Raising money for a business endeavor is as old as business itself. The concept of looking to “friends and family” in order to raise capital is the yeoman’s work of the burgeoning entrepreneur. In the technology world, a shift occurred years ago and capital raising went social and viral in the form of Kickstarter type campaigns. With the emergence of real estate crowdfunding sites, commercial real estate has entered the fold.
Over the last several years, several clever and prescient entrepreneurs quietly built companies around the concept of using technology based platforms to help real estate investors, developers and syndicators raise capital for their deals. These companies are now gaining both momentum and media attention as they make their way in disrupting business as usual in commercial real estate.
The Importance of Timing
Why now? Timing has played a critical role in the nascent formation of CRE crowdfunding companies. Primarily, the emergence and ubiquity of the internet as a trusted means of networking and communication has assuredly played a critical role. Yet, arguably the most important shift came with passage of the Jumpstart Our Business Startups Act (JOBS Act). Passed in April 2012, the JOBS Act allows more broad advertisement and solicitation of investments without violating Securities and Exchange Commission (SEC) regulations. Although the rules of the JOBS Act are literally still being written, the playing field has been widened and crowdfunding companies are rushing in to stake their claims.
The list of companies is getting longer, yet the most prominent of which are Realty Mogul, Fundrise, iFunding, RealCrowd and Ground Breaker and are located from Seattle to San Francisco to New York. The oldest of which, Fundrise, is just over three years old and new competitors are emerging on a monthly basis. The roster of crowdfunding sites now tops over 20 and this number continues to grow.
Realty Mogul Video on Bloomberg
Although each company is unique in its approach and platform, they all follow the general premise of matching investors with commercial real estate investment opportunities. As is the case in any ‘platform’ industry, as the dust settles certain ventures tend to take more market share than others, yet we are in early innings. Several of these companies have surpassed the mark of $10M in capital raised and are cresting the $20M mark. It would not be a great surprise to see exponential growth in years (months?) to come.
One of the best ways to learn about new entrants into the crowdfunding industry is by following media coverage. Although reliance on accuracy and unbiased reporting may be misguided, the media remains a good source of the most recent news and updates. A quick search shows coverage from a wide variety of media outlets, such as Forbes, MarketWatch, GlobeSt.com, The Huffington Post, CNBC, International Business Times, Inman News, Fox Business, to name a few.
Reviewing this coverage, and the websites of each of the crowdfunding sites, is also a great way to gain better insights into the industry and answer the many questions that I don’t have the space to cover in a blog post. Admittedly, there is much to understand in how these companies operate and what they offer to both side of an investment transaction.
The Old Guard
To say that commercial real estate is an old-line business tied to relationships, protocol and a tried and true way of doing business is a vast understatement. When even suggesting the existence, yet alone propriety, of crowdfunding for commercial real estate, many industry stalwarts waive their hands in dismissal, citing myriad issues. What about relationships, due diligence, Ponzi schemes? To this I suggest, wasn’t the industry plagued with these same issues before the rise of crowdfunding?
In any industry, the old guard will always be the old guard and will do their best to protect what they know and what they trust, and I very much believe this is for the greater good. Young industries and methodologies require challenging, vetting. It will be interesting to see how the tides of the old and the new mesh and how and if they will fit well together in coming years.
Admittedly, I am a technologist, and if you will, a consummate early adopter. I often look at commercial real estate through the eyes of other, arguably more progressive industries, and think “why not us”. Why can’t we use technology to increase our efficiency, create more transparency and in the end, promote productivity? I am not sold that crowdfunding is the right answer, yet these entrepreneurs are certainly taking steps in the right direction and tackling interesting issues and challenges.