By Joanna Schwartz
Whether tapping traditional funding sources or conducting online crowdfunding rounds, founders face a huge challenge when raising capital. Even highly active growth investors are hard to reach and harder to close.
Since startup investors are typically inundated with investment options to choose from, they can afford to be picky, fickle or both. That’s why it’s critical for entrepreneurs to showcase their capital raises in a manner designed to convert potential investors into actual shareholders. Modeling a growth-capital raise in the mold of commercial real-estate financing is one way to do that.
Raising capital in the commercial real estate (CRE) world is a different game than early-stage fundraising. Whereas an entrepreneur can pursue his or her company’s funding needs in tiered phases (seed, series A, bridge rounds) over the course of the business lifecycle, a real-estate developer typically needs to secure all of the debt and/or equity capital for a project up front, in full, before ever breaking ground.
CRE developers and sponsors often have to raise large sums very quickly from multiple sources at a time. To do that efficiently, they typically bundle up all of the information on a given capital raise into an all-in-one-package for investors.
Yet the effectiveness of the commercial real-estate-financing model lies beyond the convenience of a pre-packaged investment. Rather, it lies in the nature in which the inherent value of the investment opportunity is communicated to investors within that package.
Each of the following characteristics is common in, but not exclusive to, commercial real-estate financing, and how and why entrepreneurs should incorporate these qualities into their own fundraising strategies.
1. Transparency and disclosure
CRE sponsors are practically guaranteed to face legal repercussions if they fail to disclose a project’s inherent risks to investors. Plus, every commercial real-estate investor has a personal preference when it comes to risk: some like high, some like low. To help match their investment opportunity to the most motivated target audience of investors, real-estate-offering documents are loaded with intel on the feasibility and risk factors involved in each deal.
Entrepreneurs should pack just as much honest detail into their offering materials to help investors determine exactly how a startup investment will fit in their portfolio.
2. A focus on returns
For many investors, the appeal of commercial real estate lies in consistent, predictable cash flow. Knowing that earning “mailbox money” from CRE investments is a primary investor motivator, sponsors craft their offering materials to clearly showcase projected income, time horizons and returns.
To avoid being pinned down to investor expectations, entrepreneurs are often more hesitant to make authentic return projections in capital-raise materials. Ultimately though, numbers are king. A defined exit strategy is crucial to ensuring investors understand exactly how they’ll earn money from a growth investment.