“Transparency, honesty, kindness, good stewardship, even humor, work in businesses at all times.” -John Gerzema
In speaking to our customers at AlphaFlow, the biggest worries we hear almost always come down to one word: transparency. It’s a word easily tossed out by platforms, but they often mean honesty and not transparency. Honesty means you’re telling people the truth. Transparency is a higher standard though, in which you’re telling customers everything. For example, honesty could mean telling customers that a sponsor has done 50 successful deals in the past 2 years, while transparency means communicating that there are also 3 projects from that sponsor that are currently in trouble.
The industry is growing quickly, and while many platforms are touting transparency, that word often goes no deeper into the company’s culture than the marketing team. To be clear though, there is a difference between resisting transparency and not yet having the resources to support it well.
Some platforms have been exceptional, like Lending Club, which is incredibly responsive to our needs and is adjusting its API to help enable better reporting for our users. Patch of Land looks to be following a similar path, understanding that greater transparency for their users is directly going to lead to long term trust and thus success.
Others have been less eager, with common excuses like “that level of data will just confuse investors.” They’re the same sort of condescending things you’d hear a Dean Witter financial advisor say in the 90s when more people were beginning to manage their own portfolios online. They’re also the sort of excuses that I think will make those same founders blush in a year, when we won’t be able to imagine ever investing without that transparency.
Our customers often ask me what questions they should be asking that most aren’t. It’s tough to do when you don’t know all of the potential skeletons. Most of you have already been sharp enough to ask things like: Are the returns shown to me net of all fees? Has the sponsor ever had a bankruptcy? (not uncommon for real estate developers who were in the business in 2008) What is the sponsor’s track record?
These are all good questions. Here are 5 deeper questions I’d want to answer before investing in a deal:
- Has the sponsor track record been verified in any way by the platform?
- Am I really being protected by the investment structure, or could the sponsor make money while I lose everything? (you’d be surprised)
- What is the track record of this sponsor for ALL deals on this platform?
- What is the platform’s Projected vs Actual track record for underwriting this type of deal?
- Did you pull the comps, or were they provided by the sponsor’s agent?
I’m also particularly interested in how platforms will handle the process of a deal going bad (default, underperforming, non-performing). Many platforms appeared to believe, “I’m well funded and will hire good lawyers if a deal goes bad.” However, we’ve seen many learn the hard way that it’s harder than they thought, and their investors have been kept in limbo particularly with equity deals in which forcing action can be more difficult than with a defaulted loan.
As someone who worked in corporate bankruptcies and restructuring during the 2008 financial crisis, I know first-hand how complicated these transactions can be. I’m eager to learn who is best prepared to protect the capital that investors worked so hard to earn, and who still has work to do. Having someone mediocre vs someone great advocating for you can make the difference between recovering everything and walking away with nothing. Not every deal is going to go as planned, which is why one of the pillars of prudent investing is diversification. However, being transparent with the bad lends tremendous credibility to platforms when they tout the good.
We’re continuing to work on answering a number of these questions for our users. We’ve been pleased to have a number of platforms reach out to integrate with us and embrace transparency, and we’re hoping those resisting it will soon change their stance. As a mentor once told me, “If you don’t like change, you’re going to like irrelevance even less.”
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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.