I first connected with Brian Dally about a year and a half ago. At the time, he was working on this big idea that he could make 8-12% short term home flipping loans previously reserved for the big banks and lending institutions available to the masses. Better yet, anyone including you, me and the guy or gal on the corner could now invest as little as $10 in any given deal.
Put simply, Brian was working to give access, control and transparency to the people in one of the strongest examples of democratization of wealth I have seen since starting SIC. I was enamored from the word go. Now, here we are a year and a half later, I myself have invested into many loans on the platform, and Brian and the Groundfloor team have rolled out to 50 states and just recently partnered on a $100M deal with a major institutional partner. Needless to say, the model that many were considering kind of out there 2 years ago, are now bought in that Brian and the Groundfloor team are really onto something.
Since chatting with Brian, we have seen the elevation of many platforms proliferating across real estate offerings and startup investments, but none are serving non-accredited investors (aka the 99% of us) quite in the way that Brian is. He’s reinventing the financial markets by starting with the people. It’s a big idea, and the future is insanely bright. I feel lucky to know Brian, and I think you will all sincerely enjoy our discussion below…
And if you like what you read, you can now take part in their equity raise despite it being closed to the general public by going here and placing "SIC" as your invite!
CL: When we first spoke about a year ago there were tons of non-believers in Groundfloor. The major concern was that pursuing non-accredited investors with smaller investment minimums was a non-viable business model.
And yet it appears as though your only real challenge is managing to provide enough supply to the vast investor demand that there is. Can you talk a bit about investor demand and why you think you are gaining so much traction here?
BD: If you step back and look at what’s happening in finance, there is a multi-decade revolution and you see glimmers of it across the industry. Be it blockchains and ICOs, equity crowdfunding, marketplace lenders, and more they are all doing something that speaks to empowering the individual.
What has happened in finance, philanthropy, and communications since the early 2000’s is that people have come to believe and act as though they have the information and power they need to act on their own thanks to transparency and access brought on by technology.
They have come to reject the idea that they need to turn over control to some smart middleman to manage it for them. Not only is there mistrust in these middlemen, but they can see through them and now have the tools to live without them.
That is what is driving demand for our product. We just happen to be the only ones doing it in the real estate investing sector. Now with Title III and the JOBS act, some portals are coming out with investments, which is great.
There are starting to be glimmers of more people doing more direct offerings for non-accredited investors, but it’s still quite rare, and it’s still a fund, which is the same traditional middleman model marketed in a different way. I’m an investor in some of them, and I happen to think they are good, but they aren’t radically reformatting the capital markets in the same way that we are.
CL: Recently Groundfloor set up a $100M debt facility. How is that going to help you manage the business more effectively and provide a better experience for home flippers and investors?
BD: Essentially Direct Access Capital allows us to do two things. First, we can offer our borrowers larger loan sizes ($800K+). Second, we can direct these larger loans to Direct Access Capital, while allowing our retail investors to invest in the smaller loans, which gives them more diversity.
Under the regulatory construct there is only a certain amount of product we can offer at any time, and we rather offer a larger number of loans that enable our retail investors to diversify rather than offer a small set of loans that are larger. But, we also want to best serve our borrowers, so Direct Access Capital really allows us to balance both sides of the equation better.
CL: Since the focus has always been on providing non-accredited investors with access to this asset class, how will you manage the relationship with your debt facility provider to not take away from everyday investors?
BD: It’s actually pretty easy. Prosper had some trouble with this back in the day because investors feared the best loans were being sent to the institutions, not retail investors. For us, one element that simplifies this challenge is that we are one of the only providers of balloon payment loans.
Essentially, borrowers only pay at the end, once they flip the home. By the way this makes sense because when flipping a home, we assume your capital is tied up in the flip, and once the house has flipped than that capital becomes available. Since institutional investors require monthly payments by definition these balloon payment loans will always go to retail investors guaranteed.
We are also happy to offer the loans typically allocated for our partners to retail investors if our partners happen to be over allocated. And at the end of the day we aren’t going to go out and add 5 or 10 big partners. We do believe very strongly in our mission to serve the individual. That is our strategic differentiator. We won’t change that.
