How to mitigate the risk of investing on crowdfunding platforms where there is little transparency on the underlying financial health of the platform company.
Topics covered include:
- What is the platform economy
- How blitzscaling and an over-reliance on venture capital funding led to Peer Street’s bankruptcy
- What happens next for investors on Peer Street’s platforms
- How individuals and businesses can mitigate the risk of investing or conducting business on platforms
Show Notes
LinkedIn Post by Brett Crosby—LinkedIn
Crowdfunding platform PeerStreet files for bankruptcy by Flávia Furlan Nunes—Housingwire
VC finds its footing as headwinds weaken by James Thorn—PitchBook
PitchBook-NVCA Venture Monitor—PitchBook
Real estate debt marketplace PeerStreet files for bankruptcy by Matt Carter—inman
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 440. It’s titled “Beware of Platform Risk.”
What Are Platforms
In finance and business, a platform is an online space where users transact business or exchange information. The platform can act as an intermediary that connects buyers and sellers for goods, services, or investments. Airbnb is a platform for booking vacation homes from owners of vacation properties. Amazon is a platform for buying and selling goods.
In 2022, independent sellers on Amazon’s platform made up 60% of sales, selling 4.1 billion goods that year. Brokerage firms such as Schwab or Fidelity are platforms for buying and selling investment securities. Other investment-related platforms include crowdfunding real estate, cryptocurrency lending, and platforms for investing in startups.
Social media platforms like Instagram or Twitter provide a venue for users to interact, and often to sell goods or services. Platforms have proliferated over the past decade and a half, and they have become more powerful. Amazon, for example, is an absolutely huge platform. Martin Kenney and John Zysman are two academics that have studied these platforms, and they came up with the term in 2018 of the platform economy because in their words, digital platforms are becoming dominant economic and social intermediaries. They’ve just become bigger and more powerful.
A New Platform for Hard Money Loans
In today’s episode, I want to kick off our discussion of platform risk with a real estate platform I began using in 2016. I think it’s a good example because it allows us to see the pros and cons of investing platforms.
In September 2016, while attending FinCon, a conference of financial media professionals, bloggers, podcasters—it was held in San Diego and I met with Brett Crosby, one of the co-founders of PeerStreet, an online platform for investing in real estate-backed loans. These loans are sometimes called hard money loans because the loans are backed by collateral, real estate that can be sold if the borrower defaults.
Real Estate hard money loans typically last for a few months to a few years, and allow the borrowers to access capital to remodel or upgrade a property before selling it or renting it and replacing the hard money loan with a traditional mortgage. The advantage to the borrower for hard money loans is a quick approval process, as these are non-traditional lenders.
Now, they generally charge higher interest rates than on a traditional mortgage, but this is really temporary financing, kind of a bridge loan, while the real estate operator owner upgrades the property or does whatever needs to be done in order to get longer-term financing in place or to sell the property, hopefully for a profit.
For investors on the PeerStreet platform, this was new; an opportunity to build out a portfolio of high-yielding real estate loans by investing as little as $1,000 in each loan. PeerStreet was founded in 2013 and was one of the first companies to build an online platform for hard money lending.
Potential borrowers could get access to capital to remodel a home, to flip it, or to rent it. PeerStreet had also developed relationships with other private lenders, originators, who could get financing for deals that they sourced. PeerStreet acted as the intermediary, arranging the loans, but also servicing the loans by processing the payments and handling foreclosure procedures if a borrower defaulted.
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