"Every Fintech has a very important level of social responsibility which is to create trust and for people to see that serious companies are being created where they can put their savings. And we at Crowdium are building a solid, reliable, long-term business because we want to compete as a financial product with the banks."
CEO of Crowdium
Crowdium, the Argentine real estate crowdfunding platform.
Today we interview Damián Lopo, co-founder and CEO of the first real estate crowdfunding platform in Argentina:
Damien, you studied business administration and then you did a master's degree in finance. From there you started in digital marketing in the United States, then moved on to financial asset management and from there to real estate asset management. Tell us a little more about yourself and your previous professional experience before Crowdium.
Creating and setting up businesses is my passion, it's something I like very much and it's what I've always done. My professional experience started very early. I started working while I was in college, but I had very few formal jobs in large companies. And I was fortunate to always have opportunities to create things, which is what I liked, and luckily I always did well and that led me to take an entrepreneurial path almost my entire career.
I started a project, called Proideas, with a partner. I did just the financial and presentation part and he brought a little idea that we developed together. And some time later we ended up having a company listed on the Argentine stock exchange, with two hundred and fifty million dollars in assets.
We arrived in 2008 with the world crisis of Lehman Brothers and I had the luck, lucidity and advice of friends in New York, who told me: "Damien sells everything and get out of the capital markets because the world is melting". I was fortunate enough to be able to do so on time, and I sold my entire stake before the crisis, so the crisis grabbed me in total liquidity.
And there I started a new holding company: NewLink Capital, which is the one I have now and which today has five dams: a developer, a funding company, a land company, an investment fund and Crowdium.
As an entrepreneur, what are the main difficulties you have faced?
When I was graduating from college, the Internet era began and I rode that wave in the late nineties, with some ventures that went very well. I was lucky enough to be able to participate in that, where I learned and got very rich about what it's like to create a company from scratch and, above all, a technological company, in something as modern as the Internet was at the time, which was something totally new. That gave me a quite different vision in business, but at the same time I found a limitation: that all great ideas ended up in a closed path that is the search for capital. You made a project take flight, but when you really wanted it to take off, if you didn't have a good amount and anchoring capacity its growth was limited.
I give talks at the University of San Andrés about entrepreneurship and I always say to the kids: "you have to complement your profile". I was always commercial, I was always a salesman and I always had a facility to develop things, but when I sat in front of an investment fund with a CFO with twenty-five years of experience and said to me: "calculate the beta of this, or the risk rate of this, or what is the weighted capital cost of that?" When they went deep to make an investment, which is what big funds do, I felt I had a weakness, so that's when I decided to dedicate a couple of years to becoming a professional in the financial area.
Because I realized that I spent more time looking for money than working, I did a Master's degree in finance, I started working in futures and options trading, I worked a couple of years in the New York Stock Exchange, and I did all this to get involved in the financial sector, generate contacts, learn and professionalize myself.
Another aspect that is more difficult for the entrepreneur to control, but which is also very important, is to know how to find or value the right timing for your project. I made several companies in my career that started going very well and then I had to close them because it was too early for that product. In 1998 I created a consumer group purchasing company called Neotribu that was similar to Groupon, but fifteen years earlier. At that time the Internet didn't have mass and after some investment rounds I had to close it, but fifteen years later Groupon did make sense and today it's worth billions. Sometimes doing things too early is as bad as doing them too late, and this was my greatest learning.
You are also a recognized investor, in 2013 you were selected to participate as one of the five jurors/investors in the Argentine version of Shark Tank and you also participate in the Santa Maria Investment investment group. What do you value most as an investor in an entrepreneur?
I always supported the entrepreneurship sector and when, as an entrepreneur, I did well and had extra capital capacity, I got involved in some third party ventures and funds. What happens is that my investment capacity is not that of large funds and I go into earlier stages for some things and support some ventures or companies. And I also develop other ventures within my company. So I have the double hat, or the double role, as an investor and as an entrepreneur.
I collaborate a lot in the entrepreneurial ecosystem of Argentina. In fact, I am a founding member of ASEA, which is the Argentine Association of Entrepreneurs and I give ad honorem classes at the best business university in Argentina. What I try to do is to raise the technical level of Argentine entrepreneurs. And when I teach at the university I always tell them: "I'm going to try to teach you what they didn't teach me at the university and I would have liked them to teach me". Because sometimes books don't have all the answers and sometimes at the university they give you more theoretical knowledge, and when you come across reality outside, you say: "it would have been good if someone had told me that this is what was going to come to me...".
