Last week I wrote about the announcement to stop taking new investment by real estate crowdfund investment platform RealtyShares. It obviously interested a lot of you because it quickly became our most read article for the week. The company had raised $105 million in venture capital and debt financing and collected over $870 million in investments for more than 1,100 projects. To go from these kinds of numbers to the brink of insolvency in such a short time amounted to a death spiral. The downfall of any company elicit a lot of opinions and this is no exception.
An article came out yesterday in National Real Estate Investor that got quotes from executives at three other real estate crowdfunding companies, ArborCrowd, CrowdStreet and EquiltyMultiple. While the article was aimed at educating investors on what to look for (and look out for) when vetting a crowdfunding site it had some good insight for the property and PropTech industries about the future of this type of funding arrangement.
The co-founder and CEO of CrowdStreet thought that it was “actually an indicator that the industry is maturing.” This is certainly true. As the industry gets to the top of the growth curve the competition heats up and starts to put pressure on those without a defensible advantage. The co-founder of EquityMultiple thinks that the companies that will survive are the ones that “have managed headcount and spending a bit more.”
Interestingly, the co-founder of ArborCrowd thinks that there will be more of this to come. At the moment there are a dizzying array of companies that will take your money to buy property. The market will eventually weed out the weak ones and give the victors the spoils of the deceased.
New regulations that created the ability to offer and promote these kinds of offerings (Reg A+) did a lot to help bring capital into the real estate market that might not have been available before but there is still a limited pool of people that can make these investments. Besides CrowdStreet all the companies mentioned require accreditation in order to invest (and even CrowdStreets offering is limited in size and geography). This means at least $1 million in net worth (minus your home) or $200k of income for two years. Estimates for the number of Americans in this financial position is around 12 million as of 2016.
Getting these often sophisticated investors to buy into the idea of putting small amounts of money into a crowdfunded property will be what will separate the companies that make it from the ones that we will no doubt be talking about after they meet their ultimate demise.