Part 1: The State of the Union in Real Estate Crowdfunding

[Editor’s Note: This is a guest post from Ray Sturm, the Co-Founder and CEO of AlphaFlow, which helps investors build and manage real estate portfolios across the crowdfunding industry. Prior to launching AlphaFlow, he co-founded RealtyShares. His early career in finance included investment banking at Bear Stearns, restructuring at Lazard Frères and private equity at CCMP Capital.]

As one of the founders of RealtyShares, I remember the dawn of real estate crowdfunding in 2013. There were only a handful of real platforms and simply getting people to sign up for our websites – never mind actually investing – was an enormous struggle. Oh how things have changed!

Launching AlphaFlow last fall gave me the opportunity to step back and start to look at the industry as a whole. From the number of platforms, to the tremendous growth in crossing $2.5 billion of crowdfunded dollars last year, to the world class founders like Jilliene Helman and Brew Johnson leading incredible companies, it’s exhilarating to see real estate crowdfunding begin to truly make an impact! Looking back on the industry, I wanted to share 5 observations from what’s happening in real estate crowdfunding today.

1. Multiple platforms reaching new heights

In the industry’s early days, we often needed weeks or months to fund a property. In our first six months at RealtyShares, we barely crossed $500k in total crowdfunded dollars. In the next six weeks, we doubled that and took off with much of the rest of the industry.

Today, at least 4 real estate crowdfunding platforms have entered the “Century Club” after having funded more than $100 million: Realty Mogul, Sharestates, Patch of Land, and RealtyShares. A number of other rising stars like PeerStreet have quickly built incredible investor demand and will be there soon.

2. Big Investments

As real estate crowdfunding exploded, so did investor interest. Venture capitalists saw what is clearly an enormous market – the annual real estate market is about $500 billion – and poured massive investments into the space. About a year ago, LendingHome closed a $70 million Series C. A few months later, Realty Mogul announced a very impressive $35 million Series B. In early 2016, at a time when every headline seemed to announce the end of venture capital and proclaim that the era of large raises is over, RealtyShares announced a $17 million Series B. Good businesses will always get funded, regardless of the venture environment. Silicon Valley’s top venture firms have made it clear that they’re believers in the promise of real estate crowdfunding.

Large rounds come with enormous expectations though. Many skeptics believe the industry is in fact overfunded. I agree with Mark Suster in that overfunding early is dangerous, but it’s ok once product/market fit happens (insider tip: when you see a platform launch all sorts of complicated new products while not really winning with any of them, it’s a good sign that they’re overfunded and don’t have the discipline that comes with a tight budget). Only time will tell how these investments pan out.

3. Proliferation of Platforms

A growing industry supported by significant venture capital interest will always attract new startups. While total crowdfunding dollars grew about 6x from 2013 to 2015, the number of platforms grew ~10x during that same 3 year period to over 230 platforms worldwide. In other industries, you might say these new players are all “me-too” copycats. You might even say they’re “fast-followers.” I believe it’s more nuanced here. When you dig into the real estate industry, you realize that the space is inherently fragmented. In mortgages, for example, the top player (Wells Fargo) only has about 12.5% of the market. In fact, the top 10 players only have 40% combined! These new players have one big trait in common though . . .

4. The Emergence of Specialization

New platforms aren’t trying to do what we did at RealtyShares, where we offered both debt and equity and a variety of asset classes from our earliest days. Conversely, you’re seeing specialization in new players like Fund That Flip, which has tremendous experience in underwriting single family residential debt. Others like Apple Pie Capital bring expertise for those looking to invest in franchises. Patch of Land has expanded beyond its early short term debt product by expanding to include medium-term products – a thoughtful evolution rather than revolution in its offerings.

Real estate crowdfunding may prove to be the exception, but the rest of the real estate industry tells us that you won’t find a winner-take-all anyway BUT that the industry is large enough to support multiple giants.

5. Institutional Capital

Like with Lending Club, the early mission of real estate crowdfunding was to give access to a new asset class to the masses. Those managing institutional capital though are paid to find great investment opportunities, and as the industry gained both size and a tremendous track record, hedge funds came calling. In the industry’s early days, you saw a few institutional deals announced but those firms have told me that most of their capital was never actually deployed. That’s not the case today.

In February, Sharestates announced a $60 million partnership with an east coast private equity firm. The news came just weeks after Patch of Land signed a $250 million forward flow agreement with a credit fund.  Institutional capital has also helped break records, as Realty Mogul executed a $49 million bridge loan with Elite Street Capital in November.

Conclusion

Real estate crowdfunding has come a long way since a handful of us launched platforms in 2013. Given the size of the industry though, the industry certainly has more opportunity in front of it than behind it. In Part 2 we’ll take a look into what’s next for real estate crowdfunding and what you’ll see in the coming year!