10X. Go Big or Go Home. Burn the boats. Go all in. Scale your business.
These phrases are often bandied about in the property sector, especially amongst those relatively new in the sector. Throw in social media, with its negative impact on mental health, and you have the ingredients for the perfect storm.
Many of us, myself included, are enticed, cajoled or perhaps duped(?) into thinking that scaling a business is the only way to operate in business. In some sectors, this is certainly beneficial. The effect of economies of scale is well known. However, against the backdrop of a pressing and increasingly vocal environmental protection and sustainability lobby, does the economies of scale strategy run contrary to sustainability and prudence?
I certainly have been enticed by the ‘you need to scale your business’ mantra. When I ran my own law firm, I pivoted from a personalised service offering to a high volume residential conveyancing offering. We were completing 40 - 50 transactions a month at times. That level of volume requires scaling lots of things within the business - personnel for one but also systems, processes and other resources. Most importantly, I had to scale my mindset - you can’t run a large, complicated organisation with a small mindset. Not least because a larger organisation inherently means larger, more risky problems need to be solved. That mindset shift can be the biggest issue when scaling. In other words, you, the entrepreneur can be the problem! Part of that mindset shift involves improvements in communication - when you run a large organisation, with multiple stakeholders, communication is key. Whilst I didn’t have external shareholders in my business, I did have lenders and indemnity insurers, who become very interested in how your business is performing and how you are running it. Add external shareholders, as you frequently see in property joint ventures and development projects and communication becomes crucial.
There are presently numerous stories percolating amongst property WhatsApp and Facebook groups and networking events of various property development projects that are floundering. A number of property investors I know are very concerned about their investment in these projects. Some of the property entrepreneurs who spearhead these projects had a meteoric rise to what can only be described as superstar status within the property sector - as a result of social media marketing, hosting podcasts and various speaking gigs at numerous property networking events and as guests on other podcasts. That superstar status fuelled the very rapid ‘fully funded’ status when these projects were ‘offered’ on crowdfunding platforms. It was not uncommon for such superstar property entrepreneurs to raise in excess of £1.5M in under 20 minutes of the ‘deal’ going live on the crowdfunding platform. I was asked once to carry out due diligence, at least on the legal side, on one of these projects and could not find the actual asset! It was a glorified turnkey construction contract but had been presented on the crowdfunding platform as an investment into a property development project!
We have seen countless teenage girl and boy bands that rise to superstar status very rapidly, only for the individuals to resort to drugs or self-harm or other dangerous behavior because they haven’t had enough time to develop their mindset and their skills to cope with the intense scrutiny. I see these superstar property entrepreneurs in a similar light. They have not had enough time to experience measured growth, with corresponding growth in mindset and skills to handle the enhanced scrutiny that is a natural part of taking someone else’s money to invest in their business idea. Some of these superstart property developers have resorted to Cocaine ‘to sustain their fast paced lifestyle’. Others I know have resorted to multiple sexual relationships. Whatever the vice, the sudden shift in mindset positioning has resulted in behaviour that the individual would unlikely have engaged in if their business had a steady pace and trajectory.
These property entrepreneurs have not experienced a full property economic cycle and thus have not gained the wisdom which that experience teaches us all. Not surprisingly, these superstar property entrepreneurs become like the proverbial ‘deer in headlights’ when they are confronted with a major problem or a downturn in the property market where they are operating. Their famed property project that promised so much flounders and the investors who were enticed are now concerned whether they will even get their capital back. The teenager-like mindset of the property entrepreneur means communication is lax and shareholder update meetings are scheduled but missed or the property entrepreneur goes absent! Having not fully experienced a full property market cycle, the property entrepreneur sticks their head in the sand, hoping the problem goes away. From my own experience, I know it rarely does and the only way is to deal with it, one at a time, until you’ve cleared all of them.
I have heard of stories where elderly/retired individuals have lent or invested a majority of their life savings in the projects of these superstar property entrepreneurs, only for these elderly individuals to now worry about whether they will ever see their life savings again. This raises another concern of mine. I have acted for high net worth individuals (‘HNWI’) who became private equity investors or private bridgers, whilst retaining their ‘day job’ or main (non-property) business. In a way, the shift to pursue higher returns on their cash within the property sector is not surprising, because savings interest rates are very low and the HNWIs are looking to diversify their investments. Nothing inherently wrong in that.
