Savvy investors understand that the key to any financial portfolio is diversification. Commercial real estate has outperformed the S&P500 over the last 20 years without a strong correlation to stocks and bonds. Yet most investors are not able to access institutional-quality real estate and this asset class tends to offer very little liquidity, requiring capital to be committed for several years. LEX Markets is a real estate securities marketplace that turns individual buildings into public stocks traded on its market. Investors, non-accredited and accredited alike, can instantly buy and sell shares in buildings that are listed on the marketplace commission-free and are entitled to income distributions and proceeds from any liquidity events. For property owners, listing buildings on Lex means gaining access to new pools of capital while still maintaining operational control of properties. The marketplace is built on top of the Nasdaq Marketplace Services Platform, giving owners and investors the security of one of the largest trade execution infrastructures in the world. Lex launched in the fall of last year with a 10,000-investor waitlist.
AlleyWatch caught up with LEX Markets Co- CEO and Co-Founder Drew Sterrett to learn more about how Lex makes commercial real estate investment accessible, the company’s strategic plans, latest round of funding, which brings the total funding raised to $27.5M, and much, much more…
Who were your investors and how much did you raise?
This was a $15 million Series A. PEAK6 Strategic Capital led the round. Khosla Ventures, Two Lanterns, and MUFG Innovation Partners were also major investors, along with over 20+ other investors in this round.
Tell us about the product or service that LEX Markets offers.
LEX is a new way to invest in real estate. LEX turns individual buildings into public stocks. Any U.S. investor can open a LEX account, browse opportunities in various asset classes such as multifamily and office buildings, and buy shares of individual buildings. As a shareholder, investors can earn income as the tenants of the building pay rent and can trade their shares on our public market without lockups or hold periods. Each building on LEX has a ticker symbol and stock chart. LEX opens up direct and tax-advantaged ownership in an asset class that has previously been inaccessible to most investors.
We offer owners a new way to access capital and create liquidity for a portion of their asset, essentially a new partial exit strategy for owners.
What inspired the start of LEX Markets?
I was working in real estate private equity and realized that I had no access to the attractive real estate investment opportunities that I was working on for others. My brother Dean and I developed the idea of LEX Markets to open up access to the wealth creation opportunities of commercial real estate to all investors. Together with Jesse Daugherty, who was an engineer on Google Maps at the time, we cofounded LEX.
How is LEX Markets different?
LEX is focused on addressing two problems within the commercial real estate market: lack of access and lack of liquidity. First, LEX is open to all investors, accredited and non-accredited. So anyone can sign up today, link a bank account, and start investing in shares of a building. Second, LEX works with real estate owners to create equity securities in an asset – providing owners a new, attractive source of liquidity. Liquidity is important for the end-investor as well: the new investors can trade their shares without restrictions on the LEX trading platform, providing an avenue to exit their investment. Real estate is a great tool to diversify a portfolio, and LEX lets investors gain access to direct real estate investing, with benefits such as passive income when owners pay distributions and attractive tax treatment.
What market does LEX Markets target and how big is it?
Right now, we’re targeting the US Commercial Real Estate market – worth over $17T. We want LEX to provide a broad selection of deals for investors to choose from, so we’re pursuing all geographies and a mix of asset types including multifamily, office, mixed-use, industrial, and more. Our securities structure can also work with other asset classes beyond real estate, which we may consider in the future.
What’s your business model?
We collect a one-time only fee from owners that covers our expenses for securitizing the asset. We then have an annual fee to cover ongoing costs.
What are your post-COVID office plans?
We are continually working to get the right balance to enable our business goals and give our employees the flexibility they need to have a great experience. We have an office presence because we believe in the value of face-to-face collaboration and the spontaneous ideas that come from those interactions. In fact, we just moved into the Empire State Building – which we believe is a very fitting setting! We’re excited to make our office a compelling place for our team to show up to.
What was the funding process like?
It’s amazing how insightful a fundraising process can be. You get asked a lot of hard questions – and receive guidance too – from some of the smartest startup investors in the world. The investors who backed LEX resonated with our mission of empowering wealth creation through improved access and agreed with our “build it right the first time and be compliant” philosophy – “ask for forgiveness, not permission” doesn’t work in the sphere we operate in.
It’s amazing how insightful a fundraising process can be. You get asked a lot of hard questions – and receive guidance too – from some of the smartest startup investors in the world. The investors who backed LEX resonated with our mission of empowering wealth creation through improved access and agreed with our “build it right the first time and be compliant” philosophy – “ask for forgiveness, not permission” doesn’t work in the sphere we operate in.
What are the biggest challenges that you faced while raising capital?
Typical founder challenges – it takes a lot of time and effort to run a company, and fundraising eats away at that time to build and operate. We’re grateful to our team for stepping up to the plate during weeks where we were focused on fundraising.
What factors about your business led your investors to write the check?
We have a great value prop for both sides of our marketplace and have found product-market fit with each. We offer a new way for investors to create wealth and a great new solution that addresses real estate owner pain points. Our investors saw the adoption happening on both sides and had confidence that new capital would help scale both sides of the market.
What are the milestones you plan to achieve in the next six months?
More assets on platform and a more robust pipeline – both of investors and owners. We want awareness of LEX within the many investor communities to grow substantially.
What advice can you offer companies in New York that do not have a fresh injection of capital in the bank?
Work hard. This took a lot of work and a lot of constant problem-solving. Startups are long-haul. Focus on the wins, not the losses. The right answers don’t necessarily cost the most money, and people can do a lot with a little when they focus on the right challenges.
Where do you see the company going now over the near term?
We’re making great progress in getting more assets onto the platform. We’re excited for our next offering in Seattle, which is coming soon!
What’s your favorite outdoor dining restaurant in NYC?
Birreria rooftop on top of Eataly.
