The Road ahead
For the past few days we at Konkrete have been giving a lot of thought on how best to build a scalable business.
Our mission at Konkrete is to build frameworks that enable value creation, we want to build something that outlasts the original partners and takes a life of its own. A self regulating and expanding entity that creates value for everyone involved.
Konkrete is an evolution of Estate Baron which started off as a real estate development crowdfunding platform. We were (and still are) the only full retail platform where developers from all over Australia can raise funding for their development projects. Till date we have over 50,000 investors signed up on the platform and more than 25 projects have raised around 45 Million.
There are however a few challenges with this model. We act purely as a platform and are not the developers ourselves. Our role is to provide the information around the investment in a ¨clear, concise and effective” manner so that an investor can make his or her own decision about whether to invest or not. All investments carry risk and at the end of the day it is between the investor and the developer.
This model gives the flexibility required for the developer to raise funds on their own terms, but it has an embedded risk for us in case things go wrong. We are not exercising enough meaningful control to deliver outcomes to the investors who are our core constituency.
There are other factors as well. Every development project requires a year to three or more to deliver the outcomes required. The amounts required are large as well, a million dollars or more is quite typical for one project. Once someone does invest they will wait till they see returns and refrain from reinvesting or referring their friends till they see outcomes. A 2 year sale cycle effectively throttles the business from growing.
Once you raise a million or more for a project or two, you are quickly scraping the bottom in terms of the investment pool. In addition real estate project funding requires certainty and cannot deal with the odds of success or failure of the crowdfunding campaign. Underwriting becomes a must. Finding an underwriter becomes problematic for the preferred equity/mezzanine positioning we have for ourselves.
Long story short, it is not just important to solve a real problem so that people pay you money for solving it, you need a product that is engineered to achieve scalability.
And the model/s we have been investigating one after another have all been running into one challenge or another.
To address this issue at its core that we decided to take a step back and first go through an exercise which outlines all the factors which any product we develop has to meet. We came with a list of several factors which I will explain in detail below. We assigned weights to each of these factors and then scored each of the various investment models we had to ensure that we have something that we can really push and give it a life of its own.
The factors are (in no particular order)
- Are we solving a real problem and who is suffering the pain
This point is something which goes without saying, you want to only build something if you clearly know what pain point you are solving and who is willing to pay you for solving this pain. If you don’t know the clear answer to this, best iterate till you get it.
2. Can we control outcomes
Platforms, marketplaces are all buzz but the reality is people don’t care about whether you are a platform or not. People care about whether you can solve their problem or not and whether they have a good experience. If airbnb was full of creeps or it did not have a control mechanism it would quickly wither and die. I personally prefer Amazon over ebay as based on my prior experience Amazon goes out of its way to address customer complaints while ebay can take an unfortunate hands off approach.
If you want to build something that lasts you need to absolutely give your customers an experience that they feel happy about and want to refer you to others. If you cannot control the experience and outcomes due to any reason you are in trouble.
3. Short sales cycle, higher transaction velocity
One of the big challenges of a crowdfunding platform is it takes a significant amount of time to get a campaign over the line. In property development each project takes a year or more to complete which means investors don’t see outcomes till then and don’t reinvest or refer. This makes scaling a big challenge. The more parties you need to get to agree and larger the transaction size the slower the transaction.
Yes the reward is appropriately often larger, but it is also harder to get. You want an investment product that starts generating returns faster to put money in the pockets of investors sooner. The sooner people start seeing returns the more likely they are to reinvest and refer their mates. Regular monthly income funds often are able to attract strong capital inflows.
4. Transaction size and ability to underwrite enough transactions to get the platform to take off velocity
This point is an extension of the previous one. The smaller the transaction size the easier it is for the platform to use its own balance sheet to get enough transaction volume going. For instance a property development would take several million to get going, which makes all but institutional plays impossible.
A business loan (particularly to a SME) on the other hand can be often smaller, a personal loan can be even smaller, all of which makes it possible to get more transactions executed with the platforms balance sheet itself till it begins to attract critical mass.
I will eat humble pie here and admit that a number of platforms that started around the same time as Estate Baron have done better than us because their tranche size was smaller.
TruePillars took longer to get its compliance sorted but because their tranche for a business loan is in the tens of thousands of dollars unlike ours which is hundreds of thousands of dollars and millions, they were able to underwrite a number of loans themselves and get more over the line. While we were always gasping for air to complete one deal.
