TRD Forum: Crowdfunding competition heats up

Startups find different solutions for the same dilemma: timely funding

From left: Marty Burger, Dan Miller, Rodrigo Nino and Allen Shayanfekr at The Real Deal’s New Development Showcase and Forum (credit: Eileen AJ Connelly)
From left: Marty Burger, Dan Miller, Rodrigo Nino and Allen Shayanfekr at The Real Deal’s New Development Showcase and Forum (credit: Eileen AJ Connelly)

Spend enough time around tech startups, and you will inevitably hear some pretty violent analogies. The business competition at a major trade show is called “Battlefield.” Elon Musk’s ex-wife refers to him as “the Terminator.” And in the early days of real estate crowdfunding, entrepreneurs referred to their field as the “Wild West” – presumably with themselves as pioneers under constant attack from incumbents.

This language fits an eat-or-be-eaten world in which everyone seems to be in a constant state of war with everyone else. But at yesterday’s crowdfunding panel at The Real Deal’s New Development Showcase and Forum, the mood was surprisingly non-combative. In fact, it was almost cuddly. “There’s no such thing as competition when you’re creating a whole new industry,” said Rodrigo Nino, founder of crowdfunding platform Prodigy Network.

Still, beyond the niceties was a sense of how fierce competition has become now that the number of U.S. crowdfunding firms is in the triple digits. “Real estate is very cyclical,” said Dan Miller, president and co-founder of Fundrise. “At some point there is going to be a reckoning with deals potentially defaulting, and that’s when firms are going to prove themselves. I think the next downturn will be a consolidation with fewer firms remaining.”

Miller obviously thinks his own Fundrise will be one of them, arguing that the founders’ background in development differentiates it from its peers. Another advantage, according to Miller, is financial: the startup has raised enough venture capital to pre-fund its deals. In other words, it closes mezzanine loans to developers with its own money and then assumes the risk of finding retail investors online. This strategy tries to address a key issue with crowdfunding: borrowers need money quickly, but raising it from the crowd can take a while.

Marty Burger, the CEO of Silverstein Properties and an investor in Fundrise, spoke of the rapid growth of Fundrise’s deal size.“Two years years ago it was half a million, last year it was a million and it’s only a matter of time before it’s tens and hundreds of millions,” he said. “That’s the quality of this investor base.”

Fellow panelist Allen Shayanfekr, co-founder of Long Island-based startup Sharestates, took a different approach to the same dilemma. “The way we tried to solve it is actually bringing in institutions as anchors,” he explained. Sharestates has reached an agreement with investment firm Ranger Direct Lending Fund to invest up to $30 million through the platform. The money will make up a large portion of an individual deal, he said, reducing the time needed to close.

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Nino’s Prodigy hasn’t tapped into institutional money, but he admitted that it could become an option for future growth. “It is important to have institutional equity partners to come in for the larger deals,” he said. “Eventually we are going to have institutional capital lined up to buy buildings for third parties.”

At the panel, moderated by TRD’s managing web editor Hiten Samtani, Nino claimed New York-based Prodigy is the first U.S. firm to have raised more than $100 million in equity through crowdfunding.

Nino is a bit of an outlier among his peers. He crowdfunded buildings in his native Colombia long before the practice became legal in the U.S., and is currently doing deals far larger than his competitors – in part thanks to his connections to foreign investors. Proidgy has invested in two AKA extended-stay hotels, at 84 William Street and 234 East 46th Street, and bought the 15-story rental building 17 John Street in Lower Manhattan last September for $85 million.

“I have seen plenty of crowdfunding startups raising loans for single-family homes at 14 percent interest,” he said. “If someone is asking me for 400,000 dollars at 14 percent, there is something wrong. It’s all about the underlying asset.”

In the end, the panelists left little doubt that competition is fierce – despite all sayings to the contrary – and that crowdfunding startups are trying hard to differentiate themselves from each other.

Burger was the only panelist with nothing to prove. His presence was a reminder that those crowdfunding firms with the right strategy may one day be able to finance a Silverstein skyscraper.

“I believe in it (crowdfunding) long-term,” he said. “Right now my deals are in the one billion to two billion range, so I’m not using Fundrise,” Burger said. “But three more years and they’ll get there.”