Another offshoot from David’s question on crowdfunding is whether the relationship based approach is going to be replaced with the faceless characteristics of the public equity markets?

Are we shifting from a country club style investing where relationship is a key factor to something closer to the stock market? How should investors and fundraisers adapt in this rapidly changing technology landscapes?

It’s a great question. There’s nothing intrinsic about real estate that requires a deeper relationship in order to invest. What we’re really talking about is the difference between private placement investing versus investing in the public markets.

There is a fundamental difference between a public and a private offering. In a public offering, you have analysts at the major brokerage houses who perform due diligence on the financial analysis. But most investors don’t even read the analysis. They look at the consensus of a group of analysts who say things like “Buy” or “Sell”, or “Hold”. Sometimes they say “Overweight”, or “Underweight”. What on earth does that mean?

There is a subtle but important difference between public offerings and private offerings. Public offerings are primarily targeted at unsophisticated investors. The additional accounting oversight, and audited financials simply tell you that the accounting is accurate. The emphasis is on the sponsors of the venture. Are they keeping the books accurately, and are they managing the funds in a manner that complies with the law. That covers one of the elements of due diligence. But what gets left behind are two of the most important aspects of due diligence.

1) Is the plan a good plan? Does it meet your criteria? What is the structure of the investment and are the assets leveraged safely with the right terms?
2) Will the market actually deliver the results that are predicted in the financial forecast?

We used the restaurant analogy last week. What we’re talking about is the difference between eating at McDonalds versus the exclusive restaurant with 10 tables and a 3 month waiting list for reservations.

You can’t organically scale the exclusive restaurant into a business like McDonalds. They’re fundamentally different businesses.