40. Crowdfunding & The Socialization of Finance (Jon Medved)

The Full Ratchet Podcast on iTunesNick Moran Angel List

Jon Medved of OurCrowd joins Nick to cover Crowdfunding & The Socialization of Finance. We will address questions including:

  • Medved Crowdfunding & The Socialization of FinanceGoldman Sachs recently published a report on the Socialization of Finance. Can you first talk about what they mean by this term and what are the key factors are that are causing this to occur?
  • Specifically, what markets and/or sectors within finance are either currently being disrupted or are positioned to be disrupted significantly in the near future?
  • Crowdfunding has emerged as one of the most disruptive new financial models. We’ve talked previously about donation / reward-based crowdfunding  and also equity-based crowdfunding. Can you give us an overview of the major categories or segments that crowdfunding platforms have emerged around?
  • What are the major growth drivers or enablers of crowdfunding?
  • Can you mention some of the key players on the equity crowdfunding-side?
  • For startup investors specifically, what key factors should they assess when evaluating an crowdfunding investment platform?
  • What are your thoughts on the future of equity crowdfunding, let’s say in the next five years and the next ten years?

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Key Takeaways:


1- Problems with Crowdfunding

  • Lack of Supervision
  • Lack of Coordination going forward
  • Lack of Curation of the Opportunities
  • Lack of awareness that this extends beyond the Seed Stage and that the platforms are going to get second-rate or non-top-tier opportunities

w/regards to the last point, Jon has made investments through the platform from seed all the way to IPO. He doesn’t see the role of syndication through crowdfunding being limited to seed deals and, in fact, it has not been from his experience. They have co-invested with big name individuals, venture funds and corporate venture investors.


2- Limited Access to Top Deals

Jon spoke about how the majority of investors can’t get into the top-tier venture funds like the Kleiners and the Sequoias b/c they’re not taking new investors. And just to get into some of the other major funds out there you may need a $15M check, which typically means that you have over $100M in your investment portfolio, which is a pretty exclusive group. So, what is the opportunity for smaller startup investors to get into some of the best deals, if you can’t cut a $15M check? And this is where Jon feels that OurCrowd and other platforms can play a major role going forward, giving investors the access to top-quality deals and allowing them to get in at dollar amounts that, traditionally, would never have been possible.

And this is not a small group. The Total Available Market of Accredited Investors in the U.S. is 10M people, yet according to the Angel Capital Association there are between 100-200 thousand Angel investors in the U.S. So, only 1-2% of the total number of potential angels are actually angel investing. And, from Jon’s perspective, innovation on the investment-side and new ways to invest in more high-quality startups will only expand the participation of accrediteds in this asset class.


3- Types of Crowdfunding

  • Debt/Lending: This includes Prosper and Lending Club
  • Rewards-based: Kickstarter & IndieGogo
  • Equity: AngelList & OurCrowd
    • Accredited
    • Broad-Based (non-accredited): Doesn’t exist yet. The way they’re talking about this is a direct exchange for equity as opposed to being organized in an SPV with a lead.
  • Real-Estate
  • Charitable Crowdfunding


Tip of the Week:   Differentiators in Equity Crowdfunding Platforms

Below is the 'Tip of the Week' transcript from the Podcast Ep40: Crowdfunding & The Socialization of Finance (Jon Medved) Today we discussed how different platforms are unique. And Jon cited four aspects that differentiate. I'd like to review the four and add a fifth variable that I've noticed as well. Jon mentioned: 1- Quality of Selection/Evaluation/Diligence 2- Platforms Ability to raise follow-on Rounds 3- Governance and Representation on behalf of the investor group in the form of Board Activity, Seats & Mentors 4- Portfolio Company Support via a structure & methodology to support startup companies in the areas that they need it, such as recruiting, strategic introductions and contacts w/ the press And the fifth and final key distinguising feature between the equity platforms, that I'd like to add, is the (more…)Read More...


