Having been a tech-company CEO, I know how difficult it can be to manage shifts in business model and technology, even if they’re part of a clear and deliberate strategy. So it’s been impressive to watch AlphaFlow CEO Ray Sturm guide his company from P2P/Crowdfunding deal aggregator into a fully automated and managed (“Optimized” in their lingo) Real Estate crowdfunding portfolio, while preserving “do-it-yourself” investment options as well.
Ray graciously agreed to take the time to answer a few questions about his own journey through the crowdfunding ecosystem (both as a two-time founder and as the recipient of equity crowdfunding investments), as well as his perspective on the future of equity and real estate crowdfunding and the role of individual investors in real estate crowdfunding.
YieldTalk: There are now dozens of Reg D crowdfunding platforms for Real Estate investing, how is AlphaFlow different?Ray Sturm: Ultimately, we differentiate from the industry in that (1) our clients get exposure to multiple platforms with one investment, and (2) instead of picking investments themselves, we have created a totally passive investment experience in which we do all of the work to build and manage a diversified portfolio, while giving investors an attractive return with a low fee and minimum investment. As a co-founder of one of the earliest platforms in the industry (RealtyShares), I saw the proliferation of investment platforms first-hand. Some new platforms launched to fill an industry need, while others had similar offerings but saw an enormous industry with room for a lot of players. AlphaFlow was launched to help investors tie this fragmented industry together and easily build a diversified portfolio across multiple platforms. We’re actually one of the biggest customers on a number of platforms, so we’re also helping the industry grow and see them as our partners!
You recently launched a new Optimized Portfolio feature, shifting away from the series of funds you’d begun last year. What were the main reasons for that shift?
Our funds worked well and our clients were generally happy, as with one investment we were able to put them into a portfolio of 75+ loans invested across multiple properties, states, and platforms. We launched AlphaFlow Optimized Portfolios as the next evolution of real estate investing, offering investors all of the benefits of our funds but adding even more benefits for investors. Clients can now invest at any time and auto-reinvest returned principal and/or earnings. We’ve also minimized cash drag, so within a week or so of investing, using our inventory of loans, 100% of our clients’ capital is usually invested across multiple loans. We also continuously optimize client portfolios to keep their capital split across at least 75 loans in at least 15 states for as long as possible by offering investors portfolio rebalancing for the first time in real estate investing.
By aligning ourselves completely with investors and not being forced to think about borrower needs, we’ve built a truly unique model. Large institutions, including family offices, hedge funds, and a university endowment, have noticed and are now investing in real estate loans through AlphaFlow (on terms identical to our accredited investors).
How did your experience founding RealtyShares influence what you’re doing with AlphaFlow?
My experience at RealtyShares was the foundation of launching AlphaFlow, as I believe I was able to see the challenges of both platforms and investors first-hand. Outsiders worried that we’d be seen as competitive, but most platforms we approached were excited to work with us as we solved many of their challenges that might be difficult for any single platform to address. We’ve continued to see our role as a partner to the various platforms and have great relationships with most of the top sites in the space.
Based on your experience raising money through FundersClub, what advice would you give to other founders thinking about using a crowdfunding platform vs. more traditional funding?
FundersClub has been great as an investor to us and Boris Silver in particular has been a tremendous mind to have around the table with us as we think about strategic initiatives. While cash is a commodity, experienced founders will tell you that bringing value-add investors to your company can be transformative, while bringing what Hunter Walk calls 0x Angels into your company can be deadly. For us, we knew the FundersClub team could help us strategize. We also knew exposure to their investment community was synergistic and so it made sense for us. We’ve had a good experience there, as we did with RealtyShares in raising on AngelList, but every founder should always do her own diligence and decide what the best fit is for her own company.
Real Estate investing can be quite intimidating to newcomers, even those with a business background or even some experience in the startup world. What advice would you give someone interested in Real Estate investing to improve their knowledge?
Prudent investing almost always means diversifying (it is a conversation for another day but the exception can be when you have specialized knowledge and are in a control position, you often want concentration instead), so I would start there. Platform blogs can be helpful, but to find truly helpful information you typically want to read what investors are writing and share. Sites like CrowdDD can be helpful.
