How CrowdStreet Reached $9.9M in 2018 Revenue and 200+ Developer Customers (Interview with Co-Founder and CEO Tore Steen)

Introduction and Background

Nathan Latka

00:00Hello, everyone. My guest today is Tore Steen. He was an industry he was instrumental in leading the product sales, marketing and business development efforts for Janrain, taking them from early stage rapid growth phases to becoming the recognized leader in the social identity space with a full user management platform and global enterprise customers. Today, he's leading CrowdStreet, an online syndication platform for commercial real estate. Tore, ready to take us to the top?

Tore Steen

00:21Yes. Hi, Nathan. How are you doing?

Business Model: Marketplace vs SaaS

Nathan Latka

00:23I am well. Alright. So starting off first here with the business model, then we'll get into the kind of Xs and Os of what you do. So is this a pure play SaaS model or do you monetize a different way?

Tore Steen

00:32Yeah. It's actually more of a marketplace model, but there is kind of a subscription model associated to it. And kind of, again, back to the origin of CrowdStreet was really to transform investing in commercial real estate. Right? Make it different than the way it's been done before. So new pricing models, new revenue models.

Nathan Latka

00:48I love that. Before I move forward, can you try and quantify that? So if you look at your total revenue past twelve months, what percent would you say is SaaS versus Marketplace or some other form?

Tore Steen

00:56Yeah, it breaks down about 80% Marketplace, 20% SaaS.

Nathan Latka

01:00Okay, fair enough. Alright, let's get more of the backstory here. When did the company launch?

Tore Steen

01:042013 formed and we launched the Marketplace in 2014 and we launched the SaaS in 2015.

Nathan Latka

01:10Okay. Now, were you there from day one? You're the founder?

Tore Steen

01:13Yeah, I'm the co founder. Darren Powderly is my my other founder. He's the real estate guy. I'm the I'm the internet software guy, the tech guy.

Nathan Latka

01:20I love that. Okay. So I mean, how did you guys come across the idea?

Tore Steen

01:24Yeah. Mean, really, Darren had worked with commercial real estate firms who were trying to raise capital for their projects, and they were already always confined to their geographic region and and sphere of influence on investors. Right? The kind of high net worth investors called the country club model. Right? And then on the flip side, I kind of saw it from a personal perspective as a technology executive. I didn't have access to invest in commercial real estate.

01:48I didn't know the developers. I wasn't hanging out on the golf course, right? So the two of us kind of came together with the concept of how can we benefit both sides? How can we give commercial real estate developers and operators more access to investors across the country, and at the same time, give great accredited investors more access and transparency to the third largest asset type in our country, commercial real estate. So that was really the

02:12idea. Again, you move it online, you hopefully reduce friction, you open transparency, and you provide greater distribution, and both sides win.

Platform Metrics: Capital Deployed and Distributions

Nathan Latka

02:21Give me some snapshots today. Total capital raised to the platform.

Tore Steen

02:25So, yeah, total capital raised since inception, a little over 700,000,000.

Nathan Latka

02:29Investor distributions? What's that?

02:32Investor distributions on that?

Tore Steen

02:34Yeah, so investors have received over $70,000,000 in distributions.

Nathan Latka

02:39Okay, so what effective IRR you're talking like 25 ish?

Tore Steen

02:42Yeah, yep, exactly.

Nathan Latka

02:44That's interesting. Okay. Now with these businesses, I've interviewed a bunch of folks kind of I'm going to call you FinTech, but your real estate FinTech, you know, you have Kabbage $7,000,000,000 loan book, a lot of companies like this in different sectors. The hardest, the hardest part to build is the first 10,000,000 of the loan book, right? So So in terms of your caught your true cost of capital, usually people call it like the mafia round. How

03:04did you guys raise the first 5,000,000 or 10,000,000 for you to then deploy through the platform?

