November 23, 2014

What CrowdFunding Is, and Isn’t

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.

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September 6, 2014

Piece by Piece, Step by Step

Goal setting is very difficult for many people, in part because they try to swallow the whole elephant all at one time. Sometimes goals are very easy to understand but for whatever reason, they’re very difficult, confusing, and sometimes seemingly impossible to achieve.

In the 1991 movie “What About Bob”, Dr. Leo Marvin wrote a book called “Baby Steps” and that pretty much summarizes the way that goals need to be achieved.

I travel frequently. Let’s say that I’m going to Florida. I don’t focus on going to Florida; I focus on the many steps that it takes to get to Florida. For example, first, I have to get in my car and make sure that the car has gas. Second, I have to get myself to the parking area at the airport. Then once at the parking area at the airport, I have to get myself onto the shuttle bus to the terminal. And once I’m at the terminal I have to get through security. And once I’m through security I get to the gate, board the plane, take my seat, change planes, whatever the next series of steps are. There might be 15 different steps, but when I travel I focus on doing one step at a time until I’ve arrived at my destination.

Business goals, educational goals, personal goals, and social goals all work the same way. Break them down into little pieces.

Sometimes it’s easier to understand sports than it is to understand real life, because sports is so definable. The rules are so clear and well understood. Any game or sporting event is easy to follow if you understand the rules. Everyone on the field understands the rules, and everyone in the stadium understands them too, and for those reasons, everyone knows when a player is making the right move, the wrong move, or if he is completely off course. But somehow in our life, setting goals just doesn’t work the same way.

We have to get in the habit of breaking big and seemingly impossible goals into bite size pieces. For example, writing a book is not a book, it’s a series of chapters. Or maybe the focus shouldn’t be on the whole chapter but rather on a number of pages or a series of paragraphs. And maybe those paragraphs follow a series of outlines that require some research.

Building a fund or syndication works the same way. First define the asset to acquire, then produce the marketing material, then the disclosures for the Private Placement, then the fee structure, then make the other business decisions that guide the relationship between the promoter the investors and finally put the word out to your prospects. Each part has numerous sub-parts, but you get the idea.

We’ll go over lots of these sub-parts at the upcoming Deal Making Symposium and Syndication Seminar.

One way or the other, you have to ask yourself, “what are the pieces that will eventually get me to the place I want to go”? And by asking that critical question, you will eventually get yourself to the goal line. It’s very tough to get through the Red Zone to the goal line. The first 80 yards are pretty easy, but once you get into the Red Zone, those last 20 yards, the field is short, players are on their guard and there just isn’t a lot of margin for error. The Red Zone is where most of the fumbles take place but it’s also where the points are made.

Taking the ball 90% of the way down the field isn’t good enough because you don’t get any points for 90%. You have to cross the goal line. You have to identify your goals, you have to understand the objectives, and you have to really be clear about what it is you want to do and why you want to do it. When you understand what the outcome is going to be and what the reward is to you when the job is done, it gets a lot easier to plan the work and break the job into lots of little pieces.

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August 24, 2014

The Backstory of the Crowdfunding Business – Part 2

Last week, I shared how the crowdfunding business has evolved from a donation-based model that has been largely taken over by business users who found that the donation-based crowdfunding rules provided a great way to skirt the commerce and securities rules. But one company did such a good job that they may have poisoned the well for everyone.

In 2013, a company called Oculus invented some kind of video goggles. They were very unique, they were 3-D, virtual reality, and had all sorts of other bells and whistles, and they told the gaming community that for a $250 donation, they would get a pair of these glasses once they were invented. They were completely straightforward and they told the donors exactly what would happen – when the product was ready to go to market.

Everybody did exactly what they were supposed to do, everything was working beautifully. In fact, it was working so beautifully and Oculus was receiving so many orders for these glasses on a donation basis, that Facebook got wind of what was going on.

Facebook then calls Oculus and asks, “what’s happening, we see you’ve invented some interesting glasses and we’d like to know more.” Facebook ends up purchasing the company for $2B. The donors had no expectation to participate based on their contributions, above and beyond receiving a pair of the glasses once they were invented. But now, they’ll probably never be invented and the donors will either get their money back or they’ll get something of comparable value. But had the donors actually been investors, they then would’ve received something like $40,000 per share, for every $250 that they would have “invested” instead of donated. For this reason, some people have become very unhappy with the crowdfunding model on a donation basis.

