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.

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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.

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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.

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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.

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February 28, 2014

Is Finding Equity Capital is Getting Easier?

With all the excitement surrounding crowdfunding, raising equity capital is getting easier – or at least that’s the perception. In reality: some of it’s going to get easier, and some of it’s going to get harder.

With the relaxation of the general solicitation rules, you no longer have to keep your private placement “private”. If you opt to use the new 506(c) rules, you can stand on the rooftop of any building or on top of any mountain, and scream about the terms of your deal. Letting investors, far and wide, know exactly what you’re working on. You can advertise on TV or on the radio, attracting investors to your deal. So from that perspective, life is about to get easier for those of us who raise capital for our deals. We can now expose investors to what we’re doing, how we’re doing it, and why we’re smarter than everybody around us, in ways they never could before.

In fact, our group is looking at building a funding portal – an on-line catalog where investors can go to look at multiple deals. We will invite graduates of our standard-setting, Deal Making Symposium and Syndication Seminar program to list their projects so investors far and wide can find them and invest. What could be better than that?

Finding investors is going to be easy.

With the government allowing us to use the Internet to market our projects, life is going to get a lot easier. However, there are always two sides to the story. On the other side, investors who’ve never been exposed to a private opportunity before, are suddenly going to be exposed to a whole bunch of opportunities. My inbox is already filling up every day.

Whereas in the past, you might have been the only opportunity someone ever saw, they now will have an abundance of choices. For the first time, prospects can compare opportunities to one another. They can evaluate deals in ways that they could have before. So the hard part is going to be standing out from the crowd.

In the past, even a poorly structured deal could potentially bring in investment dollars. Now, poorly structured deals will fall flat on their faces. Deals have to be better structured. They have to look better. They have to actually be better in order for investors to consider them. They must pass muster in every way.

Most people who are promoting deals have no idea what it means to pass muster. They have no idea what it means to provide an investor with a deal that their attorney or accountant can review and bless. But these investment promoters are in for rude awakening. Under the new rules with the ability to compare multiple deals, your opportunity will be compared to everything investors consider. And that means, if your deal falls short, the investor will move on to the next deal in a moment’s time.

Dealmakers must spend some time learning how to properly structure transactions; they must learn how to properly package a deal so that investors can say “yes”.

Your job as the promoter is to get the investor to say “yes”. And in order to get them to say “yes”, you have to provide them with an opportunity that’s deserves a “yes”. If you can do that, the funds will be yours. If you can’t do it, then you’ll be in the same position that you are now, and maybe even worse position because your opportunity to find less sophisticated investors is evaporating: as the marketplace becomes smarter and more sophisticated, so too will all investors become smarter and more sophisticated.

I hope you’ll move in the direction of learning how to be more sophisticated in packaging better deals. To that end, I hope that we see you in April at our standard-setting, Deal Making Symposium and Syndication Seminar.

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February 5, 2014

Why Do Rich People Keep Getting Richer?

The better question might be why does the government keep regular people from becoming richer?

Yesterday, I was having cocktails with a very good friend and his wife, and we were talking about some important financial matters. The wife had just received an inheritance from her mother, who had recently passed away. It was a substantial amount of money to them; however, it was not enough to put them into the category of being accredited investors.

They were asking about the tax ramifications of receiving an inheritance, and they had questions about how to invest the money. I was careful to advise them that I’m not a financial advisor and don’t make recommendations about specific assets or even about how to allocate funds between asset classes. They told me they had already visited with the investment advisor at their local bank, and he had advised them that they should spread the money out, putting it into several different kinds of investments – which was good advice. He did a good job and told them all the right things. The only thing that disturbed them was that the returns for his recommendations – they were all somewhere between 1% and 3% per year.

Then they asked if they could invest any part of the proceeds in a fund like mine. They were shocked when I told them that the government had very specific rules about what kinds of people can invest in a fund like mine. You should have seen their faces when I told them that only accredited investors (high income earners and millionaires) are allowed to invest in private deals that pay 8%, 10%, or 15% per annum with manageable risk. They couldn’t believe it.

They asked why the government would restrict people like them from being involved in such opportunities. After all, these are intelligent, educated and solid people. They’re good citizens, who vote in elections. They have raised a nice family and they obey the law. I explained to them that the government is very concerned about regular people making mistakes with their money and losing it. No one cares if they gamble it all away in a casino, but they are generally restricted to stock market products promoted by brokerage firms. They were quick to point out that these investments carry a tremendous amount of risk and frequently lose money.

They were horrified to find out that the vast majority of the money that’s made in our economy is not made at the stock market level, but rather it’s made in the private placement phase. The stock market does a great job of unlocking liquidity so the early investors can cash out, but it’s the people who come in early in the private placements phase that make all the money.

