Small Minds, Big Checks: Softbank, Y-Combinator, and the Attempted Murder of Real Estate Innovation
The demise of virtually every real estate startup investment made by Softbank and Y-Combinator underscores how unlimited funding and media hype do not equal market disruption. Real estate is as broken as ever, and as ripe for disruption as ever. This piece explores how Softbank and YC set real estate innovation backwards and what direction the industry must take in order to affect meaningful market disruption.
The Real Estate Revolution that Never Happened
We need smart people to work on this problem. We need people who are willing to solve a problem for the public good…This is a personal issue for me. I love San Francisco…and am starting to see friends have to move because they can’t afford to stay and I don’t like it one bit. It’s one project [solving affordability] I will be working on and something I care deeply about.
Medium post by Jon Dishotsky, CEO Starcity (YC S16)
In early 2016, Jeff Wilson CEO of micro-housing startup Kasita, sent me a Medium article by Jon Dishotsky, the cofounder of a new housing startup, Starcity. Jon’s rally cry for techies to solve hard problems like housing affordability resonated deeply with me, as I was working in the space with the micro-housing startup, LifeEdited. Jeff encouraged us to speak, mentioning Jon had recently graduated the Y-Combinator (YC) startup incubator, which I never heard of, but was assured was quite prestigious.
When I met Jon, I was close to leaving my role at LifeEdited. Despite LifeEdited’s outsized media presence for our micro-apartments and minimalist philosophy — a New York Times feature, a TED talk, a few Dwell features — we only produced a few expensive vanity prototypes for the CEO in my five years there. I left in 2016 to consult, looking for interesting and earnest startups, developers, and innovation teams to work with while I figured out my next move.
During my consulting period, I became a super connector for founders like Jon and Jeff who were leading startups ostensibly tackling hard real estate problems. Startups included those working on alternative operating models like coliving, alternative construction techniques like modular construction, and alternative unit types like micro-housing. Others in the circle included Fedor Novikov from Backyard, Airbnb’s housing project, and later APT Buildings, Phil Levin, who later founded Cul de Sac, and Brad Hargreaves, General Assembly and Common co-living founder. The group, I thought, was connected by our shared belief that fresh thinking, the right technological interventions, venture funding, and lean startup operations could transform the severely-broken, $326.5 trillion global real estate market and its various industrial channels.
By 2018, it was evident the blog-post boasts were mostly founders high on their own supply. Kasita died a quiet death around 2018, after changing CEOs, business models, and investor groups. Starcity died a couple years later, when slightly-better performing Common absorbed them and their liabilities for a no-cash deal. Like I did for too long, these founders confused venture raises, affiliations with other startups (Airbnb, Tesla, etc.), and uncritical press as indicators of success. But these startups’ real success was transforming techy branding, public relations, and hubristic founders into millions of dollars for ideas with virtually no chance of solving any real estate problem, much less housing affordability.
An expanded list of once-hyped, now-dead, venture-backed real estate startups include:
- Prefab startups Boxouse*, Acre Designs*, and Katerra**.
- Coliving startups HubHaus, Starcity*, Roam, Ollie, Collective UK, and WeLive**.
- CRE startups: Knotel, Breather, and Spacious**.
A list of operating, shakey-future venture-backed real estate startups include:
- Steel modular builder Blokable*, a startup that shows one small project on its “project” page despite the company’s six years of existence and $30.4M dollars of funding.
- Common, the co-living “winner” was losing $1.5M month in operating income in late 2021, according to an insider.
- WeWork**, which, despite its recent IPO and biopic, has never made money, nor shows promise of doing so.
- CuldeSac,* the walkable, “green” real estate startup being developed in one of America’s hottest, driest, least sustainable cities (Tempe, AZ).
*Y-Combinator; **Softbank Vision Fund.
YC and Softbank’s overrepresentation is no coincidence, as both helped create a new definition of startup success, where ever-increasing venture raises, media buzz, and unearned organizational prestige (did Softbank do anything other than invest in Alibaba at the right time?) became substitutes for development of sustainable businesses with durable markets.
The superficial venture successes were often distractions from deep organizational failures. WeWork’s Adam Neumann, Katerra’s Michael Marks, and many others churned out a steady stream of unkept promises and bogus project pipeline while draining Sofbank’s bottomless pit of questionably-sourced venture funds. I knew several people at WeWork at their funding peak and witnessed how its unlimited budgets warped workers’ outlook, rationalizing pie-in-the-sky, bound-for-failure projects as innovation. I was around for the development and flop of the company’s two blank-check WeLive residential projects, which stand as prime examples of a culture of unabated profligacy.
The showiness of Softbank’s failures make them easier to identify than YC’s quiet, distributed failures. Every YC founder I’ve known — from Starcity’s Jon Dishotsky to Social Construct’s Michael Yarne to Blokable’s Aaron Holm — maintained a studied air of secrecy that gave an illusion they were working on a lot more than they were. After the death of Social Construct, Starcity, and others, I realized the silence hid YC’s lack of technical chops and their near-perfect record of failure incubating real estate startups.
If it seems like I have a bone to pick, it’s because I do. In 2020, I assembled my own startup, the Change Order Group (COG). Our mission was, “to prepare the world’s built environment for the economic, environmental, and social challenges of the 21st century and beyond.” I turned to Jon for help with funding or deals, but he offered little beyond suggesting I enroll in YC. Given my team included the Zillow Group’s outgoing Chief Economist, North America’s leading mass timber construction architect, WeWork’s head of design, and others with comparable experience — I wondered what benefit YC’s almost-perfect record of funding and mentoring failed real estate startups would add?