Something similar was announced this week. It was just two years ago when home-automation company SmartThings began life as a Kickstarter Project. With an initial goal of $250,000, it raised $1,209,423 from 5,694 backers. The company then raised an additional $15.5 million in venture capital, including a $12.5 million Series A round of funding. On August 14, 2014 Samsung scooped it up for a reported $200 million dollars. How do you think those donors feel?

Not related, but concurrently, the Congress of the United States passed legislation making a new kind of crowdfunding legal for the first time in United States history. From now forward, securities-based crowdfunding would become legal. That means that regular people, meaning people who are not accredited, (i.e. people who are not high income earners or millionaires) would have access to opportunities that are not public on the stock market but rather, in the incubation stage.

Rather than making a donation, the crowd can contribute capital in exchange for stock or even a debt instrument. Think about this…

Maybe you know somebody who has invented the next Facebook or the next Twitter or “The Next Home Run”. Going forward, those companies would be able to solicit early stage investment capital from regular people. And regular people can get stock that could potentially explode. (Or not).

Professional investors know that the real money is not made when a company goes public – that is when the game of Musical Chairs begins. The real money is made in the private placement phase – a phase that until now, has been controlled by accredited investors. But not for long.

Legislation known as the Jobs Act became law in 2012 and was enacted by the Securities and Exchange Commission in 2013. It allows for general solicitation of investors if they are accredited, but it also provides for a mechanism for “regular people” to participate too. We are currently waiting for the SEC to layout the regulations.

I will continue to bring more info on this topic because it is potentially the biggest business game changer in 80 years. Keep your eyes on it. This one is BIG.

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August 17, 2014

The Backstory of the Crowdfunding Business – Part 1

The concept of crowdfunding is not new. In fact, it dates back to the beginning of the industrial revolution, over 200 years ago, when the earliest industrialists needed to pool capital to take their businesses to the next level. I can just imagine Henry Ford sitting around in the country club, at the bar in the early 1900s with a bunch of his wealthy friends (his crowd), explaining the new concept that he’s come up with — the idea for a factory and an assembly line, to produce automobiles. Several of those guys probably each chipped in a sizable number of dollars; shares were issued to each of the investors, and the investors in that company and their families have been set for well over a century.

The whole stock market is based on the concept of pooling capital, which is a form of crowdfunding. But the form of crowdfunding that we refer to now really relies on the digital world and the use of the Internet to generate both leads and dollars from investors.

The earliest forms of current crowdfunding are five to eight years old, with the advent of “donation-based” or “rewards-based” crowdfunding platforms. Systems like IndieGoGo and Kickstarter turned these platforms into a sizable business that currently generate over $1 billion a year. Under the donation-based or rewards-based model, entrepreneurs such as filmmakers, artists, and others can go to a community of fans who like the product that the promoter is producing and solicit donations.

For example, for $20, a person might put the money in with the expectation only that they would receive a DVD of the finished product, if and when it was ever completed. If they put in a little more the reward would get better so perhaps they would receive a theatrical poster with the DVD. Or if they put in even more, maybe the poster would be signed by the star of the movie. But in every case, it was a donation with no expectation of anything material in return, especially if the project became successful. These projects have worked great, and lots and lots of different businesses have been funded in this way.

It didn’t take long for the business community to catch on. And once the business community got involved, everything started to change. As most of the readers of my column understand, for most inventors and entrepreneurs, the hard part is getting the seed capital to get the project rolling.

What’s difficult is producing the very first product, or sometimes even the prototype. In most jurisdictions in the United States, making sales without having a product that’s available and ready to ship is against the law. So, there’s a real conflict for the entrepreneur. How does one get the capital to produce the product? If they could just produce the product, or if they could just pre-sell the product first, then producing it wouldn’t be so bad. Unfortunately, that leads to all kinds of problems, Ponzi schemes included.