When we recorded Shark Tan Argentina, one of the clearest things we saw was that there was a strong deficiency in financial literacy. It can't be that an entrepreneur tells you that a company is worth ten million dollars and that when you ask him how they arrived at that valuation, they only know how to give you the intuitive answer. No serious institutional investor is going to recognize a valuation of five or ten million dollars in a company if you don't have some financial backing.
And don't you forgive entrepreneurs who don't have that financial culture that you had when you started?
No, I don't forgive anyone who doesn't know about numbers. Entrepreneurs make the typical mistake of talking to you for an hour and a half about their product or service and then they don't know how to value the company, they don't know how to calculate the value of a discounted future cash flow, etc. And there are countless technical, numerical things that the investor is going to see first. The investor will only listen to you for a few minutes to see if your product or service is good. And if the answer is yes, then the investor wants to hear about business: how much money do I put in? how do I get it? how do I invest it? what are the risks? where are you going to invest? how much are you going to use for marketing? how much for management? how much for technology? how much for human resources?
The main mistake that entrepreneurs make is that they don't understand that to make an investment with an investor the talks are basically numbers. The product talk should be twenty or thirty percent maximum and the other seventy percent are numbers!
Young guys don't have much professional experience, but they have the energy, the will, the desire and the idea, all to say: I'm going to make a company! They all dream of being the next Facebook, but they suffer from completing their financial profile. They are very motivated with their idea, which is perfect, and they talk to you for two hours about their idea and then they don't know anything about the other side of numbers. And they need to say: "I'm going to tell you a little bit about the idea, but I'm going to explain the good business behind it".
And with all that previous background, how do you get to crowdfunding? And how do you decide to found Crowdium?
In the first place, my previous holding company was already in the real estate sector, so I've been in the real estate sector for fifteen years now, and when you're in the real estate sector as deeply as it is a relatively small market like Argentina and they already know you, it happens that businesses often come to you and people call you.
And I got tired of people calling me every day and asking me: "I have $40,000 saved, what can I invest in?" And I had to answer: "With that capital, for now in nothing, you should continue saving a little more to be able to access some investments".
And then we said to ourselves: "we have to create a product for people who have less capital". Moreover, in Argentina and Latin America, unlike Europe and the United States, there is a total lack of credit. And if you want to buy a department worth three hundred thousand dollars, you have to have three hundred thousand dollars. You don't have to have the down payment of thirty thousand and a financial capacity to face a twenty-year credit because there isn't one. And that is the reality. Only in the last year, credits began to appear a little, but with a system of rates linked to inflation that failed again. The rates went through the roof with inflation and the people who took out credits are extremely worried. Latin America lacks credit altogether compared to the most developed countries in the world.
And, at the same time, in Argentina we have a lot of Spanish and Italian descendants and we all have a family mandate to want to invest in bricks, because there is a real feeling that it is safer than investing in the financial market. So people want to start by putting their savings in bricks, but then they can't because they don't have enough capital.
So we said to ourselves: let's create a simple, simple, safe and profitable platform that allows anyone to invest from a very low amount in the real estate market. That was the leitmotiv with which we started this more than three years ago.
When we started with the idea we began to look for viability and ten or fifteen companies of this same category were shyly being born in the United States, so we launched in Argentina our real estate crowdfunding platform almost at the same time that they were going out in the rest of the world.
In what year then did you create Crowdium?
We started the setup and programming phase at the end of 2015. And we have received five international awards and part of the credit is for our technology. Today in the world there are more than four hundred real estate crowdfunding companies, but Crowdium was the first company in the world to have a 100% transactional platform.
That means that you see a Crowdium banner, you click it, you enter the page, you register, you put your data, you open your account, you upload the documentation requested by the government to be able to invest, you make a turn of your home banking, you make a digital signature and your digital participation certificate arrives at your home. And you can do it if you want from the beach with a cell phone. And Crowdium was the first in the world that allowed you to do this. All the others always ended up in a physical signature, or a contract or something. We were the first to have a 100% transactional and legally valid platform.
Our platform has a very strong technological part, with five interrelated platforms:
- front (what the client sees)
- back office
- sales channels
Fiduciary means you can go to a local real estate agent, or a broker, to open an account at Crowdium. The system connects to the Crowdium backoffice, uploads the documentation and creates a Crowdium account for you. Then the backoffice automatically communicates with the fiduciary and, according to the government and according to the documents you sent, the fiduciary automatically tells you your maximum legal capacity to invest. And that's what's approved in your account and that's what's accepted. And this technological development was why we were given so many awards in 2016.
What is the legal status of Crowdfunding in Argentina? It's been more than a year since the Argentine government approved the so-called Entrepreneurship Law, but it wasn't very successful. Do you know what the status of this legislative project is and what your opinion is about it?
