Top of Mind: When Crowdfunding Goes Awry | Aspen Funds
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Top of Mind: When Crowdfunding Goes Awry

Join hosts Bob Fraser and Ben Fraser in the latest episode of the “Top of Mind” series on the Invest Like A Billionaire podcast, as they talk about crowdfunding. Unpacking the recent Wall Street Journal article, “Missing Millions and a Rabbinical Arbitrator: Real-Estate Deal Gone Bad Hits Popular Crowd Funder,” they walk through shocking events that have recently come to light on one of the largest real estate crowdfunding platforms. You’ll find out what happened, their personal experiences with this company, and how mis-aligned incentives can create ticking-time bombs. At the end of the conversation, Ben and Bob give you the primary things you need to ask during due diligence and how to spot red flags early on.

The Wall Street Journal Article ⁠

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Ben Fraser: Hello and welcome back to another episode of the Invest Like a Billionaire podcast. I am your co-host, Ben Fraser, joined by fellow co-host Bob Fraser. And we’re coming today with a Top of Mind episode. So this is one of the segments that we do on the show that are a little bit more short and focused on one particular topic and usually something that we see in the news or a question that we get from investors or something that is newsworthy or noteworthy right now.

And something that was brought to our attention just a few days ago, about a week ago, actually. It was an article that was on the front page of the Wall Street Journal about a crowdfunding platform that we’re very familiar with and a lot of you’re probably familiar with as well, called CrowdStreet.

And it’s a very interesting write up. And you can see here I pulled up in the back behind us. The title is “Missing Millions and a Rabbinical Arbitrator: Real Estate Deals Gone Bad Hits Popular Crowd Funder”. And so it’s really interesting that the Wall Street Journal did an exclusive on this digging into some of the deals on the platform.

And it was really interesting because we’ve had both independently Bob and I had experiences with CrowdStreet over the past several years. There’s always some kind of, just some checks and the yellow flags that we had, and it’s interesting to see some of this. So do you wanna share a little bit of just what the article highlighted?

Definitely. If you haven’t read it, encourage you to go read. Read it, right? Yeah. This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you’ll learn from this podcast will make you a better investor.

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Bob Fraser: This is the kind of thing that scares a lot of investors, right? Yeah. This is a lot of people. Don’t do private alternatives.

It’s how do you know you’re not gonna get ripped off? And CrowdStreet didn’t necessarily rip people off, but they did do due diligence. Yeah. And so there’s a couple deals that says they raised $63 million for a company called Nightingale to do real estate development.

And it turns out that. They didn’t do any and literally the money has disappeared and it’s no properties were purchased, no properties were purchased.

Ben Fraser: So they raised $63 million of investor capital and no properties purchased, and I think around a hundred thousand dollars left in the account right now.

Bob Fraser: And now, and then it’s apparently part of the agreement that everything was arbitrated through rabbinical courts. And so now they’ve got to go through, so the chances of investors getting their money back are probably very low. And then another deal they did with a company that was under, that was, had been accused of fraud by the SEC and they never doubled.

They never checked this. And so they raised money and and they also point out in the article that a number of the deals that these guys have done, some of the, some of ’em do they’ve done better but some of the people have not gotten their money back. I think it was around, up in 20% of the cases, if that’s right.

Yeah. And not good. This is the kind of thing that, that, that really scares investors and. Yeah. And now I personally had an experience with CrowdStreet, so.

Ben Fraser: Well before, before you say that share, the other piece of this is highlighted in the article where there was an issue that was flagged, but they did review the track record of, I forget which sponsor it was, but sure.

Bob Fraser: So they literally edited the track record of this, of the sponsor of this real estate sponsor. To eliminate two bad deals. So they would show only the rosy deals and, yeah. And so they eliminated one where they had a $25 million default and another one where they lost a building to a lender.

So this is the deal where they gave back the building to the lenders? Yeah. Presumably investors were wiped out. Another one was where they defaulted a 25 month hour default and CrowdStreet. I simply eliminated that from, they didn’t even bring it up when up. The deals didn’t go up and then when they’re interviewed for the article, they said, oh, we didn’t think that was relevant, that investors would want to know that it wasn’t essential to the investors. Hello. You wouldn’t wanna know that there was a default and that these guys gave a building back. Now that, now the truth is, there’s going to be, there’s, you’re new all deals are never gonna work out. But you want to have, you wanna have your disclosure, right?

