ULI New York Blog

Real Estate Crowdfunding: The Currency of Social Capital

Today, entrepreneurs can crowdfund practically anything.  From agriculture and design to the arts and technology, crowdfunding and its success stories have been all over the internet.  Recently, real estate has become an adopter of the online world of crowdfunding.  With its origins deeply rooted in both crowdsourcing and syndication, real estate crowdfunding is a popular tool to generate large sums of capital.  Additionally, with the popularity of social web based fundraising, real estate crowdfunding has become a viable tool for investment seekers.

While most research has focused on the overall broad strokes of crowdfunding, little is known regarding the social science of crowdfunding and its “currency” in social capital.  This report is aimed at opening a discussion regarding the sociology of real estate crowdfunding and its impact on the real estate community.

Similar to crowdfunding, within real estate crowdfunding, there is a strong correlation between a project and its social ties.  The strongest ties usually come from immediate relationships, i.e. friends and family.  While friends and family is a broad term, many early stage investors have either a relationship and/or “trust” the founder of the project.   According to a Cambridge University study, 31 percent of startups’ capital is provided by friends and family.  Furthermore, a study of entrepreneurs by Michigan University stated that the lion’s share of initial (startup) capital comes from individual savings, friends and family. While this connection facilitates immediate access to both capital and information, the early investment participation may also signify confidence in the project, facilitating future involvement by outside backers via social influence.

The involvement of both social ties and social influence can positively or negatively affect the outcome of a real estate crowdfunding project.  Within the complex real estate relationship structure between, owner(s), operator(s), and investor(s), the social science behind why investors back a project can be linked to the Reinforcement Theory.  Subconsciously, within the context of real estate, the Reinforcement Theory asses why people invest in already funded projects. While in a traditional sense, multiple investors backing a real estate project, typically does lower the risk of an investment, the underlying hypothesis is that projects are more “fundable” if there is an established community backing a project.

The social science of real estate crowdfunding is further heightened with the addition of online social networking.  The success of reaching a projects target fund is further strengthened when projects have established a strong base via friends and family, in conjunction with investment from backers within a platforms community.

While Fundrise, a leading real estate crowdfunding startup platform, hasn’t released metrics regarding target funding success rates, since 2012, they have generated nearly 163 networks, $24.5M projects under management, and 18 endorsements. Furthermore, should a project receive significant amount of social support, it can help motivate future backers to also support the project, based on Kickstarter statistics.  According to Kickstarter, nearly 80 percent of projects that raised more than 20 percent of their goal were successfully funded.

The most undervalued yet compelling element of real estate crowdfunding’s popularity is its transparency.  Transparency builds and empowers trust amongst a community.  In the age of information, the elements of social media within crowdfunding platforms makes crowdfunding transparent, which may help explain investor behavior.

Many crowdfunding platforms showcase a list of backers and information regarding user’s contribution to a project.  Within the realm of crowdfunding, transparency helps explain and reinforce the attitude of a project based on the involvement of the community, further validating social currency within a community.

While online real estate crowdfunding is relatively new, the social aspect of crowdfunding can be applied across all parameters of crowdfunding.  Similar to other crowdfunding platforms, real estate crowdfunding may help attract “angel” investors within the realm of real estate, which may facilitate a new breed of real estate entrepreneurs and investors.  Though in its infancy, real estate crowdfunding has to manage demand, scale, and return on investment in order for real estate crowdfunding to be viewed as a success in the macro real estate community.

Sources:
Ghose, A., S. Han. 2011. “An Empirical Analysis of User Content Generation and Usage Behavior on the Mobile Internet
Moisseyev, A. 2013. “Effect of Social Media on Crowdfunding Project Results”
Fundrise. (December 2013). Fundrise: A Social Network for Investment
Kickstarter. (December 2013). Kickstarter Stats

 

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