Uniqueness – The Bane of Fundraising

I have seen this time and again. Someone uses their brainpower to come up with a cutting-edge idea for real estate investment. It is a niche (a “Power Niche” as I call it), or a way of looking at real estate that no one has done before. It seems pretty cool, but the lament is that “investors won’t go for it”, so, alas it is just not viable.

If the fundraiser doesn’t just throw in the towel at this point, the next question is whether the fundraiser should “tweak” the business model (or maybe in other words ruin the cool and cutting-edge part of it) so it will look like other investments and thereby become appealing to the target investors; or stick to his guns and try to find investors, even though most prospective investors will not be willing to take the plunge. That sounds kind of terrible too – like the sheepherder throwing in the towel and just deciding to follow the sheep.

As an aside, I don’t mean to imply that the investors who reject the new ideas are foolish. They are not dumb at all. Indeed, the prospective investors are smart to avoid the newfangled investment idea for the simple reason that if they all stick together and perform in an “average” manner, they will remain employed and their lives will continue on (probably happily) as they were before. If, however, they take on the risk of the new idea (and all new ideas have enhanced risk as well as enhanced reward), and it goes poorly, they may be out of a job.

I had been noticing and thinking of this irony – or paradox – for years, but then Todd Zenger wrote a really interesting article in The Harvard Business Review called The Uniqueness Challenge, which explains this conundrum in a very readable and understandable manner. He calls it the “Uniqueness Challenge” and that does describe it very well, as it is always a “challenge” to be “unique”.

I note that my law firm took this Uniqueness Challenge by making the determination to be The Pure Play in Real Estate Law®, thereby taking the enormous downside risk of being different (and unique). We “burned the ships” with this strategy and, fortunately, it worked out exceptionally well. At the time we did it, we were very nervous about it, but now looking at where we stand in the marketplace it seems so obvious – what were we worrying about?

So hats off to Mr. Zenger for his article – it is well worth reading.

Now we have this conundrum—this irony—this paradox. The question is how to solve it. Here is my best shot at it:

At the outset, I wouldn’t tweak (i.e. ruin) the business idea to appeal to investors. That is just like the sheepherder throwing in the towel to follow the sheep – and, in this case, even the sheep would (sheepishly) maybe admit privately that they don’t disagree with the strategy – they just don’t want to take a risk where the risk/reward isn’t to their benefit.

I will – very reluctantly – admit that tweaking/ruining the strategy’s novelty might be the optimal short-term economic strategy, and may result in more immediate fund-raising success. But where is the fun in that? What is the point? Where is the break-out upside? It isn’t there. You are just conforming to be like everyone else.

However, I wouldn’t waste a lot of time on a strategy that is doomed to failure either. If you know that the main investor group just can’t invest in your idea, probably for the reasons I outlined above, don’t spend two years with a fruitless private placement memo trying and failing to raise a billion dollar fund that is doomed to failure or, worse yet, that a Blackstone-type party will do itself if they like the idea. Nor would I use a straight-down-the-middle fund-raising advisor either, as such an advisor would advocate you soliciting the mainstream investors who will likely not be able to say “yes” for the reasons outlined above. Overall, the odds are stacked against you and you could waste two or more years of your life being essentially jerked around and come up empty.

What I would do is approach those who are outside the normal channels, i.e. instead of pension funds, insurance companies, endowments, and similar parties, I would look towards high net worth individuals, family offices, and investment funds that make it their bread and butter to seek alternative investments and that are deliberately set up to not follow the herd. There are a lot fewer of these parties, and the way forward will be tortured, like following a narrow bending path up a mountain; however, I think the chances of success are much higher.

As an outgrowth of this strategy, I would also dial down my fund-raising size dramatically. Instead of visions of billion dollar funds dancing in your head, consider a fund of, say, $25,000,000. All you would want is the bare minimum for a “proof of concept” and an amount you can invest quickly to confirm the strategy is doable. Once you have that, it will likely be a very different story when you go back to the mainstream investors. They will likely change from skittish to eager very quickly.

If you follow this strategy, the only thing you can be sure of is that you don’t know what will happen. However, a strategy where you don’t know what will happen is a lot better than a strategy that is likely doomed to failure (as is the straight-down-the-middle strategy), so mathematically, this strategy is optimal. Also, if things go badly, you will spend a lot less time and money failing.

By the way, if “you” mainstream investors are reading this when you are visited with a Uniqueness Challenge, consider giving the guy presenting to you a break. Maybe this is your big chance to stand out from the herd yourself. Maybe this is a time for you to take a chance too…

If you are a reader of The Real Estate Philosopher and have thoughts on this, feel free to email your thoughts to me and maybe I will put them out in the next article as a follow-up piece.

Finally, if you have an outside-the-box idea in the real estate world that perhaps rises to the level of a Uniqueness Challenge, I hope you will give me a call or shoot me an email. There is nothing I like better than trying to figure out how to make unusual, different and unique ideas successful.

