Deal Abstract
https://www.seedinvest.com/calibercos/series.b
Commercial real estate investment company. Complete lack of financials and refusal to give investors timeline to profitability and estimated rates of return. Analysis requested by a reader (yes, I take requests at mail@muhanzhang.com!) Not a startup investment, but worth analyzing in the greater context of investments.
“Setting return expectations for a business pursuing a growth path and a future public listing is not something we can do at this time. We hope to perform according to similar businesses experiencing substantial year over year growth and, as all management teams do, will seek to outperform our benchmarks.”
https://www.seedinvest.com/calibercos/series.b/updates
Shoutout to E. Z. for the tip!
Decision
Pass, for me as an angel investor.
For passive real estate investors: pass as well. More notes below.
Why Investing/Passing
Doesn’t fit my thesis, but analyzing for readers/using the deal as a demonstration of how to blend different business analyses.
UPDATE: Post analysis reasons for passing:
- Too much fluff and garbage: way too much effort to find financials, only to see that the company refuses to give a path to and estimated range of return. Show me your profitability and historical pay out, or get out. I’ve watched too many startup pitches to know when a company is distracting retail investors with fancy large numbers while dancing around the central questions of operations and profit.
- Undifferentiated: Besides capital scale, I can’t see what this firm has to offer. Looking at the website, it says their strategic and competitive advantages are “Southwest, relationships, long-term vision, and trust.” The first is a thesis (which is actually quite reasonable, from a demographics standpoint,) while the rest all sound like platitudes. Investors should expect and ask for more specific differentiators.
- Thesis mismatch: I believe in the power of real estate to build wealth. That said, I believe that the key factor in real estate to build wealth is leverage, in that America will give individual real estate investors a loan to reduce their own money in. Without leverage, real estate is a pretty average investment, and I’d rather buy into S&P 500/FAANG/insertYourFavoriteFacebookAmaGooSoft.)
The 6 Calacanis Characteristics (91 161 18)
| Check | Pass/Fail |
| 1. A startup that is based in SV | Fail: Scottsdale, AZ 85258 |
| 2. Has at least 2 founders | Pass (2) |
| 3. Has product in the market | Pass: has $440MM in present assets and $550MM in scheduled assets. Will look at debt schedule to see how much equity is actually theres. |
| 4. 6 months of continuous user growth or 6 months of revenue. | Irrelevant: not a startup, so this metric is not relevant. |
| 5. Notable investors? | Fail: No one in the investor section that has large brand-name real estate investment experience. |
| 6. Post-funding, will have 18 months of runway | Irrelevant/most likely: not a startup, so this metric is not relevant. |
The 7 Thiel Questions (ETMPDDS)
- The Engineering question:
- N/A: No technology.
- The Timing question:
- Good: Can see COVID being a great time to acquire cheaper properties.
- The monopoly question:
- Horrible: real estate is famous for being a fragmented market and the likelihood of one question that runs all the commercial development is unlikely, at most you’ll get a few large players within a certain region.
- The people question:
- Good: team seems to have done well in last few years.
- The distribution question:
- N/A: not a startup so not relevant.
- The durability question:
- Absolutely: Real estate has capped growth but also capped downside from the reality that it’s not going anywhere.
- *What is the hopeful secret?:
- Investing in the Greater Southwest growth region of the United States will provide superior real estate returns.
What has to go right for the startup to return money on investment:
- This investment should return money on investment, though returns may be tepid or take a decade plus. More below.
What the Risks Are
- Relatively less risk, with relatively lower upside. More below.
Muhan’s Bonus Notes
As readers will observe, writing a deal memo for a real estate investment company with startup criteria is silly. This self-aware absurdity is meant to demonstrate the fundamental differences in analysis between different forms of investment.
Investing in startups is investing in 50 highly speculative companies, expecting 45 of them to return little to no capital, 3-4 of them to return 2x-3x, and 1 of them to return 10x-100x. Take a moment to appreciate how mind-boggling it would be to ask someone for $25,000 and have them expect to get $250,000 in 3-5 years. This would be a ~26% growth every year for 10 years (1.26^10,) or ~3.7x the annual growth of low-fee index funds. Compare 26% to the real estate cap rates below and you’ll see the stark contrast. Startups are rockets that either crash-and-burn or achieve escape velocity.
Investing in real estate is all about optimization. People have been living in houses, working in offices, and congregating in physical spaces since dawn memorial. Because the risk of ruin is so unlikely, the central question of real estate professionals is not “will we make it?” but rather “how quickly will we make it back?” To put this into perspective:
| PROPERTY TYPE | Average Cap Rate |
|---|---|
| OFFICE (URBAN) | 6.67% (14.92 years) |
| OFFICE (SUBURBAN) | 7.91% (12.64 years) |
| INDUSTRIAL | 6.27% (15.95 years) |
| RETAIL (NEIGHBORHOOD) | 7.48% (13.37 years) |
| MULTIFAMILY (URBAN) | 5.20% (19.23 years) |
| MULTIFAMILY (SUBURBAN) | 5.49% (18.21 years) |
| HOTEL (URBAN) | 8.01% (12.5 years) |
| HOTEL (SUBURBAN) | 8.55% (11.69 years) |
In short, since real estate is such an established industry, when you’re looking at an investment like this there is only one question you need to answer: *what’s your rate of return?*
Wading through pages and pages of fluff, you may notice the lack of a clear answer to, frankly, the only thing that matters, is concerning. You can proxy that Caliber took 10 years to become profitable (founded in 2008, EBITDA profitable in 2018, conventionally profitable in 2019,) while expanding quickly, but even then, there’s no clear financials on the SeedInvest page.
Compare this to another real estate investing comparison gold standard: Vanguard, and their real estate index fund, which has capital and income returns clearly demonstrated on the first Google search. (Link.)
To the question of “what’s your rate of return?”, Vanguard clearly answers, “135.11% over ten years,” or roughly 3% annual per year.
Only after wading through comments in the section for Caliber do I get this from their team:
Setting return expectations for a business pursuing a growth path and a future public listing is not something we can do at this time. We hope to perform according to similar businesses experiencing substantial year over year growth and, as all management teams do, will seek to outperform our benchmarks.
https://www.seedinvest.com/calibercos/series.b/discussion
Investing in real estate is a fine avenue, and when used with leverage, the returns can be outsized for the relative stability of the asset. In this case, however, I cannot recommend investing in Caliber. I am open to new information from readers or the team and will post updates as appropriate.
Last thing pet peeve wise: why is there a video glitch at 1:46? (Bill Cantrell vs. Robert Kwints) I’d give startups that are worth $5MM-$10MM a pass, maybe, but if you’re raising $50MM on a $130MM valuation, you should be able to afford to fix this glitch.
Financials (References)
- None, surprisingly.
Updates
This is where I’ll post updates about the company. This way all my notes from offering to post-offering updates will be on one page.