Crowdfunding Platforms
Anyone ever consider starting a crowding platform like Fundrise or RealtyMogul? Why are there suddenly so many popping up in 1 form or fashion?
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It's an attractive concept, but crowdfunding doesn't work that well in practice because the equity check on most viable real estate deals is just too big. If you are trying to raise $3-4M for some crappy Class C apartment deal with a total capitalization under $10M it can work, but a more typical institutionally-sized apartment deal (let's not even talk about more capital intensive office) is going to be in the $30-$40M range. Think about how many equity partners you need to syndicate to raise $15M instead of $3M when everyone is stroking a $25,000 check.
Because of the issue above, the deals tend to be smaller, so the fees are smaller. The fees are what keep the lights on day to day...crowdfunders have to do way more volume for the same fee income, and the small deals can be just as much work as the big ones.
RealtyMogul's (may be wrong on which company) was on a podcast where he spoke to the issue that Ricky Rosay spoke to. He also mentioned that it was really challenging close deals when it might take a long time to fundraise from individual investors, rather than relying on one check from a large investor. Made it difficult to scale the platform.
Also, since many of these firms are venture funded, the VC community is looking for that 100x return. If you're only accepting 2% of deals you see as a CF platform, then you can produce that sort of volume.
As a Fund Manager it gives me fucking aneurysms to think of trying to structure a fund around an entirely unpredictable amount of capital in/outflow. Raising PE funds is an extremely structured, premeditated, legally arduous process for a reason. There's so much that could go wrong with a funding mechanism by which you have no ability to budget, forecast and plan accordingly for the amount of capital you're going to have to be able to deploy and manage in any given quarter/year. How the hell are you supposed to have any type of business plan for the future and build an infrastructure to steadily scale, deploy and manage capital when you don't know if you'll be getting $1mm or $1B in capital contributions over the next year? I just don't see how the internal management will ever be able to calibrate successfully in the long-run. You can try to limit capital inflow and try to create some sort of systemic queue but it's still liable to get cluster-fucky in all the ways that a typical PE fund structure is supposed to try to limit. How long do you expect your individual investors to sit in a queue and hold pure cash in escrow before they decide they don't really want to be involved and just buy some shares of a REIT?
I’ve lent on properties where the equity was partially sorurced via crowd funding. The big thing we look out for is that the sponsor has the right to dilute the crowdfunding guys in the event of an unfunded capital call, and they the sponsor/other equity players have the means to fund additional capital that may be needed.
So if fundrise fails to meet its equity deliverable after the due diligence period ends, does that mean they themselves have to put up the equity? How does this work?
This structure is later down the line during the term of their acquisition. If the crowd funding doesn’t come to the table pre-close, sponsor has to find alternative capital from elsewhere. Saw this happen a ton before RealtyShares went belly up
It seems like ArborCrowd is doing it successfully.
Anyone have insight to this?
what makes you say that? just the number of deals? i don't know if anyone has compared results between crowdfunding platforms, they may not have enough deals.
fundrise is a bit different than the others, as you're investing in a basket of deals rather than one individually, like realtymogul. its more of a reit, really, although not publicly traded and not nearly as large.
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