Pictured: Volition Capital Managing Partner Roger Hurwitz
At Volition, we’ve been actively investing in property technology since our inception in 2010. With every investment we have made across the real estate ecosystem, the same issue repeatedly comes up – the idea that the total addressable market (TAM) isn’t big enough to build a large business. While we understand the concern, fortunately we have a different perspective when it comes to assessing the market opportunity.
Traditional investor TAM analysis usually looks at the number of properties in a target market and multiplies that figure by the average revenue per unit (ARPU). This view is often far too narrow as there are many more addressable units than most analyses suggest. Real estate is everywhere, from single-family homes and multi-family apartments to office towers and mixed-use properties.
Early on in a company’s lifecycle, it’s common to focus on one segment of the market and even further narrowly focus within such segment. For example, one may start in residential and within that pursue single-family residences. Not only can companies expand within residential, but commercial properties are also viable as they often face comparable challenges. Remote work has also created the need for more mixed-use properties. As such, what appears at first to be a limited market is actually much broader.
The ARPU used in most TAM analyses can also be misleading. It is often assumed to be static when, in fact, it is constantly evolving. Great prop-tech companies evangelize new categories that previously did not exist and steadily expand their product suites to capture additional wallet share. The industry is rapidly adopting technology to drive top-line and cost savings, providing a TAM that is far larger than initial calculations may suggest. The opportunity continues to grow as companies innovate – think energy, telecom, security, maintenance, package delivery, pet services and home services. Companies must constantly be thinking about how to expand and invest ahead of the curve to drive sustainable growth.
Another critical but often overlooked aspect of the prop-tech market is the power of best-in-class retention dynamics. Many prop-tech companies have a sticky and durable customer base. Property owners and managers want to deploy the technology, set it, realize the benefits, and forget it. By providing a great customer experience, the compounding impact of strong retention can be profound. Additionally, many customers own a portfolio of properties yet start with only a subset of properties for a new technology vendor, providing a big land-and-expand opportunity within prop-tech. To illustrate, let’s compare two businesses that each start with $25M in ARR and add $10M of new logo ARR each year, with the only difference being Company A has 120% net retention and Company B has 95% net retention. Company A achieves over $135M in ARR after five years, while Company B is about $65M. In this scenario, Company A needs a smaller addressable market to capture its opportunity, while Company B’s issue is not TAM but much more likely other challenges.
Finally, most TAM analyses in prop-tech focus exclusively on the United States, while many other software sectors take a global view. While few U.S. companies have cracked the GTM motion internationally, the market opportunity exists when ready to execute on it. Ironically, TAM continues to be a big issue for investors, yet the prop-tech companies do not pursue all the white space globally as the U.S. market is more than enough to focus on and build a category leader. Ultimately, what can sometimes look constrained on paper is, in practice, broad, dynamic, and filled with potential to build great businesses.
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