crowdfunding Archives - Lazy Man and Money

A friend reached out to me the other day. We’ve traveled around in blogging circles since I started around 2006. Back then I was obsessed with peer-to-peer lending (P2P lending). I had convinced myself that I could lend money to people at 20%+ or more and make 15% on average after defaults. With the trusty exponent button on my calculator, compound interest of 15% quickly turned into enormous wealth. Unfortunately, many more people defaulted and most people were lucky to even break even.

It’s too bad because it seemed like a great idea to take the middleman (banks) out of the lending and borrowing process to make it a more efficient marketplace.

This friend wanted to tell me about a new idea. He admitted that it is a little like P2P lending, but more like crowdfunding for small business bonds.

So it works like this:

A small company decides that they need funding to grow their business. They explain how the business currently works and how this new money is going to increase profits. In some ways, you get to play Mark Cuban on Shark Tank. The difference is that you don’t buy ownership in the company and you can’t negotiate the terms. However, let’s face it, neither you nor I happen to be Mark Cuban* so we don’t have the money and influence to start trying to dictate terms. Instead, you get to be the bank, earning around 8% interest on your investment. This, like with all P2P lending, assumes that you are willing to take on the risk that the company will pay back its debt.

You might be asking yourself, “Should I be taking on this risk to earn 8%?” I don’t know of any risk-free ways to earn 8%. It can be challenging to earn 2% risk-free nowadays. With the stock market booming for the umpteenth year, many experts are suggesting that it won’t be able to grow much over the next several years – and it might crash. I humbly suggest that this investment may deserve a seat at the table with some of your other investments. After that consideration, you may decide that the following risks are too great:

1. The company you fund can go under.
2. The SMBX platform could go away.
3. The Feds could change the rules that allow this kind of investing.

I was able to reach out to the company and they told me that 60% of SMBX bonds have collateral behind them. That’s a lot better than the old P2P lending days when anyone could just walk away with a ding to their (likely already bad) credit score.

All that said I wouldn’t put too much of my money on this platform. However, after writing about bitcoin in 2011, I’ve promised myself that I would be open to putting down a small amount, such as $50 or $100 to see if it works out. Back then a $50 investment would have us living mortgage today. With SMBX, the upside is considerably less.

Nonetheless, I will own $50 of bonds on this Wing Food Truck.

Sometimes It Isn’t About the Money

When you buy a diversified mutual fund or ETF, you are investing in so many diversified companies. You have to take the good with the bad. Every company isn’t going to have the same values I have.

The greatest strength of that diversification is that I can invest in almost everything. I can even invest almost everywhere, even frontier ETFs.

SMBX allows me to invest in a completely different way. If I want to invest in minority-owned companies, I can do that directly. If I want to invest in women-owned companies, that’s easy too. If I want to invest in eco-friendly companies for Earth Day, that’s also an option. If I want to invest in businesses that are Mohawk-owned, I can do that.

You can invest in specific communities where financing may be tougher. You can literally make an impact on a small Mom and Pop business. I consider this to be the backbone of American business… and they need it now more than any other year in my lifetime.

Getting Started with SMBX

I was surprised how easy it was to get started with SMBX. The sign-up process was just a few pieces of information. I had expected it to take days to verify my bank and transfer funds. I was very surprised to find myself ready to loan in just a few minutes.

SMBX uses Plaid as its payment processor. Plaid almost merged with Visa in a deal that would be have been worth more than 5 billion dollars. That deal didn’t happen because of regulatory issues. I think the government thought that Visa would become too strong. In any event, Plaid is highly respected and considered as safe as any banking platform in existence. In other words, if it’s good enough for Visa, it’s good enough for me. Side note: A few days after signing up with SMBX, I created a Coinbase account and they used Plaid as well. So it’s good enough for $100 billion dollar companies like Coinbase.

You can get started with as little as $10. I like low minimums, but that might be too low. I guess if you are spreading $10 to a bunch of companies it can add up, but I think most everyone will invest more. Maybe it would be useful for my kids somewhere down the line. Right now there aren’t many companies that they would be interested in on the platform. In fact, there aren’t many companies overall on the platform. SMBX is relatively new and it needs time to grow to fulfill the promise of being able to offer very specific investing choices to potential investors.

So, what do you think, would you invest with SMBX?

* If you are Mark Cuban. Hi there, big fan!