But in a donation-based or rewards-based crowdfunding model, entrepreneurs are able to create products and services by taking in dollars first, and producing the product second. They do that by taking donations for the product, and once the donations are in, they can reward the donors with a copy of the artwork or the product that the money was donated for, thereby skirting the commerce rules that limit so many traditional companies. It’s a complicated formula, but using this crowdfunding model has solved a lot of problems for a lot of entrepreneurs. Unfortunately, there was one project that was so successful that it has really soured the water for everybody who has come since then.

I’ll finish this post with that story in a few days.

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June 17, 2014

Is Crowdfunding Going Institutional Already?

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.

* * *

If you have an opinion or thought on this topic, please write a comment in the form below. Share this blog with your friends. Thank you for being one of our loyal readers.

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/.

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June 4, 2014

Has the Storm Has Arrived in Your Inbox?

Some months ago, I wrote that with the advent of the JOBS Act and with the implementation of Crowdfunding that deal promoters would be filling our email boxes with prospective deals. That is happening now.

Every day, my inbox is filling up with opportunities to invest. Just over six months ago there weren’t any deals in circulation. Now there are tons.

All over the country, the crowdfunding industry is getting organized. I am speaking on the topic regularly and last week I addressed an audience in Austin, TX. The speakers are sharing technical details while the attendees try to glean hidden treasures and secrets. But I have a strong sense that most people are missing the big picture.

The deal business is about the deal.

Just like e-commerce isn’t a new product line, it’s a different form of mail order selling. It’s a new channel for marketing but it is fundamentally a sale like we are all used to.

Crowdfunding is somehow perceived as a panacea for those looking for capital. And for some, maybe it will be.

I see it differently though. To me, crowdfunding is the front end of the capital formation business. It is a new way to find leads for investors. It is a way to remove brokers from the mix. It is a new way to begin an investment conversation.

But at some point in the discussion, the hard question comes up. And if you can’t answer this basic, 4 word question, you will never close a sale. Investors want to know, if they give you a check, “what do they get?

Prospective promoters are scrambling to understand crowdfunding, but they don’t understand the deal business. Not a word about the need to organize, structure or manage deals is part of the crowdfunding conversation – which is why 90% of those who are looking into it will never be successful.

With all the deals floating around in the new “public solicitation” environment, how will anyone notice your deal? Will you stand out? Will you have the best answers to the investors’ questions? If not, pack up and go home.

The deal business is about deals. Once you have your deal and the opportunity organized, crowdfunding will be a great mechanism for finding investors. But if you aren’t organized, don’t bother looking for investors because they won’t say “yes”.

How will you get organized and put forth the best deal in the marketplace? If you don’t know, then make it your business to join us at the upcoming Deal Making Symposium and Syndication Seminar to learn all you can about crafting a competitive and compelling offering for your prospective investors. You can bet that your competitors are building out strong deals.

Hope to see you in Las Vegas.

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April 19, 2014

Can The People Dismantle Wall Street?

The new crowdfunding rules are taking everyone by storm, and they’re bound to have impact in ways that can only be guessed at so far. And only in the imagination of the most “crazy” of us, can we look down the road even a couple years.

We don’t know exactly what’s going to happen with crowdfunding and its implementation, but one thing is for sure: there are a lot of parties who are nervous about it – and well they should be.

For example, the banks. Banks are not friends to consumers. Granted, we all need a place to park our money, but is it really likely that most consumers are going to get loans from these institutions? They barely help businesses. They rarely help homeowners get financing to make purchases or refinances. To be fair, this is partly because of government regulation but it also reflects their own risk tolerance. These giant institutions, which were declared “too big to fail”, are too big to be in business and they are about to get a haircut.

It’s only The People that can take them down.

The new crowdfunding rules are attacking the banks head-on. Since banks won’t make loans, new organizations have sprung up that are making loans to consumers in record numbers and in record time – like never before. Companies like LendingClub and Prosper are taking in small increments of dollars from regular people (investors), pooling them together and making loans after implementing a fair underwriting process for the borrowers. This is providing consumers and small business owners with access to limited the amounts of capital to meet their needs.

I was speaking with the CEO of Prosper recently who told me that he believes young people will probably never have a need to walk into a bank. I believe that he’s right. My kids, for example, take pictures of their checks; they use ATMs to get cash and they use the Internet to move their money around. They have a pretty good sense that a bank will never loan them any money, so they might as well go to one of these peer-to-peer, “P2P”, lending services if they need capital for a business, car purchase or other item.

