Stellifi

In our most recent investor update, we highlighted the economic factors that we expect to be a boon for our portfolio companies, and investment thesis more broady. Here, we expand on those themes and discuss how we expect to capitalize on the tailwinds.

The Big Picture

Over the last 2 years, liquidity has flowed out of private and into public markets. Now the herd is running headlong into private credit.

After more than a year of declining venture investment, valuations have have bottomed out for PropTech companies. For a company to have a chance at being investible they need product market fit, great unit economics, meaningful traction, great leadership, a clean cap table, and a bonafide path to profitability. The reason for these requirements is simple - capital is scarce.

The result is that relatively few new companies are being started and products invested in. At the same time, the real estate market has an all-time high demand for innovation and PropTech solutions.

So where do customers find innovative software to solve their existential challenges? How do early-stage companies get access to liquidity?

Later-stage companies will be forced to find liquidity through the IPO market. Still, it will be some time before allocators re-embrace the asset class with the worst liquidity characteristics (longest duration, least liquid security market) - early-stage venture capital.

All of this adds up to a generational opportunity to buy into low valuations in companies that will have relatively little friction on their way to massive market share through the land grab for the infrastructure of a digitalized and connected real estate tech landscape. Stellifi is fortunate to have capital to deploy at this time. We have the opportunity to have our pick of the companies that are primed to raise a minimum amount of capital and have maximum optionality in whatever liquidity solutions develop most favorably over time.

To break down how this opportunity unfolds, let’s take a deeper look at underlying market dynamics.

The CRE Outlook

While the debt maturity wall looms, and operational challenges persist, you’d think the CRE industry would be depressed. However, cautious optimism is in the air, with hopes of rising transaction volume in 2024.

Refinancing Hopes: A total of 441 loans ($13.6 billion) were modified in 2023, much of that through loan extensions. Borrowers remain hopeful for refinancing opportunities in the coming year if only they can survive to see a drop in interest rates. In the meantime, they must optimize performance for any chance at a desirable refi or exit.
Distress Means Opportunity: There were already indications of a narrowing bid-ask spread at the end of 2023, and we expect that spread to narrow more as situations become more dire. Any distress that pops up presents a buying opportunity for the 100's of billions of dry powder.
Crucial Moment for PropTech: Distressed or not, operators are hyper-focused on their margins, and tech is increasingly part of that conversation. Companies with proven solutions can capitalize on this moment and capture market share.

Venture Capital Landscape

Capital allocators have largely turned their back on PE/VC in the last two years, which has had downstream effects on the whole ecosystem. But while the capital flows shifted, new opportunities have emerged.

Consolidation: In a market that survives on regular capital injections, it's no surprise that 2023 was a year of consolidation in venture. Carta, which serves and estimated 50% of the market, reported that 700 startups shut down from the start of the year to November 2023, up 238% from the year prior.
Improved Discipline: Companies that survived are operating with greater financial discpline and capital efficiency, enhancing their investment potential.
Attractive Valuations: Startups that are raising now have lower valuations than was the norm two years ago, presenting a compelling entry point.
New Opportunity: Put these themes together - fewer companies, more discpline, lower valuations - and you see an attractive investment opportunity for VC's.

Allocation Preference

To build on the trends in real estate and venture, the broader capital market flows will further benefit early-stage VC as they evolve in the coming months and years.

Shifting Capital: Rising interest rates have drawn capital towards credit and public markets for liquidity and yield, and away from PE/VC.
Public Markets: Inevitably, valuations will continue rising in the public markets, until there's a potential arbitrage opportunity from the private to public markets.
Future Outlook: A wider valuation gap between private and public markets could jumpstart the IPO market, and renew interest in VC. Today's early-stage companies will benefit immensely if they can sustain.

Stellifi's Approach

In the meantime, we remain focused on building a portfolio grounded in sustainable growth. We firmly believe that a focus on capital efficiency and steady revenue growth will win out, and lead our portfolio to a more advantageous private market environment over time.

Focus on Sustainable Growth: Our portfolio prioritizes long-term, sustainable growth, enabling it to weather market fluctuations. This focus has attracted new, less dilutive capital to fuel expansion.
Undercutting Competition: In contrast to high-burn companies boasting frothy valuations, our portfolio companies have been able to undercut competition and gain market share while remaining solvent. This strategy has proved prescient as real estate players are increasingly tech-driven, but also price-sensitive.
Consolidation Benefits: As PropTech consolidates, efficient companies will benefit from increased adoption and reduced competition.

Navigating a Perfect Storm

We see a confluence of events creating a generational buying opportunity in PropTech: