Q: Why don’t VCs invest in real estate? I have a great idea but I can’t get past the sentence where I mention it’s a real estate deal.
A: (Jason). We don’t invest in real estate because we don’t know what we are doing in that market. Okay, that was a little glib, but it’s true. VCs don’t / shouldn’t invest in sectors and themes that they don’t understand. Outside of some folks that I know who made some shrewd residential moves with their personal properties, I’d not want to trust my money to a VC doing a pure-play real estate deal.
Our investors don’t want us in that arena either, as evidenced that most of us have a charter of what types of deals we can and cannot invest in. For instance, a VC’s partnership agreements might say that they can “invest in the domestic technology industry in companies that do not require government approvals for the sale of their products.”
In this example, the VC could invest in U.S.-based technology companies, but not in any industry where the government would have to okay the sale of their portfolio companies products. Translation: this VC can’t invest in biotech (FDA approval) and better be careful about some media deals (FCC approval), etc. The VC would, however, be able to invest in a technology company that provides solutions to the real estate industry (think Zillow.com).
There are plenty of real estate development corporations out there who can much more effectively play in this space.
Posted in: Fund Terms | Posted by: Jason MendelsonCOMMENTS (4)
VCs are usually technology guys. While we can study and learn new things (we aren't all old dogs), we still stick to core technology knowledge.
Hedge funds usually aren't sector specific. Their talents lie in financial engineering a lot of the time. It is then that sector knowledge is laid on top. In this respect, they can more easily tackle different sectors than VCs.
I am curious to know why VC's don't invest in more real estate oriented online services. i haven't noticed much funding in real estate related onlne services. Is this because VC's do not understand market.
Don't forget REITS or property companies are probably the investment vehicle use for property and the return on property is probably not big enoght for a SC VC. I did very well out of TR property after the dot com crash for example.
There’s few Property type investors on Dragons den in the uk but I have my own views on whether they are real VC/s
Why don't VC's take the time to understand the real estate market just like they do to learn new technologies?
Hedgefunds have private equity arms responsible for real estate, even if its core competency is trading.