a result of the vision and determination of its leadership team is no question. But credit also goes to the unique strategic investment approach we took starting well before we led SmartRent’s Seed and Series A rounds — a strategy we developed when we founded RET Ventures, and which we plan to continue utilizing in the years ahead.
To better showcase our strategy, we’d like to go behind the curtain on the SmartRent deal, illustrating the program we’ve created with the goal of helping build the most compelling startups in the proptech space.
The Proptech Sector
The old aphorism states that “it’s not what you know, but who you know.” However, RET’s approach is predicated on the assumption that those two categories are intertwined.
Founded in 2017, RET was established with the express goal of funding technologies for, and in partnership with, owners and operators of residential real estate. To accomplish this mission, the RET team brings together real estate, investing, operating and entrepreneurship experience. With this highly targeted mandate and capability set, RET curated a Strategic Investor base comprised primarily of real estate companies who are potential users of the technology we invest in. By creating such a targeted, highly engaged group of LPs, we’ve equipped ourselves with an important voice to consider when developing our investment themes, sourcing and assessing investments and guiding the growth of our companies.
Like all other VCs, we are frequently approached by startups looking for funding. While our investment team has extensive experience in both venture capital and growth investing and the real estate industry, we regularly consult with our Strategic Investors to ensure that we have the most timely and accurate insight on the value a given technology solution will provide to the industry. And with our 40+ Strategic Investors owning and managing a fairly meaningful subset of the industry, often we learn about demand for the product from existing users — our Strategic Investors — who are strongly considering signing up. Coupled with our extensive analysis and underwriting, this gives RET Ventures a significant competitive advantage in identifying the startups that are poised to gain market acceptance and scale their growth.
But the value is even greater on the proactive side. While we are actively tracking more than 1,250 companies in the proptech space, our regular conversations with our Strategic Investors allow us to regularly discuss industry challenges that none of those technologies can sufficiently resolve. The importance of a deep understanding of the industry in this sort of discussion can’t be overstated. Investors — even those focused solely on residential real estate technology — are, by definition, a step removed from the technology, which effectively means they are prone to missing some level of nuance or be behind the adoption curve. End users, who utilize the existing technology and experience the pain points firsthand, have a better perspective on what the industry needs.
After we have determined what technology solution the industry needs to solve, we are uniquely suited to find or build the right solution that can address those issues.
The Investment Process
With this approach in mind, three years ago, we determined that there was serious demand for a smart-home integrator designed for the multifamily industry. Consumer-oriented smart home devices have proliferated in recent years, allowing millions to benefit from in-home tech amenities. But with disparate products serving as thermostats, smart door locks, smart lighting, IoT sensors, intercoms, media devices and more, a unifying platform became an essential need in a streamlined smart home. And, while there were a number of emergent consumer-focused platforms, there was no enterprise-focused platform, particularly for operators of large multifamily and single-family rental portfolios, that would meet the needs of both owners — e.g., portfolio-level asset management features — and their residents.
As an early-stage venture capital firm focused on driving technology innovation in the multifamily and single-family real estate sectors, RET Ventures was well aware of this problem. With no mature technologies available to fill the void, RET began a search for an early-stage startup that could capture the market opportunity.
The first step in our selection process — quite atypically for venture investing — was issuing an “RFP” to several early-stage startups and identifying which had the potential to actually create the solution we and our Strategic Investors envisioned. We then had five startup finalists gather to present their companies and technologies to a group that included both our corporate executives and senior leaders from several of our Strategic Investors.
When we started this process, we considered an additional vetting round to whittle our five candidates down to two or three, who would each run small pilots with our LPs before we decided who to back — but that ultimately proved unnecessary. SmartRent swept the room. From every vantage point — founder, vision, experience, product — the company had the necessary ingredients to become a best-in-class platform. The only area where SmartRent fell short — reference client base and commercial traction — was an area we felt confident we could address.
We led SmartRent’s seed round in Q1 2018, while also pre-negotiating a Series A that we would lead if all went as planned.
