Case Study: RealtyShares
What is this post about?
Almost 10 years before we did, someone had a similar idea. What if there was a platform that allowed you to invest in real estate for say, $5,000? We won’t give them too much credit as Dylan and I were still playing each other in middle school basketball then, but nonetheless, Nav Athwal and Trey Clark’s RealtyShares was one of the first real estate crowdfunding platforms to gain significant traction. In this post we’ll discuss RealtyShares, where they succeeded and where, ultimately, they failed. We’d like to say that our only intent is to share our thoughts from an entrepreneurial perspective and to highlight the key obstacles in this sector, not to criticize the entrepreneurs themselves
RealtyShares in less than 100 words
RealtyShares was a real estate investment platform where accredited investors– people who make $200,000 or more for three years in a row, or have a net worth of $1,000,000– could invest in real estate for as little as $5,000. The platform debuted in 2013 and facilitated over $800 million in investments in over 1,100 unique deals before an abrupt announcement that the platform would close its doors to new investors in 2018. The company downsized significantly, the remaining team honoring more than $400 million still invested in RealtyShares deals
Proof
Because of Realty Shares, we know that large scale real estate crowdfunding works. Investor demand was so high that deals were usually fully funded within a day, and many users never even had the chance to invest in any deals. In just 5 years, over $800 million dollars was invested through the platform, funding that few private funds could raise in their beginning years.
Platforms like Realty Mogul, Equity Multiple, and Crowdstreet have built on Realty Shares’ success, providing billions in large scale commercial equity investments to tens of thousands of investors.
How a company with $400+ million under management went under
In the fall of 2018, RealtyShares’ $30 million Series D was pulled at the last minute, damming the stream of venture capital the company had been relying on. To date, RealtyShares had raised almost $60 million across four rounds: a $1.9 million Seed, $10 million Series A, $20 million Series B, and $27 million Series C. RealtyShares’ fundraising track record indicates that investors were optimistic about the company and the future of real estate crowdfunding. They no doubt saw an abundance of eager real estate investors and the essentially limitless supply of real estate as a recipe for scale. But nonetheless, venture capital pumped the brakes.
From what we’ve gathered, the general consensus is that RealtyShares simply wasn’t growing fast for their backers. Sounds unreasonable given the information you’ve been given (hundreds of millions of dollars invested via the platform), but one key piece that we neglected to include was that, in 2018, RealtyShares was supposedly set to make just $4-5 million in fees. Given that this was their primary (if not only) source of revenue, it’s a lot easier to understand the cause for concern.
RealtyShares’ revenue was pinned at about 1% of their gross investment volume, that is, $4-5 million in revenue from $400-500 million in active investments. While the ratio is similar to Robinhood’s, who reportedly have around $80 billion in assets under management and had $959 million in gross revenue last year, the underlying assets that Robinhood offers are much more accessible. If the average RealtyShares deal was around $500,000, that’s 160,000 individual properties to reach Robinhood’s size. 160,000 houses is a huge number and ensuring that they’re all good investments is nearly impossible. This is likely the reason RealtyShares tried to pivot to commercial real estate in 2017, where deals could have funding goals up to $50 million. Pivoting to a new investment type didn’t solve their fundamental problem, however. Ultimately, RealtyShares’ downfall was their linear growth model.
Two takes on where they went wrong
There are a small number of articles and blog posts about RealtyShares and their assessments as to why the company went under fall into two categories. We’ll highlight those here and give our own thoughts after.
“RealtyShares lost sight of the sedate principles that drive prudent real estate investing”
An article by Adam Gower for the NAIOP (National Association for Industrial and Office Parks) best argues what we see as a traditionalist argument about RealtyShares. The general thesis of the article is that RealtyShares fell victim to venture capital that “demanded rapid growth at the expense of fundamentals.” Gower cites that while a healthy growth rate for a real estate company is 30-40% a year, RealtyShares’ backers wanted 100% plus.
Gower adds that “RealtyShares did not reach a point of independence from outside capital soon enough.”
“They didn’t have the technology”
A Financial Samurai post from Sam Dogen highlights how operational inefficiencies may have caused RealtyShares to run out of runway. Dogen writes, “RealtyShares ran a personnel intensive business to review, finalize, and manage deals.” In a few words, any process done by people, needs more people at scale; any process done by an algorithm, doesn’t.
My Take
Technology. Technology. Technology.
We’re convinced that the companies that will dominate real estate crowdfunding in ten years will have deeply integrated technology into their model. What does this look like? The real estate investment dealflow is extremely replicable. The goal for us will be automating 70-90% of the signings and filings so that we can have a lean internal team and provide a seamless user experience.
Find Greener Pastures
RealtyShares’ model limited them to a linear model: Revenue = Total AUM x % Fee. While there’s trillions of dollars of real estate to be had, startups and their backers are looking for exponential growth. Yes, people came to RealtyShares to invest in fractions of relatively small deals, but they had to think beyond that. They tried to shift to bigger deals (more AUM = more Fees), but they had to go beyond that too. If you make money when money changes hands, how can you make money change hands more often? Or what if real estate is just the main attraction of the theme park that is an entire investment ecosystem. Sadly I won’t reveal more here for strategic planning reasons, but the point is, there is so much you can do with a functioning real estate investment platform.
