Atlanta Inno

Jun 07, 2023

The real estate crunch has made fundraising tough for KP Reddy, who runs a venture capital firm focused on property technology. But that slowdown is also providing new opportunities for innovation.

Shadow Ventures provides seed funding of around $1-2 million to companies developing technology that focus on real estate, property management and construction, with a heavy emphasis on sustainability. The firm began investing in 2018 and has about $60 million in assets under management, Reddy said. Its current fund is $12 million.

Shadow Ventures' investors include big names in construction, engineering and real estate, Reddy said, such as Hensel Phelps Construction, Thornton Tomasetti, POWER Engineers, and about 50 other companies. Most of those are based in the United States, though few are here in Atlanta, with about 10% located outside the United States.

Real estate companies are currently dealing with an office market that is still facing challenges from the pandemic trend of employees working from home. Plus, the cost of borrowing debt has increased significantly because of interest rate hikes, and there are few banks and other nontraditional debt partners will to lend money in this sector.

"The fundraising cycle is pretty tough, because capital allocators are kind of tough right now," Reddy said. “Real estate values are like cut in half ... People are struggling,” Reddy said. For many investors, dealing with the down real estate market is the top priority, he added.

Last year, U.S. venture capital firms raised close to $170 billion. But this year VC is on-track to hit a six-year fundraising low, according to a July PitchBook analysis.

Meanwhile, funding for property tech startups dropped to $19.8 billion in 2022, down from a high of $32 billion the previous year, according to a report from the Center for Real Estate Technology and Innovation.

Despite these capital challenges, companies in Reddy's portfolio are seizing opportunities in the changing market.

For example, as hybrid work persists, Reddy has zeroed in on two companies that could benefit from the trend.

Silicon-Valley-based Kadence is aimed at helping companies manage hybrid work environments given workers' widely varying schedules. Kadence last year picked up just over $10 million from investors including Shadow Ventures, according to PitchBook.

L.A.-based Occuspace provides granular data about how space is being used, whether for businesses or in other settings like higher education. Occuspace just picked up $3.6 million from investors, including Shadow Ventures, according to PitchBook.

“We kind of say Occuspace helps you understand how much space you need and where and what type of space and then Kadence helps you manage the hybrid workforce, including space,” Reddy said.

Reddy said his relationships with Shadow Ventures investors allow him to spot trends in real estate. He knew from almost the first day of the pandemic that remote and hybrid work were here to stay.

“We get such good signals .… We hear from them about what's happening before everyone else does,” Reddy said.

Reddy said that it's a common misperception that younger workers prefer remote work. He is hearing from his investors that many recent graduates are keen to work from the office to learn from more experienced workers. Empty-nesters and older workers also prefer the office.

It’s those workers who are trying to juggle childcare or other commitments at home that most prefer the work-from-home model, Reddy said.

There could be another downside for those who work from home, Reddy said.

One corporate executive – whom Reddy would not name – recently said that his company had a round of layoffs. After it was over, the executive noticed that most of those laid off were remote workers.

“There's a massive bias towards, ‘I'm not gonna lay off the person that I sit next to … that person that I see on a little box every once in a while on my computer, I don't know them,’” Reddy said.

“’Unless they're executing in a way that's magnitudes better than the person in the office, let's stick with the person I know," Reddy said of the mindset around layoffs and remote work.