2,800 crowdsourcing and crowdfunding sites
OurCrowd made headlines last week when the company announced its $5.5 million series A funding round, as well as $6.5 million raised for Israeli startups through its platform. OurCrowd’s founder and CEO Jon Medved describes his company as “crowdfunding with a twist,” saying the platform operates much like a venture capital firm. OurCrowd, for example, is open only to accredited investors, and it usually takes board seats in the startups it supports. We recently had a chance to get on the phone with Medved, who was kind enough to answer a few questions about his company, entrepreneurship, and equity crowdfunding. You can follow Medved on Twitter @jonmedved and his company @OurCrowd.
Anton Root, Crowdsourcing.org: Why did you decide to only accept accredited investors?
Jon Medved, OurCrowd founder and CEO: I think one needs to pause and think seriously before rushing to add thousands of small $100 investors to an early stage startup. It’s hard enough to manage your own needs in a startup, and adding to this the challenge of handling thousands of small investors is going to be really tough. I’ve been involved in making over 100 early stage investments myself. I’ve been an entrepreneur, a venture capitalist, an angel, I’ve run a public company, I’ve been around the block in my 30-year high tech career, and I can tell you that working with accredited investors is a lot easier than small investors.
In fact, regarding investors, there’s generally an inverse relationship between the amount of headache and the amount of money that they invest. (laughs)
However, I do think that eventually there is room, ultimately, for crowdfunding among people who are not accredited. The whole beauty of this vision that some day, everybody can participate in startups – I think it makes sense. I’m not sure that I’m smart enough to figure out the model under which that can work. Hopefully, the SEC and the U.S. government will succeed at this. But there’s a problem: people who don’t have a lot of investment expertise and financial knowledge, and have very small sums of money to invest – I think they have to be very, very careful when they meet early-stage financing. I think there’s something to be said for making sure people are accredited.
Obviously, the big thing today is the regulatory issue. Before the government promulgates these regulations, my understanding is, unless you’re dealing only with accredited investors, you’ve got yourself a problem.
I was going to ask about that from an Israeli perspective: are there any laws regulating crowdfunding currently in Israel? Is there anything in the law that makes the country more or less friendly to crowdfunding?
Not really, Israel’s securities laws are very much patterned after the U.S. We’ve spoken with securities authorities and from the feedback we’ve gotten, we’re operating in a completely legal manner.
Again, the thing the thing that helps us do that is the fact that there is no public solicitation on our site. In other words, in order for you to get access to the dealflow, you have to be accredited. We’re very careful about making sure that at every one of our public appearances, or in any kind of communication, we’re making it absolutely crystal clear that this is for accredited investors only. To make the actual investment you have to file quite detailed accreditation forms to make sure you meet the investment criteria. But even to get access to the information about the deals, you have to be accredited. We have an open portion on our site, but no information about our companies that are raising money is supposed to be available unless you are accredited.
We have given up a lot of potential users by focusing on accredited investors. We have a reduced number of visitors that come to our site, a reduced number of members. On the other hand, we gain a lot – we focus our marketing attention, and we get a group of people who, while many of them aren’t professional investors, the chances of them better understanding the way this works is much higher.
Can you describe the due diligence process – what do you look for in startups who want to be on OurCrowd?
We look for six criteria. First of all, we look for an excellent team; we have a strong preference for people who have been there and done that, or people who have tried before. You’ll note that a lot of the entrepreneurs we’re backing are actually repeat entrepreneurs.
Number two, we look for companies that are addressing big markets, and fast-growing markets. If the market you’re addressing is pretty much stable and not that big, then, really, we’re just not that interested.
Number three, we’re looking for companies who have demonstrated traction. Meaning that probably most of the companies on our site – not all, but most – are companies that have already raised seed money, have an angel involved, and have already onboarded a quarter million or a half million dollars before we even get there. They have demonstrated traction, and they can point to customer case studies or metrics that show that this train is pulling out of the station.
Number four, whatever the solution is, and it obviously should be an innovative solution, it’s got to be an easy-to-understand solution. It might be great, and it might actually make a great investment, but if we can’t explain it easily on the site, then it’s not for us. A really crisp elevator pitch helps immensely.
Number five is we love crowds. We don’t just love crowds in terms of people who actually come to our site and invest in companies, but we want there to be sort of a little mini-crowd already helping the company. Meaning, this company has succeeded in either attracting some well known people onto its board or as advisors, or they have other prominent co-investors (most of our deals are actually us co-investing with other people). We have a bunch of name-brand venture capital funds and angels (Accel, Index, Carmel, Khosla, Gigi Levy, Cedar Fund, etc.) who are investing alongside us. That gives us a lot of comfort, eases marketing the deal, and, more importantly, it’s what a company needs. Companies need not just a great funding source like OurCrowd, but a syndicate.
And then number six, coming from Israel, I can’t help myself – I look for deals. I want things to be priced attractively. I think our users will look for the same.
How do you plan to use the $5.5 million dollars that was invested into OurCrowd?
Wisely, slowly. (laughs) The reality is that we’re using that money to fund our activities as we grow the volume of transactions on our site. The way we break even is by flow of money through the site. And as we’re ramping that up, and thankfully that seems to be going well, In the meantime the money we have raised will be used to pay for our team, who is engaged in deal selection, diligence, and negotiation, as well as for business development, marketing and building up the technology platform.
We don’t just have a website. We’re actually building a platform that entails a whole series of automation elements, and reporting, and, ultimately, ways for us to be active investors and become value added supporters of the companies.
You mentioned earlier your 30+ years of experience in this field – what’s one piece of advice you wish to pass on to current or prospective entrepreneurs?
Just go for it. What’s the worst thing that’s going to happen to you? You’re going to fail and lose somebody some money? Get over it.
In other words, it’s all about risk. There’s nothing better than starting things up – the excitement, the thrill, the pride, the total scared fear that you get when the chasm opens up in front of you. This is like living life to the fullest, and there’s nothing better than being an entrepreneur. It’s not for everybody. But it’s a really cool thing and I think it has to do with, basically, people getting over their own internal fears of failure. Failure is okay, you’ll try again. And it turns out, actually, that entrepreneurs who have failed have a higher success rate than those who have never tried. There are no losers in the entrepreneurial game, in my opinion. They are people who are just waiting for their next victory.
My last question for you is: three years from now, where do you see equity crowdfunding and OurCrowd?
We hope to continue growing in Israel, in what happens to be the world’s second most vital and active arena for innovation. Israel today is clearly number two in the world after Silicon Valley in terms of innovation as reflected by startup creation, by M&A exits, as well as IPOs. The ranking of companies traded in New York is: the U.S. is number one, China is number two, and Israel is number three. It’s okay that China has now overtaken us in terms of overall number of public companies traded in New York. We can live with it.
But the reality is that, in my opinion, outside of Silicon Valley, there’s simply no better place for doing equity crowdfunding than in Israel. In general, there is a lot of interest around the world in the Israeli tech miracle. So there’s no better way or tool to hook these people up to the Israeli startup scene than equity crowdfunding, together with a VC operation model, which both selects dealsand helps the companies. We hope to create a safe zone for people to start getting into the habit of making early stage investments over the web.