November 23, 2014
I get calls every week from alumni of the Syndication and Hedge Fund Symposium program, advising me that they have a “smoking hot deal” that needs some number of dollars. They ask me for an introduction to one of the big CrowdFunding platforms such as Realty Mogul, iFunding, FundRise and the like. They all want to tap those big databases for the millions they need. I’m quick to advise them it doesn’t quite work that way. You may be disappointed by some of what I have to say.
But not to worry. There is a happy ending.
First of all, these venture backed companies are run by some of the smartest business people on the planet. They’re not about to allow any of us to “borrow” their list of investors, which they spent millions of dollars building, so we can fund our deals. Life doesn’t work that way, and business doesn’t either: especially a new and exciting business like CrowdFunding.
The way most of those bigger portals work is they curate the deals they like. That means they select a few deals from the thousands that cross their table. They pick the promoters and deal types. Deals have to meet rather specific criteria that each portal establishes for itself. One might like high-yield investments, another might prefer land investments and yet another might prefer debt instruments. Every one of those sites has some area of specialization. They’re not random and they demand established operators with solid track records, good net worth and expert deal sense. But even if you qualify, the likelihood of being selected is still extremely low.
The myth of CrowdFunding being the “democratization of access to capital” is nothing more than a myth. Most of big portals will look at thousands of deals, but they’ll pick a tiny number to fund. The number I’ve heard is very close to 1% of what crosses their plates. In fact I saw an interesting statistic: one portal says they have evaluated over $700 billion worth of deals, yet they’ve only actually funded less than $50 million. $50 million is nothing to sneeze at, but when you compare it to the $700 billion they’ve evaluated, you can see they’re not selecting very many deals to fund.
What other choices does a promoter have to participate in the new CrowdFunding arena? I usually suggest the promoters manage and retain control of the “means of production” of their business. In the syndication and hedge fund business, the means of production is capital. It’s the one function you don’t want to outsource.
Let’s say for example you get lucky and get one of those big portals to fund one of your deals. Next time you go back and they change their mind because they’re already busy with other deals, or the new deal you bring them doesn’t fit their evolving criteria. Because you’ve become dependent on a third party to raise your capital, you effectively are out of business. Finally, when you deal with these larger portals, they’re not loaning you the investors to be nice, they’re going to take some very significant portion of the carried interest that the promoter charges for setting up the deal. Plus there may be broker/dealers involved who will charge fees, so the amount of overhead that’s added to the deal is significant, and the amount you will retain will probably be disappointing. Plus from my experience in the venture capital world, if you “fall down and skin your knee” in the execution of the deal, they might take it away altogether to protect the investors. It isn’t going to work out how you think.
Retaining control of the means of production means you probably should be building your own database of investors. In order to do that, you need to have your own portal. The “white label” portals which are typically operated by software companies, can cost $10,000 to $35,000 to set up, and $3,500 and $5,000 a month to maintain and operate. That means the very first year alone, your investment could be up to $100,000. To the large hedge funds that’s a worthwhile investment in order to build a substantial databases of investors. They’ll use the portal to handle the e-commerce portion of document sharing, investor subscription and cash management. It’s very smart.
But for entrepreneurial companies it’s not an option. It’s simply is not economically viable. For those reasons it’s very difficult for entrepreneurs to participate in the CrowdFunding opportunity. This is compounded by the fact that very few entrepreneurs have a pre-existing database of investors to reach out to on the Internet so they are starting from scratch. It’s hardly an enviable position.
As a long-time entrepreneur, I look hard at these kinds of problems. What I notice is that there are thousands of real estate entrepreneurs, who want to promote deals – many have substantial experience in the business. But they’re being boxed out of an industry that’s only one year old, because they either don’t have access to the venture capital, or they don’t have access to the working capital to buy a portal.
For these reasons, Bullseye Capital has established a company that will solve these problems for the entrepreneurs who want to own and control their own databases of investors without the burdens described above. If you want to participate in something bigger than yourself and participate in a company that has the potential for creating enterprise value for all of us, stand by.
First, reply to this piece and let me know that you are interested in learning about our solution. Alumni of our standard-setting Syndication and Hedge Fund Symposium program will be notified about this company in the next several weeks. Others will hear about it early next year.
Finally, the next standard-setting Syndication and Hedge Fund Symposium program will be held in Austin, TX from April 26 to 29, 2015. We hope to see you there.