To survive, crowdfunding firms are remaking themselves

Firms that target larger investors resemble old-fashioned real estate funds

Jan.January 07, 2020 12:00 PM
As crowdfunding startups rethink their business model, many are becoming more like traditional real estate investment firms (Credit: iStock)

As crowdfunding startups rethink their business model, many are becoming more like traditional real estate investment firms (Credit: iStock)

Starting in 2012, a wave of crowdfunding startups sought to take advantage of new regulations to revolutionize real-estate investment in the same way that Airbnb and Amazon have upended hospitality and retail. But things didn’t work out that way.

Many crowdfunding firms from this first wave have gone out of business, while those that have survived have had to reconsider their strategies — often becoming more like traditional real estate firms in the process, the Wall Street Journal reported.

Crowdfunding in real-estate is “a revolution that ended up replacing the old guard with the same thing, which unfortunately happens more often than you would think,” industry pioneer Dan Miller, who co-founded crowdfunding firm Fundrise in 2012, told the Journal.

Fundrise has since abandoned the traditional crowdfunding model that lets investors pick and invest in individual projects via its website. Meanwhile, Miller has moved on to focus on assets aimed at socially and environmentally conscious investors, such as sustainable farms.

Some crowdfunding firms, like Kushner-backed Cadre, are targeting wealthier investors. Cadre requires a minimum investment of $50,000.

Most crowdfunding firms have targeted investors with an income of at least $200,000 or $1 million in net worth, but they have struggled to convince such investors that their model is superior to traditional investments, such as investing in REITs or rental apartments.

The abundance of other cheap financing options after 2012 also led crowdfunding firms to back riskier, less appealing projects.

As detailed in The Real Deal’s October issue, Prodigy Network chief executive Rodrigo Niño resigned amid multiple lawsuits from crowdfunding investors who fear they may lose all of their money.

“Democratizing real estate sounds great and it’s inspiring, but it’s tough when you go up against the titans of Wall Street,” said Ray Sturm, co-founder of the now-defunct crowdfunding firm RealtyShares. [WSJ] — Kevin Sun

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