It turns out submitting to YC may have benefited my venture, but likely at the expense of building a successful business with useful products.
While my startup starved and my phone service got cut off, Jon enrolled Jeff and his “housing” startup Jupe to be one of YC S21’s 377 cohort members, where Jupe secured a $9.5M Series A venture round led by YC OG, Garry Tan. Perhaps if the cohort wasn’t so big, YC and Garry would notice Jeff blew over $12M at Kasita, only delivering a handful of janky prototypes, or that he skipped out on Kasita’s payroll, factory rent, and delivering on any of his stated economic or technological ambitions.
Like most YC real estate ventures, Jupe’s business model depends on the belief YC knows something you don’t and that a venture raise means a business has teeth. They don’t mean these things.
YC Secret Sauce + Absurd Product Startup + Inexperienced Team + Big Venture Round = Inevitable Market Disruption
Only YC understands how a $20K, top-heavy, uninsulated, unsecurable, LED-festooned tent no power or plumbing is going to house 100M people as he claims (Jeff told me at Jupe’s inception the main use was short term rentals for bros in California and Texas). The $9.5M would be better spent on land and high quality canvas tents (max $5,000, including base) for folks lacking proper shelter.
Had I drank the YC Kool Aid, my startup might have secured an investment from their pool of investors, of which YC takes a cut. The raise and YC affiliation would get us press we could leverage to attract more investors and, importantly, candidates into YC’s upcoming accelerator programs, safeguarding YC’s future. Under YC’s incubation, my startup would establish unrealistic technical and fiscal expectations to justify our raise and valuation. Unable to match reality with absurdity, my real estate startup would “fail,” shutter, be absorbed, or continue without fulfilling our initial goals — while YC gets a cut of any scenario. If I was a lucky, I’d get bought out or stash income from the initial raise to transition into my role of “angel investor,” which mostly consists of me telling founders to go to YC.
YC’s closed circuit churn of incubating, investing, and dealing in hyped-up, pre-revenue startups with weak founders and businesses is one reason I’ve accused them of being multi-level marketing organizations. Jon’s repeated suggestion that I enroll in YC suggested he might get a direct or indirect spiff from enrolling cohort startups. Getting more people into the incubator and growing the fund based on enrollment seems like their endgame — it’s definitely not market disruption of revenue-based success.
Venturing Beyond the Bullshit
In late 2018, I wrote and researched a report about the future of housing for a large consumer hardware retailer innovation arm. In the report, I dug deep into the current state of the U.S. housing market, projected where things were heading, and suggested practical solutions for solving the challenges that would likely arise. My research — writ large in today’s headlines — attested that America’s likely future would be dictated by diminished financial, manufactured, and natural resources as well as a more unpredictable, uncomfortable, and hostile climate. These are problems that require more than pitch decks to solve.
Though historically a proponent of dense, urban living, this client’s national interest kept my focus mostly on single-family housing, which makes up around 80 percent of the U.S. housing stock. The best technological interventions I found were unsexy things promoting building efficiency, safety, density, and climate resilience. I reasoned then, as I do now, that real estate in the U.S. can be so much more than it is: that it need not be built with 1835 building technology (stud-framing), that it need not be oversized and socially isolating, that it can do so much more than enrich passive investors while homeowners and tenants struggle to get by.
Solving for affordability, energy efficiency, and other huge, real-estate-related problems requires investment, but returns are unlikely to have the hockey stick growth of software startups. Real estate hardware returns are delivered over the course of a building’s lifetime through improved usability, energy efficiency, comfort, and, part and parcel to those features, a real estate asset’s ability to hold its economic value. Most of today’s VC’s aren’t thinking long term, and most have disinvested in property startups like the ones mentioned and increased investment in transactional software startups like Opendoor, Trulia, and Compass, who have made it easier than ever to buy, sell, and invest in real estate, particularly housing. But the real estate being traded remains technologically primitive: thermally inefficient, too big for most, often empty, designed for cars not humans, unaffordable for most, requires too much upkeep, and is unprepared for 21st century climate realities.
What I found in my research is that many companies delivering practical innovation weren’t startups from the incubator and venture scenes, but functioning companies with simple, fleshed out building and operating solutions, albeit ones that could often benefit from tech-enabled design, operating, and marketing support.
I found the most interesting people weren’t 27 year-old engineers who interned at Tesla or SpaceX for a month, but seasoned builders, designers, and problem solvers who questioned the orthodoxy that real estate had to be poorly designed, engineered, and operated. These seasoned types often sucked at branding and their measure-twice, cut-once attitudes made them loathe to make statements that couldn’t be supported without evidence. While these qualities make them poor receptacles big, dumb checks for solving unsolvable problems, it makes them the best people for smart investments.
The grave economic, social, and environmental problems affecting today’s real estate industry and market require practical, buildable solutions coming from experienced practitioners. Solving these problems requires a combination of new thinking and patient capital, which I believe VCs could and should provide. For VCs to realize real estate market disruption, definitions of success must move beyond big checks and digital-agency-generated hype to measurable improvement everyone can live with and enjoy.
As always, I’m around to help serious people solve serious problems.
