Equity crowdfunding for startups was supposed to be a game-changer. The excitement began in 2013 when Title II of the JOBS Act gave individuals who met certain requirements for income or net worth—called accredited investors—the ability to invest in some types of assets that had previously been restricted to institutional investors.
After Title III (Reg CF) of the JOBS Act went into effect in May 2016, expanding access to all individual investors, anticipation reached a fever pitch.
Two years on, the supposed “Big Bang disruption” still hasn’t materialized.After Title III of the JOBS Act went into effect in May 2016, expanding access to all individual investors, anticipation reached a fever pitch. Two years on, the supposed “Big Bang disruption” still hasn’t materialized #CrowdfundingClick To Tweet
In the year after Title III went into effect, startups received only $38 million in equity crowdfunding, according to Bloomberg—an amount that amounted to “a rounding error” in the larger system.
However, while the results of equity crowdfunding under Reg CF for startups have been underwhelming, real estate crowdfunding has been a quiet success story.
Tangibility wins out
The problem with early-stage startup investing is that, even when there is transparency and the investor has every piece of information they need, the deals are still complex and difficult to understand.
The nuances of a new business model or product offering can be highly abstract and a challenge to evaluate. And, with an expected failure rate of a startup at 75 percent—according to a Harvard study—how do you gain confidence that you are picking the two or three companies out of ten that will survive?
By contrast, real estate is far easier to understand.
Even the grandest skyscrapers are tangible, hard assets. On top of that, most people have already made at least one real estate investment—their own home.
The learning curve for first-timers is simply much, much shallower. And as the third largest asset class in the world—excluding cash—there is a lot of real estate to invest in.The problem with early-stage startup investing is that, even when there is transparency and the investor has every piece of information they need, the deals are still complex and difficult to understand. By contrast, real estate is far easier to understandClick To Tweet
Access and ease of use
Before the JOBS Act, there were three formidable barriers to widespread individual investment in commercial real estate.
1. Limited access to deal flow: If you want to buy a single-family home, you can easily search online listings via websites such as MLS.com or Zillow. Commercial real estate has always been much more opaque. Many smaller commercial real estate projects are still funded by what I like to call “country club money”—syndicates of high-net-worth individuals who all know each other and who rarely share information and opportunities with outsiders. If you’re not in the “club”, you don’t know about deals, much less get invited to participate in them.
2. Inconvenience: Though understanding the value of a commercial real estate investment usually isn’t overly difficult, actually closing a deal is another matter. In the pre-online environment, investors had to rely on an entirely offline process (phone, email, and even snail mail). It was a long and arduous process analogous to the early days of stock trading, when an investor had to call their stockbroker and tell them which stocks to buy and sell, over the phone.
3. High minimums: Due to the inefficiencies of the cumbersome offline investment process, real estate operators historically required large individual investments into their projects—typically $200,000 or more. Such high minimums compelled investors to conduct next level due diligence, often driving or flying out to meet with developers in person, spending hours meeting with the team, and then spending weeks haggling over terms.
Online crowdfunding has eliminated all three barriers
To begin with, the process is far more transparent and accessible, with minimum investments dropping to as low as $10,000.
Moreover, with the newfound ability to diversify away the risk of over-reliance on a single operator, investors are now empowered to quickly review an investment opportunity and make a decision more in line with how they select an equity investment. When is the last time you flew out to a corporate headquarters, interviewed the executive staff and walked one of its production facilities before you decided to invest in its stock?
Today, most people who want to trade stock simply click a button in the user interface of their Charles Schwab or Fidelity account. Thanks to the JOBS Act, real estate investing is trending towards this Amazon-like ease, too.
Online platforms display commercial real estate deals as straightforwardly as Zillow, with detailed property information and videos, and offering terms. If a deal seems attractive, investors can buy in in a matter of minutes, not weeks—and they can do so with a few clicks.
The result is that commercial real estate scales more easily online than any other asset class, except perhaps stocks and bonds.
A bright future for crowdfunding
None of this is to say that startup equity crowdfunding is dead in the water. In fact, I’m optimistic about its future – I just expect a slower growth rate than other asset classes.
The Fidelity and Schwab-ification of formerly opaque investment types is inevitable. In the coming years, we can expect to see a broader range of investments – including complex asset classes like corporate private equity – move online, making investment crowdfunding even more mainstream.
Within a decade, the idea that commercial real estate investors ever physically went to a property location to meet with developers will seem as antiquated as trading stocks by calling a stockbroker on the phone.
Ian Formigle is Vice President, Investments at Crowdstreet – a real estate crowdfunding platform. Ian is a real estate professional and serial entrepreneur with over 19 years experience in real estate private equity, startups and equity and options trading. Prior to joining CrowdStreet, Ian was VP of Business Development for ScanlanKemperBard Companies, where he managed the firm’s alternative investment platform and served as an acquisitions officer on a team that completed $460 million of commercial real estate acquisitions during his tenure. Previously, Ian cofounded and served as CEO of Clarus Property Ventures, a real estate private equity firm that focused on multifamily acquisitions in southern and midwestern states. Ian holds a BA in Economics and a BA in Political Science from the University of California at Berkeley and is a FINRA registered representative with Series 7 and 63 licenses.