What happens when you combine one part Google, one part real estate and one part online lending into one fintech startup? What you end up with is PeerStreet, a new investment platform for real estate debt where accredited investors can contribute to real estate projects they believe in in the form of crowdfunded debt.
Brett Crosby, a former founder of Google Analytics turned fintech entrepreneur, is out to change the game of real estate investing through innovative big data analytics and strategic loan originator partnerships.
PeerStreet’s mission is as powerful as its analytical tools. Check out my discussion with Crosby below and learn more about investing in real estate debt…
CL: Brett, you have quite the career that has led up to your co-founding of PeerStreet. Most notably you helped co-found some of the most prominent products that are in the Google Suite of user tools. Can you tell us a bit about your time co-founding products like Google Analytics and how that is shaping your approach to PeerStreet?
BC: Sure, but before I talk about my background, I should point out that my college buddy, Brew Johnson, originally came to me with the idea for PeerStreet while I was still working at Google. He is a former real estate attorney who became obsessed with the securitization market in his quest to discover what was driving so many of the bad decisions that led up to 2008. In many ways, PeerStreet is a combination of what he lived through before and after the global economic collapse and my experiences at Google and in tech.
There are two key pieces of my Google background that have helped shape PeerStreet. The first is that I was a co-founder of Urchin, which was a web analytics software company. We helped build the web analytics space, then were acquired by Google in 2005. Once there, we basically rebranded Urchin as Google Analytics. Using large amounts of data to drive decisions and insights is baked into our DNA, and that’s the first thing I brought to PeerStreet.
The second piece is the approach we used at Urchin to go after customers. We called it our “fishing boat strategy”. Instead of going after individual customers, we went after hosting companies, who already had aggregated all the owners of websites. That business strategy enabled us to scale while providing value to the entire ecosystem.
Now at PeerStreet, that approach is even more important. Instead of going after borrowers, we work with private lenders who interface directly with borrowers. Their deep knowledge of their local real estate markets and borrowers allows them to make smart underwriting decisions quickly. So they aggregate the borrowers and the loans. We partner with those lenders, then utilize our data analytics capabilities to vet and curate the highest quality investments for our investors. The goal is to scale our business while maintaining quality for our end investors and helping our lender partners out-perform in their local markets.
CL: For those who don’t know, how would you define PeerStreet?
BC: PeerStreet is a platform for investing in real estate debt. We focus on short-term bridge loans because as as an asset class, it has a terrific risk-adjusted return. Our model allows investors to diversify in this asset class in a way never before possible.
CL: Outside of being a technology based company, in what ways would you say PeerStreet parallels the operations of Google offerings?
BC: There is quite a bit of Google thinking that’s gone into PeerStreet. Besides utilizing both the analytics and the fishing boat business model strategy discussed above, we have also brought transparency, control and access to an industry that hasn’t previously provided that for investors. Our approach creates value for the entire ecosystem.
For lenders we help them create more loans, and recycle capital so that they don’t have to raise larger funds. They can focus on getting more loans to high quality borrowers.
This has a great trickledown effect to the local community. The community housing markets improve, jobs are created and the local economy is stimulated on a very local level.
We are also mission-driven for our investors. In a world starved for yield, and with some banks even providing negative yield, people are in need of new options.
Many people were sold on the American dream that you can build a nest egg, retire on the interest of your savings and still pass on your inheritance to your kids. This has become increasingly hard to do. We are working for those retirees and millennials that are disenfranchised from the banking system. For these groups of people, we are solving the yield problem.
CL: Conversely, how is PeerStreet differentiating itself from real estate investing platforms like RealtyShares, Groundfloor, and Fundrise?
BC: Competitively, that’s the other thing I have taken away from Google. Don’t over-obsess about competitors. Obsess about your own business and make sure what you do is unique, interesting and provides real value.
That said, some companies are doing interesting things in our space, but most tend to be unfocused. We have maintained a disciplined focus on real estate debt. What you want to see in a business like ours is a growth trajectory that can be visualized as a hockey stick. By maintaining a strict focus on a single asset class, you can build an architecture and foundation for the business and make it more efficient over time.
