Thought Leader: Why M&A will fix fragmentation in Smart Buildings

TL;DR: We spoke to Proptech Bankers about the current state of proptech M&A. They believe consolidation is inevitable; it will play a key role in fixing the current technology fragmentation in the smart building market; and any landlord or proptech company not currently in consolidation conversations is missing an important opportunity to control their destiny.

To get in touch with the Proptech Bankers team for help with your next move in this market environment, visit: https://www.proptechbankers.com/contact and tell them Nexus sent you.

This piece is part of Nexus Labs’ new Thought Leader program. To become a Thought Leader in the Nexus Newsletter and on the Nexus Labs website, visit our partners page here.

A few weeks ago, James asked a tough question on LinkedIn:

Technology fragmentation in smart buildings will be solved by _____

A. Interoperability standards
B. Mergers & Acquisitions (M&A)
C. Put your answer in the chat

The answers were suprising. Out of 47 comments, almost zero people said ‘B’. Since Nexus Labs writes about M&A and produces an ongoing podcast series about it, we flat out disagreed!

So we decided to seek out some expert guidance from outside the core Nexus audience—what might people be missing by dismissing M&A as a transformational force?

Enter: Paul Stanton and Sandor Valner from Proptech Bankers. They believe consolidation is inevitable; it will play a key role in fixing the current technology fragmentation in the smart building market; and any landlord or proptech company not currently in consolidation conversations is missing an important opportunity to control their destiny.

Their answer as to why M&A will be key in fixing fragmentation is below, along with feedback on what's happening around M&A in the current proptech market and what startups should expect in the near and distant future.

Proptech Bankers: Our cop out answer to your LinkedIn question would be: 'C'... as it will be 'A', 'B' and a multitude of other factors like better MSI services, systems design processes, etc.  But we'll focus squarely on 'B' for purposes of this response.

First, 'B' is inevitable. In most nascent technology verticals, like smart buildings, the market evolves from a jumble of many "point solutions" into a few leading "platforms", whereby complimentary point solutions are brought together to become features as part of a broader offering under a bigger company.

This happens for a few reasons, including:

1. The customer prefers platforms as they can go to a single vendor to for multiple solutions and get access to bundled pricing and centralized customer support,
2. The platform can scale faster and more efficiently (and reduce its prices to undercut competition) by selling multiple products through a single organizational system
3. The platform can integrate its products' UX and data sets more effectively than separate point solutions trying to integrate with one another, even if all have easily accessible and open APIs.

This last reason in particular is why M&A will play a key role in solving technology fragmentation in smart buildings. But it's probably also worth understanding why this is happening now, and what this means for many proptech and cleantech companies today and in the future.

There is a perfect storm happening for consolidation and M&A in our industry, which is being created by the combined headwinds and tailwinds proptech companies are facing today.

The headwinds are coming from the capital markets. The uncertainty in the capital markets driven by interest rate hikes and the looming recession are forcing lower valuations and a decrease in investment activity, making it hard for most companies to raise fresh rounds of capital (particularly those that raised their last rounds at aggressive valuations over the past 12-18 months). This uncertainty is forcing founders and their boards to consider partnering or selling earlier than expected, with some having no other option than to sell immediately.

The disruption in the capital markets has created a divide between companies and funds that raised capital before the correction and those that did not.  There are many  companies that, while they may have an extraordinary product and strategy, they don't have enough cash to implement it.  There are others that are flush with cash and are looking into this market as an opportunity to use that cash to expand.

And the tailwinds are coming from the mass adoption of property technologies post-Covid.  For example, in the office sector, Covid forced many companies to rethink their real estate footprints, shifting the office industry's supply-demand dynamics and driving a "flight to quality" trend whereby market activity has become focused almost exclusively on the highest quality buildings with the best amenities, technologies, and green initiatives. Thus landlords are investing and adopting technology solutions aggressively, and demanding from the proptech market better pricing, integration, and buying experiences.

Additionally, you have the drivers that traditionally fuel consolidation in every industry, including:  cost and distribution synergies potentially derived from mergers or acquisitions, regional expansion by acquiring local players, talent and IP acquisition, etc.

So with many point solutions now looking to sell (some at highly discounted valuations), and landlord demand rising for platforms that provide suites of comprehensive solutions, the opportunity is ripe for certain leading companies to consolidate adjacent point solutions to deliver a more comprehensive platform offering to the market.

Again for example in the office space, Measurabl (Hatch, Wegowise) and VTS (Rise, Lane) are both great examples of companies doing this effectively at the moment. JLL has also been an active consolidator, taking majority and minority positions in a number of companies to build out their own portfolio of product offerings.

Over the next 12 months you can expect this consolidation to continue to escalate, especially as private equity groups like Thoma Bravo and Vista continue to get involved. Most companies are still too small for private equity to justify acquisition but as certain category leaders get scale they'll become targets for roll-up strategies.

Looking further out, you can expect the proptech industry to be dominated by a few large platforms in 3-5 years, likely organized around asset classes and the stakeholders serviced within that asset class. As an example, there will likely be only two or three property management platforms in the office industry, combining tenant experience, operations, and smart building technologies into a single platform.

With that said, any proptech company today that isn't seriously strategizing how they will lead or be part of a consolidation play is not likely to be around in the future. Behind-the-scenes conversations are happening daily between the category leaders across every vertical, and those that navigate this period most strategically will be the winners of tomorrow.

Similarly, those landlords that participate in these conversations, and help shape and support this consolidation, will also be the winners of tomorrow. Landlords have the assets, capital, and operating experience to best dictate what the platforms of tomorrow will look like, creating an opportunity for them to get highly involved and participate in the upside in the platforms that become winners.

In summary, consolidation is inevitable; it will play a key role in fixing the current technology fragmentation in the smart building market; and any landlord or proptech company not currently in consolidation conversations is missing an important opportunity to control their destiny.  

—

To get in touch with the Proptech Bankers team for help with your next move in this market environment, visit: https://www.proptechbankers.com/contact and tell them Nexus sent you.