A High-Conviction Investment
After a few of our Strategic Investors piloted SmartRent, any doubt we had was gone. Several of the largest residential operators had now used the technology and made subsequent decisions to adopt the platform, and we led SmartRent’s Series A round six months later.
Because we were so passionate about the solution SmartRent was providing, our investment in the company was unique in a few different ways. First, we made a particularly high-conviction investment in SmartRent, acquiring a much more significant ownership percentage than is typical in a venture investment. We also committed to have several of our LPs — all of them major multifamily operators with a total of more than 250,000 units owned and managed — work extremely closely with the SmartRent team, effectively incubating the product to meet our joint vision. With this ongoing feedback, we had confidence that the SmartRent team would be able to hone the software and hardware to meet the needs of varied users, creating a more flexible solution that resonated with a larger portion of the industry.
In addition to providing SmartRent with several ideal development partners from among our LP group, the internal RET team was very hands-on with the SmartRent team. Our entire team — from partners on down — worked closely with SmartRent founder and CEO Lucas Haldeman to provide business and operational support for the growing company.
In one notable example, over a year ago, when SmartRent was still aptly classified as an early-stage startup, one of their vendors was a small overseas company that made essential technology for SmartRent. Lucas and his team saw the potential value of vertically integrating with this vendor, which would allow them greater latitude in terms of designing their software and hardware. But as an early-stage company without an in-house CFO, they didn’t have the internal manpower to assess and manage the potential acquisition.
The RET team, however, has extensive experience in M&A. One of the RET Ventures partners with 10+ years of private equity M&A experience jumped in to help lead the acquisition effort, traveling abroad to meet the team and underwriting the deal in conjunction with SmartRent. Over a year in, that transaction has already borne fruit, as the combined team has collaboratively built compelling functionality for SmartRent’s core user base.
Taking the Next Step
With a compelling product and strong development partners, SmartRent has been growing its client base rapidly. Since our initial investment, they’ve quickly ramped up their unit count from virtually zero to 160,000 units and have gained attention from some of the largest technology investors. SmartRent’s Series B round was led by Bain Capital Ventures and its Series C was led by Spark Capital. The Amazon Alexa Fund also invested in SmartRent — an incredibly strategic investment partner for a smart home technology product. In early 2021, the company finalized yet another round of funding, garnering $31 million from a group led by Lennar Ventures, aimed at opening channels to the single-family housing market and broader residential uses.
As SmartRent has grown, RET has continued its support of the company, investing alongside Bain Capital and Spark Capital in each venture round. When SmartRent was raising its Series C, we decided to create a special purpose vehicle (SPV) of 10 real estate owner-operators — both RET LPs and otherwise. The investment by this SPV, which collectively operates 400,000 units, directly into SmartRent is yet another example of RET’s unique ability to accelerate the industry’s embrace of the company.
Just three years after our first investment, SmartRent’s valuation has now multiplied more than 20 times over. With investments from some of the most well-regarded venture capitalists and a technology solution that supports hundreds of thousands of multifamily units across 48 states and four countries, it is a prime example of what a successful proptech startup should look like. By the end of 2020, SmartRent was deployed in more than 2,700 apartment communities, and used by 19 of the NMHC Top 30 owner/managers in the U.S.
As a fund, it’s very gratifying to see how we were able to play such a significant role in filling the significant market need that existed. Leveraging our unique investment approach, we were able to work hand-in-hand with SmartRent — at the time a fledgling startup with whose vision we were aligned — and help the company scale its growth. While Lucas and his team have obviously done a tremendous job — and the lion’s share of the work — in building SmartRent, we’d like to think that our unique approach played a role in the company’s success.
And now that we’ve validated our approach with a number of investments including SmartRent, we intend to show that it’s replicable. Working hand-in-hand with our LPs, we’ve already identified several other areas in which existing technologies for residential real estate come up short, and we are currently in the process of vetting potential technology partners with whom we can work together to fashion much-needed solutions. With the LP ecosystem we’ve created, we’re confident that we’ll be able to help create solutions that will create real value to the industry.