Interview with Diego Bestard, Ceo of Urbanitae
"The concept of the crowd has always seemed to me the most attractive and romantic: bringing many people together to take advantage of the financial muscle of the small ones to do great things."
How did Urbantae come about? Why did you decide to found Urbanitae?
When the time came to choose what career I wanted to study I was about to study computer engineering, but at that time most of my classmates were looking at the same thing and I thought it was better to study business since that option would always lead me to the world I liked the most, whether it was technological or financial. And before finishing my degree I started working in the financial sector and in the end I stayed there. But I always had this interest in new technologies and new disruptive platforms that transform existing markets.
And after many years working in the financial sector I was presented with the opportunity to work in a startup, which we founded in Germany with a huge investor and incubator group called Rocket Internet. And so I entered the world of Fintech and startups in the financial sector.
In that startup we did alternative financing, but it was direct lending, that is, it was not crowd. And the concept of the crowd has always seemed to me to be the most romantic. This idea of bringing together a lot of people to take advantage of the financial muscle of the small ones and to be able to do great things seemed very attractive to me. And what I saw in the market that already existed within the crowd sector did not convince me for several reasons.
The big American companies are not entirely crowd, that is to say, they have a lot of institutional weight. And in continental Europe, especially outside the UK, the crowd platforms are still very small and the volumes of crowds they do are small.
So, looking a bit at the market and what was being done, I thought that the crowd linked to real estate was a very powerful mix. Mainly because real estate, at an investment level, is something that touches a very deep fiber of the human being and especially of the Spanish. We love investing in real estate! People don't believe in investing in a company like Telefónica because they are afraid of the market, but in an apartment in a corner of their neighborhood everyone wants to say "hey, I have a property".
So unifying the crowd concept with what is real estate investment at a professional level always seemed very powerful to me. And then, talking with different people and with some partners, we saw that there was a possibility of entering into real estate crowdfunding in a very professionalized way, which we thought was not being done in Spain until now.
And that was the idea. We decided to launch it and at the beginning of 2017 I embarked on this project that we have here: Urbanitae.
You studied at the Amercian School and later studied business in the USA. And earlier you mentioned the difference between the Spanish market and the international market, especially in crowdfunding Has this American training influenced your vision of business and crowdfunding?
Yes, without a doubt. I have had the great luck, although if you had asked me at the time I would have told you that it was a misfortune, to be constantly moving.
I was born in Madrid, I grew up here and went to school here and I knew how to say four words in English, but when I was nine years old my father, who worked in a multinational company, was sent to the United States. And that was the first move I made. I lived in the United States for three years and returned to Madrid when I was twelve, which was when I studied at the American School of Madrid. I stayed another three years and went back to the United States until I was twenty-five when I returned to Spain. Although I have always been coming and going.
So for me, borders at the entrepreneurial level are not something I ever have in mind. In fact, the previous startup we launched was based in Berlin but didn't operate in Germany. The first launch country was Spain, after six months we went to Holland, after two months we went to Australia, New Zealand, UK... I mean, creating a company for a single market makes no sense to me. The world is very small and a single market is not attractive. And for that reason, as much in my previous projects, as now in Urbanitae, I have always thought at a global and international level.
And how does one make the leap from leaving that previous startup, SpotCap, of which you were also co-founder and which worked very well, to embark on this new project?
To be honest, I really wanted the challenge of launching something from Spain, with Spanish capital and with people from here. As I said before, I have lived abroad for many years and whenever I come back I realize that we have a certain complex that we are Spanish. It is that the English are English... It is that the Americans are Americans... It is that the Germans, a lot of fabric with the Germans... And this complex that we have in Spain, then at the level of skills and capacity has no correlation. The people I've met here and the projects that come out of here with a certain vision, are really good! So I wanted to launch something here and without having to spend all day going to Berlin as I did before, with Spanish capital and people from here and do something international and big.
The topic of crowdfunding linked to the real estate sector had always seemed very attractive to me and this was coupled with the fact that the real estate cycle was starting to improve after some very bad years. Setting up something like this in 2010 would have been crazy as things were. But now, the cycle was in good shape and it was also a good time for me at a business level: we had just closed a very large round in SpotCap of thirty-six million euros, so the company was well positioned and my departure was not going to be dramatic. So all the circumstances were right, I really wanted to do it and I started to do it!
What is the status of Urbanitae's license application as a PFP at the CNMV?
In this matter, and looking back everything is much easier, I recognize my naivety. When I started setting this up I was hearing that the other PFP's were still waiting for the license to be granted. There was still no authorized real estate crowdfunding platform and they had all been waiting eight months, nine months, twelve months... And I went in there thinking I was the prettiest at the party. And I said to myself: "we already have the Law 5/2015 on PFP's and as we are setting up something from scratch, if I follow the law to the letter, they will have to give me the license in four or five months..." And I fell into the naivety of setting up something new without having any idea how things work.
We have the license application submitted. There is no problem with the application, but they are taking as long as they are taking. Some platforms have taken twelve months, others fifteen months. It is true that we have introduced some changes in the file, such as the entry of new partners in the last round of capital that we have closed, and that has slowed everything down a little. But I hope that soon we can be operating and open the platform to everyone.