Case Study: RealtyShares
What is this post about?
Almost 10 years before we did, someone had a similar idea. What if there was a platform that allowed you to invest in real estate for say, $5,000? We won’t give them too much credit as Dylan and I were still playing each other in middle school basketball then, but nonetheless, Nav Athwal and Trey Clark’s RealtyShares was one of the first real estate crowdfunding platforms to gain significant traction. In this post we’ll discuss RealtyShares, where they succeeded and where, ultimately, they failed. We’d like to say that our only intent is to share our thoughts from an entrepreneurial perspective and to highlight the key obstacles in this sector, not to criticize the entrepreneurs themselves
RealtyShares in less than 100 words
RealtyShares was a real estate investment platform where accredited investors– people who make $200,000 or more for three years in a row, or have a net worth of $1,000,000– could invest in real estate for as little as $5,000. The platform debuted in 2013 and facilitated over $800 million in investments in over 1,100 unique deals before an abrupt announcement that the platform would close its doors to new investors in 2018. The company downsized significantly, the remaining team honoring more than $400 million still invested in RealtyShares deals
Proof
Because of Realty Shares, we know that large scale real estate crowdfunding works. Investor demand was so high that deals were usually fully funded within a day, and many users never even had the chance to invest in any deals. In just 5 years, over $800 million dollars was invested through the platform, funding that few private funds could raise in their beginning years.
Platforms like Realty Mogul, Equity Multiple, and Crowdstreet have built on Realty Shares’ success, providing billions in large scale commercial equity investments to tens of thousands of investors.
How a company with $400+ million under management went under
In the fall of 2018, RealtyShares’ $30 million Series D was pulled at the last minute, damming the stream of venture capital the company had been relying on. To date, RealtyShares had raised almost $60 million across four rounds: a $1.9 million Seed, $10 million Series A, $20 million Series B, and $27 million Series C. RealtyShares’ fundraising track record indicates that investors were optimistic about the company and the future of real estate crowdfunding. They no doubt saw an abundance of eager real estate investors and the essentially limitless supply of real estate as a recipe for scale. But nonetheless, venture capital pumped the brakes.
From what we’ve gathered, the general consensus is that RealtyShares simply wasn’t growing fast for their backers. Sounds unreasonable given the information you’ve been given (hundreds of millions of dollars invested via the platform), but one key piece that we neglected to include was that, in 2018, RealtyShares was supposedly set to make just $4-5 million in fees. Given that this was their primary (if not only) source of revenue, it’s a lot easier to understand the cause for concern.
RealtyShares’ revenue was pinned at about 1% of their gross investment volume, that is, $4-5 million in revenue from $400-500 million in active investments. While the ratio is similar to Robinhood’s, who reportedly have around $80 billion in assets under management and had $959 million in gross revenue last year, the underlying assets that Robinhood offers are much more accessible. If the average RealtyShares deal was around $500,000, that’s 160,000 individual properties to reach Robinhood’s size. 160,000 houses is a huge number and ensuring that they’re all good investments is nearly impossible. This is likely the reason RealtyShares tried to pivot to commercial real estate in 2017, where deals could have funding goals up to $50 million. Pivoting to a new investment type didn’t solve their fundamental problem, however. Ultimately, RealtyShares’ downfall was their linear growth model.
Two takes on where they went wrong
There are a small number of articles and blog posts about RealtyShares and their assessments as to why the company went under fall into two categories. We’ll highlight those here and give our own thoughts after.
“RealtyShares lost sight of the sedate principles that drive prudent real estate investing”
An article by Adam Gower for the NAIOP (National Association for Industrial and Office Parks) best argues what we see as a traditionalist argument about RealtyShares. The general thesis of the article is that RealtyShares fell victim to venture capital that “demanded rapid growth at the expense of fundamentals.” Gower cites that while a healthy growth rate for a real estate company is 30-40% a year, RealtyShares’ backers wanted 100% plus.
Gower adds that “RealtyShares did not reach a point of independence from outside capital soon enough.”
“They didn’t have the technology”
A Financial Samurai post from Sam Dogen highlights how operational inefficiencies may have caused RealtyShares to run out of runway. Dogen writes, “RealtyShares ran a personnel intensive business to review, finalize, and manage deals.” In a few words, any process done by people, needs more people at scale; any process done by an algorithm, doesn’t.
My Take
Technology. Technology. Technology.
We’re convinced that the companies that will dominate real estate crowdfunding in ten years will have deeply integrated technology into their model. What does this look like? The real estate investment dealflow is extremely replicable. The goal for us will be automating 70-90% of the signings and filings so that we can have a lean internal team and provide a seamless user experience.
Find Greener Pastures
RealtyShares’ model limited them to a linear model: Revenue = Total AUM x % Fee. While there’s trillions of dollars of real estate to be had, startups and their backers are looking for exponential growth. Yes, people came to RealtyShares to invest in fractions of relatively small deals, but they had to think beyond that. They tried to shift to bigger deals (more AUM = more Fees), but they had to go beyond that too. If you make money when money changes hands, how can you make money change hands more often? Or what if real estate is just the main attraction of the theme park that is an entire investment ecosystem. Sadly I won’t reveal more here for strategic planning reasons, but the point is, there is so much you can do with a functioning real estate investment platform.