As the sun rises on 2016, I wanted to share 10 predictions on Real Estate Crowdfunding for this year. Given AlphaFlow’s place in the ecosystem though, I’ll concede that these are not only predictions but also some items we plan to help bring to fruition.
- Automated Underwriting: A number of platforms raised enormous rounds of venture capital in 2015. Many of these rounds were much larger than their performance metrics might garner in other industries. Fintech is hot right now though, and P2P/crowdfunding is on fire. Large rounds come with similarly big expectations though. If RE platforms are to hit hyper growth, as Lending Club did around 2010 and Prosper did soon after Aaron Vermut and Ron Suber took the helm in 2013, you’ll see one big change. Specifically, I think you’ll see many more companies adopt some form of automated underwriting that allows them to evaluate exponentially more applications without growing their headcount proportionally. I’ll write more on this soon.
- Make Room at the Top: I think at least 2 of the top 6 real estate crowdfunding platforms a year from today will be names unfamiliar to crowdfunding investors today. We’re in partnership discussions with a couple of large firms that I never thought would entertain crowdfunding, and I have to believe there are many more thinking about it.
- Consolidation? People often speculate about platforms merging. I’m not sold that we’ll see that yet in 2016. Too many platforms – even those I think are struggling to figure out an identity – have raised too much money to need to consider that path just yet. In 2017 though, Steve McLaughlin and FT Partners may be working their magic for a well-funded platform (see #7).
- Do What You Do Best: In the last post, we referenced Ron Suber’s seesaw metaphor for marketplaces, in which platforms shift between having too much capital or too much product to fund. I think we’ll see more platforms focus on sourcing investment opportunities and will work with institutional capital and other firms, like AlphaFlow, to consolidate their investment sources and streamline distribution. I’m talking my own book here, of course, but we launched AlphaFlow because we think it’s the best thing for both platforms and investors in a fragmented P2P world.
- Lipstick Will Come Off of a Very Ugly Pig: A lawyer once described the industry nightmare not as a deal going bad, as that’s just part of investing. Rather, she said finding that a deal was backed by “an appraisal that turns out to have been written in crayon” was the doomsday scenario. I think processes at the platforms have improved a lot over the last year, but I think cutting corners on an early deal will come to light in 2016.
- Industry Standards: Go to five platforms and you’ll find five different ways of presenting a deal. Five different opinions on what’s important to disclose and what isn’t. Five different ways of reporting after an investment has been made. That’s a huge pain point for investors and is simply unsustainable. From more standardized reporting, which AlphaFlow is providing today, to companies like Accredify providing accreditation for Rule 506(C) offerings, 2016 is the year where the industry moves towards uniform standards.
- Don’t Splash the Pot: Venture capitalists are raising more capital than ever for their funds. That said, there are also a number of strategic investors (a fancy name for the venture arms of corporations) that have lots of cash and a low cost of capital. I’ve been in more than one meeting in which the investor said something to the effect of, “I get that you’re trying to raise [x] dollars. Could we just go take the whole market if we invested 5 times that amount and blow everyone away?” There’s a reason experienced VCs don’t adhere to this tactic, but I think in 2016 you’ll see a strategic investor employee just this type of rationale and over-fund some platform.
- Focus on What You Underwrite Best: As we dig through the numbers, it’s interesting to see how some of the biggest platforms have abysmal track records in underwriting certain asset classes and fantastic track records in others. I’m not sure if the platform themselves are even tracking these projected vs actual numbers, but our users have been and they’re noticing. While some platforms will likely continue to offer a variety of asset classes, I think you’ll see them dig deeper into asset classes where they’ve had the most success.
- Moving Beyond Adolescence: In our last post, I suggested 2015 might be called the teen years for real estate crowdfunding. 2016 is time to grow up, and that is going to bring a number of new opportunities for investors. Not only in where they invest, but also in how they can invest. From aggregators to investment vehicles, investors will see a new suite of offerings that give them increased transparency and more options. We’ll announce our first step in that direction soon.
- Fixed Income Dominates: I think we’ll see a strong shift to fixed income (debt) offerings over equity deals in 2016. While some platforms are doing a better underwriting job than others (e.g. RealCrowd, led by real estate veteran Adam Hooper), from a 30,000 foot perspective, cash-on-cash returns for equity deals have usually been below what was projected (see #8). Between this and general uncertainty about fixed income in 2016, I think you’ll see a significant growth in first lien real estate debt. Firms like Patch of Land, which focus on this product, may benefit if they can demonstrate specialization as a result of their focus.
If you’ve got thoughts on what’s going to happen in 2016, I’d love to hear them – Ray@alphaflow.com. Happy New Year!
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About the author:
Ray Sturm is a leading entrepreneur in financial technology, and is currently the CEO of AlphaFlow. Prior to launching AlphaFlow, he founded RealtyShares, one of the P2P industry’s top platforms for real estate investing. His early career in finance included investment banking at Bear Stearns, restructuring at Lazard Frères and private equity at CCMP Capital.