As states begin to open up and main street slowly comes back to life, real estate investors are evaluating next steps on their current holdings while embarking on new opportunities.

In this episode we chat with Tore Steen the CEO of CrowdStreet, the leading commercial real estate investment platform for individuals seeking access to the asset class.

Tore shares his thoughts on real estate marketplaces as well as CrowdStreet’s story.  We hear about how the company came to be, how they have been impacted by COVID-19 and where they’re headed.

I am your host RJ Lumba, Managing Partner of GrowthCap.  We hope you enjoy the show.

(Hear the full conversation with Tore on iTunes or Listen Notes.)

RJ: Tore, thanks so much for taking the time to chat with us, really excited. Marketplaces and crowd funding has really been an exciting area for many to watch.  Tell us a little bit about CrowdStreet, and as part of that, your background.

Tore: Certainly, and thanks for having me today, RJ. So CrowdStreet is an online marketplace for investing directly into commercial real estate.  We were founded in 2013; we launched our marketplace in April of 2014 so we’re coming up on basically just over six years since launch.  And it allows accredited investors across the United States to come online and to find opportunities across a spectrum of asset classes, everything from multifamily, to office, to industrial storage, retail, hospitality, all different asset types in different geographic regions, mostly secondary markets.

And for the sponsors or developers, it allows them an opportunity to grow their base of investors.  Traditionally their investors have been locally focused and geographically constrained.  But by putting it through an online marketplace, it helps both sides, both the supply and the demand.  The marketplace has grown significantly; we just crossed over a billion dollars of total equity that has been invested through our platform.  And we’ve got now over 50,000 registered accredited investors on the marketplace.

A little bit of background on me, I would say my career has been, I’ll call it a couple of different phases.  The first would be more of a traditional phase, I came out of undergrad in 91 from Notre Dame.  I went into a financial analysis program with a commercial bank.  I did that for a couple of years.  And then as tends to be the process, I went back to business school at that point to get my MBA at Duke.  Following Duke I kind of stayed on that traditional track, I went into management consulting, and did that for three years in the Bay Area from 96 to 99.  Obviously those times in the Bay Area with the boom of the internet, I caught that bug as well.  And so coming out of consulting I went into the internet and software space.

I joined EarthLink in 2001, and was leading business development efforts for that company.  And really that’s where I got my start, I’d say in my next stage which was really in the B2C space, I was running a consumer portal for all the EarthLink subscribers, so all the content, commerce and those types of things.  Then, RJ, I moved back to the West Coast to join a company called Webtrends, at the time they were part of NetIQ, and I helped take that company private with the rest of the executive team.  And then the third phase of my career, after Webtrends, and really doing more restructuring and reengineering type of work, I jumped into the startup world.  I joined a founder here in Portland, Larry Drebes, who had just started a company called Janrain, that was trying to disrupt and transform the online identity management space.  And I was there for six years before meeting my founder, co-founder here, Darren Powderly, and helping to launch CrowdStreet.

It really sounds like you’ve had experiences that built upon each other.  I’m curious, when you were looking at crowd funding and real estate, in particular, did you think this is a bit distinct from what you’ve done in the past given that there’s two sides of the market that you have to build up and understand the nuances of each side and connect the two.  Meanwhile there are competitors popping up at the same time.  Can you tell us a little bit about your thought process and how you developed conviction around this idea?

I think it goes back to even before CrowdStreet, just being immersed into the B2C and the B2B side of the internet and software industry.  I’ve been following kind of crowd funding and, you know, kind of the incarnation of the web kind of transformed.  And I thought, boy, this is going to be hugely disruptive, it’s unlike Web 2.0 or any of the other things.  And if you, you know, as you followed it probably, you know, you had the kind of the reward based and donation based type of things, Kickstarter or GoFundMe.  And those were really interesting and they do great things, but it had not really kind of come to the kind of the equity or the debt markets, if you will.

Then, you know, up comes Lending club and Prosper and players like that to start looking at kind of these alternative investment opportunities, and starting to transform them and open them up.  So when I met Darren, and he had the idea and he was bringing it to me, it just clicked right away because, you know, when you look at an industry like commercial real estate, third largest asset class in our country.  The largest of the alternative asset classes out there.  And how it’s been done for so many years in an analog kind of offline, private, many times, and also only really accessible to either the largest of institutions that have those large equity checks or to kind of the family office or ultra high net worth who could really invest a significant capital.

So when I looked at that industry and saw that and thought, wow, this is ripe for an opportunity to open it up, open up the access.  And also open up the transparency, personally I had invested in a commercial real estate deal in 2006 and it was through a friends and family thing.  And I would say it was not a very transparent process, I didn’t know who the other investors were, I didn’t know if I was getting all the same information that other investors were.  So I had a personal experience of kind of that offline analog private closed way of doing it.  And I also as I talked to the developers and operators of real estate, I also heard about their trials and tribulations and frustration of trying to circle their capital.

And many of them had great country club money that was coming into their deals.  But many of those investors were growing older and they found it hard to replenish those types of investors.  So when I looked at that backdrop and thought, wow, this is an industry, and especially layer onto that, RJ, the significant regulatory changes.  Because until the Jobs Act and specifically title two of the Jobs Act, which allowed kind of the general advertising, it would be still limited to be how you could use the internet to do that.  So with that backdrop and with understanding of really the two sides of that marketplace, and the benefit that it can bring to both of them and then, you know, right at the foundation is obviously leveraging technology.  Because you can’t open something up to hundreds and thousands of investors if you don’t have automation and technology as kind of an underpinning.

It’s interesting, you mentioned something there, the country club aspect.  And typically when there’s a friends and family round, it’s somewhat of a social activity as well.  You’re going to have social proof, who else is investing.  And so when you think about these platforms, how do you transfer that level of trust that you used to get through people you knew personally and interacted with quite frequently. 

How do you transfer that feeling of trust over to the internet and the platform?  And I think we’ve seen examples of where it hasn’t worked, it could be in stock of private companies and certain platforms that have tried it that way.  I talked to a close of friend of mine about real estate platforms and he had fantastic things to say about CrowdStreet.  And I was curious, I asked, “Well, why are they so good?”  And he said, “It’s the quality of the deals.”  So that’s a little bit of a lead in but why do you think you’ve been successful?

Well, and you nailed it right there, RJ, it’s really building trust.  And that’s not an easy thing as we all know, as we look back the last 20/30 years from the dawn of the internet of like how do you build both consumer trust as well as on the business side?  And so that was one of our – and especially when you’re a brand that nobody knows, right, and you’re trying to come into a space and say, you know, “We think we’ve got something that’s really interesting here.”  So it took us, honestly, from when we launched the marketplace, it took us about over two years to really get enough on the supply side, I call it, you know, the sponsors, the real estate developers and operators.

Because as Darren and I looked at it we said, “Look, it doesn’t matter if we go out and try and convince a whole bunch of accredited investors to come to our marketplace.”  Because it might be easier to get some of them because they haven’t had access, it’s going to be harder to convince the supply side here, to your point, the real estate developers and operators who traditionally know their investors on a first name basis.  They’re in the same social circles, they see them at the grocery store, they see them on the golf course, wherever.  And to say, “Look, that’s great, keep those relationships, but also recognize that, you know, when they would want to get to new investors, it was mostly through referrals.  It was mostly through their existing connections introducing them to new investors, and we know that that does not scale.

And really most of these developers had not done any online advertising, they were fearful of it in many ways because again, they wouldn’t know who those investors are.  So really we realized that unless we could convince the developers and operators, and really the ones that we, to your point, RJ, the higher quality sponsors and developers who don’t necessarily need the capital.  They are intrigued and they look at this as an innovation of their platform, right.  They are many times innovators in what they do in real estate.

And they recognize that to evolve as a company they need to look at other channels of raising capital and using technology.  So that was kind of in our favor is that many of these sponsors recognized that they needed to change, and it wasn’t going to happen overnight for them.  But they needed to start testing new mediums for the growing their investor base.  And so, again, it took about two years, until we had a significant enough supply, and it really just took a lot of hard work of going out, leveraging our connections that we had in the market, Ian Formigle, our Chief Investment Officer had significant connections because he and Darren had both been in the CRE space for over 15 years each.