I’m biased of course to a more passive investment model like AlphaFlow, but if you’d like to actively invest and pick deals yourself, my advice would be to sign up for a few sites but sit back and see how they each present information on each deal and then ask questions to both yourself and to the platform. If two deals look similar but have highly divergent returns (not uncommon in the space), try to understand why. A common mistake I see with investors is failing to discount returns based on risk and assuming everything projecting a 20% return with actually hit that number. Finally, understand each group’s incentives. If there are enough fees built into a deal to make the sponsor money even if they deal fails to perform, I’d be wary (you’d be surprised how often deals like this get funded because of a high headline number).
It’s obviously still early days, but two of the biggest clusters of crowdfunding sites are in Real Estate (which you’re obviously familiar with from RealtyShares and AlphaFlow) and Startup/Angel (which you’ve experienced firsthand via FundersClub). In both categories, I’ve repeatedly heard incumbents dismiss crowdfunding offerings as “not good enough” for the traditional funding sources (VC or sponsor/syndicates, respectively). How would you respond to a wary investor who’s hearing that?
I believe it is a fair concern, but like everything, you have to understand the perspectives and incentives of the people saying so. The question is, “why are these opportunities are being offered on these platforms?” If the platforms are the financier of last resort, with a deal only being shown after traditional institutional players passed, then there are obviously adverse selection problems. If, however, accredited investors simply require a lower return that institutional investors, that creates an opportunity. Delineating that isn’t always clear, which I believe has led to the AlphaFlow in real estate and syndicates on AngelList as investors trade a small amount of return for increased diligence and specialization.
I can imagine more Reg A+ offerings coming to market and I’d like to eventually find a way to offer something similar through AlphaFlow. I’m still seeing fees of 2-3x what AlphaFlow charges with only a fraction of the diversification, which I think is a problem when you’re dealing with less experienced investors.
What’s the most interesting thing you’ve learned from the data passing through AlphaFlow about investors or investment performance?
When we first built our platform and allowed investors to consolidate their accounts around the industry, we also built new tools like a map to plot all of their investments. Many of our clients were shocked to find how heavily they’d concentrated their investments in their own home city or state. While it makes sense to invest where you understand the geography, customers in CA for example realized their own homes and their crowdfunding investments would all take a hit with an earthquake. Many have since diversified to more geographies. It all starts with seeing your entire portfolio though, as you Peter Drucker said, “You can’t manage what you don’t measure.”
How do you evaluate potential platforms that want to participate in AlphaFlow?
We’ve underwritten a number of platforms and today work primarily with five, and are looking to onboard with one or two additional platforms in the coming months, so our bar is high. It’s a combination of track record, sourcing and underwriting process, and corporate stability. In an industry that still lacks standardized data, it’s difficult to have hard rules but our team includes professionals from three of the major platforms (RealtyShares, LendingHome, and Patch of Land) so our industry knowledge helps us to find the best origination partners.
This emerging industry hasn’t yet been through a housing downturn, what do you think will happen when it does?
It’s perhaps cliché to say by now but Warren Buffet’s quote comes to mind: “Only when the tide goes out do you discover who’s been swimming naked.” Some platforms have growth through prudent underwriting and by attracting great borrowers with efficient application and funding processes, while others have simply had a low underwriting bar. In a rising market, it can be tough to see the difference but it will be abundantly clear in a downturn. Personally, we look not only at deals but also at individual markets to see where we should be leaning in and also where things are getting overheated. That’s more challenging if you’re an originator and focused on particular geographies, but easier for us as we can shift dollars from one partner to another.
How much of your customer base is individual investors vs. institutions or family offices?
The majority of our clients – measured both in number and in invested assets – are still individuals and I expect it to stay that way for some time. Institutions are great, but we’re also very interested in partnerships with wealth managers and financial advisors who are managing individual portfolios today and have found AlphaFlow to be a great way to add exposure to real estate loans. Whether the investors come through our platform or via a partner, our focus is on individual investors.
Speaking from experience, recruiting great talent is always top of mind for tech CEOS. What’s the hardest skill for you to hire for right now?
I think if you ask anyone in the tech world, you’ll hear they’d like to hire more engineers! We’re certainly in that camp. While we have prudent investment management at our core, our low-cost service is built on automating tasks typically handled by armies of people at traditional investment firms and that requires stellar engineering talent. If you’re a great engineer looking to help transform the way Americans invest, please reach out!