Shark Tank Bashes the Crowdfunding Platform

46 Replies

Did anyone else watch yesterday's episode of Shark Tank?

A new Real Estate Crowdfunding company called Tycoon was on. The owner of the company as well as the entire crowdfunding industry was bashed pretty hard by the Sharks.

Video Clip

Thoughts?

  

James Wise, Real Estate Agent in OH (#2015001161)
216-661-6633

I would agree with the sharks. Liquidity is an element I want with any investment. Reits are going to be superior in most cases. Although, I would have done that 50% deal.

Yeah I agree for the most part that someone with 5k or 10 to their name really doesn't understand the complexity of these investments.

When I have clients that have 400k, 1 million, 5 million etc. they tend to be really good money managers and quick learners.

Unless it was an inheritance they had to build that money over time slowly and get educated on the process of growing money.

Workers that wait for tax returns to get a big check typically do not understand the government makes interest off their money for free all year long. The workers see it as a forced savings plan because they do not have the self control to get ahead.

This is why people's retirements etc. that have limited income these investments can be risky.

I am just personally not a fan of pulling 100 investors at 2,000 a piece etc. I would rather have a fund I set up and have people invest that are accredited in larger amounts. If I can't get the structure I want I would just stick to transacting commercial real estate for commission with clients. It has to make sense for my time or I won't do it.

Crowdfunding platforms are a dime a dozen. Tons of them popping up.

These folks seem to be talking past each other. The Tycoon entrepreneur is talking about investing for as little as $1000, the Sharks are talking about someone's life savings. If your life savings amount to $1000 you should not be investing in anything. On the other hand, the Sharks are right when they say that your brand is everything.

The problem with the clip is that not enough information is included on the Tycoon platform to make an evaluation as to whether this is a worthwhile venture.

WOW! EVERYONE HERE needs to listen to the full version! Listen carefully to each of the sharks, they said it better than I could in a few words.

Now, take their comments a step further, listen carefully, one spoke of the internet platform, another to predatory issues, another hit on the pitch man, while another spoke of knowing who is really behind a company, knowing their expertise and experience. That applies to everything in RE, not just this crowdfunding spin master.

They touched on the hype as well, folks, you need to calibrate your BS Meter in real estate! :)

I thought the Sharks were overly critical. I think if it hadn't been on a TV show, the conversation may have been a little different. Of COURSE there is risk in real estate investing (or any investing), and investors need to understand those risks. I think the concept was just too "complex" for a five minute conversation; and it was easier to just point out the negatives without having to carefully explain the potential gains.

I'm not saying it was a great investment opportunity, but the idea that the business model is as flawed as they suggested seemed a bot over the top to me.

What got me was when he pitched real estate as "sexy" -- even if I was considering funding him (which I wasn't), his statements would have killed the deal immediately.  

The sharks' arguments were sound and reflective of what I've been saying about this space for a long time now. We debate this space on a weekly basis between our team and I always come back to the same conclusions (with others as well).

While I don't have issue with crowdfunding for sophisticated investors, I really don't see this as a play for folks who aren't experts in real estate, nor do I believe that crowdfunding should be opened up for non accredited people. Perhaps someone could convince me otherwise . . .

There are many factors that come into play with ANY real estate investment. No investor should be investing in a deal based on its existence on a crowd portal and/or its promised return.

I think you guys didn't listen carefully enough, knowledge of the investor putting in a grand, even if they can afford it, will most likely not have the knowledge to assess RE risks, there are more naïve people out there than those with significant knowledge, then add on top of that the hype and salesmanship element tossed at investors and that lack of general investing knowledge, they are doomed to do sufficient due diligence. That's exactly what the gurus play on, hype, promise, desire, close on the naïve.   

I'll bet you could talk to a syndicator type all day and never be informed of the risks, collateralization specifically or the outcome of default, it's simply counter to the sales pitch. 

Fractionalized investing is more risky than simply doing a deal yourself. :)

Mr Wonderful offered to buy his business for $50 k for 50% and could have ran it up to a 100 million dollar business. That guy made a huge mistake

Steven you can tell people things all day and for some the light bulb will go off. For others they have to fall flat on their face and go "Ouch that really hurts let me think of a way not to do that again!" lol

Are the sharks greedy?? I don't think so they just understand the risks and have the money. Of course they start off with what they would be great for them and go from there.

To make something go you need money and expertise. Really seemed like the Tycoon concept lacked a little of both.

Just like a best house everyone thinks they have the best business idea. Rarely does that turn into reality and the other 90% plus are delusional.

The Tycoon person I am sure after the show aired likely received many offers at less equity than 50%.

Some of these groups go on the show with no intention of making a deal with a shark. They just want an investor watching the tube to call them and invest. 

I agree even though his business had some flaws it still is not  much different then soliciting investors through this website . If you have 1 or 100  a syndicate or not he got great exposure . I am weak I would have went for Mr Wonderful especially since he had less then $100,000 in sales and little track record

Investing in actual crowdfunding platforms is very risky.  Most of the platforms are coked up on venture financing and are waiting for someone to come along and buy them.  There is no way they can be making much money from operations.  I have said several times I think the business model for these platforms is poor.  We're about to launch a model that is significantly different from what the rest of the industry is currently doing.  

