When Crowdfunding Goes Awry | Top of Mind Series
In this short "Top of Mind" episode of the Invest Like a Billionaire podcast, co‑hosts Ben and Bob Fraser dissect a recent Wall Street Journal exposé on the real‑estate crowdfunding platform CrowdStreet. The article, titled “Missing Millions and a Rabbinical Arbitrator,” details several troubling deals: a $63 million Nightingale development that raised capital but bought no properties, a $25 million default that was omitted from the sponsor’s track record, and a Marriott hotel project in Salt Lake City that suffered a $25 million budget overrun, a failed capital call, and a subsequent re‑offering that concealed the failure. The hosts discuss how CrowdStreet’s venture‑capital funding creates sales‑first incentives, leading to misaligned interests and selective disclosure. They share personal experiences as both limited partners (LPs) and general partners (GPs), highlighting red flags such as edited track records, lack of guaranteed construction contracts, absent committed lenders, and rushed urgency tactics. The Fraser brothers outline a practical due‑diligence framework for LPs: scrutinize alignment of interest, fee and waterfall structures, GP skin‑in‑the‑game, ask about deals that went poorly, review historical reporting and communication consistency, and diversify across multiple private‑alternative investments. They contrast this with their own GP approach at Aspen Funds, emphasizing investor‑focused incentives, back‑end compensation, and thorough operator vetting. The episode concludes with actionable advice for investors to pause, ask tough questions, and not let fear of occasional failures deter them from private‑alternative opportunities.
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Hello and welcome back to another episode of the Invest Like a Billionaire podcast. I am your co-host Ben Fraser, joined by fellow co-host Bob Fraser, and we're coming today with a top of mind episode. So this is one of the segments that we do on the show that are kind of a little bit more short and focused on one particular topic and usually something that we see in the news or a question that we get from investors or something that is kind of newsworthy or noteworthy right now. And Something that was kind of brought to our attention just a few days ago, about a week ago actually, was a journal that was on the front— or an article was on the front page of The Wall Street Journal talking about a crowdfunding platform that we're very familiar with and a lot of you are probably familiar with as well called CrowdStreet. And it's a very interesting write-up. And you can see here, I pulled up in the back behind us, the title is Missing Millions and a Rabbinical Arbitrator. Real estate deals gone bad hits popular crowdfunder. And so it's a really interesting— it's, you know, kind of the Wall Street Journal did an exclusive on this, digging into some of the deals on the platform. And it's really interesting because we had both independently, Bob and I had experiences with Crowdstreet over the past several years. There's always some kind of just some checks and yellow flags that we had. And it's interesting to see some of this. So Do I share a little bit of just what the article highlighted? Definitely. If you haven't read it, go encourage you to go read it right now.
Yeah.
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You know, this is the kind of thing that scares a lot of investors, right? This is why a lot of people don't do private alternatives. It's like, well, how do you know you're not going to get, get ripped off, you know? And And, and Crowdstreet didn't necessarily rip people off, but they didn't do due diligence. Yeah. And so there's a couple of deals that says they raised $63 million for a company called Nightingale to do real estate development. And it turns out that they didn't do any. And, and literally the money has disappeared and it's no properties were purchased.
So property, they raised $63 million of investor capital and no properties purchased. And I think around $100,000 left in the account right now.
And, and now, and then it's apparently the part of the agreement was that everything was arbitrated through a rabbinical courts. And so now they've got to go through, you know, so the chances of investors getting their money back are probably very low, you know. And then another deal they did with, with a company that was, that was under, that was, had been accused of fraud by the SEC and they never double, never checked this. And so they raised money. And, and they also point out in the article that a number of the deals that these guys have done, you know, some of the— some do well, they've done better, but, but some of the people have not gotten their money back. I think it was around up in 20% of the cases, if that's right.
Yeah.
And so, you know, not good. I mean, this is the kind of thing that, that really, that really scares investors and And now I personally had an experience with Crowdstreet.
So, well, before, before you say that, share the other piece of this that's highlighted in the article where there was an issue that was flagged when they did review the track record of, I forget which, oh yeah, which sponsor it was, but share that piece of it.
So, so they literally edited the track record of this, of the spa, of this real estate sponsor. To eliminate two bad deals. So they would show only the rosy deals. And yeah, and so they eliminated one where they had a $25 million default and another one where they lost a building to a lender. So this is the deals where they gave back the building to the lender. Presumably investors were wiped out. Now, the one where they defaulted, a $25 million default, and Crowdstreet simply eliminated that from—
they didn't even bring it up when They didn't shut up the deals.
