How Much Should You Raise Through a Crowdfunding Campaign?

S o how much should I raise through a crowdfunding campaign? This question comes up a lot. The expectations for a crowdfunding campaign are all over the map. Some promoters want to raise all equity from the crowd. Some think they can get massive leverage through crowd-funded debt without a bank. Every deal is different, but it’s usually somewhere in-between. Because crowdfunding appears to be something new, there is a tendency for people to want to replace pre-existing forms of capital-raising with the new thing. Let’s be disruptive! Throw away those antiquated forms of raising money, now we have the crowd!
Not so fast…
Running a crowdfunding campaign is really just online syndication. It’s the same thing promoters have been doing for hundreds of years, just on the internet, integrated with online marketing and automated. So there is a lot of upside to crowdfunding, but it is not a silver bullet.
Equity
Equity is skin in the game. Any savvy investor is going to pay close attention to how much money the promoter has in the deal. That is the single best indicator of promoter confidence. A crowdfunding campaign can be used very successfully for raising equity for real estate offerings. I would still make sure to have some of my own money at work as a promoter, which provides alignment and faith in the promoter.
Now another more interesting equity angle is to sell off your own equity after the deal is performing. I love this approach because as a promoter I put up all of my money and debt to get a deal working. Once it is performing, there is proof that the deal works. The promoter has put his skin in the game and built something of value. With that in hand, the promoter can now sell off a portion of the equity in a deal to the crowd.
This recapitalizes the promoter so she can go do the next deal. It sells a performing asset to investors so they don’t have to wait and see if the promoter can pull off the deal. As a promoter, you can usually sell the equity so you are making a little margin on it as well.
Debt
Debt is leverage. In most cases promoters would love to use conventional loans at least from their cost point of view. However banks can be time consuming and pull the rug on your financing at the last minute after telling you yes for a month or more. It’s just the way they work. The sales guy says of course we can do your loan, no problem. The real decision is made in underwriting. If you don’t time the review cycle just right, this can even take two months. You still may come up empty handed and have to start the process all over again with another bank. Make sure to have a backup strategy if your conventional financing falls through. Better still, get two or more banks to process your loan at the same time so you can tell one of them no.
Crowd funded debt for real estate projects is still around 9 to 12% as of this writing. Patch of Land does a lot of this kind of product, and I’m basing that number purely off skimming over their offerings. As you can see, crowdfunded debt is popular. It’s easy to understand, and the rates are attractive for investors.
As a promoter, this money is similar to hard money rates. Crowdfunding money can be used for bridge financing as well, but it’s going to be tough to sell a short-term note to the crowd. Most online investors really like a 12–18 month product for their first experience. If it works, then they will be more likely to try something longer.
Debt is certainly an option, but it’s not going to be much cheaper than hard money and in order to sell it, you’re going to need to keep those notes for at least a year.
Make it a Win-Win
- The promoter sells a performing asset, not a plan
- The investor gets paid from day one
- The promoter gets margin on the sold shares
- The promoter can go do another deal with the same set of capital without having to wait for a deal to complete
The warning light here is selling off all of your equity. This puts all of the risk onto the investors and the promoter comes away with their spread. You can do that, but I wouldn’t. I would still leave some equity in each deal. This keeps alignment, it is the right thing to do, and will ensure that the promoter still manages that project effectively.
Conclusion
The same rules for raising money still apply whether you are using crowdfunding or not. You can’t get away with not having any of your own equity in the offering, or it will at least raise a few red flags. Leverage still makes sense in most real estate offerings. So use it. Using a combination of funds for the capital stack is going to usually give you the best flexibility and chance for success. Crowdfunding can be a great source of funds for any part of the stack. You will need to ask yourself how your investors react to the following:
- How much risk do they like to take on?
- How big is your investor list?
- What is the average investment they can make?
- What percentage will invest?
- How long is the expected timeline for repayment?
- Do they want regular payments, or is a closing sum ok?
Use the right tool for the right job. A crowdfunding campaign can excel at raising money quickly once you have a seasoned list and a great track record. It can provide equity to close your loan to value gap. You can sell off equity that you have deployed in existing projects. It can also provide bridge financing. Most importantly it can increase the awareness of your project to a large audience. This will spread your success stories and grow your list of investors. A big active list of investors is what will set you up for a lifetime of deals where you have control.