It’s the way of the new world. What’s ironic is that banks are more profitable than ever but the post-bail-out profits are not coming from loan interest. Much of it is coming from fees they unscrupulously charge on overdrafts, bounced checks and other account-related services.

The other who is desperately concerned about the implementation of the crowdfunding rules are the Broker/Dealers (BDs). Broker/Dealers are organizations mandated by the Securities and Exchange Commission (SEC) to oversee and employ stock brokers. The concept of a Broker/Dealer means these companies both broker other people’s securities as well as dealing in product that they own (do you sense the conflict of interest?). Stock brokers and Broker/Dealers are paid a lot of money, but unfortunately, only a few add much value. Most of the rest are just a drain on your accounts.

I want to repeat: just a few are really good.

The amount of regulation they have to deal with from the government is tremendous, and consequently, the amount of value and service they can deliver to consumers is low. Worried about crowdfunding, the Broker/Dealers have been pushing the SEC to create very strict guidelines around the new processes. They want to make sure that “the fence” they have around financial transactions stays intact.

As brokers and intermediaries, they want to be in the middle of every transaction but if the Internet has taught us anything, it’s that nobody gets to be in the middle. The Internet is the great enabler that makes it possible for people to manage their own affairs. But at the present time, the Broker/Dealers want to make sure that all the money being raised in these crowdfunding arrangements runs through them. Some of it will, some of it won’t, but clearly they’re worried that their monopoly on capital raising and money management is at risk.

By the way, most Broker/Dealers have never heard of crowdfunding and most of those who have are laughing at it – at least for now.

Crowdfunding is clearly the democratization of access to capital. There are still many rules that need to be revisited and revised. But at least for now, a lot of the old rules are being assaulted – and this is going to work out well for consumers.

Maybe the Banks and Wall Street have finally met their match. The government can’t control them but my bet is that the citizens of our country can. Go People.

* * *

If you have an opinion or thought on this topic, please write a comment in the form below. Share this blog with your friends. Thank you for being one of our loyal readers.

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/.

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April 15, 2014

My Experience with the Crowdfunding College

Last week, I went to Las Vegas to take a class on some of the new rules, strategies, and techniques being applied in the crowdfunding industry. I am very excited to report that it was well worth the time invested.

This program is put on by the Crowdfunding College, a new organization, specifically designed to educate professionals who work with clients about crowdfunding so they can properly represent the new initiatives for accessing capital to their clients. The goal is for CPAs, attorneys, bankers, lenders, consultants, and others to have a better understanding of how this new fundraising technique works.

Spending eight hours studying the history of crowdfunding, the JOBS Act, along with some of the complexities, and some of the dilemmas that the government is dealing with in implementing this program, provided outstanding insight and very interesting, actionable information.

I spent a lot of the eight hours thinking about how about I could monetize these opportunities and I can promise you, it won’t be long before several of these ideas come to life. We are building out our teams now.

Sitting in a room with other professional studying this material was of great value. First, the audience was a very impressive and high quality group. Second, the material provided outstanding fodder for discussion. And third, because this is a brand new, emerging, and enormously growing sector of the economy, the opportunities that will come from it, are virtually unlimited which adds to the excitement.

For many people who are thinking about raising capital I will recommend the crowdfunding alternative. But don’t think you can put up a little website and have the capital pour in. It is still critical to understanding the private placement process, because crowdfunding is still based on the familiar private placement model.

Promoters must still have an outstanding value proposition; they must stand out and be able to represent their product (such as real estate) in a professional and outstanding way; they must be experts in their area of specialization, and most importantly, they still have to understand that now, investors have lots of alternatives so your offering has to stand out even more than it did before.

But if you master these skills, lots of dollars will tumble in. In fact, I personally know someone very well, who recently raised $604,000 using crowdfunding – in only three weeks, and he did not have a single call with a single investor. This gentleman is using these funds to avoid using bank financing for a special project that he’s working on. The cost of the funds are probably slightly higher than bank financing, but the brain damage of dealing with the bank has been completely eliminated, and he’s very happy about how the transaction turned out. This is real. It’s becoming more real, and will continue to become more prevalent every day.

