Crowdfunding, a new way to raise capital, has been gaining traction lately and it’s clear (at least to me) the result will be far-reaching. Traditionally, entrepreneurs or inventors would self-fund ideas or seek out banks and professional or institutional investors to secure the capital they needed to take their ideas to the next level. With crowdfunding, on the other hand, entrepreneurs can raise capital from a group of smaller investors in a secure and automated way online. At a basic level, here’s how crowdfunding differs from the traditional fundraising model:
Traditional Fundraising Model (Simplified)
Idea –> Pitch Banks or Investors –> Funding –> Execute Idea
Non-traditional Crowdfunding Model (Also Simplified)
Idea –> Set Up Crowdfunding Initiative –> Funding Goal Reached –> Funding –> Execute Idea
This “democratizing” of fundraising allows people outside the traditional investor groups and lenders to join in on the process. Kickstarter is still leading the way when it comes to creative consumer products with over $900 million pledged to over 125,000 unique projects. So far, crowdfunding has had the most success with tangible consumer products. For example, there might be an engineer who is building a more efficient bike seat and needs $10,000 to get it to market. He can post the project on a crowdfunding website and immediately have access to thousands (if not millions) of people and customers who would like to support bringing the project to market. Once the funding goal is reached, the money is transferred and the project can start.
For investors, crowdfunding means less risky, smaller dollar investments in projects they care about. For entrepreneurs, crowdfunding is a better alternative to traditional investment capital that improves the likelihood of securing the capital required to stay in business.
When we start to think beyond consumer products like new bike seats, we see other possibilities that impact other industries like real estate, startups, and even alternative energy.
To learn more about these possibilities, I did a brief interview with Nav Athwal, CEO of RealtyShares. He discussed his thoughts on how crowdfunding will affect the future of real estate investing. His Silicon Valley startup is thinking about the problem in the right way. Hopefully, his insights will help investors and other financial services entrepreneurs interested in crowdfunding.
Nav, how does traditional real estate investing work?
Real Estate is inherently fragmented and inefficient. Accordingly, although investors have a variety of options to choose from when investing in stocks and bonds, they have very few ways in which to access private real estate. Under the traditional “country-club” model to real estate investing, investors must solely rely on their own networks to access quality real estate investments. And to participate, you typically need to invest a minimum of at least $50,000-100,000. The problem is, most investors just don’t have that level of access or don’t want to put such a large sum of money into a single property, which obviously hinders diversification. And although REIT’s solve part of the problem, with REIT’s investors are investing in a pool of properties rather than a specific property. This in turn reduces transparency and control.
How do you apply a crowdfunding model to real estate at RealtyShares?
Through our online investment platform, www.realtyshares.com, we provide accredited investors access to real estate investment opportunities that are nationwide. Investors can browse opportunities by asset type (i.e. single family home or apartment building) or geography and can pool their money with other investors to purchase shares in these opportunities for as little as $5,000. Investors also have access to an investor dashboard where they can monitor their investments, returns and tax documents. Thus, through crowdfunding, we’re making investing in real estate as easy as easy as investing in stocks in publicly traded companies.
Why is crowdfunding particularly good for real estate investment? Is there a painpoint that traditional funding models don’t address?
Crowdfunding eliminates most of the barriers or difficulties involved with traditional real estate investing. Real estate is time consuming, expensive and requires skill and local knowledge. Accordingly, unless you’re willing to invest $100K into a single asset and can afford the time and effort to actively manage and operate the property, it isn’t a viable investment option.
Crowdfunding through platforms like RealtyShares not only provides a level of access and transparency that has never before been possible for real estate but also greatly reduces the time and capital requirements needed to invest. That is because each investment is passive and investors don’t have to worry about the usual headaches that come with property management and the investment minimums are much lower. This allows investors to invest more quickly and also to allocate the same $50-100K they may otherwise put into a single property across multiple properties in different geographies thereby achieving greater diversification.
Imagine sitting on your couch in New York and browsing apartment buildings or single-family home investments in Los Angeles or Seattle from your laptop or tablet. Crowdfunding is making that possible.
Where’s the future of real estate financing and investments?
Historically, real estate has been slow to adapt to technology and this has attributed to the fragmented and inefficient nature of the industry. But that trend is now changing. For example, only 8 years ago, searching for a home online wasn’t a possibility, yet as of August 2013, over 64 million searches were made through Zillow Z +1.99%.com.
I think real estate will continue to become more and more efficient as its intersection with technology becomes more and more prominent. As a result, we’ll continue to see greater efficiency, more transparency and much greater access in the real estate and finance industry. And crowdfunding will play a big part in that.
Also, due to the nature of securities laws, most investment crowdfunding platforms to date have only been open to accredited or high net worth investors. But with the passage of the JOBS Act and the Crowdfunding Rules only 6-9 months away, we’ll also see retail investors participating in this burgeoning industry in the not too distant future. This is a monumental change since these investors have historically been excluded from investments in alternative asset classes like real estate.
Thanks for the interview, Nav!
It is difficult to innovate within the financial services world. Changing the underlying incumbent methods – in this case, how traditional real estate fundraising and investments work – is the right way to make headway on a larger scale.