And so, getting just one or two every couple of months to come on the marketplace, suddenly you get some brand recognition.  And then other developers say, “Wow, if it’s okay for that company to try this out, maybe I should give it a look.  And maybe CrowdStreet’s really doing it in the way that’s going to be right for me.”  And that again was another thing, our business model tended to be play very well with the sponsors that we were going after.  We weren’t, you know, crowd funding could be kind of a negative term for them, RJ.

And so really what we were talking about was online syndication, because we weren’t trying to change the way, they were still doing the same deal.  They were still putting it in an LLC.  They were still raising LP money.  And we said, “Look, great, use the same PPM, the same subscription documents, the same operating agreement, we’re just going to digitize everything for you and we’re going to help you come online.  And then we’re going to make it really easy for you to raise this capital without having to pick up the phone, without having to have a kind of personal relationship with those investors.”

So does it work as a SaaS product?  I mean, I noticed that CrowdStreet isn’t necessarily a broker dealer or a crowd funding platform.  Does it work really on behalf of the sponsor or developer?

Correct, yeah, you’re exactly right.  So, you know, when you look at an operating page it’s all of the sponsor’s content, it’s all of their documents, it’s all of their details about the deal.  Any, you know, emails that we send out is kind of on behalf of the sponsor.  So, you know, we don’t have a sales team – investor sales team.  We have a customer services team, but we don’t really, it’s really the sponsors deal, they are the issuer, they are the offer, it’s their LLC, it’s their investment entity that the investors are going into.

We really look at it as what we’re helping them with is we’re providing, to your point, kind of like a SaaS, we’re providing the technology.  But we are also providing the kind of services and the marketing capability, because if you think of our value proposition to them, a big part of it is that we’re going out, and I’ve got a great marketing team here that knows how to attract consumers, the investors to come to CrowdStreet to learn about commercial real estate investing.  We spend a significant amount of time and resources on the content marketing side of things.

And so we are basically doing that work on behalf of the sponsors to educate investors about CRE.  And then basically to provide that great platform and the ease of use that comes with an online marketplace to allow those investors to look at deals side by side, everything is kind of in the same format.  And it really allows that kind of full transparency for investors.  And ultimately it’s the investor then that’s investing directly into that deal.

And did you find that, I guess in the early days, when you were discussing your revenue model that clearly it would be a recurring subscription that will be better than a success based revenue model?

Yeah, we were able to actually – it was challenging in the beginning, because it’s easy to fall back, RJ, on the more traditional way and say, “Well, this is how a broker dealer has done it, they charge 4%,” or pick your percentage on a capital that’s raised.  And then that model, the broker dealer kind of owns the investors, they control the investors.  And the sponsor never meets those investors because the broker dealer shows up with that single check, if you will.  And so that would have been, and quite honestly we looked at it in late 2014, some of the other platforms that we’re springing up were creating kind of that SPV model, for every deal they were pooling the investors.

And I actually quite honestly, it rubbed me the wrong way because it felt like it was simply taking what’s been done in an offline world and putting it online and cutting the cost in half, right, because they platforms were basically doing that same thing.  And I said, “Look, if we’re truly trying to disrupt and disintermediate kind of the middle people in this, doing it that way is not going to do it.”  And so we had to come up with a pricing model that was more akin to a SaaS, it was not perfectly like a SaaS, but more like a SaaS, that also does have kind of like a SaaS.

But the more usage you get, the more money you pay.  So it’s kind of on a, you know, you have a per license or a per-seat, in this case the per-seat is per investor room, it’s created.  So the more investors the higher the fee, but the lower the effective rate, just like a SaaS model would.  So it did take us time to kind of transform our model to kind of get there.  But also, again, like any pricing, the sponsors have to see that it’s equitable and that there’s value in it.  And it also has to be value to CrowdStreet.

And there’s at least two others, I mean there’s more that are in the real estate market, some are maybe more broadly across real estate, others also focused on commercial.  But are there material difference between CrowdStreet and some of the other folks out there like Cadre or Fundrise?