People are right to ask the question, but who we are and how we are operating is enabling us to deliver high yield and diversification. We are returning capital on a less than average 8 month return period, which is just unheard of for individuals.
CL: The ability to invest on the platform just rolled out to all 50 states. What did that process look like and how does this help Groundfloor fulfill its organizational mission?
BD: We have always wanted to be available in all 50 states but under the regulations of being a Tier 1 offering that would not be possible. This led us to assess the cost-benefit of pursuing a Tier 2 offering from a product and regulatory perspective. We realized that if we wanted to continue to grow as an organization and become a national company, we would need to shift to be a Tier 2 offering, which took about 3 to 6 months to make sure we were fully compliant.
This wasn’t an easy process, but we believe in following the rules rather than breaking the rules. That doesn’t mean we are complacent, rather we are trying to find the ways to be on the leading edge of regulation, and we will continue to push forward as our expansion continues. By no means is rolling out to all 50 states as a Tier 2 offering the end of the product road map, it’s just another step in our evolution.
CL: In terms of regulation, what limitations do current Regulation A rules put in place and how are you managing to balance working within them, while growing the business?
BD: Currently under Regulation A, Tier 1 offerings allow you to conduct $20M in aggregate investment offerings in one years’ time, and under Tier 2 you can conduct $50M. That’s the limitation we are up against. Of course, we would be in favor of increasing the limit.
At the same time, I think the regulation is good for protecting investors and the overall economy and absolutely should be managed carefully. I think the SEC has been judicious in how they form rules and apply them, and I am a fan of investor protection and disclosure.
And we have been creative this year in expanding our ability to go from being able to offer $20M with Tier 1 investments, to switching to Tier 2, which allows us to offer $50M, and our partnership with Direct Access Capital allows them to buy $100M in loans from us. Effectively, we have more than quintupled the size of our business opportunity by adapting to regulation and partnering with an institution. And we will continue to see if we can find ways to use the ever-evolving rules to offer much more than $50M to our retail investors.
CL: Currently Groundfloor is focused on offering 6-12-month home flipping loans. Will you ever expand the product offering to include longer term investments like mortgages?
BD: We are always open to considering other offerings, but there are certain aspects of the home flipping loans that we really like and feel provide a strong return profile for our investors. For instance, the loans on our platform typically pay back in 8 months-time with 8-12% returns.
This is possible because our borrowers (house flippers), typically earn $62 thousand per project they do. That means they can afford to take out loans that charge higher than average rates and fees, since without it they don’t typically have a lot of ability to take on much leverage. This high willingness to pay is great for bringing strong return investments to the platform.
We also recognize that expanding to things like mortgages or consumer loans where we are loaning directly to consumers leads to taking on a great deal of other challenging regulations. It’s not to say we won’t do it, but it is more a question of when to make those moves and we are considering that now. In the near term, I don’t think it’s likely but after a next raise I could see it as an expansion opportunity.
CL: On the platform, individuals can now set up IRAs as well. What type of demand have you seen for these accounts and what is your pitch for why having a real estate focused IRA is valuable?
BD: Since we started Groundfloor we have been hearing from investors that they wanted an IRA account. I think one of the reasons why is that when you invest in an IRA with Fidelity or Schwab, you can only invest in publicly-traded market investment products. But with a self-directed IRA, you can qualify other types of investments outside of things like publicly-traded stocks, ETFs, and traditional mutual funds.
People really care about being able to make IRA investments in asset classes like ours because of the tax implications of having their money invested via an IRA rather than in a traditional investment account. With the IRA, taxes are deferred until you begin to withdraw that money during your retirement, which can be highly beneficial especially when you are earning 11-12% on our investments. With a Roth IRA, the earnings are never taxed! We don’t offer financial advice, but most advisors would say probably it’s a good idea to have a portion of your retirement investments in something like our real estate debt securities.
CL: In the future will you look to partner with current lenders in order to increase the supply side deal flow or will it always be kept in house?
BD: We will continue to source our loans in-house because the rules we hold ourselves to wouldn’t allow buying loans from third parties. The business model used in those cases typically has the borrower taking the loans at 12% and then the platform offering them to investors for 8% while pocketing 4% of the yield. Most people don’t know that. My opinion is that the daylight of disclosure and transparency is dawning, and people will catch on to those schemes. I find it repugnant, and don’t believe in the privilege of the middleman taking one-third of the yield out. The web will lay waste to that kind of business practice.
