offer investment opportunities directly to the consumer,
specifically accredited investors, in a more efficient, scalable
and repeatable manner.
Another significant benefit of direct online capital formation is
that it gives sponsors access to a much larger national investor
pool. Sponsors often rely heavily on an existing investor base
in their local city or state. For the first time in history, reputable
sponsors who have a solid track record of doing great projects,
returning capital and rewarding investors are now able to “tell
their story,” build up their brand and reputation and grow a
loyal investor base nationwide.
ADVICE FOR SPONSORS
The rise of equity crowdfunding has created a proliferation
of firms touting their real estate crowdfunding expertise. The
question for sponsors is how to align with the right platform
and the right strategic partner in this online endeavor. Like
any real estate deal, the best advice is to do some good
First, look at the quality and types of projects that a
crowdfunding firm has both completed and currently has listed
on its platform to make sure that it is a good fit. CrowdStreet,
for example, focuses on institutional quality assets, such as
office buildings, assisted living facilities, self-storage and
apartment properties, while other companies specialize in
smaller scale, entrepreneurial projects or the likes of buy and
flip rental housing. The types of offerings posted are not only
a good indication of the focus of the crowdfunding firm, but
they are also a good indication of the types of investors that are
most likely on that platform.
Second, it is important to look at the team behind the platform.
Crowdfunding is not just a technology platform, and it is not
just commercial real estate. It also involves private equity
capital formation. So, sponsors need to see that the team behind
the platform has all of those different capabilities and skills.
Third, sponsors should choose a true strategic partner that will
help them promote their brand, build up their investor base,
and work with them on future projects. We’re hearing from
a lot of sponsors that they want a firm that can do more than
just provide them with a check for one project. As the market
is getting more educated, sponsors are realizing that they want
to build up their expertise in this new online capital formation
world and gain a partner that provides them the solutions,
technology, marketing and services that can help them create
long-term, direct-to-investor relationships.
The flip side is that most crowdfunding companies set their
own criteria or guidelines on the types of sponsors and/or types
of projects they will accept. At CrowdStreet, for example,
sponsors need to have a minimum of 10 years of experience
in the particular product category. Once we engage, we
conduct background checks and other screening before any
sponsor or any specific project gets posted to our marketplace.
CrowdStreet takes very seriously the feedback received from
its investor members on the types of sponsors and projects that
they are interested in seeing.
MORE GROW TH AHEAD
Over the past two years, the emerging crowdfunding industry
has seen both meteoric growth and a seismic shift in perception
from both investors and sponsors. By all accounts, there is
even more growth and evolution ahead.
There are roughly 9 million accredited investors in the U.S.
and 95 percent have never invested directly in real estate. That
in itself represents a significant opportunity for fundraising.
In addition, there is more legislation going through Congress,
including Title III of the Jobs Act, that will open real estate
crowdfunding to unaccredited investors.
The growth potential for real estate crowdfunding is exciting.
The estimated $1 billion in online capital formation sourced
directly from retail investors for commercial real estate
projects in 2014 is expected to jump to $2.5 billion this year,
according to industry data from Massolution. In addition
to the capital growth, the crowdfunding platform itself is
continuing to mature and evolve. When crowdfunding first
emerged, many of the large sponsors put a toe in the water to
test how the direct-to-investor crowdfunding channel worked.
What they are now recognizing is that, while they love the
efficiencies of the crowdfunding marketplace, they also want
these capabilities for their own websites. Many sponsors
already have established relationships with a core group of 50
to 200 high-net worth investors that they have worked with in
the past. They want to be able to offer those investors the same
online services directly from their own website.
The growth of e-commerce is a good analogy for what is
occurring in online real estate fundraising. When e-commerce
first emerged in the 1990s, offline retailers saw it as a huge
opportunity to sell their products online and go direct to
consumers. The retailers recognized that the best approach
was to sell their products through both online marketplaces
and their own websites.
E-commerce has by no means put traditional retailers out of
business, but rather has forced retailers to evolve their business
practices, embrace digital marketing strategies and modernize
their technology stack. It is believed that the same will prove to
be true for crowdfunding. These changes will enable sponsors
to reach a wider audience of potential investors and will
democratize access to commercial real estate opportunities
while adding efficiency, convenience, and transparency to the
investment process for both investors and sponsors.