The following is a guest post from Soren Godbersen. He heads Marketing and Communications for EquityMultiple, and is a dedicated student of commercial real estate finance and investing. EquityMultiple is an online platform that connects accredited investors with shares of pre-vetted, institutional-quality commercial real estate deals. The company is based in Manhattan, and partnered with Mission Capital, an established commercial real estate advisory firm.

Intro: A Brief History of Real Estate Crowdfunding

Following the housing crash of 2007 – as regulations were introduced and credit tightened – emerging companies were left with little or no access to the capital markets. In an effort to ameliorate the credit crunch, Congress drew up the Jumpstart Our Business Startups Act (JOBS Act for short), broadening the scope of who can invest in startups.

While the legislation was conceived with startup businesses in mind, interested parties quickly realized that the new rules could extend to real estate equity investments, allowing real estate companies to essentially market shares of projects to individual investors – a method of raising capital that had been legally precluded since the Securities Act of 1933. While real estate companies are able to broaden the reach of their investor network through this new paradigm, individual investors also gain access to a realm of real estate projects that were previously available almost exclusively to very wealthy individuals and institutional players, lowering the barrier to entry and allowing many investors to participate in commercial real estate investing for the first time. This value was evident enough to encourage a number of hybrid real estate/tech companies to enter the space, with Fundrise, RealtyShares and RealtyMogul emerging as early leaders and raising substantial venture capital.

Growth Trajectory

The road hasn’t always been easy. While a handful of companies have grown impressively, many others have fallen by the wayside, as many investors and real estate companies have been cautious in pursuing real estate crowdfunding. Those without the requisite experience in tech and real estate have struggled to find scale. Still, the young industry continues to grow impressively year over year:

YoY Growth – Real Estate Crowdfunding
Year	RE Crowdfunding Numbers Worldwide
2012	$19m
2013	$400m
2014	>$1bn
2015	$2.5bn (150% growth) · North America: $1.4bn · Europe: ~$1bn · Asia: ~$50m
2016^E	$3.5bn (40% expected growth)

While growth slowed somewhat in 2016 (likely in response to top-of-market trepidation) the 40% figure is still robust, and the U.S. accounted for a large share of the $1bn of overall industry growth this year. In 2015, the $1.5bn in volume for U.S. real estate crowdfunding represented only 0.3% of total real estate finance transactions in the U.S., indicating that the sub-industry still has enormous room to grow, even while remaining modest as a share of overall commercial real estate activity in the economy. As time goes by, crowdfunding platforms have specialized and molded themselves around particular niches within the space, focusing the profile of their deals. While Fundrise and RealtyMogul saw early success marketing the opportunity to invest in distinct, tangible projects, both have pivoted to offering an ‘eREIT’ product that takes asset allocation out of the hands of their individual investors while providing built-in diversification. Meanwhile platforms like PeerStreet, RealtyShares and Groundfloor offer mostly or entirely single-family debt deals, offering investors a steady flow of fixed-rate, relatively-safe, relatively-low-upside investment opportunities. EQUITYMULTIPLE remains focused on institutional-grade commercial real estate projects while offering both debt and equity investments.

What Happens Next?

The trend of division and specialization among real estate crowdfunding platforms is likely to continue, with the potential for consolidation in the advent of a dip in the market. While more established players in the space have raised tens of millions of dollars of capital, even those with extensive track records over the past few years have recently experienced difficulty in sustaining quality deal flow, particularly with respect to high-upside equity deals.

The transition of the executive branch will likely have a major impact on commercial real estate capital markets, and therefore on the prospects for the young real estate crowdfunding industry. The trouble is, no one can credibly claim to know what that impact will be. If initial optimism in the public markets is to be believed, capital markets at large will benefit from a business-friendly regime and reduced regulatory oversight. However, uncertainty in the new regime’s attitude toward trade, fiscal policy and a host of other issues make it difficult to draw any concrete conclusions. What does seem certain is that we’re headed for the long-anticipated interest rate hikes, and that volatility in global markets is unlikely to disappear anytime soon.

In the near term, the real estate crowdfunding industry (and commercial real estate more broadly) should benefit from the age-old axiom that in unsure times, real estate holdings should be prized for their low volatility and the inherent worth of underlying assets.

SMBX: Crowdfunding Small Businesses

The State of Real Estate Crowdfunding