In 2012, the Jumpstart Our Business Startups (JOBS) Act created an exemption under the federal securities laws that lowered the barriers to invest in private companies, enabling the so-called “crowdfunding” industry to facilitate the sale of securities (including real estate) to the general public more easily.
Eight years later, the online direct investing industry has matured and improved. Several high-profile early entrants into the space have gone belly-up, while some true winners have emerged.
To some, the term “crowdfunding” is tainted by inferior sponsors and small capital raises. Let’s just call it what it is: crowdfunding is merely a bad name for what is simply direct-to-consumer capital raising and financial products.
Across many industries, today’s consumers want to buy from the brands and companies whose mission and product they feel connected to — for today’s buyers, the “why” is just as important as the “what.” Investing is no different — retail investors want to allocate capital not only to companies that share their generation’s values but to companies whose entire experience is designed with the end-client in mind. From branding, to user experience, to company colors and logos, it all matters.
Why It Matters
In the context of this discussion, it’s important to consider demographics. According to population estimates from the U.S. Census Bureau, there are 72.1 million millennials, representing the nation’s largest living adult generation. By 2030, it is anticipated that millennials will hold five times as much wealth as they do today and inherit over $68 trillion, representing one of the greatest wealth transfers in modern times. So, in short, millennial preferences matter. Their preferences are quite clear — they value convenience, expediency and user experience. This is underscored in a CB Insights report which notes the following:
• Online > in person: Millennials are the most likely generation to use both online (92%) and mobile channels (79%)
• Big tech > big banks: 73% of millennials say they would be more excited about a new financial offering from a tech company like Google, Amazon or Apple than from their nationwide bank
• Future potential > the past: As of 2013, 70% of millennials believed that the way people purchase things would be totally different in five years, and 33% believed that one day they won’t need a bank at all
Platforms that are poised to capitalize on these demographic trends and behavioral shifts will be the ones who reap the benefits. Millennial investors have embraced online investment platforms in record numbers with no signs of slowing down — even during the pandemic, when many of them have experienced record volumes and new customers.
Future Prospects
What does crowdfunding (or direct investing) look like in 2020 and beyond? Hint: it’s looking good.
Today’s investors are savvy, in part thanks to the endless information available on the internet. They also like to do their own homework. Just as they would do their research on Yelp before making a restaurant reservation, TripAdvisor before booking a hotel or Amazon before buying a product, they now have the tools and the ability to make informed investment decisions on their own. This isn’t only good news for retail investors but for sponsors, too, who now have an entirely new audience of investors to tap into.
The proof is in the numbers. Real estate direct investing platforms, such as Cadre and Crowdstreet, have raised billions of dollars for vetted real estate sponsors. In doing so, they have proven that even sponsors who have good access to more traditional forms of capital can find retail investors beneficial to their capital stack. To be clear, the sponsors who have embraced direct retail capital raising aren’t struggling for capital — they’re prestigious firms with legitimate track records that are using this as a competitive edge.
Some impressive examples of these direct retail raises include:
• In 2020, $12.5 million raised for Urban Investment Partners, a Washington, D.C.-based real estate investment, asset and property management company which has invested over $2 billion since inception
• In 2019, $27 million raised for PRP, a Washington, D.C. real estate investment firm focused on corporate net lease, multifamily and office properties that has invested over $3 billion since inception
• In 2019, $25 million raised for Parkway Property Investments LLC, an Orlando, Florida-based commercial real estate investor with over $4.3 billion in assets under management and
• In 2019, $14 million raised for J. Jeffers & Co., a Milwaukee, Wisconsin-based, mission-driven real estate development and investment firm.
While the benefits to retail investors are clear, the advantages for real estate sponsors should not be overlooked. Astute real estate developers fund managers and property investors recognize the immense value that crowdfunding affords them:
• Ability to solicit investments from the community
• A broader investor base
• Truly passive capital
• Favorable investment terms
• Marketing benefits for the project and the sponsor.
No Cancellation
“Getting canceled” isn’t an option for direct investment platforms that understand both sides of the equation. It is worth noting that nearly all real estate capital raised directly from investors to date has been from accredited investors, which represent only about 10% of Americans.
Republic Real Estate, an off shoot of the startup investment platform affiliated with AngelList and Product Hunt, is one of the first direct real estate investment platforms that can raise capital from all investors, including accredited, non-accredited, domestic and international investors.
The ability to raise capital from everybody opens up a universe of possibilities for clever sponsors who understand that a capital raise can be more than just a way to fund a deal. Rather, it can be a competitive advantage by allowing other stakeholders to own a piece of a project, ranging from tenants in buildings, neighbors in a community or fans of a particular hotel or shopping center. It creates alignment and, therefore, loyalty between the sponsor and a broader base of investors.
The real estate sponsors who move first to raise directly from retail investors will be the ones best positioned to tap this capital source going forward as this industry continues to grow. Millennials, who will increasingly hold the purse strings, have shown their loyalty to new brands across all categories from consumer products (Warby Parker, Quip and Glossier) to financial services (Robinhood, Coinbase). This shift in how retail investors find investment opportunities will propel brands with millennial appeal into enormous players in just a few years. This sentiment is echoed by Republic’s user base — over 50% of whom are millennials.
Direct investment platforms have experienced their strongest investment volumes in recent months during the coronavirus pandemic — and there’s no sign that this momentum is slowing down. Republic has added over 76,000 new investors during the pandemic, and Wefunder, a competitor platform, has seen a 35% increase in investor volume from February through April.
The Future of Direct Real Estate Investing
Republic is an online direct investment platform, offering an array of alternative investment opportunities which are open to all investors, accredited and non-accredited, foreign and domestic. What began as a platform dedicated to raising money for startups has transformed into an all-encompassing alternative investment marketplace in just four years, providing retail investors with access to crypto investments, video game investments and, now, real estate investments. Republic has 700,000-plus users and has closed over $125 million in investments across more than 185 offerings.
