Starting a Real Estate Tech Startup

starting a STARTUP
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Reportedly enticing the most amount of capital in recent years, the real estate technology sector is booming and no end on the horizon is visible in the short term. We take a look at what is needed to allure the right capital investor and get your idea to market.

Startups are risky, with 90% of all startups failing. As they say, high risk equals high return, and the return can be substantial. For this reason, capital investor’s are eager for the next big thing, but they expect perfection, all T’s crossed and all I’s dotted.

If you are yet to commence your new business idea, the first step you need to take is to get your idea sorted. This may sound complacent, but is easily the most important role of the process. Will your idea float or is it a pipe dream? As a guide to getting your idea off the ground, we have outlined the following steps to assist with your decision making:

  1. Float your idea with family & friends. Usually, asking those with no formal background into a proposed business idea is not the best process to take when seeking advice. However on this occasion, it helps you understand what you may expect from the market, are they confused with your idea or do they get it? This is also a good first step to iron out your pitch. Learn from the feedback and work with it. Keep emotions separate, if the idea receives much negative feedback, it’s time to reconsider your idea. This can save you a lot of headache, time and money. If it’s not worth partaking, don’t do it. If you still completely believe in your idea, take the cautionary next step, keeping in mind lessons learned from asking your family & friends. Similarly, if you receive unanimous support, keep a level head and remain analytical but never despondent and do your due diligence.
  2. Plan your idea. Take your idea to paper. This step is not a business plan, that will come later. This is blue sky planning. Write your goals and what is required for the business is to achieve them. For example, “XYZ will completely transform the way consumers interact with rental properties”. Try to envisage where the business will be in 5 & 10 years time, then work back from there. Where do you want to be and how you need to get there. You don’t completely need to know the company structure at this point, but you do need a good understanding of what it is you are creating. Think of as many possible situations of how your business idea can improve the existing process, or if there are a lack in processes, list them. Then do the opposite and play devils advocate. Ask yourself questions that go against the business idea. Knowing as much about the business model at this stage will only help you down the line and answer those difficult questions.
  3. Market Research. Once you have a plan, do your research. This step helps you understand whether you should cull the idea or progress further. Don’t be afraid to go back to the start and don’t be afraid to dump your idea. Remember 90% of startups fail, and they fail largely due to lack of planning and lack of asking the difficult questions. Think of this step as perfecting your idea, training the business muscle to strengthen your idea further. This is where you find the statistics to back up your business idea, keep in mind this statement “numbers talk, opinions walk”. Listen to the numbers, what are they saying. There may be a lot of opinions out there, specifically on the internet, try not to listen to these. Unless of course they are trusted and come from well researched sources. Depending on your idea, it will depend on whether you survey the market. Some ideas need it, some don’t. With a consumer focused business idea, I would suggest a survey (it can only help). Remember to keep all of your research, as you will need it for capital raising.
  4. Branding & Corporate Style Guide. Once you have your research, it’s time to work out what the business will look like visually. Try not to do this yourself. Find a graphic artist to help you, it will only make you look more professional. This step is not just a logo, you are crafting the look of the business for the next 5-10 years. A good source is Freelancer, a service where you list a project for freelancers to bid on your work. In essence, it is ebay for business, so to speak. When you find a designer you are happy with, and you have assessed their work, work with them and reveal some of your research. For example ask something similar to the following, “I require a corporate Style Guide for my new business idea. In addition to logo’s for print & web, I require a handbook illustrating the logo structure, colours used for print & web and the specific fonts employed. I have performed extensive demographic research into the business idea which are:… “, list the research that means most to this process. Example, the average consumer age, gender, location, similar brands etc. Designing a corporate identity based on demographic data will not only make your business look more professional, but will cut through to that specific target market, resulting in more consumer intimacy with your brand (thus sales) once you launch. If you feel your idea is substantial, you can Trademark/Copyright your branding. The next step concerns Intellectual Property and can help you Trademark your logo, text styling. A reminder that you cannot (in most cases)  Trademark words or phrases, just the styling.