We are very involved in the issue because the legal firm that is drafting the Law of Entrepreneurs in Argentina are also the lawyers of Crowdium. A first regulation of the National Securities Commission (CNV) came out, called General Resolution 717-E/2017, which regulates Collective Financing, or crowdfunding, among other things.
But this so-called Entrepreneur Law, although we had already warned it, came out with many shortcomings and in fact it was a failure due to the excess of requirements that were demanded and no one has been registered as a PFC or Collective Financing Platform.
Then we had a meeting less than two months ago with the CNV, lawyers, people from SEPyME, which is the Secretariat of Entrepreneurs and SMEs of Argentina, and some of the representatives of the Fintech ecosystem in Argentina. And the CNV asked us for our feedback in order to know the reason for the failure. So we proposed the modifications that we believe are necessary and that we had already warned them some time ago.
The first problem with the regulation was to consider crowdfunding as something generic and to consider all cases the same. The word crowdfunding does not mean anything else than collective funding, but the government has to understand that financing a product, a startup or a real estate project is not the same thing. This is because the nature of this financing changes considerably, especially in the area of risks.
The government wanted to regulate the crowdfunding of startups, because statistics say that 80% of startups go bankrupt, and wanted to prevent someone with very good sales capacity from convincing investors to put all their money into a project and then lose them. So to protect the investor and limit his exposure in crowdfunding equity in startups, they decided to limit the maximum amount per project, the maximum percentage of your capital you can invest, etc.
So you can't regulate in the same way a startup that tells you that it's going to make a rocket to reach the moon and that it's going to be worth ten billion and the probability of that happening is 0.1%. That having a square meter invested in bricks, that the probability that you still have it is 100%.
And then they understood that crowdfunding encompasses very different items and that they cannot be regulated the same way. And this is the mistake they are making: regulators have to understand that the crowdfunding of a startup is not the same as the crowdfunding of a real estate project. What we have to value is the underlying asset that is underneath and assess whether the investor is putting the money in something safe or something that has a lot of risk and where they can lose all their investment. Because when you invest in bricks your chance of losing all your money is zero.
So crowdfunding is regulated in Argentina?
Nowadays the real estate crowdfunding platforms in Argentina are not regulated and are not reached by regulation. Another thing is the platforms that offer equity or participations in a startup. So what I can't offer are company shares.
Can you explain us a little more how you structure investments, trusts and what legal coverage the investor has? How is the investment process in Crowdium?
We negotiate a discount with the promoters, which can be between ten and fifteen percent. We sign a purchase option with that discount and ask you between 90 and 120 days to integrate the capital. We upload the project to the platform, which is legally tied up, and we have the agreed term to raise the capital.
The idea is that the one who buys with Crowdium will get it cheaper than if he purchased it on his own directly from the promoter, because he would not have access to the discounts we do get for volume and cash payment.
When we raise all the capital we go to the developer with an ordinary trust. We work with CFA Compañía Fiduciaria Americana, which is a public fiduciary audited by the CNV, which is the highest level of transparency you can have in the item in Argentina. We execute the call option and the trustee remains the owner of those departments with a trust.
Crowdium never handles investors' money. The clients deposit the money in the fiduciary account, which is in charge of executing the contract. And the investor receives a share of a trust that guarantees you the corresponding percentage of all the rights of that trust.
Two years ago we had the opportunity to see your presentation at the South Summit in Madrid, where you were one of the 100 startups selected. What has changed since then and what plans do you have?
We have a long-term vision and we want to be throughout Latin America in the next two or three years. And the only way to grow a company that works with people's savings and with their capital, which is basically similar to a bank, is absolute and total transparency. We work with the highest standards of transparency, security, documentation, compliance and everything in Latin America, so that Crowdium can pass any level of audit.
We are talking to U.S. investment funds to replicate the company and we are already in talks to open in Mexico, Colombia, Chile, Uruguay and the United States. And we must be as transparent and pristine as we can be. And that's how Crowdium works.
Because we have a very clear long-term objective, which is to be the number one crowdfunding company in Latin America, with the greatest transparency and to create a brand that is solid, reliable and that people see through the years that they can get their capital in a place that is totally safe.
We at Crowdium have chosen to provide the investor with the maximum legal protection figures existing in Argentine and Latin American law. The fiduciary and controls of the CNV are very expensive, but we are building a solid, reliable and long term company and we want to compete as a financial product with the banks.
You've talked about Crowdium's expansion plans, but at the moment you don't accept foreign investment. Do you plan to open up to investors from outside Argentina?
