What a difference a year can make—especially when it comes to the volatile world of crowdfunding startups.
This time last year, the up-and-coming real estate entity RealtyShares had just acquired one of its largest competitors, the fittingly-named Acquire Real Estate, and was strategizing ways to garner investments in commercial and multifamily real estate in addition to so-called “fixer-uppers” and expanding into the burgeoning single-family housing loan market.
Things started to take a turn for the worse when the company chose to offload its residential lending venture to Lima One Capital and shift its focus solely onto commercial and multifamily loan deals. Now, a little over a year later, RealtyShares has failed to capitalize on its business moves and will be forced to lay off a majority of its employees and halt incoming investments on its platform.
Per a recently-released email circulated amongst the unfortunate entity’s investors, RealtyShares was unsuccessful in its repeated attempts to secure reliable operating funds to sustain targeted expansion and will subsequently avoid engaging in actively investing in new ventures.
However, RealtyShares is not shuttering its business completely—a corporate press release announced the company will pivot its focus to maximizing returns to its existing investors and their nearly $400 million of associated assets currently managed by the business. It’s a dramatic fall from grace for a corporation that was created just five years ago and had invested more than $870 million on over 1,100 projects to date.
It’s difficult to pinpoint exactly what RealtyShares’ drastic downturn is attributable to. The list of culprits may include an unsustainable expansion rate—including new personnel, costly office spaces and transitioning in and out of residential dealings at high price points—without a corresponding input of maintenance capital.
Specifically, if an upstart company has excess demand, their customer acquisition cost (CAC) will gradually increase to untenable amounts as new customers simply languish without injecting nearly as much capital. Thus, it’s imperative for businesses that find themselves in comparable scenarios to find an ideal balance between supply and demand in order to sustain progressive growth.
Additionally, RealtyShare likely failed to implement adequate technology to scale rapidly. The company operated on a largely people-reliant business model to analyze, manage and close projects. As a result, their growth was predominately linear—as opposed to the exponential expansion projections the majority of venture capitalists tend to favor and could have been a reason for the company failing to draw new capital for future investments.
From a long-term perspective, there will likely only be a select few winners in the real estate crowdfunding market—namely those entities that find the ideal supply/demand equilibrium coupled with reliable technological adaptation to support sustainable growth. However, the unfortunate demise of RealtyShares offers business owners and investors an invaluable learning opportunity to avoid similar mistakes. Here are three key takeaways to avoid a similar pitfall in the real estate crowdfunding industry and maximize your chances of success.
- Get Your Tech Right from the Start: If you’re looking to build a venture capitalist-reliant company where scalable technology is a must, it’s smart to dedicate more time perfecting the technology in the beginning before moving towards aggressive expansion.
- Read the Writing on the Wall: Any savvy real estate professional is cognizant of the fact that the industry is cyclic—you should invest accordingly. Be aware of the fact that the market is currently late cycle headed into 2019. Inventory is creeping up, as are interest rates, and prices are stagnant at best or decreasing at worst. Costly seaside urban properties are already growing soft. If things take a turn for the worse, less expensive markets will also take a downturn regardless of long-term demographic fluctuations trending towards more affordable cost areas. It generally takes three to five years for the real estate market to rebound from such a down cycle. Plan for the worst-case scenario by diversifying your portfolio and limiting risky alternative investments.
- Don’t Walk Away Empty-Handed: A $400 million investment portfolio like that once boasted by RealtyShares with a $4 to $5 million rate of return is substantial. Despite the company’s recent struggles, their book of business will likely be acquired by a competitor for $5 to $10 million. Based on those figures, whoever takes over that portfolio could recoup over a 40% IRR return over a relatively short timeframe while having the added incentive of attracting a new class of accredited investors to generate future income. In the meantime, RealtyShares’ original corporate investors would recover a significant portion of their initial $60 million backing.