Yeah, you actually named the two I would have chose too.  And I think as any market starts to evolve we all know there’s kind of winners and there’s ones that don’t make it, as markets flush out.  Now that we’re really about six years into online marketplaces for commercial real estate, I’d say there’s really kind of three swim lanes, and you named two of the players that I think are leaders in kind of the other swim lanes.  In one swim lane, I’d definitely put Fundrise, who’s a leader in there, where they’ve kind of gone the way of creating these eREITs.  And again, they started with that more SPV model anyway, so it was a nice evolution for the middle runners and for Fundrise to move that direction to kind of creating an eREIT, they were able to kind of do a Reg A offering.  And then they were able to make it available to non-accredited.  So, many investors that have tried to dip their toe in and maybe non-accredited especially, can invest as little as $1,000.  But rather than going directly into a deal, they’re going into a pooled REIT, non-traded REIT structure.

I’d say on the other end of the spectrum is somebody like a Cadre, who might be coming after more of the private equity or institutional capital part of the marketplace and to try to disrupt.  They are issuing the term sheet, they’re kind of trying to take away kind of that institutional check.  And I think our swim lane is kind of in that middle, where, again, it’s many great sponsors that, you know, raising 5-15 million, sometimes upwards of 20 million of equity on their deal that could be a 50-80 million total project cap.  And they usually pool that capital through their own high net worth investors as well as sometimes some family office money.  And then when their deals get big enough they, you know, when it’s 25 million check they many times do tap an institutional or capital provider.  But they do like the fact that, you know, this model would give them more control over their assets, and probably is a better split on the upside.

Real estate is one of these asset classes that almost everyone invests in, in some way, shape or form.  A lot of the family offices and ultra high net worths that are in our audience, play the sector in different ways.  And I know obviously one thing that’s top of mind for everyone is how Covid-19 is impacting the market.  And you have some great videos on your website and updates from thought leaders.  I was curious if you’ve seen a change in activity through your platform because of the pandemic?

Yeah, I think – well, I think the Covid pandemic obviously is hitting all industries.  I really don’t think there’s any place to hide and that we’ll be impacted.  What we saw, just to give you a feel, right away, you know, kind of the latter part of March, kind of when things really came out, you know, right away we had to in our production pipeline really stop the deals.  And they had to get reevaluated, some of them fell out, some of the sponsors were not going to move forward on those deals.  Some of the deals that were in our pipeline, RJ, you know, that hadn’t gone to production yet had to go through kind of rescreening and re-vetting.

And many, again, many of the sponsors were going to reevaluate those deals for really a post Covid, they had to kind of re-underwrite them themselves for a post Covid kind of environment, which is hard to imagine, and especially when you’re at late March.  So right away we saw for about three weeks there, you know, we kind of halted production, if you will, of putting new deals up.  While our investments team and our productions team, and our capital markets team were spending tireless days and nights working with sponsors to see, do any of those deals still make sense, if you will, to come to the marketplace?  Since then we’ve been putting deals on the marketplace but it’s been at a fraction of what the release cycles were before this.

And we knew this, actually we had done some recession planning about a year and a half ago as we knew that, you know, CRE is a cyclical market and our economy is cyclical.  And we knew that we were 10 years from, you know, from the last trough, if you will, right, in the recession.  So everybody was talking about, you know, “When is it going to happen?”  And none of us expected that this is how it was going to happen obviously.  But we’d already planned for kind of what was going to happen in a recession.  And we knew right away, hey, production’s going to come down significantly, at least in the near term.  And then the higher scrutiny level is going to happen over the deals that will make it to the marketplace.  So we’re actually seeing our very first distressed deal that could be coming to the marketplace here shortly.  I expect that in Q3, Q4 we’ll see more distressed deal opportunities as things flush out.

But what’s interesting is when we looked at the 70 day period pre Covid, and now the 70 days after, if you look at the pre Covid we had about 200 million dollars of investor demand across 30 different offerings.  And in the 70 days after the pandemic we’ve seen roughly 100 million in investor demand, but it’s across 10 offerings.  So you’ve seen we’ve brought the supply down, but the demand, investors are still there.  Investors are still recognizing, many of them obviously have dry powder or they also had capital that they wanted to invest.

And we’re seeing a lot of new investors come into the marketplace.  And I think part of it is they look at the major, you know, stock market decline that happened in March and they recognize that they can’t be totally overweighted in the public markets.  So we think it’s going to be a tough year obviously, there are, you know, again, we’ve reduced that supply significantly.  It will be very select deals that have to make sense in this Covid environment, in a post Covid environment that come to the marketplace.  But the investor demand is still there for those types of deals.

