“The Cadre value proposition for investors is far superior to that of existing options, and will — like other digital marketplaces — disrupt less efficient analog incumbents”
Jeff Jordan, General Partner at Andreessen Horowitz
Cadre is often described as a disruptive company. Statements like this one, are all but rare when Cadre’s novel business model is the topic of discussion. However, according to Clay Christensen’s definition of what constitutes a disruptive business model, they seem to contain somewhat of a contradiction: how can Cadre be disrupting real estate investing with a value proposition that is “far superior” than existing alternatives? And, if it isn’t, how should we think about this undoubtedly innovative solution?
Cadre is a digital platform that connects qualified investors and institutions, to fully vetted commercial real estate investment opportunities. Property managers can apply to have their assets listed on the platform, giving them access to a network of high-net-worth individuals and institutions. By clicking on the property, investors are shown a summary of information about the building — like purchase price, how much equity is available, and key statistics — and are invited to watch an immersive drone video of the property. They can then bid for a portion of that specific building, and, within a matter of weeks, will learn what amount they have been allocated. Ryan Williams, CEO and founder of Cadre, compares the process to buying something on Amazon…only with price tags ranging from $50 to $250 million.
Cadre is a two-sided platform. To succeed, its value proposition must be compelling both for investors and property managers. Therefore, to assess whether the Company is really on a disruptive path, we must do so from the perspective of the two sets of target customers.
The first category of disruption identified by Christensen are low-end disruptions. These attack the least profitable customers at the low end of the value network, that are being overserved by existing solutions. A lower performance, lower priced alternative will be “good enough” for these customers and, given that they represent the least attractive segment of the market, the move will be ignored or even welcome by incumbents who will readily move up-market.
Does Cadre’s model for investing in commercial real estate fit this description?
By leveraging technology to automate key investment processes, Cadre claims it benefits from lower overhead costs than other investment vehicles, and can afford to charge sellers lower fees — some say as much as 50% lower — for the service. If so, the low-price requirement would be fulfilled.
But are these property managers the sort of customers that are being overserved by existing alternatives and are willing to compromise on performance in exchange for a lower price? To answer this question, we need to first establish what we define as “performance” in this context.
If performance is determined by the price sellers obtain for their property, it would only be rational to accept a lower price if the proceeds net of — lower — fees were higher than what is available through alternative channels. Therefore, net performance must be higher or equal than that alternative, which seems to contradict the theory. It is also difficult to argue that a seller can be overserved if the criteria for making that judgement is solely price — the vast majority of sellers will always want to sell their product for the highest price possible.
Performance must, therefore, take on a different meaning in the context of Christensen’s theory. Whether this is speed — Cadre claims that it reduces the entire investing process from months to just weeks, ease of transacting — it’s platform helps sellers manage the capital raising and asset management process efficiently -, or execution risk — it offers guaranteed funding -, Cadre is not asking its customers to compromise. If anything, it is doing the opposite.
From the investor’s perspective, the analysis around whether Cadre represents a low-end disruption will vary depending on who — what channel — we consider as the incumbent.
Relative to private investment vehicles, such as non-listed real estate funds, Cadre’s proposition, again, presents a low-priced alternative, in so far as it claims to eliminate the “2 and 20” pricing model used by most traditional funds — thanks to its technology-enabled, lower cost structure -, and charges up to 40% lower fees.
Investors in these vehicles, however, can seldom be described as overserved. Cadre’s is in fact built on the very premise that these investors demand greater transparency, liquidity, and the ability to have discretion on a deal-by-deal basis. All of which Cadre seeks to provide.
Relative to publicly listed vehicles, such as listed real estate funds or REITs, Cadre’s value proposition also seems superior: while both allow investors to exit their positions before the end of the projected investment period, Cadre provides significantly more transparency, as well as the possibility of selecting which individual assets to invest in. It is also unclear whether Cadre’s solution is any cheaper than investing in real estate through these listed vehicles.
Defining performance, from the investor’s perspective, solely on the grounds of net investment returns obtained, doesn’t shed any light on whether Cadre’s business model is in fact disruptive or not. If we did, the overserved customer would theoretically be willing to accept lower returns in exchange for a lower fee, i.e. higher net returns, which is contradictory. Consequently, the other performance attributes previously identified — transparency, liquidity, and flexibility — ought to be an essential part of the analysis. And, regardless, Cadre is definitely not promising its investors lower returns than the competition.
We can conclude, therefore, that Cadre does not fit the mould of a low-end disruption. For while it generally represents a lower-priced service, it does not seek to capture or appeal to the low end of the market. Cadre’s value proposition is, in fact, “far superior” than existing alternatives, and will appeal to all segments of the market.
Some would think that, as a potential investor in Cadre, this would be a positive conclusion. However, Christensen’s theory warns us that the reason why companies with disruptive strategies have historically been able to prevail against incumbents, is because these tend to create asymmetrical motivations that encourage them to retreat rather than fight.
Before buying stock, I would think long and hard about how the Blackstone’s of the world might react once Cadre starts to win over their traditional customers, and what happens to Cadre when they do.
A potential source of reassurance for investors in Cadre, could be the belief Cadre is in fact creating a new value network that competes with non-consumption rather than the incumbents, i.e. one that fits Christensen’s second form of disruption: new-market disruptions.
From the sellers’ perspective this argument doesn’t seem to hold true. Cadre is probably not encouraging property managers to sell assets that they previously planned to own, but rather providing a new, more convenient, channel through which to do so.
From the perspective of the real estate investor, the hypothesis is more compelling. Before Cadre, direct investments in real estate were out of reach for all but very high-net-worth investors and large institutions. Therefore, most investors were forced to pay someone else, with the ability to aggregate capital, to do this for them — with all the inconveniences that that entailed. Cadre’s platform created a simple affordable way for these investors to do what they previously weren’t able to — to consume what they previously didn’t.
While this logic seems to perfectly describe the type of disruptions that Christensen termed new-market, the key underlying question we need to ask ourselves is: are these investors really non-consumers of real estate investments? The answer is probably no.
It is important to remember that Cadre currently targets qualified investors — both high-net-worth individuals and institutions — that can afford to invest more than the $100,000 minimum per transaction. While these investors may well not have had access to direct deals before Cadre came around, they certainly had access to a variety of different private and public vehicles through which to channel their real estate investments. In other words, while they were non-consumers of direct real estate investments they were, in all likelihood, consumers of indirect real estate investments.
Christensen’s third litmus test tells us that, to be a disruption, an innovation must be disruptive to all significant incumbents in the industry. That is not the case here: Cadre is a new-market disruption relative to direct real estate investment incumbents or strategies, but it is a sustaining innovation relative to other indirect investment vehicles.
To avoid creating a situation where they are forced to compete head-to-head with Blackstone’s yet-to-be-created digital real estate investment platform, Cadre should target true non-consumption. That is, retail investors who currently don’t have access to direct investments or private vehicles, and represent the least attractive segment for publicly listed funds. These are Cadre’s best customers. And for that, they must remove their current minimum investment requirement. Only then, will they be considered irrelevant by the large incumbents and have a clear runway for sustainable growth.
 Clayton M. Christensen and Michael E. Raynor, The Innovator’s Solution, (Boston, MA: Harvard Business Review Press, 2003)
 Refers to a pricing structure typically used by private equity funds whereby the fund receives 2% of committed capital as a management fee and 20% of profits above a certain hurdle rate in the form of carried interest.