The CEO of the Crowdfunding College is Ruth Hedges. I’ve invited Ruth to come to the Deal Making Symposium and Syndication Seminar that begins on April the 28th. She will discuss crowdfunding and the opportunities for those of us in the real estate business, to apply crowdfunding to our capital-raising strategies. You can’t have a capital-raising discussion any longer without including a discussion of crowdfunding. This is not a legal discussion; it’s not an accounting discussion. This is a discussion about marketing and about accumulating enough social capital to get investors to recognize that what you’re saying makes sense, and that they should follow you instead of other people.

If you’re not already in this space, I encourage you to immediately put some focus on it. If you’re interested in the Crowdfunding College, and the course that they offer, I recommend it. You should check it out as soon as you can. My experience was good, and I’m sure yours will too. In the meantime, I hope we see you at the upcoming Deal Making Symposium and Syndication Seminar or if not this one, at one of our future programs. We have nearly a full house, largely in part to the new crowdfunding rules and the excitement that it’s brought to the capital raising business. People are simply fascinated and want to understand how the new rules will affect their ability to raise capital and to do deals.

I can’t say it’s changing everything about how we are doing business, but I can certainly say that it’s already made an impact. And once you understand how it works, it will make an impact on you and your business too.

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March 19, 2014

Why Do Rich People Invest in Hedge Funds?

Ultra-wealthy people, those who have $10M or more to invest, don’t usually pick up the phone, call a stock broker and ask the person to bet a bunch of their money on the “red”. In other words, they don’t just pick a bunch of stocks that they think will go up in the future – hoping that it works out.

No. Ultra-wealthy-people frequently bypass the brokerage chain and go direct to money managers, hedge fund managers and others that they know, respect and trust. They cut out the middle-man, go to the people who handle the money, and get opportunities that are generally not available to the retail public – which is exactly what you want to do too. Given how retail investors are dumped on, shouldn’t everyone try to make other arrangements for the stewardship of their precious capital? The product generally offered to retail investors is exactly what you want to avoid.

So where is the smart money going?

The smartest people (who frequently are rich people) generally don’t like to pay retail. They don’t follow the herd off the cliff into the leftovers that brokers need to move out of their inventory. Rich people have connections with people whom they pay to take care of them. And here is how it frequently works:

First, the most successful people always leave some of their money in cash for general needs. And they commonly compartmentalize the rest of the money into “buckets” that are structured to earn various amounts of return for understood levels of risk. Much of this money is managed by professionals who participate in the profits – meaning if the manager does well with the capital that they manage, they get paid a lot. If they do poorly, they get little or nothing.

How does your “wealth manager” (sales person) get paid? Probably on commission – and if there is any lesson from this piece, never take advice from someone who works on commission. Let consultants consult and let salespeople sell – but don’t mix up the two.

This is partly why placing capital into hedge funds and other private equity vehicles is popular among wealthy people: the returns are good, the risk is manageable and the funds are generally easy to work with. Here is a summary of how it works.

What is a hedge fund?

A hedge fund is a structure or a pooled investment where people put their capital together to take advantage of opportunities that they cannot or will not take advantage of alone. The word “hedge” means to protect against some kind of problem or risk. Sometimes a hedge protects against a price going up or down but sometimes the hedge can be used to mitigate the effects of time by contrasting fast vs. slow.

For example, my fund (the Bullseye Capital Fund) has a strategy of acquiring opportunities where we can add value. But we also know that that value doesn’t get added on a monthly basis which makes a quarterly dividend payment program hard to predict. We only pay cash at the end of the opportunity when the value has ripened or matured. Therefore in order to protect against the downside of waiting for an upside opportunity to prevent and mature, we use an alternative strategy at generating short-term cash flow using arbitrage. Those two activities together form the hedge against the downside, allowing there to be lots of upside and cash for making dividend payments.

Can anybody hedge?

Of course, anybody with a good sense of the markets could learn how to hedge – and everyone should. Young people get MBAs based on their understanding of hedging strategies. But here are the main reasons why few people, if anybody ever does:

1. They don’t know how. Crafting a strong hedging strategy is a special skill.

2. They don’t have the capital base to effectively protect one position using another one.

3. They don’t have a team with the expertise to execute multiple tasks at one time.

4. They don’t have time if this isn’t their full time occupation. People who are working and putting money aside generally make more money doing their primary business than their second one.