And are these investors largely individuals, what does your typical investor looks like?

Yeah, I mean when we started, RJ, our typical investor in our first few years, I’ll call the early adopter, was a qualified purchaser in kind of the 10-20 million net worth range.  And they were the ones who traditionally had been invited through their local markets to invest with developers.  And they used to have to put 100 or 250k checks down.  And they were a great audience for us to get started, back to your earlier question about the quality bar.  We had to keep the quality of the sponsors high because we knew the types of discerning investors we had on the other end.

But they’d already been invited to the party, if you will.  And so over time though, our investor base has grown.  We’ve got now a significant amount of investors at what I call more the retail accredited level, the 1-10 million net worth level.  And we also have quite a few investors that are over kind of the 30-50 million net worth range, so we’re really across the spectrum.  We had to make it easier for some of the kind of retail accredited.  So we launched a family of funds to allow those investors to invest.  And we also offered, and we created our own registered investment advisor, our own RIA, called CrowdStreet Advisors.  And we actually created what’s called a private managed account where those investors can actually have a client services person.  We can do a custom portfolio based on what their needs are.  So it’s almost like a little CRE portfolio specifically for those clients, because those are the types that are used to using just advisors to help them do everything.

I saw one of the examples of a sponsor who’s able to raise, I think around 25 million in a few hours, or maybe less than that.  How does it happen so quickly?  Is it that your system is able to disseminate the information about a deal instantaneously or is it combined with a calling effort to your investors?  How do you, you know, how do you ensure that you can kind of reach and engage with investors in such a short period of time?

Yeah, what we do, RJ, is when a new deal does launch on the marketplace and everything there is at their fingertips, you know, they’ve got all the documents, they’ve got tables and sources and uses and proformas and things like that.  So there’s a standard email template that goes out, you know, to all the investors, thousands of investors on the marketplace, just informing them of the new deal and here are the highlights, and they can go read more.

We have between three to five days until the actual webinar with the sponsor.  So investors at that point cannot actually invest in the deal.  And I think it’s the right thing to do, you want to let people have a chance to review all the information.  They can even ask questions, we have a Q&A function so that they can ask questions, and sponsors throughout the online platform can address those questions.  And they can actually even indicate interest, and while it’s not holding a place for them, they can say, “Keep me abreast or if there’s any updates I want to know.”

But when we hold the webinar, at that three to five day mark, that is when the offer window opens for people to submit their offers.  And so that gives people plenty of time to review the offer and to ask questions.  And then even on the webinar, right, they have a chance to open up and ask questions of the sponsor about the deal, but that’s really the process.  And so what that allows us to do is, again, we’re not having to make call-downs to investors.  It’s really investors coming on their behalf and saying, “I’m interested in this deal, I do want to attend the webinar.

And they know when the offer window is opening and so obviously for a deal that with a great sponsor, when you’ve got this distribution of investors, thousands of investors across the country, it does show the power of the online channel.  Because you can raise 25 million dollars in a matter of a couple of hours from 400 investors when your investors are in 50 different states.

Are your investors still mostly individuals or are some, I can foresee kind of a time where you have institutional investors that are dabbling in buying smaller stakes and diversifying more.  Do you see some institutional or institutionally minded investors?

We’re starting to see that movement, RJ, actually.  But traditionally it’s still the individual investor, our minimum investment size on the marketplace is $25,000, but our average investment size is closer to $50,000.  So you’ll see many investors putting in 50, 75,000, sometimes 250, sometimes $500,000 checks onto certain deals.  And we are starting to see, we’ve had some RIA, some wealth managers actually starting to use the platform on behalf of their client.  Because they have the ability to create one account and then they can manage the investing entities for their clients, because they’ve got the limited power of attorney to do that.

They can actually invest directly into those deals on behalf of their clients.  Or they can actually invite their clients into the account at that point.  And if their clients want to invest they can do it that way.  So we’re starting to see a move now from that direct to consumer, which is the right way to start, starting to see more channel opportunities open up with wealth advisors, larger institutions that are interested in this, that could put capital to work.  But we’re going to be always mindful, we’ve actually created a global allocation policy because one of the things I won’t do is kind of push out the individual investor, right.

