For the world of real estate crowdfunding, 2013 was perhaps the infancy period. 2014 might be characterized as childhood, with platforms making great progress but still failing to be taken seriously by the “adults.” Looking back on 2015, this year could perhaps be the teen years: fantastic growth and maturation, but also an overabundance of invincibility by both platforms and investors that created some learning opportunities.
The space is absolutely on fire, and that could mean great things for investors in the long run. As the sun sets on 2015, I wanted to share 10 thoughts on the space:
- Huge Funding Numbers: As someone that remembers how hard it was to fund even a $50,000 property in the industry’s early days, I’m so proud and impressed with how many platforms are hitting huge numbers in 2015. To give some perspective, Lending Club funded just over $75 million TOTAL between the start of 2007 and the end of 2009. This year, at least four platforms have already exceeded that number. The ability to fund more capital means better sponsors, who were perhaps hesitant in the past because of uncertainty of closing, are now considering crowdfunding as a strong funding option. That means better deals for investors, and has me excited.
- Big Venture Capital Rounds: A number of platforms in the industry executed huge funding rounds for their businesses in 2015, perhaps highlighted by Realty Mogul’s $35 million Series B in July. It’s unclear how much of these rounds are equity vs credit lines the businesses can use to pre-fund deals. In either case, it’s capital that will help the businesses and hopefully lead to better experiences for investors. Given the numerous conversations I’ve had with venture capitalists over the last 3 months, asking for feedback and opinions on specific platforms and founders, I think we’ll see many more of these big rounds in Q1 2016.
- Specialization: A few platforms like RealtyShares and Realty Mogul will still list a large variety of asset classes (e.g. single family home, office, multifamily, retail). More platforms though – particularly new platforms being launched – are narrowing their focus and working to offer their investors specialization. Patch of Land, for example, almost exclusively lists single family residential debt deals. People often debate how this fragmented industry will play out. My opinion is that I don’t see consolidation coming anytime soon (more on this next week), but in the long run I see the industry breaking down by asset class more than geography. I certainly don’t think this is a winner-take-all industry, as real estate is simply too big and crowdfunding is still only a tiny part of the funding ecosystem.
- Wait, some deals fail? 2015 brought maturities for a number of deals crowdfunded during the Infancy period, and that meant defaults too. Many investors expressed not only frustration, but absolute outrage when some of their investments failed. I’ve heard it first-hand, as our users forwarded me emails from various platforms trying their best to apologize. No one wants a deal to go bad, so I empathize with these people, but experienced investors will tell you that it’s part of a normal portfolio. Even Lending Club has about a 5% default rate. To address this, platforms MUST improve their transparency. Secondly, investors are thinking more and more about diversification, which may help take the bite out of defaults (see #8).
- Going Offline: Real estate crowdfunding was built on words like “democratization” and “access.” The mission was ostensibly to bring deals previously reserved for institutions to the masses. However, some large platforms are now doing as much as 50% of their deals offline. Great companies like Orchard are helping to connect the ecosystem (Note: We’ve been asked a number of times if we’re competing with Orchard. We’re not, and believe we have a very different vision, and may actually become a customer in the next year). That naturally raises questions of preferences for whomever is funding the offline deals. From a finance standpoint, I understand why they’re seeking larger pools of capital to make their jobs easier. That said, I know venture capitalists are questioning the innovation of this space when so much business is now being done in what’s basically the traditional way (see #2). Much more to come on this in January, but our solution is building a platform that gives you the same power as these hedge funds.
- Welcome to the party, Institutions! Many of today’s real estate crowdfunding platforms were launched by great entrepreneurs like Jilliene Hellman and Jason Fritton. Like myself, neither of these two came from an institutional real estate background prior to helping to launch the industry in 2013. This year, with the business model more proven and a strong potential for venture backing, a number of platforms were launched either by institutions themselves or professionals with years or decades of industry experience. I think you’ll see much more of this in 2016.
- Investors Flexed Their Muscle: I once heard Ron Suber of Prosper describe marketplaces as seesaws, in which you’re constantly balancing having too much product or too much capital (Note: if you’re not familiar with Ron, google his name and watch some of his keynote speeches. He’s phenomenal.). At RealtyShares, we seemed to hit a critical mass of investors/deals in January 2014. We doubled our previous six months of crowdfunding dollars in the first six weeks of the year. Investors told me they felt like they’d discovered an unknown investment area and began to push to get into deals, and so Ron’s seesaw meant we were scrambling for more product to list. This year, I heard many investors pushing back on platforms and demanding better reporting, clearer and more timely answers to questions, and generally better performance before they’d invest more dollars. The seesaw swung, and the sites responded with lots of “invite a friend and get paid” promotions. (In full transparency, we’d love for you to invite your friends to AlphaFlow too!)
- Hints of Diversification: Some platforms are starting to put out more diversified offerings. From Fundrise’s “eREIT” to others offering small pools of properties, platforms are starting to embrace the value of diversification in smoothing out bad deals (see #4). We’re going to do our part to help as well. Our members have continually asked us to help them easily invest across multiple platforms with one investment. We’ll share details on this after the new year, but we think we’ve put together something incredibly unique and powerful.
- Crowdfunding Overseas: Crowdfunding is already making an impact abroad, particularly in Europe, but in 2015 we found new real estate crowdfunding platforms being launched in entirely new markets. For example, PropertyShares was launched in Australia and is scaling much quicker than U.S. platforms did in their Infancy period. U.S. platforms have always talked about tapping international investors, but U.S. investors may soon find great investments around the world.
- The Best is Still Ahead: Within the crowdfunding world, we’re all very excited about the progress to date. To outsiders, it often seems like the platforms must be very competitive with one another. The real competition though is lack of awareness that the space exists at all. I spoke to a director of a top platform recently, and he was just back from a real estate conference in which he said he spent 90% of his time explaining what crowdfunding even means in real estate. That’s great news, as it speaks to the immense potential ahead of us.
If you’ve got thoughts on 2015, I’d love to hear them – Ray@alphaflow.com. Next week I’ll share my thoughts on 2016. Happy holidays from all of us at AlphaFlow!
If you enjoyed this post, sharing it on Facebook, LinkedIn or Twitter with the links below is the highest form of flattery. Thank you!
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.
Ray has a BBA-Finance from the University of Notre Dame and a JD/MBA from the University of Chicago.