*Please excuse any errors in the below transcript

 # Jon, welcome to the program.Jon: Thanks # Nick, good to be here.

Nick: Can you start us off with walking through your background and how you got involved in venture?
Jon: Sure. I’ve been living here in Israel for about 34 years. I grew up in California, and my first outing as an entrepreneur was in a fiber optic communications company called # MERET, which I did together with my father, who was a physicist. And we sold the company to # Amoco, the big oil company and then built another software company called # Accent Software  and took it public. And I figured two successful entrepreneurial outings under my belt, I could be a VC. So I started raising a venture capital fund in my garage, a little fund called # Israel Seed Partners. Timing was good, it was 1994, and ultimately we managed about a quarter billion dollars and made a whole bunch of really good investments. After that run, I decided I wanted to go back and be an entrepreneur again, built a company called # Vringo , shared it to the public on the New York Stock Exchange.  And after exiting that I decided I wanted to go back and sort of do a hybrid of the entrepreneurial and the investing activity. And I started something called # OurCrowd , and that’s what I’m doing now. I’m the CEO and the founder. And we are, according to our reckoning, the largest equity crowd funding platform in the world. We’re headquartered here in Jerusalem, Israel. And we find really cool companies that we select in a sort of a venture like rigorous process we choose them. We then diligence them, negotiate term sheets, sign them up. We put our own money to work, and then we invite the crowd. And so far, this model has worked pretty darn well. We’re up over a hundred and ten million dollars of invested capital already in 66 portfolio companies, and we’re representing about 8000 accredited investors on our platform. So far it’s limited to accredited investors, because that’s the way the regs at the SEC and other countries would like us to work. But it’s a really cool way of providing a brand new leg for the whole innovation finance arena.


Nick: Yeah, I talked to a number of investors that do this ping pong between where in that the angel or the VC had and then going back to entrepreneurship. And I’m pretty impressed that you’ve found the convergence of both with # OurCrowd.


Jon: Yeah it’s fun. It gives me a little bit of challenge in both arenas. I mean a lot of challenge frankly, because this is very entrepreneurial. We’re pioneering in really a new way of investing . And on the other hand I’m getting the kick out of being an investor on steroids. We have 66 portfolio companies in a little over 2 years.


Nick: What is it, a couple a few a month basically?


Jon: No, right now more than one a week, at the moment


Nick: Wow


Jon: It’s accelerating. This year we’ll invest north of we think about a hundred and twenty million in just a year, we’re projecting next year to more than double again. And we don’t see an end to this. We think that crowd funding is one of those rare things that is actually under hyped if you could believe that


Nick: Agree


Jon: Everywhere we look they keep on revising their projections, besides the market, upward. There used to be a projection that was talking about ten billion. And then the world bank issued their study and said no it’s going to be a hundred billion in ten years. And now # Goldman Sachs comes along with their study and they talk about 1.2 trillion dollars. So who the heck knows. It’s right now extraordinary amount of heat in the overall crowd funding area. This week in New York you had the Lendlt conference, which was probably the hottest area, which is period to period lending. And I was very lucky to be an angel investor at the # Lending Club, which is the leader of that sector.


Nick: Yep


Jon: And I’ve seen it from the front row of how wonderful this is and how great that is. Equity crowd funding is couple of years behind, but we’re tracking if you actually look at our numbers ahead in terms of originations or what # Lending Club did back in their beginning in the 07-08 arena. And we think that the value to be unlocked, both in terms of profits and returns for us and our investors, but also for the overall ecosystem and what kind of a change it’s going to have on society and on innovation, I think equity crowd funding is going to change a lot of stock.


Nick: Certainly, like anything in angel investing and in venture there is a learning curve on the crowd funding side. But we’ve spent a lot of time and we’re doing a series right now on crowd funding and it’s amazing to me how it can exploit some of the advantages of both angel and VC while not experiencing some of the traditional drawbacks. So it’s a pretty incredible innovative new approach to seeding and funding companies. So I decided to have you on and talk about this topic of crowd funding and the socialization of finance.

So # Jon, # Goldman Sachs recently published a report on the socialization of finance. Can you first talk about what they mean by this term, and what are the key factors causing this trend to occur?


Jon: It’s an obvious extension of the sharing and web based economies. Until now finance has been one of these highly regulated, and generally by the way for a good reason, right. Because a lot of fraud is involved in finance , you want to get ones there  would be regulations.