Yeah. There needs to be, investors need to get, to have the disclosure and then make the decisions what they want to do. And I will say too, To investors as well. You need to look at the track record and look at those deals and not just, Hey, if a guy has one little speed bump, you run the other way.

Sure. But you wanna ask, you want to ask them and talk to them and ask them about those deals. Okay. What happened? Was the due diligence done? How are you handling this? And actually, you might learn a lot. Yeah, and it might be able to deal went bad, but they did everything right.

They did the due diligence. And are they hustling? Are they working hard to solve these problems? This is what. As a passive investor, you pay your general partner to do it, right? They’re out or they’re one, they’re running ahead of the issues, yeah. There’s not a single deal, or it’s rare that you have a deal that everything goes exactly like you plan and that, and without ever inter any intervention.

So what we do as general partners is we’re running ahead of the deals, we’re looking ahead, are we meeting the numbers? If we’re not, how serious is it? And we’re working on those problems. We’re solving those problems before they ever become big problems. And we’re figuring things out and we’re communicating to investors.

And that’s what you wanna know is are your GPS working for you? Yeah. Are they hustling? Are they on this, do they know what’s happening and are they solving the problem? There’s for sure always gonna be issues for sure. The question is, Is your GP working these things? So I think don’t just, if there’s a negative deal, don’t just run the other way, but go ask the questions and do a deeper dive.

Ben Fraser: Absolutely. I think that’s a great point. And one of the things I tell people all the time when they’re evaluating their sponsors, they’re always asking, what are the questions I should be asking to do my due diligence? As a passive investor, you are at a disadvantage sometimes because a lot of times you don’t have the ability to go run the background checks yourself or go and.

Do a deep dive into the underwriting models or the track records, or maybe you’re trusting a platform like this and they’re actually excluding information that should be critical in your investment decision. But what I always say is a very simple question you can ask is, tell me about the deals that didn’t go according to plan.

Ask a sponsor. Because the first red flag is if they say, oh, we’ve never had a deal that, that, that didn’t go then they’re probably bad. They either haven’t been doing any deals or they’re lying, right? Because inevitably there’s gonna be deals that don’t go according to plan, both positive and negative.

But then the next question is what are you doing to proactively manage that? What went wrong? How are you mitigating the risk? And what are you doing to make investors whole? If there is any kind of potential loss or an issue of that. And so it’s important to see how they react, right?

Because the character of a person or a sponsor is not gonna be revealed to the deals that go well, but, and ones there, you don’t go well. And seeing how they respond to that is actually a very good indicator of what they’re going to do in those situations.  

Bob Fraser: If they’re playing coy and hiding and not wanting to talk about what it’s, I would run the other way personally.

Yeah. Yeah. But if they’re hustling and if they’re doing everything that you would expect a person to be doing then I wouldn’t, I wouldn’t run the other way. A lot of times, those things make us better managers, and like I said there’s always something going wrong.

It doesn’t mean deals go bad, it just means there’s always hiccups, right? Yep. And, that’s just the way it is. So I had a personal encounter, issue with CrowdStreet, just I made a personal investment as a limited partner. I. In one of their deals and immediately the deal, they came back with a capital call like just a couple months after I invested.

Ben Fraser: Which Explain. Explain what happened, what that means. 

Bob Fraser: So literally they said it was a $55 million construction cost. It was a big hotel. They’re gonna build in Salt Lake City, downtown. Beautiful. Great thing. It was a Marriott gonna be a Marriott. They came back and said, oh, they, we got their pricing in and it’s gonna be 80 million, not 55 million.

So that $25 million budget blew up. And then apparently their lender backed out and the lender was apparent. Apparently the lender wasn’t under, they didn’t have a binding agreement with the lender, which is bizarre and. These are two things that you absolutely do with every real estate deal.

You get a guaranteed max contract from your construction people and you get a lender that’s committed to the deal and it’s not gonna back out, right? You’ve got terms that are committed and they didn’t do either of those things and went and raised, I don’t know, maybe 20, 25 million if I recall, and then they go back into a capital call.

The capital call fails. 

Ben Fraser: And let me make a little interjection there, because one of the things that was interesting, that was again, a yellow flag was they sent back a new proforma. So the cost has increased by 30, 40%. Their debt got a lot more expensive. Yeah. The debt. 

Bob Fraser: But surprise second li their second lien holder stepped up and did the first lien at an incredibly high interest rate.

Ben Fraser: And this was a billion interest rates skyrocketing. And surprisingly the pro forma net returns to the investors actually went up. 