Early Fundraising: Friends, Family and Seed Rounds

Tore Steen

03:09Yeah, I did it, I think, a traditional way. Friends and family, right? Started there. That was the first 250,000, right? Just, you know, because they know you well enough, they're gonna actually invest in you as a person. And then I was actually fortunate to meet a FinTech focused VC down in the Bay Area that does only early stage. And so that helped us kind of, they came in for a little bit more institutional seed round to

03:31get us to 1,300,000 in seed. And that was in October '14. So we closed that first round. So that kind of helped us, you know, kind of at least build the initial team, start getting the, you know, some sponsors on the marketplace, start building the technology as well, the platform. And then really the A round, that remaining kind of sub 5,000,000, the $3,500,000 raise, that was through a traditional VC down in in Silicon Valley. So Rally

03:56Ventures, again, does kind of traditional a round. They love the fact that we were kind of this up and coming marketplace and also had a SaaS model to it as well.

Nathan Latka

04:05What total capital raise to date on the equity side?

Tore Steen

04:08Yeah. We've raised 13,000,000 for the company, so it's very, very capital efficient business at this point.

Nathan Latka

04:12When you did the three five with Rally, what was your total outstanding loan book? What was the size?

Tore Steen

04:18Oh gosh. We were... In terms of what we've done on the marketplace?

Nathan Latka

04:22Yeah. How much had actually investors put in and you lent out?

Tore Steen

04:25I mean, we were probably only 25,000,000 had been done on the marketplace. And the reason that number stands out, just a fun fact, Nathan, is yesterday we celebrated a big success, a big raise on the marketplace. And I said, look, what we did this week is more than we did in the first two years. So, you know, that's the that's the beauty of that flywheel, right, of a marketplace once it starts to build trust and and

04:48between both sides.

Nathan Latka

04:49So let me just repeat this back to make sure I get the timing right. $25,000,000 loan book in 2016 when you did a 3,500,000 equity round with Rally.

Tore Steen

04:49Mhmm.

Nathan Latka

04:49Okay. So you answered my question on how you got your early equity, but what I was actually asking is actually getting the the the people loaning you the money at cheaper rates and what you're lending it out so you get a spread. That's sometimes the hardest part. So

05:10where did your first dollars, not your equity dollars, your first kind of debt fund dollars come from?

Tore Steen

05:15Oh, you mean for the marketplace itself?

Nathan Latka

05:17Correct.

Tore Steen

05:18Yeah, so we're unique in that we grew it organically. So we didn't actually take balance sheet capital to invest onto the marketplace. We actually felt like if we're gonna build kind of a trusted marketplace, we don't wanna go buy deals, in essence. So what we wanted to do was build, go take our time on finding really good deals, really good sponsors, the supply side of the marketplace, and then at the same time, kind of try and

05:43keep the demand and supply in kind of an equilibrium.

Marketplace Growth Year by Year

Nathan Latka

05:46No. I think that's great. So so in 2014, that first twelve months in business, do you remember how much you had you had raised on the debt side again from investors saying, yeah. I wanna do a loan through you?

Tore Steen

05:56Yeah. And really, it's more the... They're investing equity as opposed to the debt side. I mean, there are some players that do debt, Nathan, but we're always there investing on the equity portion portion of these deals, which has nice upside as opposed to debt, which is usually a fixed return. And so really in that first twelve months, we'd only raised about, you know, kind of $10,000,000 on the marketplace.

Nathan Latka

06:17Keep keep... I want to track this growth. We already know 2016 was 25,000,000. What did 2015 end at?

Tore Steen

06:24Oh, 2015, it was like, you know, again, $15,000,000, $16,000,000. It was it was pretty... Between '14 and '16, it was... I won't say it was negligible, but it was at least proving that this market could... That you could actually take commercial real estate investing and move it online.

Nathan Latka

06:41So from 2016 to today, you went from 25,000,000 in essentially loans out to 700,000,000. So let's just keep going year year by year. 2016 was twenty five million. What was 2017?

Tore Steen

06:492017 was 130,000,000.

Nathan Latka

06:53Okay. I'd say that's pretty significant growth, almost 6x ing the 25,000,000 in the prior year. Did something special happen there? Did you land one big investor or something?

Tore Steen

07:01Well, what we had seen was really an inflection point. It was interesting. It was July '16. Remember when we looked around, there were probably like 18 of us in the company. We were in one big room, right, a startup, and we kind of looked at each other and we were like, We've hit an inflection point because we'd seen three months of kind of steady new supply coming on the marketplace. We'd seen a steady nice growth of

07:21our investors coming on the marketplace and repeat investors, right? Investors now that we're putting in their third or fourth or tenth investment into CrowdStreet marketplace deals. So I think what had happened is we'd finally by the middle of 'sixteen hit that inflection point where it had been proven and larger sponsors were now coming onto the marketplace. And so we started to build more of a demand, the investor side, the consumer side of the marketplace. So really

07:46by '17, it was really ready to take off. And in '18, we did $250,000,000 of equity on the marketplace in '18.