Groundfloor believes in “what you see is what you get.” Our investors earn what we earn. It’s a rather uncompromising way of building a business, but for us it’s not just about writing as many loans as possible and making as much quick revenue as possible. We prefer to be extremely diligent, and out of 700 loan applications a month we accept about 30. Though rigorous and slower than we would like at times, it’s also the reason that we can get major institutional partners like Direct Access Capital to have confidence enough to purchase $100M in loans from us over the next year.
And just as importantly on the retail investor side, I don’t think there is anything better as an entrepreneur than hearing from your customers that their number 1 request is for more of your product. That’s a testament to our diligence and ability to deliver a truly strong investment product.
CL: Speaking to how much your customers love Groundfloor, can you talk about the fact that you are actually doing your next round of investment directly through the website?
BD: Groundfloor last raised a $5M Series A VC round 2 years ago, which was an important round for building to the scale we are at today. We are now at a point where we need to make significant investment in sales and marketing to move to the next level of scale. Typically, this is when you would go and hit up Sand Hill Road or New York to raise another round.
But, when we looked at how much capital we needed we felt it could easily be supplied by the people using our product. We also felt that if our mission is to allow individuals to have access to private offerings, we thought why should the VCs have all the upside? It just made perfect sense for use to raise from the crowd.
We also didn’t feel like we needed a truckload of capital to go to next stage. If we needed $15 to $20M, we may have taken a different route, but we only need a few million to get us to our next milestones. To be honest, we have had way more interest than we were planning on having, so now the question we are asking is if we should take on even more capital to give more of our customers a chance to invest.
I will say however, that the reason I would imagine more don’t raise from their customers is because it can be challenging if you aren’t already set up the way we are to raise from the crowd. Our whole business model is focused on doing this, so we have all the pieces in place to do this raise seamlessly, but I’d imagine it would be more challenging for others to take on. To qualify for these rules is a significant investment for any startup. To do it from standing start cold is hard and that’s why there are platforms out there for these raises.
CL: Will you also be looking to raise funds via more traditional channels in the coming months?
BD: Time will tell. I’ve been blown away by the level of interest to invest in Groundfloor. I think once the individual investor wakes up there is a lot of power and scale that we are welcoming. If you asked me before testing the waters, I would say yes, we’d go a traditional route to raise a more significant amount of capital. Now I am not so sure. I suspect retail and individual investors can have a pretty massive impact.
We don’t have an upper limit in mind. You could see an innovative combination of venture and retail capital. We are starting to think creatively about that. The fact is VC investing moves in waves. It transitions between sectors that get hot or cold. We can’t control where it is flowing. What we can do as entrepreneurs is provide value to the customer with large, sustainable and profitable businesses, and when you do that capital seems to arrive on cue. We’re fortunate that it has so far for us anyway.
CL: As we start out 2018, what are Groundfloor’s goals for the new year?
BD: We have a few. The first goal is to balance supply and demand, and make sure that everyone that invests on Groundfloor has ample opportunity to diversify and stay fully invested. That’s first and most an important goal, and I think we are approaching it the right way.
Another goal is to look at a way to offer more than $50M a year subject to the Tier 2 limit, and we have several ideas about how to approach that. These goals will enable us to scale our business in a way that lets us best serve all of our customers!
I’ve always felt that if the only problem as an organization that you have is that you are struggling to keep up with the pace of demand from all sides of your platform that’s a great problem to have. Brian is proving that doing the hard thing well is better than finding the quick win. To build a business that is around 100 years from now requires taking the lumps up front, and the pain that comes with cutting no corners.
Groundfloor is a testament to democratizing wealth and reimagining markets that were thought untouchable until now. I am compelled to believe that Groundfloor will be one of the most important companies in the world of financial services within the next 10 to 15 years. They will most absolutely serve as an example of how to build a financial system for all, which is undoubtedly where we are heading. Its just a matter of time.
Start partaking in the future of finance by investing on Groundfloor and thank you to Brian and the Groundfloor team for investing in truly Simple.Innovative.Change