Bob Fraser: Right. They went up all this bad, but they went up and all they, it was a spreadsheet exercise. Yes. They manipulated their spreadsheet to show We’re gonna make lots of money, don’t worry about it.

Ben Fraser: So then the real issue was when they went back to crouch.

Bob Fraser: A capital call is when you make an initial investment and they go back, Hey, we need more money. You gotta save the deal. You need more money. So they went back and that, that capital call failed. They didn’t make, they didn’t raise the additional money through existing investors, no, no big surprise. So then CrowdStreet goes back and makes a brand new offering to investors, not disclosing that this was a failed deal. Not disclosing, I said, yeah, we got a lender, they’re all on board not disclosing that this was nosebleed interest rates and that this was a failed deal and with a failed capital call.

And I’m like, oh my gosh. Just this, it’s really just they’re pushing so hard to get deals done and it’s not honest and. And so I’m both, I’m a general partner as Aspen Funds. We’re a general partner. That means me. We’re responsible for the deal to make sure the deal goes well and we operate those deals like crazy.

And we’re a hundred percent investor focused. We wanna make sure our investors get paid no matter what, and we’re working our tails off to make sure that happens. But I’m also an lp. And so what’s interesting is I’m in that deal as an LP and I did a little due diligence. But it’s nothing like what I do as a general partner.

So when we’re general partners we easily invest six figures into every deal. Doing investor background checks, sorry, operator background checks. We look at their operating history, we look at their teams. We go onsite, we visit them as an operator. We go do pro formas, we do projections, and we build up our own, we do our own projections.

They don’t take theirs. We actually start our own, build our own, we do our own market research, original market research into their markets. We do, we look at their track record and we really ask a lot of questions on those things. And it’s simply a lot of time and money that as an individual, I didn’t do as an lp.

And you can’t do it as an LP, you really can’t afford to do that, I’m in the same boat and I understand what it is to be an L lp. And so what does that mean? Does that mean that we shouldn’t do any private alternatives? And the truth is, private alternatives are far superior, even with these little potential issues, but you have to trust somebody, right? And so you know, hey, talk about that. You know what? Yeah.

Ben Fraser: How do you pick? I had another experience too with CrowdStreet completely separate from you. And this was several years ago, and this was. When they were just up and coming, making a big splash in the crowdfunding space.

These guys have raised $4 billion from investors, from retail investors. They’re one of the biggest players in this space. And, we were looking at one point getting some of our deals up on the platform and just, evaluating what that would look like.

And so I was talking with one of the reps. And, it was interesting, kinda how their model worked and all that. It’s definitely set up as a brokerage, so they were actually paid by their broker dealers and getting paid for the amount of equity that they raised.

That’s how they got paid. And then I just asked, how are you guys funded? How are you guys capitalized? Is this bootstrapped or venture capitalized? And it was venture capitalized. They had just done like their series A or series B round, they’d raised a lot of money. And I think when we were talking, they had just raised another round and a huge amount of capital that they had raised and then he went on to share some of their kind of goals and what they were trying to raise capital wise.

And it was just, it was so interesting because it really struck me that their number one motivation was the dollars and the dollar sales was sales. And you can see how that played out. Obviously fast forward a few years of seeing this when they, when it came to an issue of Do we choose to disclose this?

Or would that potentially hurt the amount of capital that we’re gonna raise? That’s what trumps when you’re venture capitalized and you’ve actually had experience with venture capital money in your tech firm, it’s, to me, a pretty big red flag. And because the incentives are totally misaligned.

Bob Fraser: And before we hit that point, you may not know, maybe you do. If you’ve listened to this podcast for a while, I actually ran a venture capitalist firm in the late nineties and raised $44 million in venture capital and. Did an AB and a C round and then and had one, a kind of a very famous, well-known venture capitalist join in first and really I, teach me all about VC.

Here’s the way VC works: basically they just, they supercharge your business. They just pour gasoline all over you and light you on fire and you either blow up or you blow up. And one or the other and they don’t care, which really, it’s 5% of the time it works, 95% of the time it fails.

They have one in 20 deals that achieves their goals of a hundred x returns. And the, and that 101 deal does that, means all the other deals are basically irrelevant. And so they don’t care if you two x or three x or 10 x that, that’s irrelevant to them. They want a hundred x.

And that’s their model. Yeah. It just lights you on fire and so then they become an organization that becomes sales focused and and first, and so it’s super important to find, I believe as limited partners, we have to trust people. You do. You have to trust people.