SaaS Product: Customers, Pricing and Revenue

Nathan Latka

07:55That's great. Okay. Let's jump in. Let's just shift just the SaaS portion of business for a second. So who is paying you? The the builder, the developer, or the the person lending the money or investing the money?

Tore Steen

08:07Yeah. The developer because we white label our software and we license it to the to the developer.

Nathan Latka

08:13Okay. So what is the... I'm sure you have a ton of customer cohorts, but we don't have time to talk about all of them. The average developer is gonna pay you what per month or per year to use your platform?

Tore Steen

08:21It's... Yeah. It's an annual subscription. It's right around 20 to $25,000 is kind of where they where they fall in. So it's a non exorbitant expense, but it's, it is a capital budget.

Nathan Latka

08:30And when did you... So 2014, you start writing the code for this thing. When did you get your first dollar of revenue on the SaaS side?

Tore Steen

08:36The SaaS side was in 2015.

Nathan Latka

08:39Okay. So about a year of investing in the MVP. Do remember how much cash you guys sunk into the MVP before your first dollar of revenue?

Tore Steen

08:45Yeah, I would say it was probably a couple hundred thousand dollars worth of, you know, pure engineering product development that went into that MVP.

Nathan Latka

08:54That's not bad. Okay. So your first developer comes on in 2015. How many are you working with now today?

Tore Steen

08:59Oh, we've got over 200 commercial real estate developers using our platform.

Nathan Latka

09:04Okay. And, I mean, so can I can I take 200 times that essentially $2,000 a month? You guys are doing north of $400,000 a month or about 5,000,000 in ARR just on the SaaS side of your business?

Tore Steen

09:13Correct. Yep.

Nathan Latka

09:14Yeah. I mean, that's pretty healthy. And you said earlier, that's 20% of your business. So if we multiply it by five, right, that obviously takes you to 20,000,000 in terms of total run rate.

Tore Steen

09:21We're on that. Right? Yep.

Nathan Latka

09:22Wait. Where... If you're at that today... And let's just talk about SaaS here for a second. You're $400,000 a month today. Where were you a year ago? Do you remember?

Tore Steen

09:28Oh, we were at least probably half of that.

Nathan Latka

09:30Yeah. Okay. Good. Now did that growth come from developers, the same set, spending more with you, or was it new onboarding, new logos altogether?

Tore Steen

09:38Yeah. I mean, it's it's interesting because we we built the SaaS, Nathan, really as a way to help developers come online, right? So we recognized in '14 as I was espousing a marketplace to these commercial real estate developers, many of them were like, I don't speak your language.

09:54They're twenty years behind in using technology because I would say, how are you managing your investors today? And they'd say, well, use spreadsheets, right? And I'd go, oh, time out. I could license your technology and manage my own investors. So we built the SaaS and we developed the SaaS part of our business as kind of a tip of the arrow, right? To help these developers manage their own investors. And then it was easier for them to

10:14say, wow, okay, I understand the value of your marketplace. Now maybe I'll start putting deals on your marketplace. So like to bring that up because the SaaS is a kind of an ability to help these developers in what they're doing today, which is they could be managing a couple hundred high net worth investors and millions of dollars that they're raising capital and managing investors. But then, you know, our marketplace gives them that expandable set of investors,

10:40right? Beyond this, their own close net. So they go hand in hand. And so the way we actually look at it is how many sponsors that start on our SaaS developers go also to our marketplace, and we have about a 40% crossover.

Nathan Latka

10:52What does that mean? Developers who make money then go and invest on the other side?

Tore Steen

10:55Exactly. They start... Well, they use our software to manage their own investors. You know, they're used to doing a kind of a private offering where they raise capital from kind of a small net. So they'll go from using our SaaS solution to manage on their own website with their own investors to then actually saying, I want to put a project on CrowdStreet. So the way we look at it is we're gaining new logos through our SaaS

11:17solution, which then also crosses over to them using our marketplace.

