Bloomberg for Real Estate - Geophy revisited

April 4th 2016 | via:

Portrait of an Active Scaleup changing the world of real estate investments

Teun van den Dries is CEO and co-founder of Geophy (short for geophysics; i.e. understanding the world). When we first spoke in late June 2015, his company were finalists amongst 1600 startups in an international startup festival. But Geophy was already proving to be very much more than a simple “big data mapping company” started by a team of students from Delft University.

They have uncovered a very important niche to become the “Bloomberg for real estate”. We returned in March 2016 to find out from Teun how all this big data is unearthing amazing scenarios. Investments in Florida? Views on a Brexit?

Now read on…..

Making it so much easier to analyse Real Estate

For a country, perhaps the most valuable commodity they have is their land” explains Teun. “Knowing who owns what is important. It’s a foundation on which wealth is built. All the countries that established such a registry in previous centuries are the ones we regard as “developed” today.”

As this article goes online, an avalanche of stories is emerging from the Panama Papers investigation. It proves Teun’s statement perfectly.

“Land registry is essentially an exchange of information about title deeds. They map a country using some sort of annotation system to describe plots and the structures built on top of those plots including details about ownership. That whole process was initially done by human surveyors who made a paper document and which someone signed to establish its authenticity. These documents needs to be accurately scanned and converted into digital maps and databases. In general, these registries are not easily accessible. These legacy documents are accurate, but they are only a record of the moment in the past when they were made — not necessarily an accurate representation of what is there today. “

“For instance, if you want to know the title deed for any building in the Netherlands, you need to know the exact address. There is no interactive map that allows you to browse a particular area, and then call up the details of a building you might be interested in. There is no easy way of interfacing with the data. It’s complicated by the fact that registries in different countries have different interfaces. We digitized the data and make sure you can access it through a map with a unified interface.”

Global Approach Essential

“Geophy is already active in 50 countries. There are around 30 countries with some kind of land registry, of which 15 are digitized. The other 15 are still paper based. In some we’re establishing scanning methods to do this. For the remaining 20 countries, the national land registry is not going to be a source of data for us. We’re going to have to build our own system.

So we’re going to start by mapping all the world’s buildings. And then map the plots of land around it, because those boundaries are more difficult to define. It starts with building address lists and we’re using over a dozen different methods in parallel to do this comprehensively.

We have started trialing in 5–6 countries in Asia, Africa and Latin America that don’t yet have a land registry.”

Building a company to make sense of it all

“It turns out making sense of this huge amount data is really difficult to do. In fact, when we started out three years ago, many industry specialists told us it was impossible.”

“Now, I love a challenge like that. Especially because, as an architect, I saw a way we could do it. “

“So, at the Technical University in Delft, we formed a great team of brilliant engineers, economists and IT business visionaries to crack the problem. It took us a year of thinking, building, testing, and rebuilding. And my job was validating our hunches with highly critical, real-world customers. But our hunches paid off big time.

“Banks, governments, and businesses all need to report extensively on the commercial assets they own and loan against” continues Teun. “There’s huge pressure from all kinds of authorities on being transparent these days. And big fines, in the tens of millions, if you’re not.”

“Yet, in practice, people rarely know what their own building is worth; let alone every commercial building in the country”. Geophy is a new and still unique service which creates that overview, verifying the source, allowing its users to assess risk and underlying value. You end up with a sort of due diligence report presented in a visual form that’s easy to understand.”

But hasn’t Google already done this with services like Streetview?

“Streetview is only available in parts of the developed world. There is no Google Streetview in China. In fact, there is very little Google Streetview in India. Various organizations have satellite imagery, of course, but those pictures need to be processed before they become useful data. Geophy is looking at ways in which they could use aerial photography to generate building definitions which they can subsequently tag. Since they’re interested in the data, not the imagery that makes it so much easier in discussions around privacy.”

Last time we spoke you were tracking 55 million buildings What’s the figure now?