We’ve seen too many platforms that go the way of, hey, now I’m just actually here for the institution to invest in deals, and kind of that individual investor gets squeezed out.  And so that would fly in the face of our marketplace.  But we do recognize that there are bigger checks out there, there’s bigger investors out there that now are very intrigued at what we’re doing.  And so we’re going to be mindful of not letting them just take the entire deal down because then we might as well just be a private equity firm that’s doing it, right?

I think it’s been the Holy Grail that, if you can tap into the financial advisor universe and simply have a button on their platform then you would open up the floodgates to even more investors.  And presumably, it sounds like there’s no extra fees, because that was typically the obstacle before was fees on fees.  But you’re not charging any fees to investors, so it seems like you’ve really mitigated the friction from those channels to open up.

You’re exactly right, we, because of our business model, have made it so we can be cooperative, if you will.  And actually we look at it for those advisors as a way to, you know again, it’s almost like 2014 when we were going out trying to convince the sponsors to do this.  Even I know that the wealth management industry doesn’t move on a dime either.  And so they have a fiduciary responsibility to their clients and they have to be, rightfully so, they have to be careful and compliant with how they offer alternative investments to clients.

But we do envision a time, in the foreseeable future where more wealth managers will be able to make this an option available to their clients.  And again, it’s going to take, you know, we’re talking to different technology platforms that they use that we could integrate to, to make it easier from a reporting perspective.  We’re talking to some compliance firms that might be able to give us a seal of approval, so it makes it easier for those advisors to leverage us.  And I think one of the things that’s a clear movement is, you know, a couple of years ago, Motley Fool came to us and said, “We’re looking at offering a commercial real estate investment platform, that’s in a sub brand of Motley Fool’s called Mogul.  And we’re evaluating different platforms.”

We were luckily the partner of choice and that’s been over a year since they launched that.  But I think that’s an indicator of when you find an established player, and I think a Motley Fool is a perfect example, because they’ve been in the online investing space.  So they’re already light years ahead in terms of what they’ve done for investing and stocks and bonds and things like that.  And for them to then take that next step and say, you know, “Alternatives and CRE is the next big thing,” is a leading indicator, if you will.

Well, I know we’re running short on time here, but did want to ask you, given you’ve been in the industry, the tech industry and also crossed financial services and consulting.  So you’ve seen a lot.  So maybe as we wrap this up, what do you think that some of your keys to success have been throughout your career and, in particular, with building an organization?

Yeah, I think I’d have to put it on two big things.  And I think the first one is specifically to a startup environment and growing a business and kind of where you’re trying to transform an industry.  So I think the first one was my ability to kind of prioritize and execute on the strategic opportunities.  And what I mean by that is the ability to quickly analyze opportunities in front of you, and then determine which ones you should tackle at the appropriate time.

Because I always like to say, here at CrowdStreet, I mean we didn’t have an issue and have never had an issue of kind of not enough ideas, not enough opportunities.  You and I just talked about the wealth management channel, that’s a good example of back in 2014 we could have made the strategic decision to say, “Look, the easiest way is to go get investors is going to go work with wealth advisors.”  Well, that wouldn’t have worked, they would not have wanted to come around to this until we were able to prove it by the direct to investor.

So I like to call it the virtual bookshelf, we have tons of great ideas, I help the team kind of analyze those strategic opportunities and say, “Hey, this is a great idea, it’s just not right, right now, let’s put it on the virtual bookshelf, let’s take it off.”  And we have ideas; we’ve launched things in the last two years that we had conceived of four or five years ago.  I’d say the second kind of key attribute that I’ve been able to display, and it’s really critical with a startup and growing rapidly is the ability to build teams.

And one of the things I love doing is trying to figure out what are the right skills that I need on the leadership team and then across organization as well, at the right time?  So just like those opportunities, trying to match the team that we need to build with the opportunities, as well as an eye to the future of what future skill sets do we need, find that talent and then provide a framework for them to succeed.  So I’d say those are probably my two if I look back over the last few years, probably the two key attributes.

Well, Tore, you’ve been very generous with your time, again, really appreciate you sharing your insights with us and telling us a little bit more about CrowdStreet.

Well, it’s great to join you there, RJ, thanks for having me.

Thank you.