There’s simply no way around it. You cannot do six figures of due diligence, on every deal you do, you have to trust people. And so who do you trust? Who do you trust? 

Ben Fraser: And I think, there’s a few things that, that I would say are pretty critical, that are probably the top questions you can ask, top things you can look at, they’ll get you 80, 90% there.

And I think the biggest one is to take a step back and just look at the alignment of interest. The way that the deal’s structured is favorable to investors first and prioritizing investors, are the fees. In line with the market is the waterfall of how cash flow gets distributed and, preferring investors.

And then I think the biggest thing of all is. Skin in the game. And this is something that’s thrown around a lot, but it is simply the best measure and best proxy for alignment of interest that there is for the general partners investing as LPs into the deal that they’re presenting to you, right?

And I guarantee you the general partners of CrowdStreet, we’re not investing in every deal. They probably definitely need to invest in Nightingale. 

Bob Fraser: A deal. So when we sponsor deals as general partners now we generally will take some upfront fees and generally, hopefully we’re trying to recover a little of what our due diligence costs.

But that’s not where we’re making our money. Where we are making our money as general partners is the backend Yes. Performance of the deal after our investors are getting paid, so after they’re earning their preferred returns and everything else, then if we’ve done a good job then we’re gonna get paid and.

And that’s the way, so our incentives are aligned, right? If yes, if we’re paid on the back end, not the front end, versus if I’m paid on the sale, then that’s not necessarily a good thing. And then the second thing, as you mentioned, one of our standards from the beginning, every deal we do are our, are partners in our management company, all invest.

In the deals, we invest on the same terms as limited partners. Yep. And so I’m a limited partner in all my deals and so is every one of our partners. And so we, we really care. It matters to us that these deals go well and we’re, we’ve always been really, it’s, our culture is a hundred percent investor focused.

We want to make sure our investors win. We’re, our growth as a management company is secondary to our investors winning. And we’re gonna make sure they win. And so you wanna make sure your incentives are aligned. 

Ben Fraser: Yep, yep. And I think that’s probably the biggest one. Incentive skin in the game, how much capital they put in personally to where it’s gonna cost them if the deal doesn’t go well.

We’ve talked about track record a little bit, and I think it’s important to ask about those deals that didn’t go according to plan. And if. They’re an operator worth any salt. They’re tracking, what is, what was my pro forma and what is the actual performance and where’s the difference and what’s the cause of that and how are we managing to do that.

You can see some of those things, and one of the best things I think you can do too, is just look at the historical reporting of their other deals, right? Because a lot of times I’ve heard people invest in a deal. There’s a lot of interest, a lot of excitement, a lot of urgency to get in the deal, and then as soon as the wire is sent, the check’s been sent for the deal.

The operator doesn’t send any updates and they don’t hear from ’em for multiple quarters or even a year or longer. And so it’s how consistent the communication is so you know what’s going on. And I think that’s another really big thing you can look at, showing the reporting from past deals and past.

Operations. And so again there’s a disadvantage, but it is finding those people that you can trust by doing some of these basic levels, due diligence and just dipping your toe in, starting small, right? Build that trust. And over time and, the thing that CrowdStreet did so well, to their detriment was they created a lot of urgency, a lot of scarcity, sometimes of these deals.

And it was, you gotta go now or it’s gone, right? You click on a deal and the button doesn’t refresh fast enough and it’s gone. You feel like you’re missing out. And so it is. It forces you to maybe truncate the due diligence process because you feel like you’re missing out. And yeah, as an investor it’s always okay to wait, 

Bob Fraser: But don’t let this dissuade you.

Yes. From private alternatives, they’re so far superior, far less volatile, far more, far better returns. And but what you can’t do if you’re doing is, one syndication. You don’t want to just own one apartment complex, Make sure you sprinkle your money around several deals and go slow.

It’s okay to go slow. We have a lot of investors that may have millions to place and they’ll put $50,000 with one deal and they just watch how we do, and that’s really fine. It’s your money and make sure you don’t wanna sleep at night. But don’t let it, don’t let it, don’t let it slow you down.

Ben Fraser: Yeah. Love it. We always appreciate you guys listening and especially on this segment of the series, if you ever have questions that you have about, evaluating deals or different things going on in the market or different thoughts that you have or questions you have, feel free to reach out.

We actually have a spot on our website,, at the top where you can submit a question and we’ll see it. And we may choose to respond to it in a future episode. So appreciate you all listening and hope you got some value out of this episode.


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