“In March 2016 that’s just over 100 million. We know the address, which defines the geolocation, function, the size, year of construction, energy labels or certificates, energy use in some cases, tenancy, value, rent levels, technical specs, and all the peripheral data like how close is the nearest public transport stop and other demographics of the area.”

“The main clients for this maps were originally banks. But, over the last 8 months, pension funds have overtaken them in our client base. That’s because they are the largest owners of real estate in the world. The combined property portfolio of the two largest Dutch pension funds is approaching €70 billion. They want to know which buildings they have indirectly invested in. They don’t own buildings themselves but buy equity in a fund that does. But we have the level of data they need to answer questions like: how could our investments be affected by changes in the world.”

US State of Florida will sink within two decades

We’re actively tracking the effects of climate change. Real estate owners want to understand the risk of certain areas in the world and how it will affect their portfolios in the mid- and long-term. For example, one of the regions in the world we’re tracking closely is the US State of Florida.

With the difference between land and sea-level often being around 50 centimetres, we think the most of that state will be gone within 20 years. The whole region is slowly sinking under water and there is little that can be done to reverse it. We’ve built a data model that shows the flooding risk for almost every location in Florida. The real-estate there represents billions of dollars. And that value could very well drop to zero. Timing that exit for existing investors is going to be extremely important. And there are other parts of the US that have not made major investments in building preventative flood defences, despite recent storms.

In that respect, even though in the Netherlands we’re doing this interview in a building 2.5 metres below sea level, the chances of major flooding are once in 100,000 years. That’s because of the lessons learned in the 1953 floods and the major investments made since then in both sea and river defences. In New York City. for instance, they decided that once in every 20 years was sufficient.

The Netherlands government recently gave advice to the UK. What’s the situation like there?

“80% of the value of the real estate in the UK is located the London metropolitan area. By that, I mean the institutional markets which these funds invest in. The Thames barrier is already out of date and needs a major upgrade. So the risks of flooding in the Thames Estuary is something that we’re watching closely, but it looks like there is both money and a willingness to do something. The real challenges for the UK are up North, but these are not areas where local councils have enough money to change things.”

What if Britain votes in June to exit the EU?

We did a study for the Telegraph newspaper in February in which we estimated that up to 200,000 workers could leave London if the UK exits the European Union. If the UK severs ties with Europe, up to 1.6m sq metres of commercial property would come back onto the rental market — and could mean price corrections of more than 35% in some areas of the City of London.

Most American banks are in London because it is a stepping stone to the European continent. If the UK does a Brexit, most of the banks will need a location in Frankfurt. Which is why the recent announcement of the London Stock Exchange and Deutsche Börse merger is so interesting.

From a tenant perspective, about 30% of the companies that currently rent office space in London will need to move in some form to build a presence in other countries. A 30% vacancy rate would have a major impact on property prices in the British capital. If Brexit does happen, then the Netherlands would probably benefit the most, being culturally closer than either Germany or France. Because we’ve been mapping London for a couple of years now, we know who owns what and can determine which funds would be hit the hardest by a Brexit scenario.

From a converted garage in Delft....

Cash Flow Positive from Launch

“We’re still a young company but very much in the scale-up phase now” says Teun. “Geophy was founded in November 2013 and we launched in June 2014. Our presence at major European startup competitions in 2015 triggered a lot of very important high-level investor discussions.”

“We want to become the global independent, trusted intermediary. We know that our primary source of revenue will simply be to put this data in context as a subscription. We think that freemium models, where the user is effectively the product and access to their data has a value to others, is not going to work for us.”

“One of the interesting side effects from an operation like this, is that it will become very hard for the bad guys to commit fraud. That’s because the property values and transaction history will be publicly available.”

We know our reputation is based on being fiercely independent. That’s why our basic data is open for public scrutiny. And the database is distributed rather like the “Block-chain concept”, so no one government or country controls access to the data.”