5. And, trying a new strategy is scary.

How can I get involved in this opportunity?

Hedge funds for the ultra-wealthy which include family offices and extremely high net worth people typically have minimum investments that start at about $10M. Some of them start at $100M. Ironically the family offices that I know frequently can’t get into the deals with the most famous hedge fund managers because even though a fund might open for $1B, the hedge fund manager probably has 15 friends that buy up the entire fund in a half an hour. Consequently smaller funds that are controlling $25M to $100M can’t get into those funds because they don’t bring enough to the table.

It’s very difficult to find opportunities for much smaller numbers of dollars. The market for those funds is substantial because the number of people that have $50,000 to $1M to invest is very large – but, unfortunately it’s also a very scattered market which is very difficult to get your arms around. Crowdfunding should help to find and segment referrals to qualified investors.

We, for example, cater to this under $1 million segment market and so do most of the attendees of the Deal Making Symposium and Syndication Seminar program. The people we deal with have a net worth typically between $1M and $10M, they’re well healed, and we consider them to be upwardly mobile. They don’t have the cash base or the liquidity to put $10M or $20M into a single deal (yet), but they still deserve the kind of returns that the ultras are earning.

People who invest $50k are still moving a lot of money around so this isn’t designed for everybody, but hedge funds and private equity structures are great for lots of individuals and their retirement assets. If you haven’t looked into it before, you should. And if you are thinking about promoting an investment opportunity, be sure to start small. Remember, the goal is to succeed over the long-term and if you strike out on your first try, there probably won’t be a second round.

Filed under Business Financing, Business Growth, Financial News, Growth Minute, Guru Marketing, Private Equity, Raising Capital, Real Estate by

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March 18, 2014

Who Wants Rolling Stones Tickets with Back Stage Passes?

When I first got into the real estate syndication business (in 1987), I pestered everyone I came into contact with about investing in my deals. As you can imagine, I soon found myself spending a lot of time alone at parties, network functions and outings. People would run as they saw me approach everywhere I went.

I had achieved a special place in salesman’s hell – reserved for the most obnoxious and persistent of irritants. I had achieved the rare status normally reserved for someone at the level of Ned Ryerson (the intolerably obnoxious life insurance guy in Groundhog Day.)

Something had to change because the pattern wasn’t working.

Over time, I learned to appreciate the deals I built and the special opportunity they represented for investors who joined me in those deals – especially as the track record of success mounted. I hit a homerun with one particular deal in the 1990s and there were several doubles and triples. (FYI: there were some singles and strike outs along the way too.)

But I came to understand that I was good at what I did and the more the investors thanked me for allowing them to invest and reinvest, the more I realized that asking for – and receiving the investment funds – was a two way street. The investors felt as lucky to be in my deals as I felt lucky to have them in the deals.

This taught me a very important lesson: I no longer beg investors to join me in my deals. I share the information about my current fund with confidence, passion and hubris – but I never beg. I am not for everyone and everyone is not for me. However, for those where it is a good fit – it is a very good fit.

My track record demonstrates that I am the real deal and the investors know it from what they see happening. At present, the Bullseye Capital Fund is getting ready to make a sizable payout and the investors will be very happy with it.

This leads me to the punch line. There are no Rolling Stones tickets – and there aren’t any back stage passes. But if I had them, would I beg you to take them? Would I whine, whimper, pester and irritate you to see if you had any interest?

I look at my deals in the same way. I wouldn’t choose the deal unless I felt it would work for the investors and the managers. We pick very good deals and we are proud of our results. I treat these results like I would treat great tickets: I would be lucky to have them and you would be lucky to get them.

Try this attitude and see if it doesn’t change the way investors respond to you. Especially in this age of crowdfunding where competition is starting to heat up, you must put out great deals and present them with supreme confidence.

To learn more about how to structure a great deal where investors want to say “yes” (and a deal where you are properly paid), we hope to see you at our upcoming Deal Making Symposium and Syndication Seminar beginning April 27, 2014 in Las Vegas, NV.

Filed under Business Growth, Growth Minute, Guru Marketing, Private Equity, Raising Capital, That's Cool by

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