For example, investors in Facebook and Twitter are up somewhat thanks to the stock market. But the guys that got in at a penny a share, or two pennies, or 10 cents during the private placement phase are all making tens of thousands of percent on their money. These are the people that ultimately become millionaires and billionaires.

Regular people are locked out of a lot of different kinds of investment opportunities, because the government is a concerned parent – overseeing investing matters. I understand the need to make sure that retail investors don’t get conned or swindled, but at the same time, they’ve estopped a lot of people from participating.

And even worse, the new rules from the JOBS Act, which have just recently come out, reduce the number of non-accredited investors from 35, to zero if the new general solicitation rules are followed. That means that funds like mine can stand on top of a mountain and scream about our deals, but zero non-accredited investors allowed to participate. So now, non-accredited investors are more likely to hear about deals that they can’t get in. Do you think regular people might start getting angry?

It’s just another way that the government protects rich people and hinders regular people. It would be good for the government to step back and let people have a little bit more jurisdiction with their resources. After all, most people manage to get through their day without the government’s help so why should they assume they can’t handle their financial affairs as well?

If only rich people have access to the great deals and regular people are barred from them – banished to the sludge promoted by brokerage firms, is it any wonder that the rich keep getting richer?

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September 16, 2013

Family Office Investors: Why We Turned Down $50 Million

To learn more about Family Office Investors, attend our Symposium next month. It is Syndication Info for Syndicators from a Syndicator.

I regularly address audiences on the state of the real estate market, strategies that are appropriate for dealing with these real estate markets, creating syndications and managing hedge funds. My message targets very high level audiences and I do this because I believe that entrepreneurs are benefited by understanding how the capital markets work.

Last week I spoke the most exclusive of audiences. My directive was to provide insight to the managers of some of America’s most wealthy families who use a structure called a “family office”. Family offices are the way that many of the super-wealthy people manage their wealth – organizing it with the precision of a well-run public company. Such a family would likely control their empire with a full-time CPA who functions like chief financial officer, an attorney who functions as general counsel and typically an investment advisor plus multiple bookkeepers and more. The overhead expense of managing an empire this way usually demands a minimum net worth of $50 million.

By treating their wealth like a business, they require special services so special firms have evolved. Most of the time, these family offices have great liquidity to invest into deals and consequently there has become a very high level environment where these people go to get briefings on the economy on investment alternatives and ways that they can maximize their wealth. I’ve been invited several times to these esoteric conferences to provide them with insights that I have on how the market works and how to best take advantage of opportunities. Unfortunately many of the opportunities that are put forward are old and boring. New opportunities are surprisingly welcome in this environment.

After describing how the Bullseye Capital Fund uses a two prong strategy to produce both long-term growth and short-term cash flow, a representative of five different family offices came over to me and asked how he could get involved. I told the gentleman that we’re looking for several investors at $500,000 to $1M each. He looked at me, crinkled his forehead and said that he couldn’t do that. He told me that they can’t place $1M into a single deal because their minimum is $10M for a single deal.

Real estate requires time to absorb capital unlike the stock market which can soak up nearly unlimited amounts almost instantly. He understood that during the ramp-up phase of our strategy, we didn’t have enough deal flow to absorb $50M ($10M from each of his five family offices). It may seem unimaginable to turn down capital, but he respected our position. Imagine starting to pay a preferred return immediately upon receipt of the capital without having deals of that magnitude ready to go.

Consequently, I turned him down. Not to worry, I’ll speak with him next week and we’ll talk about a strategy where perhaps they can ease in and do a little bit at a time as we ramp up – giving him first right of refusal on continuing injections into our fund.

This proves several points:

* First, it’s easier to get a lot of money than a little. Frequently going after the tiny investors is the most troubling of all and it’s better to aim at people who are more substantial.

* Second, the magic word (“no”) is frequently the best way to make somebody want you even more.

* Finally, knowing your business as well as we know ours is what makes people want to move forward. I always say that “money follows expertise” and when you demonstrate that you’re an expert with tactical skills in specific areas, money flows in a big way.

And sometimes so much money flows, that you just have to say no.

We will discuss these family office opportunities at length at the upcoming Deal Making Symposium and Syndication Seminar in Las Vegas on October 27 to 30, 2013. This discussion is one that you won’t want to miss.

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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. We appreciate you and are rooting for your success. Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenues and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker, advisor and is an astute investor.

Joel is CEO of Bullseye Capital , a full-service real estate company supporting owners and buyers of real estate assets with brokerage, leasing, property management, and mortgage services. Joel is also the founder of the Bullseye Capital Real Property Opportunity Fund, LLC which is an investment company that acquires distressed real estate by working with accredited investors.

A leader in real estate syndication, we offer seminars to assist others in acquiring the skills needed to raise syndicate capital to acquire properties. Imagine knowing how to pool funds to purchase any real estate investment, whether single family, multi-family, commercial, or anything else. For more information and complete details, please go to http://www.syndicatefast.com/.

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