Currently, the Trust Act in Argentina establishes that, if there is only one foreign investor in a trust, who does not pay taxes in Argentina, 35% of taxes must be withheld from all trustees. And it is because of this different tax treatment that, at the moment, we have not accepted foreign investment so as not to penalize Argentine investors. And for this reason we make trusts for Argentines in Argentina.
But we are already working to launch trusts for foreigners who can invest in Argentina. And then for next year we are incorporating blockchain technology to simplify processes, have more security and more transparency and more internationalization.
Although, as I said before, I think it's still too early for blockchain and it's not a good idea to rush. It's still too early to launch anything because it's not popular enough and has a very high drop-off rate for users. But we are clear that it is the future and that all Fintech will be managed in ten years with interconnected blockchain networks and it is a process in which we are already working.
In September 2016 you raised your first round of investment of 500k dollars. And recently you are finalizing a serious round A for an amount of 1.5 million with different venture capital funds such as ComeFund Venture Capital and NxtpLabs. Can you tell us more about the subject?
We recently went to Miami, along with my partner Manuel Estruga, to a Real Estate investment fund event and we had more than twenty meetings to present Crowdium and we did extremely well. And there are several investment funds that want to expand the round from the initial 1.5 to 3 million to get into this stage.
There is nothing signed yet, but we are already working on the due diligence. It is a strategic decision that we have to make now, because we want to have the Cap Table in order and define well the valuation and the post money value, so as not to lose control of the company in a later B series. So we are seeing how much we accept and how much we do not. If we wait and close already with the initial 1.5 and start international operations and then we open again round to a higher valuation in which you cedes less equity.
We could do regionalization, or internationalization, with equity, but growth with organic capital is slow. Crowdium is a company that earned money after a year and a half. And for us it's a very important pride, because starting a technological company and a year and a half later being Cash Flow positive is a great achievement. But if we have to wait until we have surplus capital in Crowdium to be able to open one country and then the other and then the other, it can take four or five years. But if you are injected with a major investment in just one or two years you may be operating in five countries.
In this business time is very important and time is a value. And we are willing to sacrifice equity in the company in order to gain speed, because we want to be the number one company in Latin America in the short term.
Crowdium belongs to the group NewLink Capital, which also has other brands: Gaudium, Tirium, Arland and Landium. Can you tell us a little more about the organization of the group?
Crowdium is just one of NewLink Capital's companies, although we as partners say it is like our preferred son. The other businesses are more traditional and we see that Crowdium has the potential to be a company of more than one hundred million dollars, but if we focus so much on Crowdium it is not so much because of the economic valuation, but because of what it implies in terms of impact on the Latin American real estate market. We want to democratize investments, we want a Mexican to be able to invest in Argentina, a Chilean to be able to invest in Peru, or an American to be able to invest in Brazil. That is our objective.
What prospects do you see for the Argentine real estate market?
I have been in the Argentine real estate market for more than fifteen years, with which I would say that I know the real estate market better than crowdfunding. In the crowdfunding, as we were the first ones here, we didn't have anyone to learn from and we are writing the book on the subject and we learn with experience.
But in the real estate market we have a great deal of knowledge. Argentina has a particularity, which occurs in few markets, and that is that around the world when there are exchange fluctuations and the dollar goes up or down, properties go up or down. But in Argentina, as there is no credit, each buyer put penny by penny all the money to buy his apartment, broke his savings pig and invested it in a property.
And in case of devaluation, people are not willing to assume the loss and even if they don't sell the property they are not willing to lower the price. And that's why the Argentine real estate market doesn't usually reflect devaluation in a linear way. This is something cultural of the Argentinean, who as it cost him a lot to pour his savings there, prefers to say I'm staying rather than assume it's worth less.
In Argentina for many years we had an exchange rate nailed in 16 pesos per dollar, with inflation reaching between 25 and 40%. And that generated a gap with the cost of labor to build a property, which every year rose 30% and cost you more and more pesos, but the dollar was the same, and then it cost you more and more dollars. And there came a time when when you calculated the costs of a project: the land, the project, the materials, plus the labor and the total cost of making a building, you were above the selling price. And then what happened? Well, the construction was stopped.
We all knew, and wished, that in Argentina there had to be a devaluation. Why? Because the field was stopped, the construction was stopped, tourism was stopped, etc. Everything that depended on things in dollars, with a fixed dollar at a low value, began to slow down. And then came the great earthquake that happened, the exchange rate crisis that went from 16 to 20, then to 22, touched 42 and now stabilized at 38 or 39 pesos per dollar. While this devaluation was a shock to the economy and could have been more gradual, we were all waiting for it to happen and it wasn't as tragic as it might seem. The economy is a very complex matrix, it hurt the importer and it benefited the exporter, but I think it was good for the economy.
