YieldTalk news and links - 30 July 2022

Notable Offerings

Selected investment offerings from around the investment crowdfunding ecosystem.

• 93 Bennington Street (Sora Revere) . Shovel-ready and 100% market rate, 114-unit transit-oriented apartment development only 15 minutes from Downtown Boston and a 10-minute walk to Revere Beach. Minimum investment is $50,000. Open only to accredited investors. Find out more at RealCrowd  👈
• Domaine de la Romanée-Conti Horizontal Collection. The name Domaine de la Romanée-Conti may be the most well-known in the world. Known by most simply as “DRC” and those in Burgundy as “The Domaine,” the wines produced under the DRC label are some of the most in-demand and expensive wines on the planet. Only working with fruit from Grand Cru vineyards, the caliber of wine is nearly unmatched in the world of wine. Minimum investment is $100. Open to all investors. Find out more at Vint  👈
• Penfolds Grange Vertical Collection. “Australia’s most famous fine wine” is how Jancis Robinson describes Penfolds Grange in her world-renowned wine resource, The Oxford Companion to Wine. First produced in secrecy in a shed in the Barossa Valley, Grange has become a global icon, and the benchmark for the quality Australian winemaking can achieve. Celebrating the 70th anniversary of the first release of this legendary wine in 1952, we are thrilled to offer a thirteen vintage vertical of the most important contemporary releases* of Penfolds Grange. Minimum investment is $50. Open to all investors. Find out more at Vint  👈
• Creative Homies. A Black-owned creative hub built for BIPOC creatives, in downtown Portland. Cyrus Coleman and Adewale Agboola (pronounced “WAH-Lay”) have purchased the historic Enterprise Building originally constructed in 1905. The 20,000 square foot building is three floors with a full basement and is located at 433 NW 4th Avenue, Portland, Oregon. Cyrus and Adewale plan to repurpose it as a creative hub dedicated to the BIPOC (Black and Indigenous People Of Color) community in Portland and are calling it the Creative Homies Enterprise Building (the “Building”). Minimum investment is $500. Open to all investors. Find out more at Small Change  👈
• Tribevest. Tribevest is a collaborative, group investing platform that enables friends and family to organize as an investor group, pool money, and manage joint investments. Prior to Tribevest, group investing was difficult with a variety of tools, time and research to get started. Minimum investment is $100. Open to all investors. Find out more at Wefunder  👈

Worth Reading this Week

A roundup of insights and interesting links from around the investment crowdfunding ecosystem.

The data is from Europe, but this recent survey on attitudes about alternative investments suggests demand will continue growing despite (or arguably because of) current economic headwinds and inflationary pressure:

The results of this survey showed a positive outlook for Alternative assets over the next 12 months with 53% stating that their appetite for alternative assets will increase over the next 12 months whilst only 6.4% said they would decrease (46% net growth). The research went on to identify three key reasons for this growth; firstly, due to the current rate of inflation (62%, secondly due to an increasing need to diversify existing portfolios (62%) and finally because of the attractive higher potential returns (53%).

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Perhaps the writer who lost $135K in various crypto schemes (see the Crypto section below) could have saved some pain if they’d read this (excellent) primer on spotting bullshit in investment offerings:

Bad actors’ tactics are sophisticated and rooted in psychology. They dangle the prospect of wealth and riches (“phantom fixation”). They launder credibility: legitimization via the backing of authoritative figures. They use social consensus and group psychology to normalize ideas and narratives and pressure people to stop asking questions. They use scarcity or immediacy as a pressure tool (you’re about to miss the big returns; the fund is about to close; ngmi). These are just a few of the techniques uncovered by the Consumer Fraud Research Group undercover investigation of sales transcripts.[1] The FINRA Investor Education Foundation promotes basic diligence hygiene: learn to recognize red flags, know which questions to ask, and independently verify answers.

Real Estate

I love it when writers go beyond knee-jerk reactions to headlines and take the time to put current events in the context of history, especially when it comes to major shifts in technology or finance. Ben Carlson looks at the recent remote-work-driven housing market changes in the context of prior “mass migration” events (did you know that about 100 years ago more 5% of the entire US population up and moved to Florida in the span of less than 3 years?!):

“We show that the shift to remote work explains over one half of the 23.8 percent national house price increase over this period. This cross-sectional estimate combined with the aggregate shift to remote work implies that remote work raised aggregate U.S. house prices by 15.1 percent.”

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The standard “real estate cycle” is understood in four distinct (and sequential) phases: expansion, hyper-supply, recession, and finally recovery. What we’re experiencing right now doesn’t quite fit that pattern because despite signals a recession is coming, there’s been no sign of hyper-supply (quite the opposite), with no clear answer as to what’s next:

“In the typical narrative the “hyper supply” is because construction companies over-build, and there becomes a glut of housing units,” [economist Todd] Metcalf said. “This occurred during the housing bubble preceding the Great Recession. However, at the national level we still see a severe housing shortage.”

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That dearth of supply in the housing market means it’s been a good time to be a house flipper, with research from property data firm Attom showing 1 in 10 homes sold in the past 12 months were fix-and-flips, the highest proportion since at least 2000:

The median price for pre-flip homes reached an all-time high of $327,000, up more than 30% from the same period the year before. Post-flip home prices aren’t increasing as quickly, causing gross profits (the difference in before and after sale prices) to shrink from $70,000 in 2021 to $67,000 in 2022.