Nick: Yes


Jon: But it’s also been a very sort of esoteric closed arena. And whether it’s lending or payments or equate funding or any of these areas, typically have been sort of outside of the public eye. And now you’re seeing that the wisdom of crowds come into play. And by seeing what the # Lending Club did and Prosper is  doing it behind them. And peer to peer lending was just nothing short of brilliant. I remember when they pitched me the deal as an angel, and said look we’re going to start making it alone and we’re not really a bank. And I thought that was a great idea. Timing was perfect. They really got started just at the right time. They also did many things very smart, which is they went to the SEC and they got the regulatory thing right. So while they’re not operating strictly as a bank, they made sure that they were following the regulations or threading the needle. That’s very much by the way what we did in crowd funding for equity. Remember the jobs act was passed in April 2012, and we’re still waiting for, you know, detailed regulations, what’s called broad based equity crowd funding from the SEC. They have made some changes to the regulations, they have allowed public solicitation and other things. But people like ourselves and # AngelList, and # FundersClub and other guys like that who are already in the market were operating under an existing regulatory demand. I think that what happens is a socialization of finance in this area is that some people have to step out of the comfort zone, you got to sort of get out ahead of the way , sometimes you have to use the regulations that are out there in a new innovative way and offer these services. And when I went around to people talking about the fact that we were going to crowd fund for equity from accredited investors, even before the finals regs had come out from the SEC, people were like sort of why are you really going to take that risk, how are you going to do that? Turns out the SEC did issue what are called no action letters, which is to basically say that what we and the others were doing within the regulations as they saw them , and we’re operating now again with accredited investors more or less like an open venture fund if you will.


Nick: Yep


Jon: You’re not buying directly a piece of equity in a target company. # OurCrowd creates for each and every one of it’s investments a special purpose vehicle which essentially is a single company venture fund


Nick: Right


Jon: We have to pick the company and then we manage the process. And we think, by the way, that our model, which is a little bit of a hybrid between venture capital and crowd funding, is right for many things that people hadn’t really thought about when they thought about crowd funding. I think one of the mistakes that people make with crowd funding is they think that it’s just about the money, right. In other words, we have to figure out a way to get this cool company a million dollars or half a million dollars and then everything will work out. The problem is that the money is really just one component of a complicated process of this innovation finance, where you need to first of all make sure that the company has proper advice and a good strategic input where somebody sitting on a board to represent investors, where the investors in our model is to aggregate it into an entity, which now gets the rights that are equivalent to any other venture fund. So things like anti dilution in case things don’t go quite as planned, or drag along and tag alongs when things go well. Preemptive rights, so you can invest in the next round when things go well. And these are the kinds of rights, by the way, that a traditional crowd funding site that would give you direct equity into the company or an angel, doesn’t get those rights. And on the other hand, we think it’s important when someone’s making an investment that there is diligence done. I’m a little skeptical still of the sort of sheer crowd funding model applied to startup and equity investment which says look let the crowd decide. There should be no gatekeeper, nobody who is really responsible for it and check the thing out.


Nick: Right


Jon: The crowd will filter it out. And I’m afraid that there are simply too many bad actors out there. Not everybody is an angel investor living in Silicon Valley. There are people all around the world who read about this stuff, who say wait a minute why can’t I invest in the Facebook or Twitter or WhatsApp, but they don’t know how to even begin evaluating a deal


Nick: Right


Jon: So different companies have gone about solving this problem differently. We take the diligence very seriously, we do it with a rather large team. We’re already  up to about 70 people working for # OurCrowd. We spend a lot of time diligencing. We also employ a lot of people in our network. And we believe that by utilizing the power of an 8000 person network we can actually get to better decisions and better deal sourcing and better deal diligence than some of the smaller venture activities. But it’s also, what do you do to help the company? Because the mistake people think is they say it’s crowd funding. But it’s not just crowd funding, it’s really crowd building. It’s how do you deploy the crowd to actually add value to the company. Because the difference is at the valley everyone knows, between smart money and dumb money. It’s not just making a good investment or getting into a hot deal. It’s what you do with the deal after you’ve written the cheque. And this whole model, the crowd funding is just about okay writing the cheque and viacom deals my darling and I’ll see you at exit. I mean that’s so just completely bogus and wrong. It’s about what are you going to do to help it. Instead of what can you do , you’re a crowd. But that’s exactly wrong. The crowd can do so much if it’s properly mobilized and properly motivated and properly organized to drive these companies forward. I think that what’s going to be interesting as crowd funding develops, it’s not just who’s got the larger list of investors and who’s deployed the most money, who’s made the best decisions, who’s gotten into the best deals. But then who is actually providing the best help for these companies just the way that venture funds compete. They can add  in terms of added value to their deals.


