On May 2016, Regulation Crowdfunding took effect and enabled companies to offer and sell securities to raise capital from the common investor. This type of crowdfunding is an evolving method where more ordinary investors (say even family and friends) can invest in and provide capital to issuers, particularly startups and small businesses.
While crowdfunding is still rather distant from overall VC funding on a global and national scale, the disruptive capital alternative does appear to be gaining ground in popularity, especially as it relates to angel-stage funding, both globally and nationally. CrowdExpert.com projects 75-100% growth in U.S. equity crowdfunding volume in 2016, reaching approximately $3.5 to $4 billion. The World Bank estimated global crowdfunding would reach $90 billion by 2020, though at the current rate we may see $90 billion by 2017.
Now, there have been a number of documented pros and cons associated with Regulation Crowdfunding, but our goal is not to provide opinion or advisory but to simply draw connection to the potential impact on commercial real estate.
Without question, despite some limitations, crowdfunding is becoming more of a mainstream alternative for early stage startups, and Regulation Crowdfunding looks to only further expand the pool of funding options. These capital sources may become even more of a focal point should venture capital funding continue to constrict. As an additional source of capital, this type of funding could help give smaller businesses the lift they need to thrive. Fundivo notes that there were 3.6 jobs created in the U.S. per angel investment in 2014. As stated by The Macro, “Without startup funding the vast majority of startups will die.”
Of course, startups are an essential component to commercial real estate demand and growth, for the success of a company’s fundraising campaign has proven important in helping determine present and future demand and space growth planning. After all, most growing companies cannot operate in a garage or basement forever. Through our own analyses, in recent years Cushman & Wakefield discovered an ongoing phenomenon involving companies either still in planning or filing stages of an Initial Public Offering (IPO) that led to significant leasing activity as decision makers look to lock up space to accommodate continued and anticipated expansion. Although real estate decisions have historically followed the influx of IPO capital, numerous modern-era companies are able to generate strong funding during the pre-IPO stages—especially in the tech sector—allowing them to greatly expand their local footprints while still amidst such stages. Such growth has occurred from mere months to even years prior to IPO. Thus, we are finding the funding stages to be an increasingly critical determinant of real estate growth plans—especially for companies infused with significant cash. Granted, expansion can begin or continue long after a company becomes public.
Certainly, the impact on real estate during the early funding stages may be not be apparent initially. Regulation Crowdfunding, where investment is still minimal is likely marginal—after all, $1 million may help fund some space needs but only goes so far, especially in a hot market. Big picture, the potential for growth is where the real impact lies.
Additionally, VC money has seemingly tightened – or, rather, normalized – during Q4 2015 and Q1 2016 for a few reasons, including in correctional response to valuation concerns. Likewise, over the past two quarters, seed funding has also slowed by about 30% in dollars, while the number of rounds has fallen sharply. This downward trend could impact the potential for growth and development for some early stage startups, which is where we could really see Regulation Crowdfunding (non-accredited investors) and crowdfunding in general serve as a complementing method in supplanting seed capital to these companies, ultimately supporting real estate growth.
Jamie Katcher has worked as a real estate professional since 2001. Jamie has represented clients in virtually every business sector, with an expertise in advising technology and creative companies on their real estate solutions as they evolve from start-up to an established company. Jamie has been involved in the completion of more than 3 million square feet of tenant representation leasing assignments in Manhattan.