“We make our money from subscriptions to our unique set of analytical tools. I can’t name all our clients in public. But I can say that if you go to any bank in the Netherlands for a commercial loan on a building, they will use Geophy to make a decision.”

Defining the Geophy business model

“It makes a lot of sense for Geophy to be headquartered in Europe. And the Netherlands, having diplomatic relations with so many countries, is the best place for the moment. It has excellent connectivity and technical infrastructure, so the core development team will remain here”.

Geophy hasn’t released its revenue projections publically, but several analysts and major international investment funds have already shown keen interest.

What’s the next big challenge?

“The classical challenge is always raising capital. In our case, everything has been funded on revenue. That means we have a solid business, but it doesn’t allow us to accelerate.”

“At the moment, my main focus as CEO is finding good and affordable talent. Finding that one good developer in the Netherlands is tough. There are ten times the number of good developers in London but they are also ten times the price.”

“We do complex things fast. That requires that everything is developed in-house. So offshoring and managing a satellite team of developers in Eastern Europe or India is not going to work. Also finding clever people in sales and marketing who understand our business is a challenge.”

“We have obviously taken advice from both clients and third parties on the direction the company should take. But we have avoided the largest pitfalls which are legal and financial by learning to stand-up for ourselves. We have contacts with large corporations which work with some of the toughest terms and conditions you’ll find. But because we know what we are worth, we’ve managed to get them to accept our terms. In this business, getting contracts isn’t the problem. Getting contracts with the terms that we want is tough. Get paid by customers upfront — not six months down the road.”

Advice for other startups planning to scale

“Let me share some personal insights that I’ve learned on the journey so far.”

1. Focus on Revenue First

“Make some money first and get VC’s on board when you have a model that generates revenue, ideally profit — though that is often tough. If you are dependent on a VC for growth, you are never going to get a good deal.

We have been generating revenue since we started. A year ago, we went to some Dutch VC’s with the aim of raising about two million Euros. The response we got was “we love what you’re building but call back when you’ve found a client for a million+ Euro per year”. That makes no sense at all because once I have that client, I will never go back to the VC.

The Dutch ecosystem is famously risk averse. In London they expect you to be global from day one, and they are used to bigger tickets. It is not that the money isn’t here in the Netherlands, it is still more of mental attitude. There is a fundamental mismatch between what the Dutch VC’s have in mind, and what the company really needs to scale. Part of our income is in data, which is really hard to value. It requires domain knowledge to see this.”

Banks can be a poison pill

“The problem with funding that is equity linked is that it will always be the wrong value at the wrong time. Especially if you’re talking to the pension funds — they are only interested in large tickets. I’m avoiding investments from both governments and banks because we believe it is a kind of poison pill. Every bank I have seen that invests in Fintech just ends up destroying the business without adding value. They do it because it gives them exposure to this ecosystem which they don’t really understand. It would be much better if they took the €500.000 they want to invest, split it into €100K projects and handed it out to high potentials. Give them revenue so you can do a pilot with them and rapidly prototype.”

“There is currently an outbreak of Dutch corporate venture funds from telecom and media companies as well as famous name accountants. I fear that many will be shuttered within a year because the corporates still have difficulty in understanding that being an entrepreneur is a calling. It is not a profession.”

2. Think beyond borders

“If you’re serious about building a real global company, then you need to think and act global from day one. That’s a first requirement for serious investors. But it also makes a lot of sense. In our case, we spent too much time just testing the service in the Netherlands. Our breakthrough was to open a second office in London, where we quickly discovered challenges we didn’t think of earlier. The UK still uses Imperial measurements in feet and inches. We had to do a lot of tech work behind the scenes to bring the UK and Netherlands together in one database. It amounted to reverse engineering the whole platform. But I’m glad we did. Because now we have a giant head start when compared to what’s already out there.”

3. Everything is checked in our business

“It’s always better to under promise and over perform. When you’re playing at this level, assume that investors are doing due diligence on everything you do and say. Because they are. And they will.”

 

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