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EquityMultiple has published a handy infographic summarizing the characteristics and return rates of various alternative investments. It’s not particularly comprehensive (and is understandably focused on real estate related investments) but interesting nonetheless.

EquityMultiple’s Guide to Alternative Investments is organized across a volatility spectrum, with less volatile investments at the top, and more volatile investments at the bottom. Among other considerations, we’ve also included the level of liquidity, and whether we think the investment serves as an inflation hedge and/or portfolio diversifier.

Startups/Venture

SaaS has become the dominant business model in enterprise software, and is far more prominent than it was during the last two recessions. SaaStr’s Jason Lemkin argues that despite some turbulence (especially in the SMB market), history suggests most SaaS companies will be able to weather current economic headwinds:

The amount of folks buying SaaS software is a force like we’ve never seen before, and even with some stock market drama, many top SaaS companies still trade at $4B, $10B, $20B or more just a decade after being founded.

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This interview with CrowdCheck’s Sara Hanks (one of the most experienced attorneys working on Reg A+ filings) covers a lot of territory, including the two biggest problems with early issuers and how despite improvements in the quality and quantity of companies using Reg A+, she still sees worrisome potential for fraud and scams in some corners of the market:

There are bad actors out there using Reg A for various scams and schemes. I’ve blogged about a couple of the patterns I’ve seen and it’s still happening. I’d suggest that investors be very careful about Tier 1 offerings made by companies whose shares are already traded on OTC Markets. At some point, one of these scams is going to end up tainting the entire market.

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Crunchbase reports that it’s two steps forward, one step back for black founders amid the current cooling in venture funding after five quarters of historic levels (albeit on a tiny base to start from):

Although funding to Black startup founders in the U.S. has always been disproportionately tiny—at single-digit percentages—last year set a record in terms of dollars invested in those companies, Crunchbase data shows. Quarterly funding in the five quarters before this was much higher, ranging between $850 million and $1.2 billion, according to Crunchbase’s Diversity Spotlight data.

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In a column on TechCrunch, VC Marc Schröder makes the case that the current pullback in venture funding will present very attractive opportunities for investors willing to move ahead:

There are many very high-quality teams out there with strong balance sheets and plenty of runway building potentially world-changing products. If this downturn remains protracted for years, these companies have enough cash on hand to survive, as well as products they will be able to sell to large enterprises, even through recession-like scenarios. As investors pull back from the market, these companies will suffer valuation declines and present once-in-a-lifetime buying opportunities for venture capitalists with the resolve to invest in them.

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We’ve talked here before about the important distinction between investment platforms that take a curatorial approach to selecting which offerings to present to investors and those that adopt more of a marketplace approach of “letting the crowd decide”. The latter approach means more volume (and therefore wider selection for investors), but it predictably means looser standards when it comes to issuer quality, as demonstrated by FINRA’s recent fines issued to both Wefunder and StartEngine:

For example, one issuer, whose product was a home robot, exaggerated the robot’s level of functionality in a demonstration video posted on the StartEngine website. The video depicted the robot independently performing tasks such as waking sleeping family members, teaching a child piano and art, projecting a recipe onto a cutting board, patrolling a home for intruders, adjusting a thermostat and playing peek-a-boo with a child. During the offering, StartEngine received information that caused it to know or had reason to know that these claims were exaggerated and misleading, but it failed to correct them. Although a disclaimer on the offering page noted that the robot was a work-in-progress, it was insufficient to remediate the misleading content.

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We’ve seen startup-focused platforms like Republic branch out into offering real estate, and now real estate investment platform Fundrise is launching what they’re calling the “Fundrise Innovation Fund” to invest in startups:

The Fund intends to invest in a diversified portfolio of private high-growth technology companies, with an initial focus on several sectors that we believe have exceptional macro tailwinds.

Crypto/web3

Crypto’s crash is causing collateral damage in some interesting places, like this tenant who lost half of their security deposit:

A Reddit poster asking for legal advice reported that when they moved out of their apartment, they received only $1600 of the $3000 they provided to their landlord as an initial security deposit. When they asked what happened to the rest of the money, the landlord explained that they had put the money into a “money market account” that had lost value, then admitted they’d invested it into Bitcoin.

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Even if you have never (and never intend to) put any money into a cryptocurrency, you should read this reasoned reflection from someone who did – and lost all $135K of it – for its lessons on risk and research:

I used to think gambling meant hitting the slots in Vegas. I spent nearly a year in Vegas on a consulting project and never gambled once. But as it turns out, I am a gambler because gambling is putting money into anything without DYOR (doing your own research).

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Noted VC Albert Wegner (of Union Square Ventures) makes the case that web3’s “permissionless data” model is an innovation on par with the “permissionless publishing” Web 1.0 brought us (and that just as with the wider web, there are real downsides despite the positives):

It is difficult to overstate how big an innovation this is. We went from not being able to do something at all to having a first working version. Again to be clear, I am not saying this will solve all problems. Of course it won’t. And it will even create new problems of its own. Still, permissionless data was a crucial missing piece – its absence resulted in a vast power concentration. As such Web3 can, if properly developed and with the right kind of regulation, provide a meaningful shift in power back to individuals and communities.