It’s easy to lose focus and that’s a common mistake in this space. We’ve seen competitors move all over the map in this industry, from commercial to residential, equity to debt to mezzanine debt, from marketplace model to institutional, or switch from a marketplace to a REIT and any mix of those. When you’ll do any deal that comes your way, you may see big growth early on but then it plateaus over time.
Anyone can get fast growth upfront by throwing bodies at a problem. But you can build long-term growth and stability by focusing on engineering and operational efficiencies. That’s why we have stayed so focused as a company.
Many companies who enter our space think, “I’ll become a lender.” That’s a natural knee-jerk reaction and I don’t blame people for that. But the world doesn’t need another lender when the local professionals have a big advantage. What the space needs is more capital to provide more loans to more borrowers. And more technology to make better underwriting decisions. So that’s what we’re doing at PeerStreet.
CL: Would PeerStreet ever consider providing both debt and equity investment opportunities to investors like other investment platforms? Or is this a specific philosophical investment approach?
BC: At the end of the day, equity is the riskier position and we are trying to reduce risk wherever we can. We want to provide high value where we feel we can provide strong risk-adjusted returns. I don’t want to limit us, but for our entire past and foreseeable future, we are 100% focused on the debt side.
CL: Is PeerStreet planning to be able to provide access to the platform for non-accredited investors?
BC: Under current regulations, we can only accept accredited investors, but in the longer term, we would love to be able to allow a broader set of investors to participate on PeerStreet. The PeerStreet name is about leveling the playing field between Wall Street and Main Street, so individual investors can invest in the same assets as large institutions.
CL: What about PeerStreet is exciting to famous VCs like Andreessen Horowitz that recently invested in PeerStreet?
BC: First of all, I have been an Andreessen Horowitz fan for a long time. Marc Andreessen built the first browser and is a godfather of the internet. Ben Horowitz is a crazy smart entrepreneur and I have tremendous respect for both of those guys. Their companies, LoudCloud and Opsware, were Urchin customers way back when, if you can believe that.
Our specific investors are Alex Rampell and Angela Strange. Both are very knowledgeable about fintech and online lending. They really get what we are doing. And I actually worked with Angela on a couple of big projects at Google. She’s incredibly bright and I’m delighted to be working with her again.
There were two primary things they focused on when describing why they liked our business; growth and our ability to dominate a channel. And longer term, our model has the potential to disrupt the entire mortgage finance industry. I think that spoke to why guys like Marc and Ben as well as Alex and Angela became VCs in first place. They want to build enterprises that can truly transform the world for the better and we think we can do that with PeerStreet.
CL: Do you believe that real estate investment platforms can be a billion dollar opportunity?
BC: We wouldn’t be doing this if we didn’t believe the business could be very, very large. If we execute on our plans for this company, I think it can be one of largest and most important finance businesses ever built.
CL: VCs love to talk about customer lifetime value and customer acquisition cost. How does PeerStreet keep customer acquisition costs low, and do customers typically complete more than one investment?
BC: Customer acquisition cost (CAC) is something we keep a close eye on. Our two biggest customer growth channels are word of mouth and press. Part of our organic growth strategy is encouraging our current users to invite other people to the platform.
I think at the end of the day when people look at the asset class and compare it to others like real estate equity, consumer loans, student loans, etc., we compare favorably to any of them. Take Lending Club for example. PeerStreet loans are higher yield, shorter term, and we have far fewer defaults. If there is a default, our loans are in the first position to be paid back if we need to foreclose on the underlying property. With consumer credit, you don’t have any of that protection. Once people learn about our asset class, we find they get pretty excited about it.
CL: In terms of monetizing PeerStreet what approach is being taken to prevent the business from having to become more transactional like some P2P competitors?
BC: Our model allows us to cast a wide net across a large funnel of deal flow and then be very selective about which loans we decide to offer to investors. Our primary source of revenue is a modest 1% servicing spread, which is not an upfront transactional fee. We get paid alongside our investors, which aligns incentives.
CL: I often hear from peers that investing in real estate online seems risky. What would you tell these individuals, and how should we go about educating Americans to be more open to alternative investments?