The bulk of the value of a platform is in the relationship between the platform and the investors that fund their deals.  Without a need to fund continuous deal flow from the owners of the portal I am not sure why anyone would want to own one the way they're currently set up. 

Regarding the investors that invest in the projects there is going to necessarily be significant disagreement about things.  I am a firm believer that people should be able to invest their money however they choose to do so.  There are plenty of super-sophisticated people that are not accredited investors.  There are also plenty of morons that are accredited investors.  This is, at best, a bad mechanism for assessing suitability.

The better portals use a broker-dealer to clear their trades.  KYC or know your customer is paramount for having the broker clear the trades.  Their job is to assess whether or not the investment is suitable for the investor.  One can argue whether or not this really provides any tangible value.  

I see crowdfunding as having many parallels of those of us that were in the HML business in CA... virtually all the deals we ever did were fractionalized.. We just had co beneficiaries as described on the DT and Note... And if I look back on my company I had about 250 investors that had 35 to 40 million out.. And out of all those I would say 50 to 75 were accredited the rest were not.. they invested with us because of referrals and of course back in the 80's and 90's they got 12 to 15% APR..

At least with the debt deals that are being funded I just see it as a different approach to bring in your investors.. And the real impact if and when CF really takes off will be direct competition to HML industry.

Crowdfunding aside. Think about marketing. They need a "face" for their business. Someone that comes across as wise, careful, and caring. Not the "real estate is sexy guy". They need to desperately rebrand as well, Tycoon?? 

What if the business what structured more like kickstarter? With a minimum capital requirement.

OR , is there a way to vett non accredited investors? or protect non accredited investors? Such as maximum contribution based on % of net worth or liquidity.

Also, what about having complete disclosure and transparency. Such as a minimum contribution in the asset by each deciding member of the company? A disclosure of all known risks for each investment,  Full disclosure on all profits to the company.. ect

Could a registered fiduciary advisor be involved in this process anywhere? 

Strict rules and method of analysis would need to be developed. Everything subject to opinion/emotion would need to be eliminated. Figure out ways to vett the investment as much as possible instead of the people investing. 

Just thinking out loud

Agreed Taylor, there sure are a lot of BSer's in the business, some even show up here on BP!

To my knowledge, there are no "registered" advisors, closest thing is probably your attorney and they really aren't "schooled" in finance, that becomes a specialty and one most investors can't afford.

No license needed that I know of, advising on a mortgage to a lender/investor, there are giving advice to consumer borrowers and some in the commercial space.  I have and could, but I'd probably kill 90% of the deals as I can tell that there is a gross lack of knowledge out there, from the pitchman to the "legal advisors" they all claim to have.

Most are in violation of laws they may not even be aware of, then again, they might be. I don't recall any bank examination where that institution had zero issues, just doesn't happen, most are simply mistakes so nothing alarming. Much like the military, SNAFU is a standard operating procedure in lending.

An insured bank is one thing, some private operator flushing other people's money is another. Takes a lot of self control to handle other people's money, money is addictive and temptations to take additional risks and get greedy get the best of many, then they get in a bind leading small operators and their investors to the dark side. Few are that prudent, IMO. First indicator of trouble are those that brag, fluff and puff about money, those with real money don't speak publically about their money and successful operations, it's those that do you need to watch out for.

The sharks had it dead on!  :)    

I love shark tank  but that guy was a moron for not taken Kevin O'learys offer.

Originally posted by @Bill G.:

Agreed Taylor, there sure are a lot of BSer's in the business, some even show up here on BP!

To my knowledge, there are no "registered" advisors, closest thing is probably your attorney and they really aren't "schooled" in finance, that becomes a specialty and one most investors can't afford.

No license needed that I know of, advising on a mortgage to a lender/investor, there are giving advice to consumer borrowers and some in the commercial space.  I have and could, but I'd probably kill 90% of the deals as I can tell that there is a gross lack of knowledge out there, from the pitchman to the "legal advisors" they all claim to have.

Most are in violation of laws they may not even be aware of, then again, they might be. I don't recall any bank examination where that institution had zero issues, just doesn't happen, most are simply mistakes so nothing alarming. Much like the military, SNAFU is a standard operating procedure in lending.

An insured bank is one thing, some private operator flushing other people's money is another. Takes a lot of self control to handle other people's money, money is addictive and temptations to take additional risks and get greedy get the best of many, then they get in a bind leading small operators and their investors to the dark side. Few are that prudent, IMO. First indicator of trouble are those that brag, fluff and puff about money, those with real money don't speak publically about their money and successful operations, it's those that do you need to watch out for.

The sharks had it dead on!  :)    

Bill the last paragraph is one the best one's I have seen you write in the almost one year I have been frequenting this site.. I could not agree in more stronger terms with what you have said.. Just watch any episode of AMerican Greed !!

