[April 15, 2019]
The venture capital industry is under attack. Prominent VC firm Andreessen Horowitz is “blowing up the venture capital model,” transforming itself into a “financial adviser” so it can beat “antiquated rules about what is and isn’t a ‘venture capital’ investment.” The customers are also dissatisfied: VC funding isn’t right for most startups says Indie.vc founder Bryce Roberts, voicing the concerns of a growing number of entrepreneurs who are “jaded by the traditional [VC] playbook.“ And millions of participants in the stock market (about half of U.S. households own stocks) watch haplessly as a number of “unicorns” finally go public this year, “after large gains have been captured by elite early investors.”
Israel’s most active venture investor, OurCrowd, answers these grievances with its twin goals of democratization and globalization of startup funding. “Venture capital has been the most esoteric, the most exclusive investment activity in the world,” says Jon Medved, OurCrowd’s founder and CEO. In 2013, he founded OurCrowd as a new type of venture investment platform, following VC best practices but providing global, worldwide access—to individuals looking to invest in startups and to entrepreneurs looking for venture funds.
Just before establishing OurCrowd, Medved left a startup he co-founded, Vringo, and went on a speaking tour around the world, promoting the thriving Israeli innovation ecosystem. Twenty years earlier, he already took on “the role, that in any other country, would typically belong to the local chamber of commerce, minister of trade, or foreign secretary,” according to Start-Up Nation: The Story of Israel’s Economic Miracle. A traditional VC at the time, Medved founded in 1995 (and co-managed until 2006) Israel Seed Partners, which grew to $262 million invested in 60 Israeli startups (a number of them were eventually acquired or went public on NASDAQ).
There was something different, however, about the new Medved worldwide promotional tour in 2012—many people, individual investors, came to him after his presentation, offered their business cards and said “find me a deal.” They were mostly thinking about Angle-type deals, according to Medved. But the Jumpstart Our Business Startups Act (JOBS) that was signed into law in the US at the time got him to view the opportunity in much larger terms, as an investment platform for accredited individual investors. Other entrepreneurs in the US and elsewhere were in the process of developing or launching equity crowdfunding platforms, but as OurCrowd was coming out of the Israeli innovation ecosystem, there had to be a twist, a differentiated take on an emerging trend.
“The overall model of what they call regulation crowdfunding is antithetical to my belief system,” says Medved. “The last thing an investor needs is to buy common stock from a poor man’s broker-dealer whose being paid by the company so now you got a negative selection bias in terms of company portfolio formation and no board representation, no anti-dilution, nobody awake at the helm, no one representing [individual investors’] money.”
Instead, Medved decided to follow the VC model to some extent and regard individual investors as limited partners. However, OurCrowd’s “limited partners,” unlike those of traditional VC firms, are given the choice of which company they invest in and the investment is structured as a single company venture fund (a Special Purpose Vehicle or SPV).
“The other big difference between so-called crowdfunding and what we do is that they’re done when you bought the shares. They don’t add any value,” says Medved. “When we interview our companies, we ask them what do you want? And if they say, we don’t need any help, just give us the money, we walk away.”
OurCrowd has created a new “investment platform” category. It’s not a traditional VC because of three special characteristics: it is open to any accredited investor in the world who is willing to invest at least $10,000; the single company venture fund structure; and OurCrowd’s habit of building up their position in a startup over time and over multiple investment rounds. “We don’t have a limited fund, we have a platform with unlimited potential. How often do you start investing and then lead the later rounds?” says Medved.
At the same time, OurCrowd cannot be classified as an equity crowdfunding platform–like traditional VCs it performs due diligence (investing in only 2% of the startups it considers) and like more recent VCs (e.g., Andreessen Horowitz) it adds value by hiring domain experts and providing services to the startups in its portfolio.
This added-value dimension of OurCrowd’s relationships with the entrepreneurs it supports gets magnified by the community it has built over the last six years: 30,000 investors from 180 countries (including about 1,000 corporations, family offices, and institutional investors), entrepreneurs, VCs, government agencies, and other OurCrowd friends and fans. Medved calls this impressive ecosystem “a force multiplier” and it was on full display in OurCrowd’s most recent annual conference which had 18,000 registrants from 183 countries (up from 800 in its first gathering in 2014).