And then when they're interviewed for the article, they said, oh, we didn't think that that was relevant, that investors would want to know that it wasn't essential to the— it wasn't essential to the investors. Like, hello, you wouldn't want to know that there was a default and that these guys, you know, gave a building back. I mean, you know, now that— now the truth is, you know, there's going to be— there's— you're not— all deals are never going to work out.
Right.
But you want to have, you know, you want to have your disclosure, right? There needs to be— investors need to get— be— just have the disclosure and then make the decisions what they want to do. And, and, and I, and I will say to, you know, to investors as well, you know, you need to look at the track record and, and look at those deals and not just, hey, if a guy has one little speed bump, you run the other way.
Sure.
Right. But you want to ask, right? You know, you want to ask them and talk to them and ask them about those deals. Okay. What happened? Was the due diligence done? How are you handling this? And actually, you might learn a lot.
Yeah.
And it might, might be a deal went bad, but they did everything right. They did the due diligence right. And are they hustling? Are they working hard to solve these problems? You know, this is, this is what as a passive investor, you pay your general partner to do.
Right.
They're out or they're one, they're running ahead of the issues. You know, there's not a single deal, you know, there is rare that you have a deal that everything goes exactly like you plan and without ever any intervention. So what we do as general partners is we're running ahead of the deals. We're looking ahead. Are we meeting the numbers? If we're not, you know, how serious is it? And we're working those problems. We're solving those problems before they ever become big problems and we're figuring things out. And we're communicating to investors. And that's what you want to know is, are your GPs working for you? Are they hustling? Are they on this? They know what's happening and are they solving the problem right? There's for sure always going to be issues for sure.
Right.
The question is, you know, is your GP working these things? So I think don't just— if there's a negative deal, don't just run the other way, but go ask the questions and do a deeper dive.
Absolutely. I think it's a great point. And one of the things I tell people all the time when they're evaluating other sponsors, you know, they're always asking, what are the questions I should be asking to do my due diligence? Right. As a passive investor, you are at a disadvantage sometimes because a lot of times you don't have the ability to go run the background checks yourself or go and, you know, do a deep dive into the underwriting models or the track records. Or maybe you're trusting a platform like this and they're actually excluding information that should be critical in your investment decision. But what I always say is a very simple question you can ask is, you know, tell me about the deals that didn't go according to plan. Right. Ask a sponsor, because first red flag is if they say, oh, we've never had a deal that, that, that didn't go bad. Well, they either haven't been doing any deals or they're lying.
Right.
Because inevitably there's going to be deals that don't go according to plan, you know, both positive and negative. But then the next question is, well, what are you doing to proactively manage that? What went wrong? How are you mitigating the risk and what are you doing to make investors whole? Right. If there is any kind of potential loss or an issue of that. And so it's important to see how they react, right? Because the character of, you know, a person or a sponsor is not going to be revealed in the deals that go well, but in the ones that don't go well. And seeing how they respond to that is actually a very, very good indicator of what they're going to do in those situations.
If they're playing coy and hiding and not wanting to talk about that, it's, it's— I would run the other way personally, you know. But if they're hustling and you, you know, if they're doing everything that you would expect a person to be doing, then, then I wouldn't, you know, I wouldn't run the other way. A lot of times, you know, you know, those things make us better managers. And like I said, you know, there's, there's always something going wrong. It doesn't mean deals go bad. It just means there's always hiccups, right?
Yeah.
And, and, you know, that's just the way it is, you know. So I had a, I had a personal you know, in, you know, issue with CrowdStreet, you know, just I made a personal investment as a limited partner in one of their deals. And immediately the deal, they came back with a capital call like just a couple months after I invested.
Which explain, explain what happened, what that means for people. Yes.
Yeah. So, so literally they said it was a $55 million construction cost. It was a big hotel they're gonna build in Salt Lake City downtown. Beautiful, you know, great, Great thing. It was a Marriott, going to be a Marriott. They come back and said, oh, we got their pricing in and it's going to be $80 million, not $55 million. So that $25 million budget blow up. And then apparently their lender backed out and the lender was, you know, apparently the lender wasn't under, you know, they didn't have a binding, binding agreement with the lender, which is bizarre. And These are two things that you absolutely do with every real estate deal. You get a guaranteed max contract from your, from your construction people and you get a lender that's committed to the deal and that's not going to back out. You've got terms that are committed and they didn't do either of those things and went and raised, you know, I don't know, you know, maybe $20, $25 million, if I recall. And then they go back into a capital call. Well, the capital call fails.
Well, and let me, Make a little interjection there because one of the things that was interesting that was again, a yellow flag was they sent back a new pro forma. Yeah. So the costs have increased by what, 30, 40%? Their, their debt got a lot more expensive.
Yeah. The, the debt, but surprise, second lien, their second lien holder stepped up and did the first lien at an incredibly high interest rate.