Marketplace Revenue Model and IRR

Nathan Latka

11:22Interesting. Okay. Now let's talk about the other part of your business, the 80% of your revenue coming from marketplace. If you have about 700,000,000 outstanding and you're doing about 20,000,000 on that part of your business, again, 80 percent of your total revenue, I mean, works out to about, you know, 2.8% ish. Are you actually generating effective IRRs of like 29%? You're keeping about 3% and the investors get 25?

Tore Steen

11:42Yeah, and IRR is a little challenging, right? Because, you know, if you took all the deals that we've done, about 330 deals have gone on the marketplace, and you took the average targeted IRR, it works out to about 18%.

Nathan Latka

11:53Okay.

Tore Steen

11:53So the realized IRR as we know, realized versus unrealized, like what's on paper versus what's really kind of come in. So the realized IRR is actually what you were saying in the upper 20s, right? Because those are deals that, you know, have gotten many times an offer they couldn't refuse earlier than they anticipated at selling, or they were ground up development where they knew they would sell it within two years. So we've had 17 realized offerings

12:18so far, and that's where we have the upper 20s or mid 20s IRR. But if you kind of look across all the deals, those that are still distributing cash on a on a ongoing basis, it's kind of a blended 18% IRR across the entire platform.

Nathan Latka

12:32Okay. And is that your model, Do you tell investors when they give you a $100,000, hey, we're gonna pay you back a target of this IRR, but we're keeping a 3% or, you know, 300 points on that? Or or like how do what's your marketplace revenue coming from?

Tore Steen

12:44Yeah. So we're really clear with investors. We like to tell investors that look, you have a... There is a self serve marketplace in one regard. So any investor accredited investor can come on and as low as $25,000 they can invest in these deals. We don't charge that, I'll call it the do it yourself investor any fee, right? Sponsors are paying us a technology fee to be able to put their deal on our marketplace. And they know

13:07that we're helping digitize their offering. And we've gone out and done all the hard work to go find accredited investors. So it's really the sponsor that pays us for that kind of self serve investor that wants to invest their own. We've now added two other services for investors. We have a series of our CrowdStreet funds that is kind of like, we call it the blended portfolio. And it allows an investor to put it into a CrowdStreet

13:29instrument that then invests across 30 deals over a twelve month period on our marketplace, giving investors a kind of a diversified pool of investments. And our third offering for investors, now they do pay a 1% fee for that because it's a traditional fund structure.

Nathan Latka

13:43And how much is under management under that vehicle?

Tore Steen

13:43Exactly.

13:471% of assets under management.

Nathan Latka

13:49How much is under management on that vehicle?

Tore Steen

13:52Already in six months, we've seen $27,000,000 on that fund alone and 600 investors. So it's pretty significant growth. And our third offering is our advisory service. So we have a private advisory service. So investors that do want kind of I'll call it the white glove kind of approach, They can come in and we'll actually create a custom portfolio. We have registered investment advisors on the team there, and they're able to construct a portfolio specifically for that

14:23client over the years in terms of where they put their capital onto the marketplace. And it's about a 2% fee for that because it's a higher touch, you know, service.

Nathan Latka

14:31So just to summarize, your total revenue, call it, 20,000,000 this year is is hopefully what you'll you'll hit that this year you think or you already passed that last year?

Tore Steen

14:38Yeah. We'll be on that run rate. Yeah. We're on that run rate right now.

Nathan Latka

14:41Okay. And what'd you finish last year out total?

Tore Steen

14:43$9,900,000.

SaaS Churn, Retention and CAC

Nathan Latka

14:44Really impressive growth. So of the 20 you're gonna do this year, just to be clear, again, 80% of that's gonna come from the three products you just mentioned, some combination of fees or developer sponsor, etcetera. The other 20% is coming from the SaaS fee developers paying $25,000 ACV's.

Tore Steen

14:44Yep.

Nathan Latka

14:44That's great. Okay. Let's double down and wrap up here with just some SaaS questions. Churn's critical in a SaaS company. What's your churn again, just on the SaaS

15:05side of your business?

Tore Steen

15:06Yeah. So right now we're at a 96% renewal rate. So it's only only 4%. Yeah.

