Crowdfunding’s Move to Platform White Labeling in 2016
- Apr 20, 2016
The real estate crowdfunding industry has been flooded with marketplaces over the last several years. Some of the more prominent industry-leading marketplaces have raised considerable amounts of venture funding to staff their platforms and present opportunities for investment, particularly for accredited investors. However, as 2016 unfolds it’ll be interesting to observe how Title III impacts what current and new entrants to the market present to the crowd for investment.
Licensed legal portals will be able to raise funding under Title III of The JOBS Act from non-accredited investors, which should prove to change the industry dramatically. Many believe the impact will be more pronounced for early-stage ventures outside of the real estate industry. The $1 million cap on funding in a 12-month period will likely be a large constraint for most commercial real estate projects.
The software tools offered in the industry have had more time to mature. New entrants to the industry are working to give operators access to tools they need to bypass the industry marketplaces and present their projects directly to the crowd. Many of the more experienced operators want to control their capital-raising process instead of being one project among many in a marketplace. Traditional brokerage models are being challenged and there’s debate over which model will prove to provide the most value for dealmakers and investors.
As time wears on, I think you’ll see less emphasis on the industry marketplaces because the economics don’t scale well. Real estate developers and operators are used to raising capital, and many already have existing lists of investors or access to institutional capital sources. Crowdfunding is interesting to this segment of the real estate market, but these larger, more experienced operators are trying to figure out how to utilize the tools to help grow their business. New industry tools will allow them to crowdfund with their existing website, manage underwriting with cloud-based solutions, process back office functionality like K1 and 1098 distribution, and provide a central location for their investors to track projects post investment. Some platforms are electing to integrate with the traditional brokerage industry, while others are aiming to give operators the tools to directly access investors on their own using online marketing techniques.
Many existing real estate crowdfunding platforms were built around a model pioneered in the venture capital industry. Early-stage startups were raising seed capital or perhaps a Series A round for their new venture. Early stage venture companies generally raise money a few times as they get started and then either prosper or perish. Real estate offers a fundamentally different set of risks than early-stage ventures and has enjoyed a lot of success online in the early stages of The JOBS Act.
The move to bypass the marketplaces and give developers direct access to capital through the crowd is only gated by the proper technology to make this happen. We’ll see how things unfold in the coming years, but my bet is technology will allow the best developers and promoters to prosper without having to be one of many in a marketplace that lacks adequate staffing to underwrite all of the deals presented.
Bryan Hancock is the CEO & co-founder of RealStarter, a real estate crowdfunding platform focused on Texas-based projects but open to investors all over the U.S.