Right. And this was the billion— Mortgage rates were, you know, skyrocketing. And surprisingly, the pro forma net returns to investors actually went up.
Right, right. So it went up all these bad, but they went up and all they did, it was a spreadsheet exercise.
Yes.
They manipulated their spreadsheet to show we're gonna make lots of money, don't worry about it.
And you know, so then the real issue was when they went back to crash.
So then, so then a Kessel capital call is when you make an initial investment and they go back, hey, we need more money. You gotta save the deal, you need more money. Well, so they went back and the, that capital call failed. They didn't make they didn't raise the additional money through existing investors. You know, no big surprise. So then CrowdStreet goes back and makes a brand new offering to investors, not disclosing that this was a failed deal, not disclosing, you know, they said, yeah, we got a lender, they're on board, not disclosing that this was nosebleed interest rates and that this was a failed deal and with a failed capital call. And I'm like, oh my gosh. I mean, just this, it's really just, they're pushing so hard to get deals done and, and it's not honest. And, and, and, you know, so I'm, I'm both— I'm a general partner as Aspen Funds. We're a general partner. I mean, we're responsible for the deal to make sure the deal goes well. And we operate those deals like crazy and we're 100% investor-focused. We, you know, we want to make sure our investors get paid no matter what. And we're working our tails off to make sure that happens. But I'm also an LP. And so what's interesting is I'm in that deal as an LP, and I did, I did a little due diligence, but it's nothing like what I do as a general partner. Right, right. So when we're general partners, we invest easily high six figures into every deal doing, doing investor background checks— sorry, operator background checks. We look at their operating history, we look at their teams, we go on site, we visit them as an operator. We go do, we go do pro formas, we do projections, and we build up our own. We do our own projections. We don't take theirs. We actually start our build our own. We do our own market research, original market research into their markets. We do, we look at their track record and, and we really ask a lot of questions on those things. And it's simply a lot of time and money that as an individual I didn't do as an LP. And you can do as an LP, you really can't afford to do that. You know, so, you know, you know, I'm in the same boat and I understand what it is to be, to be an LP. And so what does that mean? Does that mean that we shouldn't do any private alternatives? Right. And the truth is private alternatives are far, far superior, you know, even, even with these little potential issues, you know, but you have to trust somebody.
Right.
And so, so, you know, you know, talk about that, you know. Yeah.
Well, I mean, how do you pick? I mean, I had another experience too with CrowdStreet completely separate from you. And this was several years ago and this was when they were kind of just up and coming and, you know, making a big splash in the crowdfunding space. I mean, these guys have raised $4 billion from investors, from retail, from retail investors. I mean, they're one of the biggest players in this space. And, you know, we were looking at one point getting, you know, some of our deals up on the platform and just, you know, evaluating what that would look like. And so I was talking with one of the reps And, you know, it was interesting kind of how their model worked and all that. You know, it's definitely, it was set up as a brokerage. So they were actually, you know, paid, they're broker-dealers and getting paid for the amount of equity that they raised. That's how they got paid. And then I just asked, you know, how are you guys funded? How are you guys capitalized?
Right?
Is this bootstrapped or venture capitalized? And it was venture capitalized. They had just done like their Series A or Series B round. They'd raised a lot of money. And I think when we were talking, they had just raised another round and a huge amount of capital that they had raised. And then he went on to share some of their kind of goals and what they were trying to raise capital-wise. And it was just, it was so interesting because it really struck me that their number one motivation was the dollars and the doughnuts, was sales. And you can see how that played out. Obviously fast forward a few years to seeing this when they, when it came to an issue of, well, do we choose to disclose this or would that potentially hurt the amount of capital that we're gonna raise? You know, that's, that's what trumps, right? When you're venture capitalized and you've actually had experience with venture capital money, your tech firm, right? It's, to me, it's a pretty big red flag, right? And because the incentives are totally misaligned.
And before we hit that point, you know, you may not know, maybe you do if you've listened to this podcast for a while, I actually ran a venture capitalized firm in the, in the late '90s and raised $44 million in venture capital and did an A, B, and a C round. And then, and had one of kind of a very famous, well-known venture capitalist join in first and really, you know, teach me all about VC. Well, here's the way VC works is basically they just, they supercharge your business. They just pour gasoline all over you and light you on fire and you either blow up or you blow up, you know, and one or the other. And they don't care which really. It's like, you know, 5% of the time it works. 95% of the time it fails. They have 1 in 20 deals that achieves their goals of 100x kind of, kind of, you know, returns. And the— and that one deal does that, you know, means all the other deals are basically irrelevant. And so they don't care if you 2x or 3x or 10x, that's irrelevant to them. They want the 100x and that's their model.
Yes.