Three Words That Might Change How You Look At The Real Estate World

I will get right to it – here are the three words:

“Competition is Evil”

Competition is a truly horrible and terrible thing and should be avoided at all costs! All competition does is destroy your profitability, as we all no doubt remember from our first year economics course in college. Indeed theoretical “perfect competition” reduces everyone’s profits to zero.

The goal in a real estate business – indeed in any business – should not be to “compete” with your “competition” but to do something different.

I didn’t make this up. This comes from just about every deep thinker in the business world:

Peter Thiel, who started PayPal and is now a Stanford professor, gets credit for coining the above phrase – and I heartily recommend his book Zero to One, which delves deeper into his thinking.

The late Peter Drucker, who I mentioned in my first article, and will no doubt quote again as he is one of my personal heroes, says one of the two most critical things for a business to do is to “innovate”, which is the essence of avoiding competition, as the whole concept of innovation is something new and different.

Michael Porter, the Harvard Professor and guru of competitive analysis, says that the biggest mistake businesses make is “trying to be the best” and beating their competition. Instead, he advises, the goal should be to create something new and therefore create value for your business. Indeed, as Porter points out, if you become “better” than your competition, all this (usually) means is that your customers, employees or other parties in the industry benefit, as opposed to your business benefiting. His definition of competitive advantage is instructive:

“Competitive advantage depends on offering a unique value proposition delivered by a tailored value chain, involving trade-offs different from those of rivals, and where there is a fit among numerous activities that become mutually reinforcing.”

Note the key words “unique” and “tailored value chain” and “trade-offs different from those of rivals”.

Seth Godin, who is a more eclectic, but in my view also a brilliant thinker, writes an excellent and easy-to-read book called Purple Cow, which emphasizes a different variant of the same thing; namely, how important it is to STAND OUT, like a purple cow would stand out, as opposed to fitting in and being forgotten.

And there are other books I have read as well by brilliant and creative thinkers. They all say versions of the same thing; namely, that it is more critical to be different than it is to be better.

So I urge you to sit down – with a bottle of single malt scotch (if you have my taste in liquor) – have a couple of snifters – turn off your iPhone or other machinery – and have a good look around at what you are doing in the real estate world. Consider:

  • Are you doing what others are doing?

  • Is your day spent trying to figure out how to be “better” than others?

  • Is what you are doing “different” than others somehow – possibly in the way you do business, the way you treat and incentivize employees, in what you offer to customers, in how you build your product, in how you use technology, in how you lend out money, in how you invest money, or in any other way? Or is your entire business exactly like someone else’s?

  • How much of your time spent on analyzing your business strategy is spent on thinking about macro things that are really in the nature of trying to time the market or the cycle with your crystal ball?

  • How much of your free time is spent thinking about how to be different?

  • Have you read any of the books I have mentioned above?

If the answers to the above questions lead you to the view that you aren’t really trying to be different and instead you are trying to do things better, then my guess is that on a risk-adjusted basis, your returns are more like to be average than to out-perform.

Reinventing The Law Business: An Introduction

By way of introduction, I am the founder and managing partner of Duval & Stachenfeld LLP. We are a 70-ish lawyer law firm in midtown NYC that focuses strongly on real estate; indeed, we refer to ourselves as “The Pure Play in Real Estate Law.”

As managing partner I have spearheaded numerous unique initiatives that have distinguished us from other law firms. Many of these ideas were very scary when we tried them out — there was always a fear that we would not only fail but, worse yet, be laughed at. Some of these ideas did not work out so well, I admit; however, the ones that succeeded have been the fulcrum to attract both lawyers and clients to our firm and indeed been the bedrock of our success.

As a relatively small firm playing with the big boys and girls, one would think that our size could be a disadvantage. But that would be incorrect. Smaller players can be flexible and move in different directions. We can take risks and seize opportunities that large law firms cannot logically capitalize on….

Unless you live in a cave you have seen a plethora of criticisms of Biglaw, how lawyers practice, and just about everything else. People beat up on us lawyers a lot for just about everything. It doesn’t have to be that way. One can run a law firm where both the lawyers and the clients are really happy and getting what they seek out of the relationships involved.

This column will focus on innovative strategies for successfully running law firms — both large and small firms. Instead of just throwing out ideas because I suspect they may be accurate, I will instead give real-world examples and relate these ideas to things that we did that proved amazing and other things that we did that turned out to be failures.

Also, along the way, I will take the risk of opening our strategies up to our competition and I will give my thoughts on how best to succeed as a law firm in this competitive world.

Ultimately, my goal with this column will be to prove a basic point: That to be successful in the law “business” one must be creative and innovative and not be afraid to try out ideas and, yes, fail sometimes in order to succeed in the end.