This article is based on OurCrowd Founder & CEO Jon Medved's talk at the NOAH18 Conference on "Why Startup Investing? Why Now?"
See the abridged talk below, followed by the transcript.
The bottom line is that venture capital is a wonderful thing – if you are on the inside. If you’re on the outside, it’s sort of an object of envy, and when you realize how much money is being made today in this private investment class and how few people are benefiting from it, it’s really outrageous.
The reality is that in the good old days, the rest of us could wait for a tech company to go public, because that’s what they did (Microsoft went public - not when it was valued at a billion dollars, Oracle went public - not when it was valued at a billion dollars, Amazon, Apple...) and if you bought those stocks back in those days – and you held them – how much money did you make? Twice your money, 3x your money? 5x, 10x, 100x? [In some cases] 500x your money, in a public stock! That’s a thing of great beauty. That’s what the public markets are supposed to do – except that today it’s gotten a little bit weird.
On the one hand, tech companies are more important than ever – the top ten companies in the world are all tech companies. It used to be car companies, banks, real estate, oil and gas, no more. It’s all tech. Except there’s one problem – the public doesn't get a chance to invest. So you have tech companies like Uber, at a $70B valuation – rumored last [March 2018], although it’s complicated – and the public’s not invited yet! AirBnb at $30M – public not invited! When the public gets invited, like at Dropbox, prices are actually going down a little bit but the prices are still crazy. Take Facebook for example. If you bought the Facebook IPO, you made three or four times your money. Great, wonderful, [but] it ain’t 500x. So what do we do? We dream, we say okay, if I only had 3 million or 4 million or 5 million dollars to be an LP in one of the great venture funds... Except if you’re going to hand over $5M to a single venture advisor, how much money should you really have? First of all, you should do 3 or 4 advisors, so you should probably be investing 15, 20 million dollars in the asset class, and how much should you put in the asset class? 10%? That’s pretty cowboy style, right? That’s like Yale University, right? 12% of the endowment in venture. So you better have $200M. Well [thankfully] there are people that have $200M or there wouldn’t be a venture capital market.
But if you don't have $200M, what are you? Chopped liver. Screwed. Nothing. Not invited. I want you, they don’t want you.
So the other option is become an angel. Find these great companies, put your money in individually. Now, there are some really good angels out there. For most people, it’s not an option. Because you want to invest 25,000, 50,000, 100,000 dollars – that doesn't do it for the company. The company needs a half a million, a million, at the earliest stages even today – and so now you got to get your friends together, and now you got to go do the legal and the due diligence.
So, along comes this thing called equity crowdfunding. And the idea behind equity crowdfunding is really simple. At least the way we do it at OurCrowd. Find a way to get you, [along with] thousands and tens of thousands - and in the not too distant future, hundreds of thousands [of others] – so that you can buy into private companies the way that the big boys and the big girls do.
So the idea is, can you find a way to put great companies in front of individual investors, give them access, do the diligence for them, do the legal for them, and manage the investment the way that venture capitalists do – report, sit on the board, lead rounds, invest in future, ongoing rounds - and that’s what we do [at OurCrowd]. We started [in 2013] and we hope that in the next five years we’re going to be five or 10 billion dollars under management. And this is all coming from 25,000 individual investors around the world [and growing].
Now, a funny thing happened on the way to building this crowdfunding platform, is that institutions came knocking on our door. They said, “Wait a minute, you guys are putting together this platform, you have cool companies like Zebra, or mPrest, or BioCatch, or CropX, or Taranis. You know, and even funds now – how come the institution can’t invest?” I said, who said institutions can’t come? Just because our minimum is $10,000, doesn’t mean you can’t invest $10M if you’d like. And so now this is what’s driving us - is that family investors and institutional investors are saying, “We want in too. We want a platform where we can choose our investments, we don’t have to pay anything up front, we’re not paying anything for committed capital, we only pay for what we actually deploy, and we can choose either an individual investment or a fund.” And this seems to be working.
The trick is going to be, not just can we get into companies and raise the money – I think that much has been proven. The trick is, can we find different and maybe even somewhat better (in some ways), ways to build these companies, by mobilizing the power of the crowd. Because let’s face it, in venture capital, you’re really dependent on the connections of the three or four partners, (who, if they’re good, they really have a good set of connections, they work hard and they manage the companies)... Which three or four partners can compete with an educated, connected crowd of 25,000, right? When you have this hoard, this crowd, who are going to get behind these early stage companies and help them grow, you can really begin to do some interesting things. You can make all kinds of connections, you can hire people, you can help build awareness in our hyper-networked world. So our focus at the moment is really moving not just from finding good deals, but to how do we help build the companies with the crowd.