June 17, 2014
You may have heard that some of the large, well established, crowdfunding portals are raising tens of millions of dollars to support their transactions. There’s a lot of excitement about this, but I believe that few people understand what the ramifications of this might be. My sense is that if these organizations raise millions with the specific intention of being able to pre-fund a deal that’s brought to them instead of waiting for the crowd to fund it, the portal will be in a position to act like an institutional investor with a tremendous amount of power.
We already know that if 100 deals are brought to these well-funded portals, they will pick 3 for due diligence and select one for funding. It sounds a lot like the venture capital model.
It might sound like a great deal for the real estate promoter who brings the deal to the portal, to get a guarantee of funding rather than wait for the crowd to act, but in reality, these deals might not be crowdfunded at all. If the portal strokes the check (from the millions they raise plus more in lines of credit) and then crowdfunds their “reimbursement”, the real estate promoter won’t actually be crowdfunding the deal at all.
Several of these larger portals use a model wherein the real estate promoter never knows who the investors are, because the portal creates a joint venture with the operating partner (the real estate promoter). So you can imagine the portals are going to be taking enormous bites out of the opportunities that come to them from real estate promoters who are looking for capital. The capital is going to come at a tremendous cost, in many cases 50% of the “promote” or of the promoter’s carried interest.
Anyone looking to do crowd funding should be extremely careful about how they move forward in this new world.
The opportunity to use the crowd is tremendous, but it seems that some companies are already suppressing the crowd – to control the transaction themselves, crowdfunding only the reimbursement of their own capital, and not actually crowdfunding the deal itself, even though the investors that put their money into the reimbursement would be paid alongside, or as a result of the deal that they’re investing in.
No one can say these portals (backed by the venture and institutional guys) aren’t smart.
Since these large portals only deal with a very tiny percentage of all the promoters that come to them (about 1 out of 100) the 99 other promoters will need somewhere else to go. Bullseye Capital is working on the solution for the 99%. We’ll keep you posted as that develops over the next couple of months.
In the meantime, keep your eye on crowdfunding – because it is a game changer.
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Joel G. Block is a successful entrepreneur, speaker, advisor and is an astute investor. Joel is also CEO and founder of the Bullseye Capital Real Property Opportunity Fund, LLC which acquires distressed real estate nationwide. The Fund partners with accredited investors to accomplish its goals.
We also offer standard-setting seminars to show others how to raise or syndicate capital to acquire properties. Knowing how to pool funds to purchase real estate investment, whether single family, multi-family, commercial, or industrial is the key to wealth creation. For more information and complete details, please go to http://www.syndicatefast.com/.