AlphaFlow

This piece was originally published by the Lending Times

On March 2nd, Dynamics Capital put together a great real estate crowdfunding conference in Los Angeles. In attendance were some of the industry’s top platforms, including Realty Mogul, Patch of Land, PeerStreet, and AssetAvenue.

I was fortunate to attend as well and present one of the keynote presentations. As one of the two founders of RealtyShares, I was responsible for the financial underwriting behind most of our deals in our first 18 months, and so got to know the sponsor perspective very well. Today I’m the CEO of AlphaFlow, where we help investors build and manage P2P portfolios. Given both of these roles, you can say I’ve seen things from both sides of the table.

Below are 5 particularly interesting takeaways from the conference:

Competition

In many industries, the competition would be the other platforms. However, in the real estate crowdfunding world, that’s simply not the case. When you compare the size of the industry (~$2.5 billion worldwide in 2015) to the entire real estate investment market, it’s clear that growing the crowdfunding pie has much more potential than fighting for a bigger slice of what’s there today. The biggest competition is still the lack of awareness. Most sponsors in the industry weren’t as interested in hearing the differences between CrowdStreet and RealtyShares as just understanding how crowdfunding works. Education and creating awareness are still top priorities. (These are likely still top priorities for much larger industry players like Lending Club and Prosper!)

Transparency

“Transparency is critical.” I say this all the time when working with my investors, but the sponsors are also very interested in transparency around their side of the marketplace. Given we’re seen as an independent 3rd party, AlphaFlow often gets emails from sponsors soliciting our opinion on a particular platform. They’re asking questions whose answers I’m not sure the platforms are actually tracking yet. For example: “How long does it take the average deal to fund?” or “What is the average return your platform has offered on funded deals by asset class?” As platforms grow and need to move beyond early adopters, knowing their metrics is going to be critical to converting sponsors unfamiliar with the space and less eager to try something new.

More and more platforms

When we did our first deals at RealtyShares in 2013, there were only a few other platforms that were actually active in the market. There were dozens of fancy landing pages but most had no substance behind them and many were a side project of a real estate broker. Today, it feels like I’m hearing from 1-2 new platforms per week with founders who have impressive credentials and solid backers. For the most part, new entrants have some niche and aren’t trying to compete with platforms like Realty Mogul, which fund a variety of asset classes with both debt and equity. Greater specialization can mean good things for investors, as long as these sites can fund their deals. You’re also seeing powerhouses like LendingHome, which built a great business with institutional investors, enter the crowdfunding space as well.

Pre-Qualifying

During a panel that included four top platforms, someone in the audience asked if he could call the platform to see if he’d qualify prior to actually bringing a deal. David Manshoory of AssetAvenue noted that doing so is already possible on his platform, but that’s probably the exception today. Most platforms have been, like all startups, resource constrained and so valuable hours needed to be spent on assessing actual business opportunities vs potential. Large funding rounds also bring an eye towards the future and long-term growth, so I expect we’ll see more platforms vying to be the funding choice of sponsors even before they have a deal to fund.

The Meaning of an Approval

With most crowdfunding sites, approving a sponsor’s deal simply means that it will go up on the platform to be funded (or not) by investors. Even if sites have confidence in their ability to execute, there is still uncertainty around the timing required. In the earliest days, we often got weeks or months to fund a deal. That’s not the case today though, as sponsors look for certainty of capital. The result is more and more platforms, like Patch of Land, pre-funding deals and then effectively selling off their own positions on the platform. Over time, you’ll see more platforms following Patch’s lead; others may not, but they’ll need an exceptional track record to instill the same confidence in a sponsor eager to close his deal.

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