- PTG typically makes full acquisitions of feature based startups
- Joint venture tends to be for later stage businesses or markets where PTG is not professional in
- "The UK is twice as big and twice as backwards when it comes to proptech.”
The growth, acquisitions
Setting the scene, Mr Hanna said there are hundreds of proptech companies in Australia. He approximated that some two-thirds of those offer tools that should not be standalone products.
“… they’re ultimately features of a CRM which have existed because other CRM companies haven’t invested historically heavily in innovation. So, typically startups will find a gap, but it’s a small gap. They’ll productise a feature and then try to sell it.”
Proptech Group typically makes a full acquisition of such feature based startups, Mr Hanna said “… we get a technology capability or product capability that we don’t already have, and get new customers, more than we could sell through our existing customer base.”
“Where we look at either equity earn-in or joint ventures are in the businesses that are later stage, very early stage, or ancillary product or service – so in a market that we’re not professional.”
The growth, partnerships
For some businesses, Proptech Group will sign an equity earn-in agreement.
“We see opportunities to essentially fast track their growth by making it easy for our customers to use their products, and earn equity in their company based on how much their sales increase. Later, we can decide whether we want to take an increased stake and potentially buy the whole business.”
Very early stage proptech businesses also tended to see “crazy valuations”, Mr Hanna said. That makes the equity earn-in model more attractive.
“We could remove the valuation conversation, eventually moving towards an equity earn-in model where we essentially say: ‘What’s the value of our ability to provide you with market share?’ And that gives us a yard stick to be able to determine what our equity earn-in is.
“So, if it is very early, we avoid the risk of having to go out and raise a lot of capital to make expensive bets on companies.”
When considering companies much further on in their journeys, Mr Hanna said partnerships tended to be the best move:
“We don’t have to necessarily raise loads of capital to buy stakes in businesses that are mature, and in both instances, we believe we can have a meaningful stake and a meaningful impact on their growth trajectory.
“Where the JVs come in is fundamentally around areas that we don’t have expertise or industry knowledge like fintech, insuretech, mortgagetech and the like. We’re unlikely to do something purely on our own because we don’t have an AFSL, we don’t want to necessarily enter that world. We’re proptech.
“It’s a clear delineation between when it makes sense for us to do a JV, versus where it makes sense for us to a full acquisition, versus where it makes sense for us to do an equity earn-in.”
Venturing into the future
Given the amount of investment Proptech Group puts into acquisitions and partnerships, one may jest: is it a venture capitalist?
Unsurprisingly, the answer is no.
“There’s still an operational cost associated with managing that investment. For us to succeed, it is not about a VC style ‘just invest’. We have a team on the ground that collaborates and works on the product integration, the optimization and continual improvement of those products.
“We still want to make sure that we are growing revenues at a fast rate. We still want to make sure that we are keeping our costs in check and not going into the red. There kind of comes a tipping point where we can’t go too crazy on the equity earn-ins or the other non-revenue generating deals.
“I think we’ll eventually segment out our ventures arm and report on it in a similar to Frontier Digital Ventures style reporting, but it will never be our core business.”
Proptech Group is also expanding into the UK market, with a view to capture a market that is roughly double the size of our own in Australia.
PTG has already spent two years in the UK, with a team of some 15 people on the ground, however “the biggest challenge with the UK has been Covid and our inability to jump on a plane to get over there.”
“Another challenge is: organic growth over there is slow and difficult. The opportunity is huge. In a nutshell, the UK is twice as big and twice as backwards when it comes to proptech.”
“There are 25,000 agencies operating in the UK. Their spend in pounds is the same as our spend in Aussie dollars, so the market is twice as big, but then twice again because of the pound.”
Mr Hanna said the industry is even more fragmented in the UK, than Australia:
“In Australia there are [circa] 100 CRMs and property management providers. In the UK there are well over 1000.”
The opportunity for Proptech Group, Mr Hanna said, is likely to be an M&A type opportunity, the sort of acquisition to at least a 10% to 15%, ultimately 20% market share.
While the company tests the waters and develops the “proof points” that will determine whether the Proptech Group product will be successful in the UK, rapid growth is still in the sights of Mr Hanna:
“Once you get to scale, it becomes a little bit easier to then go even more scale.
“When a Ray White, Raine and Horne, or Harcourts decides to come to us, it’s not only because we’ve got the best CRM in Australia, but it’s also the fact that we do all these other things, which ultimately means they could reduce their total spend on technology by reducing the number of vendors.
“We need to get to a level of scale with the UK to start that process, but once we get to a certain threshold of market share, enjoying the same type of 100% year on year market share growth, I don’t think it’s unrealistic at all.
Proptech Group’s register comprises approximately 15% of its customers, including Ray White Group, Raine & Horne Group, and Harcourts; institutional investors account for 20% to 25%; about 35% retail, and the remainder board and management.
The larger investors are typically looking at the long term benefits of PTG, supporting the company at every capital raise to either increase or maintain their stake in the company.
“The institutional investors see the potential for us to be a multibillion dollar business in terms of market cap over time, and they want to ride that journey,” said Mr Hanna.
As for ultra high net worths, and family offices, they are investing in Proptech Group in a similar fashion to the institutional investors.
Mr Hanna also said that PTG’s retail investors understand that the company is investing heavily in growth, and that “these growth rates are not unrealistic for the next few years.”
“Ultimately, I think we’ve tried to articulate as best we can that if we didn’t want to achieve these rapid levels of growth, then we can easily run these businesses with 35% to 40% margins if you reverse engineer our cost evolution as published in our last report. We can do good business by helping agents do great business.”
Mr Hanna said that because Proptech Group is pursuing fast growth, it will likely not be a dividend paying business under his tenure as CEO, however there is a clear pathway for PTG to be a highly profitable business.