All posts by 379184SV

Crowfunding in Real Estate

March 10, 2017 379184SV Leave a comment

Investing into real estate
Investing into real estate has traditionally required large amounts of funds to even get started. While returns on real estate can in the long run be more attractive than investing in for example stocks, exposure to the market is lower for the general public because the barriers to entry are so high. The real estate market is currently on the rise again, and this trend can be seen in many countries. As an example, according to the CBS the price of existing houses in Amsterdam rose by 14.7% during Q2 of 2016. Moreover, the rise of crowdfunding is stimulating some interesting developments in the real estate market, especially with respect to investing possibilities for smaller investors.

Can real estate be crowdfunded as a form of investment?
Launched in 2012, Fundrise is a real estate crowdfunding platform that allows the “average” person to have to opportunity to invest into real estate projects. These projects range from pooled small investments such as a single family homes, to large corporate buildings. The platform has set a minimum investment price of $1,000 and allows its investors to start accruing interest on their investment as soon as a project is funded. The benefits from investing directly into real estate assets is that there are generally less fluctuations in returns (granted that the project goes according plans) and more transparency. In fact, in 2015 the average annual return for all the investments on the website was 13.1% (Forbes, 2015).

Efficiency Criteria
The platform is two-sided. On one side of the platform there are real estate investment trusts (REIT), which create portfolios by participating in the development of a variety of real estate assets such as hotels, shopping centers, houses and office buildings. On the other side of the platform, users (investors) can then invest into the real estate portfolios by essentially buying shares in these funds. Through this, the development projects are funded, built and eventually rented out or sold. Users can then earn gains or make losses depending on the success of the project pools in which they have invested. Users can however, not lose more than the initial investment that they put in.

As such, the platform creates a network effect in which the more users invest, the larger the pool of real estate assets can grow, and therefore the less risk to the users that they will lose their investment. The risks of real estate pools are defined clearly and are dependent on factors such as location, asset type, and structure. Users moreover have the chance to participate in redemption plans, in which they are able to sell back a certain amount of the bought shares to the respective REITs at the end of each quarter.

The business model behind the platform is relatively well protected against legal regulations. This is because it essentially deals in shares of the REITs to fund projects, rather than by providing a loan type structure. Moreover, users get a transparent view of the assets, structures, and locations that they are investing into. The one major downside of the platform is that your investment funds are essentially managed by an external management team, and are therefore dependent on their knowledge and execution. In this aspect, the user does not have the ability to exert direct control over the way in which their money is invested, which might not always be favorable.

Sources:
https://www.cbs.nl/
https://fundrise.com/
https://www.forbes.com/sites/trangho/2015/12/03/how-to-play-billion-dollar-real-estate-deals-with-just-1000/#246e38a02173

Articles

Crowdfunding: Why People Are Motivated to Post and Fund Projects on Crowdfunding Platforms

March 4, 2017 379184SV 1 Comment

The concept of crowdfunding is rapidly becoming more popular, and people are increasingly turning to crowdfunding platforms such as Kickstarter or IndieGoGo. As such, there has been a growing amount of research focusing on how to increase the chance of running a successful crowdfunding campaign. The focus is on how to optimize elements such as the design of crowdfunding page content or reward building to get the best possible results. However, what is it that motivates people (both creators and funders) to actually use crowdfunding platforms? Gerber, Hui and Kuo (2012) conduct research to determine the motivating factors that draw people to crowdfunding platforms, and moreover explore how these platforms impact the successes of projects in general. Through various interviews with creators, funders and representatives from Kickstarter, IndieGoGo, and Rockethub, the authors gain insights into the motivating factors that stimulate people to use crowdfunding platforms.

Why do creators use crowdfunding platforms?
The findings of the study show that while creators are primarily motivated to raise funds, there are also social aspects that contribute to why they decide to use crowdfunding platforms. Firstly, the community aspect of crowdfunding provides creators with validation regarding their projects. The community can provide feedback in the early stages of the project, which can take away a lot of the uncertainties about how the project is seen by consumers. Moreover, the community validation aspect is shown to actually increase the creator’s perception of his/her own ability, which in turn stimulates increased motivation as well as increased performance in the project.

Secondly, crowdfunding platforms provide creators with the opportunity to connect with their funders and engage in direct collaboration. This shifts the emphasis from a mere financial transaction to engaging in long term two-way interactions with funders, essentially dissolving the line between producers and consumers through active participation.

Thirdly, the results show that creators are actively encouraged to participate in crowdfunding by being able to see successful past projects and the idea that it is possible to replicate those campaigns. In this sense, successful campaigns do not only draw more attention to the project itself, but they also provide social proof and an example to the public on how to become a creator.

