Jun 28 2007 by Jason

Why Don’t Venture Capitalists Invest In Real Estate?

Q: Why don’t VCs invest in real estate? I have a great idea but I can’t get past the sentence where I mention it’s a real estate deal.

A: (Jason). We don’t invest in real estate because we don’t know what we are doing in that market. Okay, that was a little glib, but it’s true. VCs don’t / shouldn’t invest in sectors and themes that they don’t understand. Outside of some folks that I know who made some shrewd residential moves with their personal properties, I’d not want to trust my money to a VC doing a pure-play real estate deal.

Our investors don’t want us in that arena either, as evidenced that most of us have a charter of what types of deals we can and cannot invest in. For instance, a VC’s partnership agreements might say that they can “invest in the domestic technology industry in companies that do not require government approvals for the sale of their products.”

In this example, the VC could invest in U.S.-based technology companies, but not in any industry where the government would have to okay the sale of their portfolio companies products. Translation: this VC can’t invest in biotech (FDA approval) and better be careful about some media deals (FCC approval), etc. The VC would, however, be able to invest in a technology company that provides solutions to the real estate industry (think Zillow.com).

There are plenty of real estate development corporations out there who can much more effectively play in this space.