Recently, the Harvard Business Review came out with an intriguing commentary entitled "The Unique Value of Crowdfunding Is Not Money -- It's Community." In it, Ethan Molick -- an associate professor at the Wharton School -- states that crowdfunding platforms transform "the opaque and oligarchical market for early-stage fundraising into a more democratic, open one. Rather than relying on venture capitalists and marketers to try to project nascent demand for new innovations, creators can directly reach out to customers and communities to refine ideas and gauge interest."
In less academic language, he's talking about transparency and a "bottom up," rather than "top down" approach to types of economic decision making -- especially in terms of the kinds of companies or projects the public wants to bring to market, or, in the case of Real Estate Crowdfunding (RECF), the types of neighborhoods, cities, buildings and businesses that are ripe for investment.
Molick goes on to cite an early study of his, on the outcomes of crowdfunded campaigns. The research was done when the kind of equity financing offered by Patch of Land and many others in the RECF space was still a newer facet for "peer investment," in the wake of Title III's various innovations and regulatory changes. His study focused more on what we might call "first gen" crowdfunding, done through platforms like Kickstarter and IndieGoGo, and used for project launches in the arts, entertainment, manufacturing, etc.
Still, much of what he gleans is applicable to the relationships we've seen fostered between developers and borrowers, seeking to innovate and renovate in both residential and commercial properties, and the investors who buy into their projects.
Successful campaigns, Molick's earlier study notes, "provided benefits in building customer communities, learning about markets, and publicity. Many also were able to leverage their campaigns to raise additional outside funds."
The metrics for RECF are similar. As the MpactWealth website noted about its benefits, "real estate crowdfunding also allows investors to gain confidence in a project through easily accessible research and project validation."
This goes back to Molick's contention that crowdfunding serves to meet the specific demands and build support communities, but it also speaks to the transparency that allows investors to perform proper due diligence and evaluation.
In an article out of Dartmouth's Tuck School of Business, which also charted unique qualities of real estate crowdfunding models, the authors called such openness "a great boon and a healthy step," for the normally opaque real estate industry. They also hoped such trends would continue, eventually including fee structures and investment results in a standardized way so investors could eventually make apples-to-apples comparisons.
According to Molick, those kinds of apples, and a trend towards evolving openness comes from the pressure of community support and one of the key benefits of the crowd -- working toward its collective self interest. Molick says this imparts "a sense of obligation in project creators as well," resulting in a high percentage of delivered projects and products on crowdfunding platforms, with creators going through extraordinary efforts including spending their own money, to fulfill promises to their backers. Transparency, then, yields benefits at both ends of the investor/invested equation, since everyone can see everyone else come through for the crowd.
By way of example, he mentions the recent funding for the Virtual Reality company Oculus Rift, pursuing VR technology -- now poised to make breakthroughs on and offline -- that had been ignored by traditional media companies and VC funders.
Real Estate Crowdfunding has analogous stories, starting with the neglected Chicago neighborhoods, now revivifying, that were among Patch of Land's original focus, along with projects in cities, like Sacramento or Cleveland, that weren't deemed officially "hot" yet, but where there was intent to rebuild and reinvest.
Other RE Crowdfunding platforms have similar stories. Realty Mogul has done it with off the beaten track properties, both commercial and residential, in places like Bakersfield, California, and throughout Indiana. More site-specific platforms, like Small Change, is seeking to make a tangible difference in Pittsburgh and environs, by not only crowdfunding the rehabbing of commercial properties, but also launching its "tiny house" initiative, to actually finance the building of small unit, affordable housing on currently empty lots.
Molick also notes that crowdfunding platforms can spark business innovation, which he calls a move "from an expert-centered process to a platform approach (which) increases diversity," something echoed in NextCity's write-up on Small Change's Pittsburgh efforts: "Banks, for any number of reasons, still aren't willing to finance projects in neighborhoods like Garfield."
They cite loan-to-value constraints, and demographics, among those reasons. But Molick contends it was the projects, and the crowd -- not the self-described "experts" -- who ultimately produced a higher percentage of critical and commercial hits."This suggests," he says "that platform-based allocation of resources can supplement more traditional expert-based decision making."
Not only supplement, but in some cases -- especially the RECF collective -- take the blinders off altogether for the benefit of both the investing crowd and the greater community around them.