Nathan Latka

15:11Pretty good. Do you have expansion revenue on those cohorts that more than makes up the 4% loss?

Tore Steen

15:15Yeah. So we actually do see a rev... On a revenue on a revenue basis, we're actually over... Last quarter over a 100% on the renewals because they're buying... You know, those are saying or buy more.

Nathan Latka

15:25Upgrading. What does it cost you fully weighted to get a new $25,000 ACV account?

Tore Steen

15:30Oh, it's it's, you know, $10,000.

Team Size and Sales Org

Nathan Latka

15:33Okay. So you got, six month payback period. You're happy with that?

Tore Steen

15:33Yep. Yep.

Nathan Latka

15:33Okay. Very cool. Team size today, how many folks?

Tore Steen

15:3975.

Nathan Latka

15:40Oh, wow. What's the breakdown? Engineers versus salespeople?

Tore Steen

15:43Yeah. Engineers of the 75. We have 11 in engineering, so good good amount. Sales salespeople, we've got six sixteen salespeople, both inside and outside. We've got people in the field, key key markets. And then we have an investments team. As you can imagine with the marketplace, we have to have a team that is experts on screening deals, right, screening sponsors. So we've got investments team as well.

Nathan Latka

16:08When a sales rep is fully onboarded, what are you saying their quota at typically?

Tore Steen

16:11Yeah, it's close to $3,000,000.

Nathan Latka

16:14And did you pick that based off a profitability target? Like you want five x profitability per salesperson when they look at their fully earned comp?

Tore Steen

16:21Well, we like to look at it also more based on what's the total productivity that they can actually achieve. I mean, I always kind of come down to how many units could they actually sell at the marketplace and the SaaS, you know, at an average ASP. So really kind of a more of a... Kind of a bottoms up to to to look at productivity.

Last Raise, Burn Rate and Future Fundraising

Nathan Latka

16:38And you mentioned 13,000,000 in the company on the equity side to date. When was the last raise?

Tore Steen

16:43It was July 2018.

Nathan Latka

16:45Okay. So you're raising right now?

Tore Steen

16:49Not not right now.

Nathan Latka

16:52Let let me ask a different let me ask a different question. Are you back to breakeven right now, or are you still burning some capital?

Tore Steen

16:57We're burning some capital, but it's very capital efficient. So I wouldn't say we're at a breakeven, but we aren't aren't far off.

Nathan Latka

17:03Okay. It is like $10,000 a month or a $100,000 a month? Or

Tore Steen

17:06Yeah. It's about $100,000 a month.

Nathan Latka

17:08Okay. That's fine. It's... Yeah. Yeah. I was gonna say, I mean, $100,000 a month on, you know you know, call it $5.06, $7,800 a month is is fine EBITDA margins. All seriousness though, I mean, you know, usually you see folks raise when they're on the VC track every sixteen to eighteen months. So if you do raise and, you know, call it q four, q one twenty twenty, what would be the right amount to raise and how

17:24would you think about that?

Tore Steen

17:26Yeah, it would really be a growth... The growth round, you know, the last round was an $8,000,000 round. It would most likely be kind of 15 to 20,000,000. You know, it would really be our our... Hopefully, probably our last, but a but a real growth growth round.

Nathan Latka

17:38Do you think you can get up to kinda 100,000,000 pre money?

17:42Oh, yeah. Yeah. I was I was gonna say, I don't know how... I'm a SaaS guy, so I don't know how your kinds of investors would value the 80% of revenue you're getting from the marketplace.

Tore Steen

17:51Mhmm.

Nathan Latka

17:52That's good.

Tore Steen

17:52Okay. I think they they look at it through... Obviously, there's the revenue, but there's also kind of the value of the accredited investors, the value of kind of the customer base, and value of kind of what... You know, there's an intrinsic value in a marketplace. Right? That's hard to put a number on in terms of the network effect that you can... You know, that you start to see.

Nathan Latka

18:10So, I mean, let me try and quantify that here for a second. If Steve Roth and Vornado comes and said, hey, we'd love to buy this thing for you know, a $250,000,000 called two fifty million bucks, do you sell?

Tore Steen

18:20That's that's a pretty lowball offer.

Nathan Latka

18:22That you said that with a pretty straight face, I would consider that very high. Mean, that is a what is that? Five, 10, that's like a 10, 15 X. I mean, that's pretty healthy.

