Crowdfunding Firms Weigh in on VC Platforms

PORTLAND, OR—Just about a year ago, RealtyShares was raising a $28 million Series C round led by Cross Creek Advisors, with participation from existing investors including Union Square Ventures, General Catalyst Partners and Menlo Ventures. At that time, founder and CEO Nav Athwal said RealtyShares had more than 120,000 users on the platform.

It deployed more than $500 million across approximately 1,000 properties since its founding in 2013. RealtyShares previously raised more than $35 million in equity funding.

Fast forward to today when the story is much different. The company will be laying off a large portion of its staff, many of whom were focused on originating new business, and stop accepting new investments on its platform, according to HousingWire. It worked aggressively during the last few months to secure new funding for its operations, but was unable to do so.

According to an email sent to the company’s investors obtained by HousingWire, RealtyShares will be shifting away from active investing but not shutting its doors completely. The company will now be focusing on servicing its existing investors and the assets it currently manages, according to the company.

There has been overall growth in the real estate crowdfunding space in the last few years, and other companies in the industry say that RealtyShares’ issues are not the norm. For example, Portland-based CrowdStreet, which offers a competitive commercial real estate crowdfunding platform, is growing and recently launched a new investment product.

Portland-based RealCrowd indicates a similar sentiment about the strength of crowdfunding and its operation. Adam Hooper, co-founder and CEO of RealCrowd, says RealtyShares woes are not indicative of the future of the industry or crowdfunding as a whole. The RealtyShares news is demonstrative of the fundamental differences in which crowdfunding platforms are structured and how this impacts the platforms’ long-term success.

“RealtyShares model was simply not sustainable, Hooper tells GlobeSt.com. “Crowdfunding is still a viable industry and will continue to thrive for years to come.”

Hooper explained that the biggest challenge with RealtyShares was within the structure of its platform. “We’ve seen this throughout our industry with many platforms that are structured where investors are participating in an LLC formed by the crowdfunding platform itself, rather than having a direct relationship with the real estate manager and an actual security interest in the real estate,” Hooper tells GlobeSt.com. “This creates a very operational intensive approach to investing and provides a barrier between the investor and the real estate.”

Hooper goes on to say that beyond this was the challenge of RealtyShares’ large venture capital investments. With more than $60 million in venture money raised and a headcount eclipsing 100 employees at one point, RealtyShares faced an insurmountable cash burn that was ultimately not sustainable, he points out.

“There is enormous pressure to scale at all costs, and once you’re on the treadmill of venture capital, you have to spend it to raise it and the cycle continues,” Hooper tells GlobeSt.com. “RealCrowd is structured with a direct investing model, where we are focusing on providing the most efficient way for managers to raise capital and for investors to access this asset class.

Hooper says this is extremely important for two reasons:

The direct investing model provides investors with the opportunity to have a direct relationship with the real estate manager and an underlying investment in the real estate as opposed to an LLC sponsored by a startup.

This is a sustainable lean business model which has allowed RealCrowd to reach profitability. By focusing on providing efficient access to this asset class rather than focusing on scaling at all costs, RealCrowd has been able to remain disciplined and make hard decisions.

“These decisions might have been influenced differently if we answered to a board that was focused on providing a return to its LP venture investors,” Hooper tells GlobeSt.com.

Hooper says direct investing models are important and without those types of models, investors and sponsors subject themselves to the counter-party risk of the platform shutting down.

“We have been advocates for educating investors and sponsors on the importance of a direct investment platform since day one,” Hooper tells GlobeSt.com. “If for any reason, our platform shut down tomorrow, which is obviously not the case, our investors and sponsors would still have their direct relationship. Investor returns would not suffer from a special servicer taking over our book of business and feeing the entities to death. They would not be impacted because of the direct nature in which we are structured.”

Because indirect investing deals are structured through individual LLCs, those investors and sponsors are at risk when the platform winds down, Hooper points out.

“If any of those entities get put into a bankruptcy proceeding like we’ve see with other platforms shutting down, that can adversely affect all involved,” Hooper tells GlobeSt.com. “While we trust that RealtyShares will act in a manner to best protect the investments of their customers, there is still uncertainty as to how the wind down will impact investor returns.”

The text of the email that RealtyShares sent to its investors is as follows:

To our platform investors and operating partners─Five years ago, RealtyShares was founded with a mission to connect capital to opportunity. With over $870 million invested across more than 1,100 projects, we have built one of the top online real estate investment platforms. We’re helping investors meet their financial goals and deploying capital to real estate operating companies to execute value-add and development strategies for properties across the US.

As an early stage company, we have relied upon venture capital to fund our operations. Over the past six months, RealtyShares aggressively pursued a number of financing options to continue growing the business. Unfortunately, despite our best efforts, we were unable to secure additional capital. As a result, we will not offer new investments or accept new investors on the RealtyShares platform.

From this point forward, RealtyShares’ focus will be servicing our existing investors and approximately $400 million of assets under management. This transition will have no impact on the underlying real estate investments. Investments will continue to be managed and distributions will continue to be made. Investors will continue to receive asset management updates and year-end tax information.

We are committed to serving our existing investors and sponsors, and have a team dedicated to supporting our ongoing operations.

The RealtyShares Team