The last 10+ years has seen the vast technology-powered democratization of products and services, from payment systems, to vacation rentals, to driving services, to arts and crafts marketplaces, to technology itself, with the rapid proliferation of open APIs. The unifying theme is reduced friction: in each case transactional elements are eliminated or decentralized, bringing supply closer to demand, reducing the influence of middlemen.
This is a great development, for the most part. Competition is introduced via easier access to markets, and consumers benefit. Through the high-velocity qualitative information and price transparency that digital media afford, these democratized markets achieve a new level of efficiency. There is risk, as well: too little friction, too few mechanisms of quality control, and the premise of a self-regulating, democratized digital market falls apart. If you don’t have your own horror story regarding Uber or airbnb, for example, you surely know someone who does.
Digital democratization has made it to the world of finance, as you know, with fintech startups collectively poised to disrupt major functions of the old guard in traditional banking (for evidence of this, look no further than the growth rate of VC investing in fintech – nearly 300% from 2013 to 2014). This is regarded as a coup to some who suspected that the conservative, insular culture of traditional finance was incompatible with the fail-fast-and-learn ethos of tech startup communities.
Lending Club, with its 8 year history, is the grandfather of fintech and arguably its most notable success story. In their short history they have transformed consumer credit, lowering the cost to borrowers by expanding the pool of lenders and reducing transaction costs and middlemen. Their 2014 IPO confirmed what those paying attention already knew – marketplace lending is more than just a trend. Recent regulatory reforms have expanded the viability of variations on the Lending Club model to a host of other industries. Since its relatively late start, the real estate industry has rapidly embraced the possibilities of marketplace finance (or “crowdfunding” as its more commonly called in the real estate space). It’s easy to see why – savvy investors are eager to invest in good real estate and real estate companies are always in search of new and competitively priced financing sources. Its a perfect opportunity for technology to do what it does best – connect people and businesses directly that used to rely on layers of intermediaries. On the other hand, there is risk, just as there is in other transformed markets (and the stakes are a lot greater than, say, a poor experience staying in a stranger’s loft apartment).
Like other industries that have been transformed by digital democracy, there’s a real need for mechanisms of quality control as syndicated deals proliferate across a growing set of online platforms. As more and more online crowdfunding platforms emerge, some may tend toward prioritizing user growth and deal velocity over security standards, thorough deal underwriting, and legal and regulatory compliance.
Fortunately, as with other digitally-democratized industries, real estate marketplace finance should benefit from several of its inherent aspects: the ready availability of actionable data, and the wealth of information investors can access. With the right platform, investors will be able to align investment opportunities with their own target return profile and appetite for risk; carefully consider the performance history of a given sponsor’s projects; ask pointed questions to sponsors; and leverage platform resources and communities to better educate themselves with regards to specific real estate markets, asset sub-classes, and individual sponsors. The platforms that earn trust from investors and sponsors, and grow in sustainable ways, will be those that embrace openness – striving to provide timely, relevant information to customers while exposing every element of the deal lifecycle to all parties involved, and providing substantive reporting throughout the term of each project. At EQUITYMULTIPLE, we’re committed to this.
With greater access, transparency, and exposure, the next generation of real estate capital markets will be more efficient to the benefit of both investors and sponsors.