While we are on the subject of regulation, what do you think of the current regulation law 5/2015 and the new draft bill to create a sandBox in Spain?
My opinion, and I think it is a unanimous opinion in the sector, is that it is a law that we must have. The fact that there is a regulation in a sector is good and avoids bad practices that could ruin such an incipient sector as real estate crowdfunding. But it is a law that was not made thinking about the activity that we develop.
There are quite a few points, which have been discussed at length in the white paper prepared by the Spanish Fintech Association, that do not make sense for the real estate sector. I understand that the law has these limitations, but what I don't understand is that it takes so long to fix them. Above all, with all the work that we companies in the sector have done and the work that the Fintech association has done to make clear what solutions we could implement.
From there, the sandbox issue, I have experienced it first hand with my previous startup. We were not regulated, but we wanted to be regulated, so we went to the Fintech market par excellence, which is the British market, which is regulated by the British FCA, and we got the license with the FCA. But the good thing about it is that while you get the license they allow you to work in a regulated environment and demonstrate that you are doing things right until you get that license. And that is what a sandbox is all about and I think it is absolutely necessary.
In Spain there is still no sandbox and in my case I have been lucky to be able to launch this project with enough financial backing to be able to support what I have been waiting for to be able to launch to the public. But these deadlines, for any normal startup that is going to launch something for the first time, are unfeasible. You can't wait for the times, nor meet the objectives required by law, if you are launching something from scratch. So, if what we want is to promote innovation, self-employment, companies and that the Fintech sector, and specifically crowdfunding, is important in Spain, we must have a sandbox. The day the sandbox arrives, I hope I will already have my license and it will not help me directly, but I think it is very necessary for the next ones to come.
As a member of the AEFI and member of the crowdfunding vertical, can you give us a preview of the main lines of work you want to propose to the CNMV to improve regulation?
To be honest, when the AEFI presented the Fintech White Paper I was not involved in the issue. At that time I was in the process of setting up Urbanitae and I was more concerned with defining the platform and its technological development. So I limited myself to providing feedback like any other partner. And, in addition, I must say that at that time I did not know too much about the regulatory sector in Spain in this activity to contribute too much.
The regulatory issues are handled more by Rodrigo de la Cruz, who is the president of the association, and at the moment he is conveying to the members that the CNMV looks favorably on the association's proposals, that they understand the points we put on the table and that the changes are imminent. Although I am afraid that the concept of "imminent" for a startup is something that happened yesterday and for a regulatory entity, such as the CNMV, the concept of imminent is something that has been around for years.
What is Urbanitae's value proposition and what makes you different?
The main value proposition in Urbanitae, which is also the reason why I thought it was interesting to enter, is the professionalization of real estate investment through the crowdfunding sector. I come from the financial sector and I have been in the investment sector, I have worked in private banking, I have worked in the insurance sector, then I have been in lending and financing through SpotCap. And I saw that I didn't like the way this new financial product that is real estate crowdfunding was being offered. And I would like to professionalize it more and be more like an investment fund than a platform for selling items or projects.
And, on the other hand, what didn't quite fit me and what is being done not only in Spain, but in most countries, is that if we are taking advantage of the crowd and bringing together a lot of people to make real estate investments and to have financial muscle, it doesn't make much sense to make small investments. And by small investments I don't just mean the amounts invested, but the type of investments that are targeted. Buying a small apartment in our neighborhood, renovating it and selling it, we can do it among four friends, or even individually. Most people know or have been involved at some point in this type of small real estate investments. But what you don't get, because it's not on the portals and real estate agencies, are the big real estate projects. The big buildings and the big real estate developments stay in the professional investment circle. Both in the professional developer circle and in the investment circle. So what interests me, where I see the real added value, is to get together a sufficient number of small investors to have financial muscle and be able to be one more player at the closed table of those who pull the strings of the real estate sector. And that is where I really see a great business opportunity and I think it is also very interesting for the small investor.
So, within your strategy of focusing on large real estate projects, what kind of products is Urbanitae going to focus on? And how does it affect you, or how do you plan to work, with the limitation of the 5 million maximum per project established by the current law in Spain?
It is not necessarily a big opportunity that requires more capital. There are many investments that are too small for large investment funds, for which anything under 7 or 10 million euros is usually irrelevant and they leave it aside. But it is usually too big for individuals. And there is a niche there: projects that are between one million and five million.
And for bigger things, many of the larger real estate operations are not carried out by just one entity and are usually done in co-investments, and why shouldn't Urbanitae be able to put 5 million into a 50, 100 or 300 million project to build an office tower, for example? So our objective is to be another player in the market and co-invest in this type of great opportunities.
