Crowded out?

Crowdfunding was once a darling of the startup space, but some early adopters have pivoted into other areas and VC backing has fizzled

Oct.October 01, 2019 11:00 AM

Crowdfunding was once touted as the next big thing — a way for average investors to get into the lucrative world of real estate and a way for platforms to tap a new spigot of funding.

The space took off around 2013, when the U.S. Securities and Exchange Commission announced new rules allowing private companies to sell securities to the general public.

That one small change — which was tucked into the 2012 federal JOBS Act — instantly increased awareness around crowdfunding and spawned a host of platforms. That was even as many (including Prodigy Network, the platform launched by Rodrigo Niño) targeted accredited investors.

See related story — Panic at Prodigy — here 

In 2014, Scott Whaley, president of the National Real Estate Investors Association in Cincinnati, told the Wall Street Journal that there was “massive demand, both from entrepreneurs who want to get access to capital, and from people who want to invest capital.”

But the field has thinned since those early days, and venture capital money has retreated from the space. Globally, venture capital for crowdfunding peaked in 2015 at about $76.4 million and plummeted to $25.7 million in 2017, according to real estate tech research firm CREtech. This year, it’s bounced back to $72.2 million year-to-date.

So far this year in the U.S., four firms — Groundfloor, RealtyMogul, Vairt and Wealth Migrate — cumulatively attracted a paltry $9.8 million.

Zach Aarons, co-founder and partner of MetaProp, a venture capital proptech firm, said many of the crowdfunding platforms that emerged in the early days were overcapitalized and going after the same users.

“That does not sustain itself forever,” Aarons said. “When the venture capital money runs out, the music stops.”

Last year, industry leader RealtyShares shuttered its crowdfunding operations. The company, which had raised $870 million-plus for more than 1,160 projects over five years, failed to drum up additional capital. Meanwhile, Fundrise, which had raised $60 million, ended its crowdfunding program in 2015.

Ben Miller, CEO and co-founder of Fundrise, said the firm shifted into raising capital for funds with lower fees in order to “mitigate risk for investors.” By switching its business model, Fundrise, like other fund managers, can raise capital before deploying it into deals and maintain control over its investments, Miller said.

Some crowdfunding companies pool money from investors for deals that they sponsor but don’t execute. Prodigy co-develops all of its properties. And unlike many of its rivals, it has never raised venture money, though it did just recently sell stakes in its company to investors.

Despite some high-profile issues, several sources said they are confident in the sector and that investor demand for crowdfunding is strong.

Many of those who’ve invested through crowdfunding portals, including via Prodigy, have, in fact, made money. One investor told TRD he invested in Prodigy’s AKA Wall Street early and exited a year or two later, with no issue.

Darren Powderly, an executive at CrowdStreet — which recently topped $800 million in equity raised — said “the interest level is exploding.”

“The growth is just tremendous, and that is because both sides of the marketplace are hitting this network effect,” Powderly said.

Adam Kaufman, co-founder of the Manhattan-based crowdfunding platform ArborCrowd, said the space is bifurcated and that many of the remaining players are thriving.

“We’re starting to see some companies … experience difficulties. But at the same time, we see a lot of companies in the space who are really flourishing,” he said. “What it comes down to at the end of the day are the fundamentals.”