Medved singles out one component of this community—large, multinational corporations—as yet another OurCrowd differentiator. By design, he says, OurCrowd has a very broad portfolio, unlike most venture funds with their limited sector focus. That attracts the attention of large corporations, increasingly looking to invest in, experiment with, and sometimes acquire a broad range of technologies (funding from corporate venture capital firms worldwide increased 47% in 2018, according to CBI). In addition to funding, these multinational corporations provide the startups supported by OurCrowd with important connections and business expertise. They also represent a new revenue stream: Some ten multinationals now pay OurCrowd scouting fees, says Medved.
In 6 years, OurCrowd has raised $1 billion for 18 funds, invested in 170 startups, and saw 29 exits (mostly acquisitions by large corporations) and 13 write-offs. What’s next? “We think that this asset class deserves scale,” says Medved. “We would like to have 300,000 or even 3 million individual investors.” In terms of dollars invested, however, Medved predicts that already this year or next, the ratio between individual and institutional investors will flip, as institutional investors invest far more than individuals in each deal. That gives OurCrowd the ability to invest in and even lead late-stage rounds, but it will require communicating even louder the democratic nature of the platform and how it uniquely caters to individual investors. “These guys are happy when they know they are investing with institutions on the same terms and that we protect their allocation,” says Medved
Other communications and management challenges for OurCrowd are finding new channels for customer acquisition, segmenting the intended audience, and improving the targeting of specific potential investors with specific deals. New revenue-making opportunities are also part of OurCrowd’s future, especially taking advantage of the “enormous data sets” they are collecting in the course of their “data-driven business.” Says Medved: “We want to play Moneyball at some point.”
OurCrowd is a typical offspring of the flourishing, dynamic, contrarian Israeli innovation ecosystem. With more than 6,600 active startups, Israel has the most startups per capita in the world. In 2018, VC funding per capita in Israel was $674, more than double the US figure ($303). This according to Start-Up Nation Central’s recent report (PDF) which attributes Israel’s success in developing its “dense innovation ecosystem” to several characteristics of Israeli society, including having people that are “often less receptive to authority or to common practice” and “doubt conventional wisdom and challenge it quite frequently.”
This urge to see things differently is what drives Israelis like Medved and Israeli startups like OurCrowd. Constantly playing devil’s advocate is of great help when you are creating new ventures in a society that operates under many constraints.
Take for example, Beresheet, the smallest spacecraft ever sent to the Moon (and which almost made Israel the 4th nation to land there, and a first for a privately-funded effort). It turns out Israel became the world’s miniature spacecraft leader because it could not launch communications satellites to the east for fear that parts of the launcher would fall in the territory of countries that may respond aggressively.
Launching satellites to the west, against the direction by which the Earth revolves, decreases their carrying capacity by 30%. “So we were forced to either abandon the option of launching satellites ourselves or to build smaller satellites,” Raz Itzhaki, cofounder and CEO of nanosatellite startup NSLComm (OurCrowd is an investor) told ISRAEL21c.
Seeing things differently also helps in flashing out Israel’s unique advantages and inventing products and services to capitalize on them. For example, the decision twenty years ago by Israel’s healthcare system to standardize the ongoing collection and archiving of patients’ data is now turning out to be (as anonymized data) “digital health gold” for researchers and startups alike. Or how the groundbreaking research 50 years ago in Israel into the science of cannabinoids and how they can serve a medicinal purpose has led to the creation of a supportive network of academic, public, and private sector entities and to the existence today of over 70 cannabis-related startups.
The contrarian mindset goes beyond high-tech, driving Israelis to take risks, to experiment, to do what seems to be impossible, in all types of endeavors. Medved’s LinkedIn profile says that he collects rare single malts. I guess he does it on his many trips around the world, as there have never been whisky distilleries in Israel. Until now. The Milk & Honey distillery has recently produced Israel’s first single malt whisky, “a winner.” Given the hot climate, the product matures about three times faster than the competition’s, traditionally based in cooler climates. And Israel’s three or four different climate zones allows for experimentation with different maturation rates and other variations. Now “the whisky industry [in Israel] is booming,” with additional distilleries up and running or in development.
This is what Medved calls “the unbelievable nature of the Israeli ecosystem” and the “sheer explosion of its entrepreneurial talent” which he believes is “only in its early days.”
Originally published on Forbes.com