On October 14, 2016, Prodigy Network Founder and CEO Rodrigo Nino, flew to Dublin to give a talk at the Irish Property Developers Conference on crowdfunding and the true meaning of our motto, “Access For All”.
Since its creation after the Great Depression, the private equity market has been increasing wealth inequality in the United States. While it was created with good intentions and meant to protect poorer, or non-accredited, investors from fraud and investing in riskier projects, its effects have been only negative. The private equity market began to accumulate the best investments, making the rich richer. Non-accredited investors were earning less and less on their dollar. Nino describes it as a room with a VIP section. Only people with a certain net worth are allowed in, and it heightens the feeling of exclusion as well as the wealth gap in our society. The 2008 financial crisis, was the peak of this income inequality. When the stock market crashed, private equity was essentially untouched. Investors in the public market lost a lot of money, and those in the private market were able to salvage most of theirs.
To solve this problem, the Obama Administration put into law the JOBS Act in 2012. It was a monumental bill because it changed the way our economic system had been functioning for the better part of the last 80 years. The private market became public, investing opportunities became available to all, and an investor’s dollar had the same return, regardless of net worth. Nino gives the example of three investors. Peter, Paul, and Mary each invest one dollar each, but their returns are vastly different. Peter gets back 22 cents on the dollar, Paul gets 8 cents, and Mary gets 2 cents. Nino then asks the audience why they think this is so, when the dollar is the same across all investors. There is a silence before the net worths of the three hypothetical investors are projected on the screen. Respectively, they are one billion, one million, and one thousand dollars. The amount of money each investor would make, was contingent to how much money they already had. The old system would only make the rich, richer, leaving the poor and middle class behind. However, through available technologies, small and medium investors now have access to private offerings previously available only to the rich, leveling out the playing field and ensuring equal returns on the dollar.
Nino moves on to discuss BD Bacata, the largest crowdfunded real estate project in the world. In Bogota, Colombia, one-fifth of the entire city’s population works downtown; this adds up to over 1.7 million people. The only solution to the 1-2 hour commutes seemed to be bringing people’s houses closer to where they worked. To do this, downtown Bogota had to expand vertically, as there was no more room horizontally. The issue rested in the funding for the skyscrapers. To explain the problem, Nino projects numbers for how the construction would happen in a traditional private equity market. The cost of the building would be approximately $200 million, resulting in a $300 million sellout and hence a $100 million profit. $100 million is a huge amount of money, but after the private equity firm takes their share, the developer would only get approximately 10%, with the traditional financing taking $90 million. In addition, the risk for the developer is incredibly high, considering the emerging company and the probable chance that the bank will take over the project.
In essence, the demand for the building exists, but the means to make it happen don’t. Real estate crowdfunding takes this problem, and uses it to find a solution. By asking the people in need of the project to fund it, the financing process happens very quickly, and the crowd is able to receive not only the building, but a return on their investment as well, with 60% of the profit going to the people. The crowdfunding firm then gets 20% and the developer gets 20% as well, increasing initiative for creative people to undertake great projects without the risk and double the return.
This has important and numerous far-reaching effects:
- The projects that people want and need are financed
- They are financed at a quicker pace
- Developers are able to pursue their creative inclinations without fear or recourse
- Wealth concentration is reduced
Nino describes this idea as a formula, saying, “The people invest in the solution of a problem they have, and they do it for a profit.” The effectiveness of this formula has been proved throughout the years, with various publications requesting interviews with Nino and asking for profiles of the company. Harvard Business School took an interest in Prodigy Network’s model and made it a case study to be used in certain classes.
The next stop for Prodigy was to take the model to New York City. Our portfolio currently consists of five buildings and is worth a billion dollars. AKA United Nations and AKA Wall Street are both operational and three more buildings for The Assemblage are either fully funded or in the process of being so. Investors have already realized returns on AKA United Nations and at number unprecedented for such relatively small investments. Prodigy Network has raised over $410 million in private equity with investors from 29 different countries. The minimum investment, currently at $50,000, continues to fall. Eventually, we hope to truly provide access for all.