Originally posted by @Joel Owens  

Yeah I agree for the most part that someone with 5k or 10 to their name really doesn't understand the complexity of these investments.

That is the problem. As regular BP readers know there are a ton of hidden costs which are not obvious to the casual investor. 99.9% of investors out there have no clue that 50% of rent income goes to expenses or that the purchase, holding, and sale costs (soft costs) of a flip are 15-20% of the deal.

Crowdfunding platforms are a dime a dozen. Tons of them popping up.

It reminds me of when internet retailing was just starting up. People came to the sporting goods trade show and said I am going to be the next big thing on the internet. They didn't realize that 5 people an hour were coming by saying the same thing. i doubt a single one of them made it. They were crushed when the big players decided to step into the market.

Originally posted by @Eric M.  .:

I thought the Sharks were overly critical.   .  .  .   Of COURSE there is risk in real estate investing (or any investing), and investors need to understand those risks.

I'm not saying it was a great investment opportunity, but the idea that the business model is as flawed as they suggested seemed a bot over the top to me.

See my comment above about small investors not having a clue about the hidden costs and therefore the risks. In crowdfunding this risk is expanded to two levels. The sponsor of the investment may not understand these risks and costs and then end investor may not understand them.

Originally posted by @Joshua Dorkin  :.

While I don't have issue with crowdfunding for sophisticated investors, I really don't see this as a play for folks who aren't experts in real estate, nor do I believe that crowdfunding should be opened up for non accredited people. Perhaps someone could convince me otherwise . . .

This lead to the ultimate irony. Isn't it odd that IT IS THE LAW THAT THE RICH GET RICHER AND THE POOR GET POORER. Unless you are an "accredited investor" (ie; rich) you are not legally allowed to invest in some of the best investment deals!

My free market sensibilities say this is incredibly unfair. Yet on the other hand i know the average investor simply cannot evaluate a real estate deal..

Originally posted by @Bryan Hancock  :
am a firm believer that people should be able to invest their money however they choose to do so. There are plenty of super-sophisticated people that are not accredited investors. There are also plenty of morons that are accredited investors.

Agreed. I resent the fact that I am not legally allowed to invest in some investments, especially considering I understand investing better than 90% of the people who wrote or enforce those laws. Yet realistically how many people would have a clue how to evaluate those real estate deals? 

Originally posted by @Jay Hinrichs  :

Originally posted by @Bill G. .:

Bill the last paragraph is one the best one's I have seen you write in the almost one year I have been frequenting this site..

Hey even a blind squirrel finds a nut every now and then. He he he 

Not to worry @Ned Carey  ....the big bad gov-mint is here to make sure you don't have access to these risky investments.  They, after all, know what is best for you and can protect you from those meanie operators.  

@Bryan Hancock  

  Gov Mint is always a day late and a dollar short protecting the investing public.. By the time they get into a deal gone bad its too far down the track to really save anyone, at least most of the time.

will be interested to see your new take on the CF space...

I see RE crowdfunding like the DIY stock market websites.  I don't know much about stocks,  but  I can buy stocks on my own with one of those DIY websites.  When I buy on my own and lose money (or listen to my Husband who got a "stock tip" about some company that is going to "make it big" who ended up filings for bankruptcy 6 months later) and I lose money (which we did) it is my fault.  I did not do my due diligence.  But these DIY stock sites are never seen as "taking advantage" of investors, it is the choice of the consumer to use them.  

I personally, am not a fan of the crowdfunding sites.  But just like there are may ways to be a RE investor, I see this as just another way for the people that feel it is right for them.   

Brie Schmidt, Real Estate Agent in Illinois (#471.018287) and Wisconsin (#57846-90)

I have been following the RE crowdfunding space very closely and I truly believe it is a gamechanger and will help shape the future for investments in our industry. In 3-5 years; most developers and operators will have their own crowdfunding portals and will open up their projects and syndicate deals directly to non-retail investors. The way I see it, crowdfunding is a good thing for RE as it makes it more transparent and efficient and puts a streamlined process around investment options. 

Fundrise, Realty Mogul and several others are leading the movement and I expect we will see more platforms emerge.  FWIW, Fundrise has raised $41M in funding and has been super aggressive in educating and helping set the standards and policies in this space.

This guy from Tycoon was just a bad presenter and couldn't really articulate all the benefits and values that comes from such platform. He also didn't seem too knowledgable about the RE space in general and couldn't really speak about the ways most RE deals are traditionally done today and how crowdfunding will change that. 

What Barbara Corchran had to say during that segment was very well stated, who are the people behind these deals?  What is their track record?

Much like if you invest in a REIT or a mutual fund, informed investors should be doing their homework on those who manage the fund or real estate project in this case.

Michael Noto, Real Estate Agent in CT (#RES.0799665)
860-384-7570

I was shocked when the guy did not take up O'Leary's offer.  If O'Leary had 50% of that business he would have basically been working for the business owner.

Trust & track record are the two things in my experience that will impact someones ability to raise money.  O'Leary has both of those in spades.

Michael Noto, Real Estate Agent in CT (#RES.0799665)
860-384-7570