layoffs

RealtyShares Is the Latest Casualty of Real Estate Finance Disrupters

How real estate projects get funded impacts almost every aspect of our lives. It determines what types of buildings get built where and what they get used for. It also is one of the determinants of global investment yield. Whether investment banks, pension funds or the family next door is willing to loan money to people building and redeveloping real estate affects the flow of money into the asset class which then affects all the others. So when the Jumpstart Our Business (or JOBS) Act came out in 2012 which relaxed the requirement for securities law the property industry was an obvious candidate for change. The act lets companies raise small amounts of money from individual investors and allowed them to solicit investment from certified accredited investors. To utilize these new exemptions in the law a group of “crowdfunding” startups popped up as an alternative way for the general public to invest in real estate.

One of these companies was ReatlyShares. Started in 2013 they raised $58 million from leading venture capital firms and started connecting investors with projects with as little as a $1,000 investment minimum. Five years later the company is announcing that they are laying off most of their employees and are no longer seeking new deals. The exact reason for the demise is still uncertain but a few factors could have contributed.

The first is that back in 2016 the largest (and publicly traded) crowdfunding lender, LendingClub, was subpoenaed and investigated by the DOJ for possible improper loans. Later it came out that the then CEO gave substantial loans to himself and three of his family members to boost their volume numbers to investors. This likely shook some of the confidence that many investors had in crowdfunding. Another possible culprit for RealtyShares’ woes was the change in leadership that happened last November. Founder Nav Athwal was replaced by Ed Frost, former Cushman & Wakefield CEO. A change like this can sometimes derail a company and this might be one of those occasions.

The lose of RealtyShares is a blow for real estate crowdfunding but other companies are still operating in the space. It is hard to tell if the companies struggles were due to internal mismanagement or a larger problem in the ability to scale crowd-sourced investment for real estate. The crowd funding industry is growing but most of the money seems to be going to fund projects like food and entertainment that people are excited about. Here are the stats for crowdfunding across industries as of May 2017:

crowdfunding

Crowdfunding could still be a good source of investment capital for real estate and a way for interested investors to get access to new deals. But the companies left in the space will have to figure out how to profitably scale portfolios that rely on small investments from a large number of investors.

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