How to raise money for CRE Archives

When I first started in private equity real estate, having a “data-driven” pitch in CRE was a unique approach to investing. Now, you will struggle to find a firm that doesn’t tout itself as being “data-driven”. I call bullshit.

Tell me I’m wrong…

If investing was truly data-driven and NOT based on human (read: emotional) decision-making, we’d see more massive swings than we do now. Real estate firms may be using data, but their ultimate decision is still based on emotion.

The public markets comparison

The more data-driven your decision-making, the more automated it becomes. And the more automated your decision making, the more likely you are to follow the crowd instead of making smart, forest-for-the-trees decisions. Take automated trading in the public markets.

In 2016, the SEC launched an experiment to evaluate the impact of algorithmic trading. They focused on small companies with market capitalizations between $1 billion and $3 billion. To reduce algorithmic trading, the SEC increased the tick size for these companies. The SEC successfully saw a decrease of 11% in trading for these smaller stocks. As a side effect, they noted that “searches for those companies’ filings on the SEC’s website surged, especially in the weeks before their earnings announcements.”

As a result of the SEC’s experiment, the smaller stocks accurately reflected earnings’ reports. Algorithmic (read: automated) trading actually made pricing less effective. The algorithms were programmed to follow the lead of large hedge funds rather than base their trades on sound judgment of a company’s performance.

Consider this…

When you’re investing in real estate using your data-driven approach, are you using the same data as everyone else?

If everyone uses the same data, how does being data-driven give you an edge?

Software failures, bad algorithms, etc.

If real estate firms truly are data-driven, why don’t we hear more about massive software failures impacting real estate businesses? Or algorithms that have mistakes or biases?

We don’t.

Over-optimization

If real estate firms were relying on data to make their investment decisions, then we would see much more over-optimization on successful strategies. Instead, as real estate firms grow, we typically see a diversification across all strategies. The classic “CYA” approach emerges instead of 1000% believing and acting on data to drive decisions.

As humans, we often expect the unexpected and will intentionally NOT rely on data if our fear of the unknown trumps whatever strong signals we may encounter.

The new “data-driven” pitch in CRE

Rather than saying your firm is data-driven like literally everyone else, talk about:

your institutional decision-making process,
the data that you have that no one else uses (i.e. YOUR data), and
all of the other ways that you’re NOT following the crowd.

Being data-driven, while unlikely an accurate claim by the oodles of real estate firms using it, is now commonplace. If you want to stand out, you need to find an alternative niche. Tell me I’m wrong about the “data-driven” pitch. Or actually be innovative.

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One of the metrics I often quoted in pursuing new commercial real estate (CRE) investors was our attrition rate: 0%. Once an investor chose to partner with us, they did so again and again. In other words, we either made them money or instilled enough confidence that we would make them money soon. How do you ensure that your investors stick with you? Follow these five simple steps for low cost, high impact in CRE fundraising.

Be as transparent as possible.
Overcommunicate.
Make them feel important.
Create connections with your other loyal investors.
Make them money.

1. Be as transparent as possible.

Share as much information about their investment as you can as often as you can. The key to this step is knowing how much to convey that instills confidence while not sharing so much that you have to answer lots of questions.

How do you decide what to share? My advice is to 1) share more KPIs and status updates than your competitors while 2) being cautiously optimistic.

2. Overcommunicate.

You need to update your investors on their investments’ progress with enough regularity and detail that they don’t question your ability to meet or exceed expectations. How often should you communicate with existing (and prospective) investors, then?

Whether you manage one syndicated investment, a fund, a REIT, or any other real estate structure where you have investors, you should formally report to investors on at least a quarterly basis.

You should also report the investments’ financial statements on a quarterly basis, including the schedule of capital by investor. This may not be required until annually depending on the investment structure. However, if you want to grow your platform, you should report both of these quarterly.

Next, you can host a quarterly webinar to review your investments’ progress. You should absolutely use this as a fundraising opportunity. Invite prospective investors. All of them.

I recommend having an annual, in-person meeting where you discuss all of your investments. Keep this limited to existing investors. Help them get to know one another, forming a bond around making the brilliant decision to invest with you. The more connected they are to your strategy, team and network, the more likely they will be repeat investors.

Notice that the step here is “overcommunicate”. What I described above is standard levels of communication. I highly recommend more touchpoints, especially for your key investors. The more time they spend with you, the more important they feel.

3. Make them feel important.

“The desire for a feeling of importance is one of the chief distinguishing differences between mankind and the animals. This desire makes you want to wear the latest styles, drive the latest cars, and talk about your brilliant children.”

Dale Carnegie Tweet

Spending quality time with your current and prospective investors, getting to know them, and remembering to ask how their partner, child, pet, etc. are all ways to make your investors feel important. This is hands down one of the most critical steps in this whole process. If you aren’t great at remembering details about someone’s personal life, then try using a customer relationship management software (CRM). As of today’s writing, Salesforce and HubSpot are two leaders in the space. HubSpot has a free version that you can use to get started today.

The more important someone feels around you, the more they like you. The more they like you, the more likely they are to invest in your offering.

Being genuinely interested in other people is also called being a good human.

4. Create connections with your other loyal investors.

If you know me well, then you know I love idioms. One of my favorites is “birds of a feather flock together.” This could not be more true of real estate investors.

It’s common knowledge in the institutional investor world that landing a lead investor guarantees several additional investments from like-minded institutions. This same practice happens with family office, UHNW, and HNW investors. While you can’t control existing relationships across these parties, you can create and strengthen new relationships. Don’t just play the game; make the game.

Introduce investors who you think will like each other on both a personal and professional level. Coordinate a lunch, dinner, or drinks meeting if they happen to be in the same city as you. Foster relationships. Again, you’re being a good human while also being effective at CRE fundraising.

5. Make them money.

If you surpass the expectations you set for investors on investment execution, be it cash flow or disposition, your investors will love you. Enough said.

I hope these five simple steps for low cost, high impact in CRE fundraising will help you be a more successful investor relations or capital formation professional. Have any comments or suggestions? Reach out below.

I hope you use your real estate valuation methods knowledge to make improve your valuations. Let me know if you have any questions or edits. I always love hearing from you.