Ratesetter operates in the unsecured lending space and its transaction sizes are even smaller.
The difference in traction are visible for everyone to see.
Note that I am not talking about investor cheque size, which we can make smaller as well. I am referring to the deal size.
While it is theoretically true that smaller cheque sizes can attract more investors, what you really want as a platform is lower goals and lower cheque sizes to reach scale velocity.
So while BrickX and Domacom can claim traction as well (relatively speaking) their tranche sizes are much larger and they will always struggle with getting deals over the line the way they are currently setup.
5. High return and relatively safe
This is easy to understand, you want an investment that offers strong returns and is relatively safe. Often these 2 factors are inversely correlated but that is where you want to engineer something that achieves a happy balance.
6. Scalable through use of technology and capital
Once the product market fit is achieved, it should be easy to increase the spend and the revenues should scale with it. The business model should be able to distilled to a set of rules which can then be programmed using software which can then be used to reduce the marginal costs of operations substantially.
7. Programmability
This point is an extension of the previous one, but it goes beyond operational cost reduction. The intent of this whole exercise is to create a machine, a decentralized self regulating autonomous operation that can outlast us as the creators and create value in a scalable manner.
A program converts inputs into outputs based on the logic that has been set in it. Apart from the input parameter it also relies on 3rd party data to feed into its logic to determine the outputs.
Consider a simple example, where you want to determine what your investment in a townhouse in Caulfield (A suburb or Melbourne) is likely to be worth in 5 years. The program might have some simple calcs in it based on how much you invest, and then it might take historical data around capital gain and cross reference it against various factors such as interest rates, demand, new supply and projects coming in the market, population growth etc.
For this program to give accurate outcomes, not only its logic needs to be sound, but it also needs to have access to clean 3rd party data.
Another example, in lending to a person you want to know his credit score, his serviceability etc and so on. The most complex decisions become simple if you have clean data to rely on and then base your logic on it. If you cannot have clean data, then you cannot get reliable outcomes and never reach programmability.
8. Sticky and cumulative revenues
This is a trick which fund managers have learnt over a period of time. If you are always going after the next transaction then you are not having compounding effects. While yes, you gain more experience and optimize your processes through prior experience. But simply gaining more revenues through sticky cumulative assets is a great prize. This can run counter to the goal of extracting maximum value from each transaction at the fastest possible rate, but again a happy balance can be struck.
Consider a software that is used by a wide audience regularly and has a small recurring fee. The more people you can get your software to use, the more revenues you make. Even if you start small and build slowly through referrals, the cumulative growth quickly starts making a difference.
9. We have an undue advantage in execution
Whatever we do, we need to have strong domain knowledge in. We should understand the industry inside out and have clear knowledge of the gaps and potential pain points that can be solved using skillfully technology and optimal use of capital. So far our area of expertise lies in property, but with appropriate partnerships other avenues might be an option too. But going beyond property would require caution and clearly defined upsides which are too big to ignore.
10. Lower complexity
This point is relative, complexity is a function of understanding the underlying factors and breaking them down till they are simplified. What is complex to an outsider might not be complex to an insider who understands the factors at play. Having said that the end goal has to be to build a machine (see earlier remarks) and clearly defined operational patterns should be decipherable.
11. Revenue generation should be faster and front loaded
Revenues should start coming sooner, you should not be doing something that would take years and years to build before you see a penny. While it is possible to go down that path and the rewards might justify it, as of now we do not have the luxury of either capital or time and other resources to contemplate this route. We have to be able to pay our way through, demonstrate traction and raise further funding to accelerate growth.
12. Easy to establish secondary market
If we make it easier for investors to enter and exit the investment, then they are more likely to invest. While it is possible to make all investment products liquid through fractionalizing them and listing them on a secondary market, some have an easier route than others. For instance, if you are not deemed a security then you can go after a wider global market and save on cost of compliance.
There are several other factors some of which we might not have discovered yet, but we feel confident that as long as we design a product offering that meets the above criteria we will be able to scale it pretty fast.
Once your platform has scale it becomes possible to open it to other offers and put in control mechanisms for even 3rd party offers. You start with a controlled offering, perfect it, design the rules and then open source it for everyone to use.
That is the road ahead for us in the next few months.