  5. Intellectual Property. Does your business idea considerably do things differently? If so, you need to secure your IP as quickly as possible. If you are unable to secure your IP quickly, a good tip is to write out your idea as detailed as possible and date it from when you first came up with it. Pen & paper will suffice, just as much detail as possible. Once you have all the information about your idea, put it in a registered post bag, (the type where you have to sign for it on delivery) and take it to your postoffice to send to your self. When you receive this, do not open it and put it away in a safe place. Then commence actions to obtain your patent/IP. The reason you send the business idea details to yourself, is to secure the date you registered the idea. This holds up in court should you ever need to defend your idea, or take others to court for using your patent. During your work with obtaining IP restriction, you may also discover other registered Intellectual Property out there. In this case, you are the one copying others and you need to cease your work immediately. Your federal copywriting agency or IP firm should be able to help you further.
  6. Partners. If you haven’t already, find a co-founder. Find someone to enhance your strengths and mitigates any weaknesses. You don’t need two CEO’s and you don’t need two Chief of Marketing. Find people who are your Yang to your Ying. If you are uncomfortable with the CEO role, find a partner who can perform this role for you. Likewise, should you chose the CEO role, find someone to take the Marketing, Finance and/or Technology role. It is recommended to not have any more founders than four, as the company structure over time may not withstand the amount of input. The magic number does seem to be two, as it is reported having minimal amount of founders can move more quickly with business decisions. Use this step to negotiate the shareholding between all founders and use this as a guide for when you incorporate your company to a legal entity. If you are unable to locate a partner within your existing circles, try one of the Entrepreneur sites like Angel List or Cofounders Lab, there are many, just Google!
  7. Company Formation. Sometimes called to incorporate. This is a must as it legalises your business idea into an entity. Before this stage, your business idea is just that. Depending on where you decide to incorporate, it will depend on the legalities required. Check with your federal government agency to find the best processes to follow. Different countries have different meanings of company structures, be sure to get the right advice before cementing your preference. In the US, startups are usually incorporated as an LLC, a C corporation, or an S corporation. In Australia, startups can be sole traders, partnerships, companies or trusts, where tax concessions apply to different structures.
  8. Business Plan. It is now time to write your business plan. This your businesses playbook; who you are, what you are trying to solve and what you need to solve it. It is the document that draws on all your earlier efforts of original planning your idea, market research, any IP and corporate branding. Remember, your playbook should determine the goals and deliverables needed to meet the business requirements (in other words, assemble everything you have achieved thus far). There are plenty of business plan templates through out the internet, a good place to start is the (small) business departments of your federal government agencies, or associations and business forums in your local area. Some business focused websites are also a great place to start. If you are not familiar with startup equity terminology, use this stage to get acquainted with these terms, and familiarise your self with what capital raising model you would prefer. Generally, there are 3 equity models (these are high level definitions, for detailed explanations please consult your financial advisor or federal body):
    • Common Equity. This is the most basic of equity and is preferred by startup’s, but not so much by capital investor’s. Basically, common equity is just that, common. The capital investor shareholder has no voting power, where they receive a percentage of the entity based on the equity they invest. Example, the pre-cash valuation of the startup is at $3million, the capital investor purchases $1million of common stock, which equals 25% of the value. They receive no voting rights and 25% of the entity.
    • Preferred Equity. Preferred equity is similar to common equity, with the added exception of voting rights. If the capital investor was to purchase $1million of preferred equity, equalling 25% of the business, the capital investor has 25% voting rights and 25% equity/shareholding. This is typically not the preferred equity for startup entrepreneurs, but does give capital investor confidence in the new entity.
    • Convertible Equity. Also known as a convertible note, this style of equity is usually for startups moving from a seed model to round A or further. However, convertible notes can be a good choice for both entrepreneurs and capital investor’s. They are more similar to a business loan than equity partnerships. The entrepreneur agrees to a time to repay the amount borrowed (usually 12 to 24 months), along with an agreed interest rate, conversion discount and valuation cap. Basically speaking, the entrepreneur has a certain amount of time to repay the loan, if the loan is not repaid in time to the investor, they take the agreed percentage of equity, plus the agreed conversion rate (discount). There is usually a valuation cap placed on the company, so as to not degrade the existing shareholders value.