BC: First I would say investing in real estate can be risky whether online or offline, especially if you are investing in equity, which is the riskiest part of the capital stack. That’s why we focus on first-position real estate debt. Loans have specific terms associated with them. For example, you can see if there are extensions built-in, you know what the expected monthly payments will be, what the value of the property is vs the amount of debt, etc. You get a good sense of what to expect from the investment you are making.
However, you need to go into it with open eyes. Not all platforms are as conservative as PeerStreet. To date, our site-wide average loan to value (LTV) is 65%, which means there’s a 35% equity cushion; nice to have in case things go wrong.
CL: Do you think that the rise of more platforms like PeerStreet will increase, decrease or maintain the chances of a future housing downturn? In some ways I would think that transparency reduces the amount of poor loans being given out?
BC: I believe the overall system is much healthier when you have transparency and know who the lender is. If the lender has skin in the game when initially making the loan and puts up his own capital you create more incentive for success. You also need to keep underwriting guidelines in check.
Pre-2008 loans were being made with 100%+ loan to value ratios with guaranteed takeouts and incredible opacity. All of us were buying through opaque systems, meanwhile banks were using our money and not paying anything for that privilege.
PeerStreet’s system is meant to take out the inefficiency and opacity and add in the control, access and transparency.
The Minute Rundown with Brett Crosby
CL: If you could tell someone considering starting up one lesson what would it be?
BC: I would say that it’s hard to go at it alone. Make sure you pick your co-founders wisely. Find good people that complement what you are doing. Founding a company and building it up can be extremely challenging and very lonely. I have always relied on my co-founders. I speak at colleges sometimes. I always tell the students look around the room those are the people you will start your company with. Find the ones you like and that complement your own skillset. Those are the ones you start with. It’s like a marriage, choose wisely.
CL: What do you miss most about not working at Google?
BC: For me it’s the people. I know it’s an easy answer but it is so true. I have so many great friendships and relationships there and a tremendous amount of respect for the senior leadership.
CL: If you weren’t starting a fintech company what other industry would you like to start up in?
BC: I am enamored with the food industry. Like my buddy Dave Friedberg who created Eatsa. It is a very cool Quinoa based restaurant that you don’t even know is a vegetarian meal and it’s all automated. The other thing I am fascinated by that is completely outside of what I do is driverless cars. The third industry is AI. There is an article on the “Wait but Why?” website that I love to read and share.
CL: From USC to Georgetown to a semester at Sea, you have had quite the varied education background, but if you had to pick one college football team to root for, who is your favorite?
BC: Well that’s easy, the USC Trojans unquestionably. But probably because Semester at Sea doesn’t have a football team. Semester at Sea was the single most influential experience I’ve ever had. My co-founder, Brew Johnson, also did a semester at sea, which is one of our shared experiences. Everyone I know who has done it finds it was very life changing so I have to give a plug to it. It definitely changed my life in more ways than I can count. I talk about it quite a bit when I interview job applicants. I always love to hear about other people’s major inflection points in life. They come in many different ways, but most people have had at least one big inflection and it’s always interesting to hear what those are.
CL: If you had to pick one founder to model yourself after who would it be and why?
BC: It is probably a coin toss between Larry Page and Elon Musk. Larry Page is someone I have so much respect for. He is an amazing person and goes after extremely hard problems for the benefit of humanity. Elon Musk for the same reason. The guy is a badass visionary who goes after incredibly hard problems even in face of crushingly slim odds. He is such a big thinker and he doesn’t just think it but he does it. So those guys really do it for me.
By the way I don’t pretend that I am comparable to those guys, but they do inspire me. For me, they are some of the most impressive human beings on the planet.
Brett and his team are focusing on the fundamentals of business by keeping their focus narrow in order to become exceptionally differentiated and capable in serving the real estate markets with more capital, while providing more yield for millions of American investors.
I have no doubt that Brett, who is a truly intelligent and open minded co-founder in conjunction with amazing investors like Andreessen Horowitz are positioning themselves as one of the potential leaders of the future of real estate investing.
Thanks Brett for your insights and thoughts on where the industry is headed and how PeerStreet is going to change the game.