Tore Steen

18:31The reason I say it is because, yeah, I guess we don't have that in mind right now. We look at what we're doing already, and we say we're excited about, you know, again, we'll do 500,000,000 on the marketplace this year. So just to put that in context, in the first kind of five years of CrowdStreet, we raised 500,000,000 on the marketplace. This year alone, we'll do 500,000,000. What's really possible in this industry, because there's about $250,000,000,000

18:55of equity in commercial real estate every year. We're still such a, I mean, it's great growth, but I just look at the upside, Nathan, and I'd almost be kind of disappointed. Well, yes, $250,000,000 would be a nice like offer, I'd be almost disappointed to kind of get out at this point with how much opportunity is still ahead of us.

Investor Side of the Marketplace

Nathan Latka

19:14Right? 100 developers on the supply side. How many investors have put in at least, call it, a dollar on the on the investor side over your history?

Tore Steen

19:21Yeah. So we've had now... We have over 5,000 investors growing by at least 300 new active investors each month.

Nathan Latka

19:30That's... I mean, that's pretty darn good. And the the... I'm curious. The average first tranche of capital a new investor puts in each month is about what?

Tore Steen

19:37Yeah. First time investor. The the average investment size is $45,000. So what what is that? Yeah. Minimum is 25 k on our platform, but you can imagine many investors might start 25 or 50 k. They come... Can maybe move up to a 100 k in certain investments.

Famous Five: Books, Tools and Lessons

Nathan Latka

19:53Interesting. Alright. Let's wrap up with the famous five. Number one, favorite business book?

Tore Steen

19:58Oh, favorite business book. I think it's the John Doerr, I, you know, Measure What Matters. Just because in the last year in terms of, you know, getting better at executing, myself and my team spent considerable time reading that book and trying to kind of build our own OKR methodology.

Nathan Latka

20:17Number two, is there a CEO you're following or studying right now?

Tore Steen

20:21Yeah, one that I always find intriguing,

20:25I use a character, which is Elon Musk. Musk. Just the things that come out of his mouth, the innovation that he espouses is pretty amazing.

Nathan Latka

20:35Number three, what's your favorite online tool for building your company?

Tore Steen

20:39Yeah. I think one that we've really coalesced and I I love is... And it goes back to the... A little bit of our methodology is is Trello. Trello has been very valuable for the... For everybody.

Nathan Latka

20:49Number four, Tore. How many hours of sleep are you getting every night?

Tore Steen

20:52Oh, I'd say six to seven is is the average.

Nathan Latka

20:54And how old are you?

Tore Steen

20:56I'm 50.

Nathan Latka

20:5750. And what's your situation? Married, single kids?

Tore Steen

20:59Married, two boys, 14 and 17 year old boys.

Nathan Latka

21:02Oh, that's great.

Tore Steen

21:03And a senior this year.

Nathan Latka

21:05That's great. Alright. Last question. What do you wish your 20 year old self knew?

Tore Steen

21:09You know, I think it's an interesting question. I think if I reflect back, because that was a while ago, I think the thing is it's okay to fail, right, if you learn from that and become better. And I think as a 20 year old coming out of school, out of college, especially kind of early 90s, was the mentality is you don't fail, right? It was that you do it this way, you learn, it's not okay to

21:34fail. And I think being an entrepreneur over the last fifteen years of my career now, and I wish I did it earlier, which is you learn from those failures, and it's okay if you've given everything you had and you did the best you did, and then it's okay to fail.

Nathan Latka

21:50Guys, there you have it. CrowdStreet did 9,900,000 in 2018 on track to do 20,000,000 this year, split between 20% SaaS revenue from 200 developers paying $25,000 ACVs to list their properties on CrowdStreet. The other 80% coming from three or four marketplace products where they take either, call it, 100 to 200 points on to drive that growth. Healthy growth, 13,000,000 of the company so far burning about $100,000 a month. 75 people, 11 engineers, as they look to

22:14scale, they've deployed over $900,000,000 in capital into these projects. Investors can get started on the platform accredited for as little as $25,000, but average first time check is $45,000. Again, healthy growth. Tore, thanks for taking us to the top.

Tore Steen

22:25Hey. Thanks, Nathan.