And, on the other hand, we also want to change those limits on the amounts that can be closed through crowdfunding. Obviously, as long as the law says that the amount is five million, we will always stick to that figure and we will always comply with the existing regulations. But in the White Paper we have proposed that these limits in the real estate sector do not make any sense. Because an operation of five million euros does not have to carry more risk than an operation of fifty thousand euros, quite the contrary. That is to say, a commercial property on Serrano Street in Madrid, although it costs five million euros, has a very limited risk, and yet a property in a suburban neighborhood costs only fifty thousand euros and is a much greater risk. The amount of the investment has nothing to do with the risk and in real estate crowdfunding this is clearly seen. And we are confident that the law will change and allow us to extend the current limits. And even if it does not change, we can always make co-investments with different investment funds and real estate groups and we hope to be able to offer this type of projects to our investors.
What is your business model for Urbanitae? What commissions do you charge?
Our business model is the classic crowdfunding business model. We have only one fee, we only charge one thing and there is no more, and that is the fee for the capital that we raise through the platform, which is the 5% that the promoter pays for the money raised through our platform. We do not charge the investor, nor do we charge a management fee to either the promoter or the investor. It may seem a lot, or it may seem a little, but that is what we charge: 5% of the money raised on the platform. We want to be hyper-professional, hyper-polished in the numbers we give and publish on the web and we want to be hyper-transparent with what we charge and how much Urbanitae costs. Everyone will have their own opinion of whether it is expensive or cheap, but what cannot be is that you do not know how much you are paying. And in our case we want to be absolutely clear with what we charge on the platform, we charge 5% of what is raised on the platform and not one euro more.
Does Urbanitae participate in the projects it publishes on its website?
The regulation is very clear in this aspect. It clearly states that the platform cannot participate in the management or promotion and that it must be dedicated exclusively to putting developers in contact with investors and to act as an arbitrator and to analyze the projects and ensure that they are viable and to bring together investors. Yes, it can participate exclusively as an investor up to a maximum of 10%, but it cannot promote the projects or participate in their management. And in Urbanitae we want to comply with what the regulator establishes to the letter, as well as the rest of the laws and norms that the CNMV establishes.
How is the investment process in Urbanitae? How do you structure the investments and what legal coverage does the investor have?
Due to the type of assets we want to invest in, it is very difficult to have something very standardized. That is to say, it has nothing to do a commercial premise in profitability that to buy a ground to promote. So, as each typology will be different, each project will have its own legal and financial structure and will depend on what the developers propose to us. We will analyze the projects they bring us and the structures they propose, whether equity or debt, and we will determine the best way to invest.
On the other hand, we have different advisors for each project and we perform due diligence on each project to make sure that everything is in order. For example, we work a lot with the well-known law firm Garrigues, to analyze both the legal and financial issues of all the business plans presented to us by the developers.
In addition, the way we do this Due Diligence is not the traditional way that any small platform would have. In Urbanitae we have a really professional analysis team that comes from the private equity world and they focus exclusively on the numbers. So our investors can rest assured that any project we upload to our platform has been thoroughly analyzed financially.
At the moment you have been working in pilot mode with Quabit, what average profitability are you offering?
The platform is not yet open to the public and we have done some operations with Quabit in order to start testing all our processes and systems privately.
As for the figures, I cannot give you a figure at the moment because, firstly, they are very different products, and secondly, because most of the investments we have made have not yet closed the cycle (purchase, promotion, sale and return of the money). Although these are the usual figures for real estate development. We do not do magic, nor do we promise impossible returns. What we do is to offer small investors investment opportunities that are normally out of the market because traditionally only professional investors in the sector could access them.
What kind of audience do you want to target and what will be your minimum investment ticket?
That's a very good question. And when you have as much time to think about it as we have had before being able to launch it to the public, it is a subject that we have given a lot of thought to.
Our initial idea was to democratize investment as much as possible and reduce the minimum investment to a minimum. But we also believe that it is essential that the investor is involved with our project and that he/she puts a minimum of his/her part. And I sincerely believe that someone who puts 50€ in a project is not investing, but simply trying to see what happens. When you put such a small amount, they probably don't even read the numbers and the analysis of the project. And in Urbanitae we want our investors to read the project dossier, to understand and analyze the risks and to ask us the questions they want to ask us. And that is why we have decided to launch with a minimum ticket of €500.
In Spotcap you raised more than 50 million in different rounds. And now in Urbaniate you have just closed a round of 1 million with K fund, All iron Ventures and Veriditas Ventures. Can you tell us the secret of your success?
Well, the truth is that my case is not very representative of what usually happens in Spain. And I have always been lucky to find funding and not because I am an outlier, far from it. In my previous project we went hand in hand with Rocket Internet and the first round we did, before launching to the public, was 15 million, so in a matter of three months we had a team of 60 engineers.
So I guess that track record, as well as the track record of my partners has been a big influence. The team is also something really important and the team we have is really top. And the project that we put forward has also raised a lot of interest.
So if the conjunction of all these factors is what has allowed us, not only to get funding, but to be able to choose with whom we wanted to make this journey, which is also something really important. And the three funds that accompany us bring much more than just capital.
What are Urbanitae's plans for the future and what new projects do you have in the pipeline?
Our goal is for Urbanitae to be an important player in the Spanish real estate sector. And that real estate crowdfunding is no longer seen as something anecdotal and that it is really the investment model that we believe it can and should become.