The crumbling of commercial real estate crowdfunding platform RealtyShares undoubtedly rattled some of its investors. But executives with RealtyShares competitors say this setback doesn’t represent an industry earthquake and shouldn’t shake investors’ confidence in the sector.
RealtyShares, which as recently as August had been named a “hot” startup by Inc. magazine, informed investors in early November that it would stop taking new investments and would lay off most of its employees because it was unable to secure more operating capital.
Now, RealtyShares is focusing on managing its assets and its investors’ money. Founded in 2013, the crowdfunding platform had collected over $870 million in investments for more than 1,100 projects, according to its website. Some observers envision the possibility of another crowdfunding platform or even a company outside the crowdfunding circle stepping in to buy and run the RealtyShares portfolio.
Executives at three of RealtyShares’ real estate crowdfunding counterparts—ArborCrowd, CrowdStreet and EquityMultiple—say the collapse of a player like RealtyShares is an unfortunate but inevitable growing pain in an evolving industry. Charles Clinton, co-founder and CEO of EquityMultiple, calls the RealtyShares situation a “natural blip.”
Clinton says the implosion of RealtyShares shouldn’t be viewed as a referendum on the industry, but, rather, as one company in the sector taking a tumble.
Tore Steen, co-founder and CEO of CrowdStreet, agrees.
The fall of RealtyShares isn’t “an indicator of the health or the longevity of this industry,” Steen says. “It’s actually an indicator that the industry is maturing. In an industry like this—crowdfunding of commercial real estate—you’re going to have certain business models that survive and certain ones that might not.”
RealtyShares is a crowdfunding pioneer that was bound to make mistakes, according to Clinton—mistakes that newer entrants into the industry would seek to avoid repeating.
“There were obviously some things that I’m sure they would have done differently with the benefit of hindsight,” Clinton says. “As a whole, I am optimistic that we, as an industry, can learn from this and help make sure that … we’re not making the same mistakes.”
RealtyShares had raised more than $105 million in venture capital and debt financing to fuel growth. However, that money evidently didn’t last long enough, as its headcount and expenses swelled “very quickly,” Clinton says.
“I think you’ve seen some of the platforms that have managed headcount and spending a bit more judiciously are maybe a bit better situated for the next couple of years of growth,” he says.
Instead of the RealtyShares shake-up being a “going-out-of-business moment,” Clinton says it might be more of a “consolidation moment,” signaling the potential for M&A activity in the space.
Adam Kaufman, co-founder and managing director of ArborCrowd, says he expects some other real estate crowdfunding platforms to shut down within the next 12 months because they’ve lost sight of their primary product—real estate, not technology—and they’ve settled on weak deals in an attempt to spur growth.
“I think some of the big players out there that exist today will not exist this time next year or 18 months from now,” Kaufman says. “That’s a problem for the industry, a hurdle that we need to overcome.”
As a result of that anticipated paring of the crowdfunding field, trust in the industry will be eroded among investors and real estate professionals, leaving a blemish on the nascent sector, Kaufman warns.
Like Kaufman, Clinton foresees an industry shake-out, acknowledging that “there’s not going to be 50 platforms at the end of the day.”
The failure of RealtyShares will probably trigger a “temporary crisis of confidence for people, particularly RealtyShares investors,” Clinton adds. “But I believe that the industry will get past this pretty easily. We’re still in the very early innings of total growth.”
In the wake of the RealtyShares upheaval, executives at real estate crowdfunding platforms suggest investors ask these questions when vetting platforms:
- What is the customer service like? Will my questions get answered promptly and professionally? How transparent is the platform with investment information?
- What is the platform’s due diligence process? What are its underwriting standards?
- What is the track record of the platform? How has it performed since its inception?
- Is the platform making inflated, unrealistic promises about investment returns? Are the projected returns conservative or aggressive?
- How are the investments structured? What happens to my investments if the platform fails?
- What is the financial health of the business? What are its growth plans?
- How deep is the experience and expertise of the in-house team? Are team members knowledgeable about commercial real estate, capital markets and technology? Have they been through up cycles, as well as down cycles?
“The more information you can get, the better. The more real estate experience you can get, the better,” Kaufman says. “Don’t focus on the marketing or the hype. Don’t focus on how nice things look or feel. Focus on the product and the opportunity and who you’re doing business with.”