  9. Mentorships. A business mentor is a really good idea. Sometimes forgotten from the Startup process, they can act as a guiding voice and business or legal bouncing board. Depending on your experience and qualifications, you might want to think about a mentor with differing qualities. If you are a thorough business leader, gain a mentor from the legal, finance or marketing/technology space. If your experience lies with technology, seek a mentor with strong business acumen. Sometimes, depending on your capitalist investor, you may have a mentor provided.
  10. Due Diligence. Do due diligence on your self, there is no hiding the fact that anyone investing in you, wants to know you and your team/business idea. With high risk startup investment, capital investors look to mitigate as much risk as possible. Due diligence helps them do that. Performing your own due diligence on you & your business will help you discover those areas you have neglected. Once you find them, fix them and do it again. Perfection is the key here.
  11. Pitch Material. This is not your business marketing material. This is the pitch material to promote you and your new entity. Pitch material is required by your prospective investor to assess you and your business. Capital investor’s usually are busy people and do not have a lot of time, keep this in mind when crafting your pitch. Keep detail short and simple, any additional material required to back up your pitch should be included at the end or in an annexure. Typically pitch material for your investor will be either or all of these:
    • Pitch Deck. This is a slide deck in power point or PDF, summarising your business plan in an easy to digest manner. It should be visually stunning and professional. Employ the research you have completed earlier and use visuals & info graphics to get the point across. Remember this is your sales kit. Some startups have multiple pitch decks for different stages of the startup process. Do not forget to include your references from the research you performed, numbers & statistics mean nothing if not backed up with proven sources.
    • Pitch Video. This is a video outlining you & your business and are typical with crowd funding websites. It is a video version of your pitch deck and should be professional and clean looking. The video should be short and sharp, addressing the business plan.
    • Financials. This should have formed part of your business plan, under the section what you need to deliver your business plan. This is the expenditure you expect to “burn” through each month/year and the income you expect to make in the first 4 years of business. A lot of the time, investors glaze past revenues as they are based on assumptions and not previous years takings. However, I do believe they are a good representation of where you would like the business to head and the value you foresee in the market.
    • Supplementary Documents. Include your business plan and any additional documentation you think that will assist with your case to gain funding. Don’t be shy, if you think it will support your business idea, then use it. But be careful, do not include literature that is meaningless. If I am looking to invest in your new startup about a new Rental Property Application, I am not willing to read information about the sale of Mars Bars in China, make it relative and make it count.
  12. Capital Raising. This is the first real milestone you have been working towards, gaining the capital to take your business idea to the next level and to market. After doing your due diligence on yourself and assembling your pitch materials, go through each of them over and over until you are satisfied. Practise you pitch, go over your goals and rehearse your response to the questions you anticipate. You are the expert in this business right now, you know all the answers. Package up everything you have accumulated and prepare to launch to the capital investment market. Determining what style of capital raising you need is more of an opinion than being a right or wrong answer. As a guide, there are 3 main styles of capital raising:
    • Crowdfunding. A relatively new phenomenon, crowdfunding works by groups of people pledging capital for something in return. The most known crowdfunding sites are Indiegogo & Kickstarter. It is important to know the terms before entering crowdfunding, as sometimes they are not quite what you expect. There are also notable differences in behaviour & what’s permitted between Indiegogo & Kickstarter.
    • Angel. These are typically individuals or couples, with more than $1million of personal wealth and, or earning a substantial annual salary. Angel investment can be a good path for entrepreneurs to run with their business idea, however the right Angel is needed as the Angel becomes a business partner. Typically, but not always, Angel investment is seen at the seed stage of a startup business, where the Angel takes a percentage of the value of the new entity.
    • Typical Venture Capitalist (VC).  Typically, VC’s do not just offer funds to get the business rolling. They offer a raft of services ranging from corporate experience to accessing expert guidance & mentorship, to media exposure. Finding the right VC can be difficult, so you need to do your homework on them, what do they expect in return of equity into your entity and what value can they bring to the team. A good VC will be your support group, if you are unsure how to move with an issue, new idea or need some urgent assistance, you should be able to expect they will be available. VC firms can be expensive, but again, it all comes down to the right VC firm, so do your due diligence on them. There are a raft of website’s out there listing the best VC firms globally, both Forbes and Entrepreneur Magazine have solid lists.

These steps are a guide to commencing your startup lifestyle, of course opinions differ, so do your homework thoroughly and don’t be afraid to start again.