Nowadays, the cost of construction has dropped by almost 35% and the real estate sector is beginning to reactivate. Credit, which was something that had helped a lot to generate sales, stopped suddenly with inflation, but now it is being reactivated. So, in short, I think the real estate market in Argentina has good prospects for the next few years, but it's not exempt from the harsh reality of the Argentine macro economy either.
You have already funded 7 projects on your platform. What average profitability are you offering?
What we saw is that the Argentine micro investor needs to have double-digit rates in dollars. If I offer rates of 7 - 8% they don't feel attracted. If I offer rates of 10 - 12% they love it. If I offer rates higher than 12% they put the money without looking. In Europe the rates are lower and yields so high to a European can sound even suspicious. But in Latin America the situation is reversed and you have to generate very good business and the investor is very demanding and for less than that does not enter. Above all, the micro-investor who throws away a $5,000 or $10,000 chip to try.
So, we at Crowdium of the six portfolios we have right now, one we already closed, which lasted three years and went all the way around and we've already paid 30% in 18 months. And the other five are in process.
Some of us know exactly how much they're going to give because we've had the luck and the ability to close some guaranteed income portfolios. For example, here in Argentina we have bought in the oil zone of Vaca Muerta, which is one of the areas with the most boom there is today, a building finished with a contract in force with a multinational, which pays you a fixed rent in dollars and also has a surety insurance if you do not pay the rent. So that rental contract already gives you a 12% in dollars guaranteed by a contract with an insurance back. And therefore it is not an expected rate, but a guaranteed rate. We in this project raised 2 million dollars in 40 days and we were left a lot of people outside.
When you offer an investor a good project and a good rate, there are plenty of investors. And that's where we see the potential of crowdfunding.
Finally, what would you say is the greatest value of Crowdium and what makes you different?
I highlight the four greatest values of Crowdium and that I believe make us different:
Within Latin America we are one of the few players in real estate crowdfunding and those who are still being born are still very incipient. We are a well-known brand in Latin America, with a good presence and good image and that is already a very important asset.
The most difficult thing about crowdfunding is that it is a volume business, so the most difficult thing is to get started. Now that they already know us and we have more than 25,000 registered investors, things get easier.
Our level of transparency and legal certainty in contracts is a great strength. With a fiduciary audited by the National Securities Commission, it is something that nobody is doing here in Argentina, and in Latin America there are few people doing it that way. And this level of legal security and transparency in the legal part is very important for Crowdium because we work with people's savings. Fintech is a new sector and has a very important level of social responsibility that is to create trust so that people see that serious companies are being created where they can put their savings. And we at Crowdium have this engraved on fire.
Not only because of everything I've already talked about its transactionality and that earned us so many awards, but second because we are now launching Crowdium 2.0 in 2019 that involves adding blockchain and adding an artificial intelligence engine and a proprietary algorithm in all areas of the company. And this is going to be a very strong differential value.
For example, from the side of the projects the developers send us all the time projects to invest that before we had to review by hand. Well, there is going to be a whole artificial intelligence engine where the developers will enter, fill in more than a hundred fields and the system will automatically analyze the projects and rank them to know which are the best for our investors.
On the other hand, the recognition and processing of all the documentation that the government requires by law to be able to invest, is also going to be automated. Crowdium is going to stop having human intervention in the processes.
Another important point is that we want people to be able to invest from $1. Today this is impossible due to the controlling structure required by the fiduciary and the CNV, which has minimal costs that make it impossible for anyone to invest as little as $1. So we have created and registered an artificial intelligence engine, called Aurora, which will act as an automated assistant for all people who invest between $1 and $1,000. And this will allow us to eliminate human intervention and lower costs and be able to receive investments from as little as $1. We want to massify the investment and go to the base of the pyramid. And to be able to advertise so massively that if you simultaneously enter the platform 30,000 people to invest $1, thanks to that automation and the assistance of Aurora, they can do it without problems.
And the last and most important point and that is the greatest value of Crowdium is the team of people we have. We have fifteen people who are a real Dream Team. We have a team in marketing, in projects, in legal, in all areas we have excellent people with a lot of experience. We are 100% dedicated to this, full time, full life, we live for Crowdium and breathe Crowdium. We believe in crowdfunding and believe that raising $100,000,000.00 is difficult, but that raising 10,000 people from $10,000.00 is not so difficult. And that's why we bet and that's what we're going to do, to make a leading company in Latin America in a short time. And that's why we have a first-class team!