Solving the Challenges of OpCo-PropCo

A better blueprint for capitalizing innovative real estate businesses

Attention Real Estate Operators: Thesis Driven’s Fundamentals of Capital Raising course is taking place September 9-10th at 3 World Trade Center in NYC. Learn more here.

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Tom Stults and Max Priest are investors at Watchung Capital, a real estate investment manager that specializes in implementing innovative operating concepts and incubating niche strategies.

In the heyday of the WeWork and SoftBank era, venture capital (VC) investors were eager to pour venture dollars into innovative real estate ventures, treating them much like any other high-growth tech startup. 

Around 2018, the market began to correct its course, recognizing that real estate operating companies do not scale like software companies—no matter how innovative the business model. Venture investors swung to the opposite extreme, showing a strong aversion to funding hard asset ownership or even traditional capital needs associated with businesses that occupy physical space (e.g., lease payments, space build-outs, furnishings, etc.).

This shift has led to a surge of venture-backed companies attempting to raise capital through an “OpCo/PropCo” structure. The OpCo/PropCo pitch tends to fall along the following lines: 

A talented founding team in the PropTech ecosystem has decided, either by choice or necessity, to raise money from two distinct sources, Venture Capital on the OpCo side (seeking higher risk and higher returns) and traditional real estate capital on the PropCo side (seeking lower risk and comfortable with lower returns). Some amount of OpCo capital has typically already been raised and, in an ideal world, the OpCo seeks to control the RE capital as a discretionary capital source.

While this at first appears to be an elegant way to bifurcate risk and returns, we have, in almost all cases, seen this intended strategy lead to a disappointing outcome, if not a total dead end.

This Thesis Driven letter will dive into: 

• Why raising discretionary real estate capital is inherently challenging;

• The tension between venture-backed OpCo objectives and PropCo expectations;

• The realities of how OpCo’s align with and create value for PropCos;

• A proposed shift toward more fully aligned real estate platforms;

• Where OpCo/PropCo entrepreneurs go from here.