Just light you on fire. And so, and so, so then they became, you know, an organization becomes sales focused And, and, and first. And so it's super important to find, you know, I believe as limited partners, we have to trust people. You have to trust people. There's simply no way around it. You cannot do six figures of due diligence, you know, on every deal you do. You have to trust people. And so who do you trust? Who do you trust?
Right. And I think, you know, I mean, there's a few things that I would say are pretty critical that are probably the, the top questions you can ask, top things you can look at, they'll get you 80, 90% there, right? And I think the biggest one is, is take a step back and just look at the alignment of interest, right? Do, is the way that the deal's structured favorable to investors first and prioritizing investors, right? Are, are the fees, you know, in, in line with market? Is the waterfall of how cash flow gets distributed, you know, preferring investors? And then I I think the biggest thing of all is skin in the game, right? And this is, sometimes this is thrown around a lot, but it is simply the best measure and best proxy for alignment of interest that there is, is are the, are the general partners investing as LPs into the deal that they're presenting to you, right? I guarantee you the general partners of Crowdstreet were not investing in every deal. They probably definitely didn't invest in Nightingale, you know, deal.
So, so when we sponsor deals as general partners, now we, we generally will take some upfront fees and generally hopefully we're trying to recover a little bit of our due diligence. Costs, but that's not where we're making our money. Where we are making our money as general partners is the back end.
Yes.
The performance of the deal after our investors are getting paid. So after they're earning their preferred returns and everything else, then if we've done a good job, then, then, then we're going to get paid. And, and that's the way, you know, so our incentives are aligned, right?
If—
yes, if we're paid on the back end, not the front end, versus if I'm paid on the sale, you know, then that's not necessarily a good thing. And then the second thing, as you mentioned, you know, one of our standards from the beginning, every deal we do, our, our, our partners in, in our, in our management company all invest in the deals and we invest on the same terms as limited partners.
Yeah.
And so I'm a limited partner in all my deals and, and so is every one of our partners. And so we, you know, we really care. It matters to us too that these deals go well. And we're— we've always been really— it's our culture. Is 100% investor-focused. We want to make sure our investors win. We're— our growth as a management company is secondary to our investors winning, and we're going to make sure they win. And so you want to make sure your incentives are aligned.
Yeah.
Yeah.
And I think, I mean, that's probably the biggest one, incentives, you know, skin in the game, how much capital they put in personally to where it's going to cost them if the deal doesn't go well. You know, we've talked about track record a little bit. Right. And I think it's important you know, to, to ask about those deals that didn't go according to plan. And if they're an operator worth any salt, they're, they're tracking, you know, what is, what was my pro forma and what is the actual performance and where's the difference and what's the cause of that and how are we, you know, managing to that.
Right.
You can see some of those things. And one of the best things I think you can do too is just look at the historical reporting of their other deals. Right. Because a lot of times I've heard people invest in a deal there's a lot of interest, a lot of excitement, a lot of urgency to get in the deal. And then as soon as the wire is sent, the check's been sent for the deal, the operator doesn't send any updates and they don't hear from them for multiple quarters or even a year or longer. And so it's how consistent is the communication so you know what's going on. And I think that's another really big thing is you can look at showing other reporting from past deals and past operations. Again, there's a disadvantage, but it is finding those people that you can trust by doing some of these basic level due diligence and just dip the toe in, start small, right? Build that trust over time. And the thing that CrowdStreet did so well, to their detriment, was they created a lot of urgency, a lot of scarcity sometimes in these deals. And it was, you got to go now or it's gone, right? You click on a deal and the button doesn't refresh fast enough and it's gone. You feel like you're missing out. It forces you to kind of, you know, maybe truncate the due diligence process because you feel like you're missing out. And as an investor, it's always okay to wait, to wait.
But, but don't let this dissuade you from, from private alternatives. They are so far superior, far less volatile, far, far, far more, far better returns. And, you know, but what you can't do if you're doing, you know, one syndication, you don't want to just own one apartment complex, you know, so make sure you sprinkle your money around several deals and, and go slow. It's okay to go slow. We have a lot of investors that may have millions to, to place and they'll put $50,000 with one deal. They just watch how we get in. That's really fine. It's your money and make sure you want to sleep at night. But, but, you know, don't, don't let it, don't let it, don't let it slow you down.
Yeah, love it. Well, we always appreciate you guys listening, and especially on this segment of the series, if you ever have questions that you have about, you know, evaluating deals or different things going on in the market or different thoughts that you have or questions you have, feel free to reach out. We actually have a spot on our website, TheBillionairePodcast.com, at the top where you can submit a question and we'll see it and we may choose to respond to it in a future episode. So appreciate you all listening and hope you got some, some value out of this episode.