Lastly, creators are motivated to use crowdfunding platforms because it provides exposure to their projects through social media channels. Since these platforms are becoming so widely used, they essentially provide a means to showcase a concept to the world without the creator having to spend significant amounts of money on advertising.

Why do funders use crowdfunding platforms?
Similar trends can be seen among funders that use crowdfunding platforms. It is found in the study that while funders primarily seek rewards, there are also social factors that contribute to the appeal of using crowdfunding platforms. Firstly, funders often become intrinsically motivated to engage and contribute to a creative community with similar interests. The idea of being part of a community and collaborating across different projects, strengthens the connections of people within the social network and provides intrinsic motivation.

Secondly, funders often become personally interested in the projects that they follow or fund, and as such become motivated to support the creator in realizing the campaign goal. Personal involvement allows funders to take pride in the achievements and developments of the project, which in turn makes the participation in crowdfunding more rewarding. The implications of perceived involvement in the project could also make funders more loyal towards both the creator and project. This could therefore lead to a greater motivation to create awareness for the project through word of mouth, and a greater motivation to fund future projects by the same creator.

What does this mean for crowdfunding platforms?
The research has practical implications for crowdfunding platforms. By stimulating the features necessary to form interactive communities, crowdfunding platforms can satisfy the aforementioned motivational factors that stimulate people to want to participate. By emphasizing and building on these elements – such as the communication channels between creators and funders, and enhancing transparency in the workings of past successful projects, crowdfunding platforms can increase participation on both the creator and funder sides.

Source:
Gerber, E. M., Hui, J. S., & Kuo, P. Y. (2012). Crowdfunding: Why people are motivated to post and fund projects on crowdfunding platforms. In Proceedings of the International Workshop on Design, Influence, and Social Technologies: Techniques, Impacts and Ethics (Vol. 2, p. 11).

Business Case

Social Trading: A new way to invest

February 17, 2017 379184SV 1 Comment

Have you ever wanted to get into trading but don’t know where to get started? Trading and investing in stocks, currencies, indices and commodities offer a high potential payoff, however can be hard to get in to. Often people don’t know how and where to get started, and end up making poor choices due to the steep learning curve. In the past, people have looked to their brokers or third parties for advice and guidance in trading, however with the rise of social and crowd platforms, a new style of trading has emerged.

What is Etoro and how does social trading work?

Etoro is a social trading platform where people can trade using ‘the wisdom of the crowds’ principle. The platform offers free trading advice, tutorials, a trading simulator, and an integrated social trading platform. On the social trading platform experienced investors can make market predictions, share information, and show their current and past trades through their public profile. The aggregate of the current trade actions is made visible for each stock, currency pair, and commodity, so users know what the crowd is doing. Users can also select individual investors based on their past trading success, subscribe to their profile (via which they can receive advice or information), and even select to automatically copy their trades. This adds a new element to investing as users can track all trades made by their favorite investors, and automatically execute those exact same trades.

Investors can moreover benefit from being a ‘popular investor’, through which they can earn payments and other benefits relating to their popularity within the platform. Etoro charges users with a transaction fee for each trade as well as a general fee when withdrawing funds (relating to the size of the amount withdrawn).

Efficiency Criteria

In essence, the platform is split into two distinct sides that interact to create value together. Experienced investors join the platform with the intention of sharing their knowledge and trades in order to build up a reputation, and benefit from the rewards and payments that come with being a ‘popular’ investor. Meanwhile, new investors join the platform with the intention of benefiting from the crowd’s collective knowledge and copying experienced investors. Through this, new investors can start building a portfolio while learning from the advice and behaviors of experienced traders. As such, the value derived on both sides of the platform is maximized by the combined knowledge and interaction of the crowd.

Etoro itself also greatly benefits from this network effect. The more experienced traders join the platform, the more useful content will be available to new users, thereby making the platform more attractive to join. Additionally, the more trades are executed by users, the higher the profit generated by the company. Etoro further encourages sign ups using a referral program in which users can gain rewards for each new person that signs up through their referral link. This serves to further enhance the network effect by bringing more users to both sides of the platform.

The business model itself is not specifically adapted to the political, social or legal regulations of each individual country in which it operates, but rather is static across all regions. As such, a country’s legal environment poses the greatest threat to the survival of the company. Due to the strict regulations that come with operating in the financial sector, Etoro’s business model has not yet been approved in all countries. Currently, the USA, Iran and Cuba are among a few countries that have not yet allowed Etoro to operate under its current business model. This is understandable since social trading and the concept of copying trades can bring about many negative consequences. For example, a user could instantly lose all their equity by forgetting they are ‘copying’ an investor who might have executed a (failed) high-leverage trade.

References:
Etoro. (2017). Retrieved from https://www.etoro.com/