Would you place a $100,000 bet?
Hundreds of real estate principals around Australia are doing just that – betting on businesses that are sometimes little more than great ideas.
As a real estate principal running a successful business you’ve probably been presented with the opportunity to invest in the latest real estate technology business that has a unique product or service. It’s actually an enviable position to be in, right? An opportunity to get in on the ground floor of the next realestate.com.au.
The truth is, investing in early stage technology is akin to backing a horse in the Melbourne Cup – reading the form, placing money down and then hoping for a smooth, trouble free run and a collect at the end. How do you assess form in the great race? Jockey? Distance? Trainer? Bloodlines? A combination of these? Whilst everyone will have their preferred ‘system’, few will crack the winning formula, few of those that win will admit it was just dumb luck and even fewer will tell you about the other five horses they backed that didn’t win. The reality is there isn’t a secret formula to picking the winner because like almost everything in sport and business it’s not an exact science. You can certainly improve your chances by choosing the right factors to assess and weighing up their importance. This allows you to eliminate the ‘also rans’, identify the true contenders and ultimately make an educated guess on who has the best shot to give you water cooler bragging rights.
So what does it take to pick the right real estate technology business to invest in? Even if most investors do a decent job of getting to know the ‘jockey’ (founder) and the ‘horse’ (business/product), surprisingly few take the time, or have the time, to study the field. Below is a list of questions that need to be asked as part of any investment process:
- Does the founder have a successful track record in small business?
- Do you know the competitive landscape?
- How are you going to oversee or measure the progress?
- How are you going to mitigate the many risks?
- Is the technology well developed, scalable and stable? How do you assess this?
- How much capital will they need to get to break even? What’s their current burn rate?
- Will you be issued ordinary shares, preference shares or a convertible note? Do you know what these common risk-mitigating structures do?
- Is the valuation they are asking reasonable? How do you tell?
- How will the board be structured? As a minority shareholder will you have negative control rights?
- What happens if the forecasts aren’t met?
These are just a few of the hundreds of questions you need to answer before investing in an early stage real estate technology product if you don’t want to be guaranteed to lose your money. And even if you get all these things right the facts are that success rates for early start-ups are less than 1 in 10.
As a real estate principal you already own a business. Not just any business mind you, you’ve chosen the all-consuming business of real estate. Time is likely to be your most valuable and scarcest commodity. It is also highly likely that your highest and best use is driving your business, coaching and mentoring key staff and strategizing.
The REIVC16 fund is an opportunity for you to invest in real estate technology businesses without distracting you from running your business. You can benefit from the potential upside without the commitment of time and focus. PieLAB meticulously assess the business and industry, structure investment to mitigate risk, professionally manage those investments and offer tax-exempt dividends and capital gains. Direct investment certainly has its advantages though and we assess these below in a comparison of direct versus fund investment. Weigh up the factors below as you consider your investment in real estate technology.
|Investment through PieLAB REICV16||Direct Investment|
|– Fund Manager’s sole focus is in sourcing investments. – Availability of venture capital attracts businesses looking for growth capital, financial and business acumen.
– The fund has a wide and diverse group of investors with vast networks who send many opportunities to PieLAB, meaning we see pretty much every opportunity in the sector.
|– Time consuming.|
|– No investor choice on investment selection.
– Expertise to perform thorough DD, including Legal, Accounting, IT etc.
– Advisory Committee representing investors comprised of prominent RE professionals to provide input.
|– Choice of Investment.
– Time consuming to conduct business and industry DD.
– Likely little or no knowledge of how to structure an investment to minimise downside risk, which is far more important (ironically) than valuation.
– Ability to diversify limited by time, people & financial means.
|– No input into management of investment.
– Primary focus for Fund Manager once invested is investment management to drive return.
– By pooling resources a fund typically has a larger shareholding and more ability to influence the direction of the business.
|– Ability to either directly control or be able to exert control on management of investment.
– Distracting from ‘main game’.
– Potential drain on current staff and resources.
– RE professional will not necessarily have knowledge of other industry / business workings.
|– No investor input into what investments are made and what portion of fund is utilised.
– Expertise in divesting of investee businesses can ensure maximum return.
|– Full control of direction and quantum of investment dollars.
– Limited resources to diversify portfolio.
Tax on Investment Returns
|– Significant tax concessions on ESVCLP Investments. The following income sources are exempt from Australian income tax for investors:
* Income (eg. dividends)
* Capital gains
|– No tax concessions on capital gains or revenue derived from investments.|
Timing of Return on Investments
|– No investor choice on when investments are sold, however fund always negotiates the ability to exit with the founders.
|– Choice in timing of sale of investment for capital gain/loss. But as a minority shareholder it’s often very difficult to sell shares, and in fact there is often little opportunity to exit.