The problem arises when the HNWIs need to enforce the terms of their loan agreement or protect their equity investment, by taking control of the project from the superstar property entrepreneur. These HNWIs may well have accumulated their wealth in sectors other than property. Whilst they may know their own sector very well, they may not be fully experienced or fully equipped, through the right infrastructure and ‘power team’, to recover their capital. This means their transactional costs of recovering their capital is higher than someone or an organisation or even a platform (such as crowdfunding) that is better equipped for bad debts or capital recovery. In a way, this is also an issue with scaling too quickly without the correct processes, people and mindset in place. There is thus an argument for cooperating with other HNWIs, perhaps under a lead lender/investor who is experienced and equipped to plug the gaps that the HNWIs may have. Crowdfunding platforms and index funds could be one solution here.
What can be done? Where does the property sector go from here?
Two books that I have read may provide some inspiration.
The first is by Bo Burlingham entitled: “Small Giants: Companies That Choose to be Great Instead of Big”. I think the title says it all. A paragraph from the book that stood out for me is this:
“The shareholders who own the businesses in this book have other, nonfinancial priorities in addition to their financial objectives. Not that they don’t want to earn a good return on their investment, but it’s not their only goal, or even necessarily their paramount goal. They’re also interested in being great at what they do, creating a great place to work, providing great service to customers, having great relationships with their suppliers, making great contributions to the communities they live and work in, and finding great ways to lead their lives. They’ve learned, moreover, that to excel in all those things, they have to keep ownership and control inside the company and, in many cases, place significant limits on how much and how fast they grow. The wealth they’ve created, though substantial, has been a byproduct of success in these other areas. I call them small giants.” [Emphasis added]
The other book is “Good to Great: Why Some Companies Make the Leap... and Others Don't” by Jim Collins. This paragraph is particularly enlightening:
“When [what you are deeply passionate about, what you can be best in the world at and what drives your economic engine] come together, not only does your work move toward greatness, but so does your life. For, in the end, it is impossible to have a great life unless it is a meaningful life. And it is very difficult to have a meaningful life without meaningful work. Perhaps, then, you might gain that rare tranquility that comes from knowing that you’ve had a hand in creating something of intrinsic excellence that makes a contribution. Indeed, you might even gain that deepest of all satisfaction: knowing that your short time here on this earth has been well spent, and that it mattered.”
Perhaps the answer lies in being disciplined and purposeful in how we run our businesses. Not pursuing growth for the sake of growth but pursuing purpose and the good that your organisation can do for the world we live in. Surely this higher purpose is more fulfilling?
Jacinda Ardern, (in my view) an enlightened politician and leader (of New Zealand) certainly thinks so. This London Economic article sets out how Ardern has put out a national budget where spending is dictated by what best encourages the “well-being” of citizens, rather than focussing on traditional bottom-line measures like productivity and economic growth.
One of the largest investment management companies in the world, Blackrock Investments has started to feature sustainability as a key focus on its strategy going forward. Other organisations are following suit, some more advanced on their sustainability journey than others.
A key aspect of sustainability does inherently mean that the greater good of the planet and its people is pursued, rather than growth for growth's sake. Perhaps then, as investors and property entrepreneurs, we should be focussing on individuals and organisations that pursue purpose, utilising what they are brilliant at and serve humanity and nature? Perhaps, instead of measuring whether an investment will produce 8-10% a year or 25% return on cash, etc. we should include a ‘fulfilment of purpose and contribution to sustainability’ factor into the investment analysis? Perhaps we should be lending and investing together because that approach embodies the ‘wisdom of the crowd’ but also leverages transactional costs.
This shift in focus would mean as investors, we do not work with property entrepreneurs who are driven by growth for growth’s sake and as property entrepreneurs, we do not work with property investors and lenders who are driven by profit (and thus growth) alone. Now that is a collective mindset shift that would elevate the property sector and wider humanity.
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