Real estate is one of those classic industries we always talk about in Silicon Valley: multi-trillion dollars in scale in terms of assets and transaction volume, but still relying on good ole’ pen and paper to get anything actually done. A huge number of companies have launched to digitize all aspects of real estate, from calculating valuations to monitoring operational costs and underwriting mortgages.
One of those companies is New York City-based Spruce, which was founded back in 2016 to digitize the prodigious paperwork that must be completed during a real estate transaction, including handling title, ensuring all closing docs are completed, and monitoring compliance in every geographical jurisdiction they operate in. The company raised a cumulative $19.1 million in Series A funding across two tranches (my colleague Jon Shieber covered the first tranche back in 2017), and now it is poised for even more growth.
The company is announcing today that it has added $29 million in growth capital led by Alex Niehenke at Scale Venture Partners, with Zigg Capital and Bessemer participating. Niehenke has previously funded companies like Root Insurance, which is focused on offering more competitive car insurance based on realistic data from drivers.
That seems to be roughly the same thesis here with Spruce — better data and digitalization can massively improve the quality and efficiency of legacy industries.
“Instead of using local offices with manual communication and manual processes, we provide [our clients] with API’s that allow them to scale effectively and to provide great digital experiences to their customers,” said Patrick Burns, the cofounder and CEO of the company. Burns had previously done product at wealth management startup Betterment, where he also met his cofounder Andrew Weisgall.
It can be bewildering how all the startups in real estate tech fit together, but this one is simple. Spruce wants to be the workflow tool for real estate transactions, which means that they don’t underwrite mortgages or handle valuations themselves directly. Rather, the platforms wants to be the central nervous system between buyers, sellers, lenders, and all the coterie of other services required to get a transaction closed. The company handles all kinds of transactions from new home purchases by families to investor-to-investor sales.
What’s interesting is that they have two streams of revenue according to Burns. First, they take a closing fee, which is customary in real estate transactions. Spruce argues that its efficiency cuts the price of closing a transaction, ultimately saving its clients money. Second, the company earns a premium as the agent of record for the title insurance policy agreed to in the transaction, which provides a continual stream of revenue from its clients. Similar to closing fees, title insurance broker fees are customary in the industry.
It’s a pretty clear value proposition, and that’s helped it grow transaction volume dramatically. According to the company, it has processed $1.25 billion of transactions on its platform, and its revenue has grown 400% annually. With roughly five million existing homes sold in the U.S. each month, that’s still an exiguous chunk of the market.
The global pandemic underway right now has taken a massive bite out of real estate transactions, particularly for homes, since buyers mostly can’t attend showings due to social distancing policies. The upshot is that those same social distancing policies have also scrambled the traditional real estate closing, which required passels of attorneys and others to work together to get all documents signed. Spruce — and other digitalization startups in the space — are poised to transition more of that legacy paperwork onto their platforms as industry players look for online approaches.
Burns says the capital will be used to expand Spruce’s product and client partnerships. The company currently has three operations “hubs” in New York, Texas, and California.