What Entrepreneurs Can Learn From Real-Estate Developers
In today’s economy, a project requires vision, commitment and funding to make it off the ground. And when it comes to execution of these business essentials, entrepreneurs in every field can learn something from those in commercial real estate.
The feasibility factor
Before committing time and money to a project, a real estate developer takes steps to investigate all possible outcomes. Referred to as a feasibility study, the developer’s preliminary research covers all legal, economic, financial and technological factors.
The feasibility study is comprised of analysis of the market, location, usage concept, competition and risk involved in the project. Armed with that information in a written report, the developer decides whether or not to move forward.
Many new entrepreneurs dive headfirst into product development without making a true business case for the app, platform or service, only to be surprised later when costs skyrocket, regulatory hurdles arise or they face an unreceptive market.
Lesson: If you don’t analyze risks and market forces before you build, you’re setting yourself up to fail.
Once they decide to pursue a project, developers put all of the planning and coordination on their shoulders. That includes scouting and purchasing land, creating a project team, securing permissions and licenses, financing the deal and managing construction. All of that tends to happen over a short period, often just several months.
But despite the broad scope of those efforts, experienced developers typically juggle multiple projects at a time. How? Through realistic business and project planning. A developer drafts an initial pro forma plan as soon as he launches a project, revising it along the way. Even an informal outline helps keep the project rooted in timelines, budgets and goals.
Lesson: Map out objectives and strategies early on. Revisit them regularly to stay in touch with your progress.
Commercial real estate deals typically involve a sophisticated financing structure including both debt and equity capital. The different types of capital are arranged in what’s called the capital stack -- a structure which dictates the order of claims to investment returns.
Depending on project specifics, a developer may syndicate a portion of the capital stack. Syndication -- which has been around for decades -- is a pre-cursor to crowdfunding. It's a defined process whereby developers divvy up some of the equity among a group of investors, often high-net-worth individuals in their network. Right up front, investors are informed about the investment terms, project timeline and return projections.
The organized nature of syndication makes it easier for developers to raise funds efficiently. Without a similar framework, a business's efforts to pursue capital can be haphazard. Often, they fail to close investors because they don’t have -- or don’t communicate -- a compelling exit strategy.
Lesson: Approach capital raising with a structured strategy. Make it clear to investors how you plan to earn them returns.
The reputation game
Real estate developers are adept at converting personal colleagues into investors. That’s partly because they emphasize ROI, but also because they know that investing isn’t just about making money: It’s about backing someone you trust.
Developers build reputations over time as they complete projects. Investors care about what a developer has accomplished, who his partners are and how his investors fared in the past. The same is true of startup investors.
Recognize from the start that until you can back up your pitch with past performance, new audiences will be hesitant to invest in you. That’s why it’s crucial to keep your network informed, engaged and motivated to be part of your success.
Lesson: Focus on becoming a known commodity by building a verifiable reputation for success. Compel the people who trust you to invest.