Nick: Yeah, sure. We recently had # Gil Penchina on the program and talked a lot about having sort of a centralized lead on a deal to handle diligence and coordinate the breadth and depth of expertise amongst the team members to help out, can be a huge asset for the target company that’s being invested in.


Jon: Yeah absolutely. # Gil , by the way , is a great investor and a great guy, and I think that what # AngelList is doing with their syndicates is a lot of sense for their model. And I think there will be several different models evolving in the equity crowd funding. I just want to caution listeners that unless there’s somebody who is essentially awake at the wheel there, sitting on a board who is making sure that they’re getting for the crowd the right kind of anti dilution and preemptive rights, going forward, you’re not getting your value. Because what happens is the big boys show up in the best cases in the good companies. And they are going to go get a whole bunch of special bennies and you want the same bennies, you want the same rights and responsibilities as the big guys. And that’s what we feel is exciting about our model, which is that when we invest, we’re typically investing now in companies as part of this of a much larger funding group, right. We’re getting into deals where sometimes we lead them and sometimes we’re following. We just led a twenty million dollar round of finance for a company called # Borrow, which is another social finance company. It’s an online lending platform that works on asset based lending. In other words, you take your Ferrari down , they’ll give you some money or even some valuable liner or paintings or what not.


Nick: Yep


Jon: And we invested in there about six million dollars in that deal, and we had about fourteen million dollars of additional money that was following us, including people like # Cheyenne Partners of the guys who were the lead investors at # Lending Club and # Rocket Internet, who were that large multinational out of Germany. But I think that some of the problems I’ve seen with crowd funding have been lack of supervision, lack of coordination going forward, lack of curation of the opportunities, and a misnomer that thinks that this is about small deals and seed deals only. We’re crowd funding later stage companies. # Borrow is a company with tens of millions of dollars of revenue already. We’re crowd funding from seed all the way up to IPO. We’ve already had the first IPO with the world where we are off a crowd funding platform. One of our companies # ReWalk that we funded is a company that makes robotic exoskeletons, think Ironman for real, gear that you strap on to your leg and get up out of your wheelchair. And we did two rounds of crowd funding for that company. And that company had a successful IPO at NASDAQ and is still trading above it’s offering price. And I think it’s a company full of great promise for the future. This notion that somehow crowd funding is going to get the sloppy seconds is going to be a sort of second rate companies that can’t get the tier 1 venture, that is totally wrong. We’re co-investing in deals at the same terms and the same prices, together with guys like # Khosla and # Aaron Schmidt and # Peter Thiel , leading venture funds and big corporations, people like # General Electric and # Microsoft and # 3M. That’s what I see is the future of crowd funding, when people like # OurCrowd and the others who are in our business are offering to the individual investor who has to be accredited still today, the ability to invest with the big boys on the same terms, and to get in and to do it in a way that it’s responsible and serious.


Nick: Do you have both institutional LPs as well as retail at some of these later stages?


Jon: Yes we do. And you’ll see more and more business coming in to our platform from family offices and registered investment advisors. People who have significant resources look at our model and say wait a minute, I haven’t had a chance to invest so far in innovation finance. One of the problems is that we wanted to write a cheque to a venture fund and it’s typically quite a large cheque, right. The good funds, the best funds you probably can’t get into no matter who you are. Because guys like # Sequoia and # Kleiner are really not taking too many new investors last time I looked. But even though if you’re two guys, you’re trying to write a five million dollar cheque and then you have to choose a single manager and you really want to choose a couple of managers, so you’re really talking more like ten or fifteen million dollars to commit to the asset class. Well, if you’re going to do that much in venture, you really should be having like a hundred million dollars of assets. But that’s a pretty rare to find group, right


Nick: Yeah


Jon: On the other hand, when you look at the criteria for what are called accredited investors in the US, it’s either a two hundred thousand dollar annual income or a million dollars of assets outside of your dwelling. There are ten million of these households in America today. Now the national angel association estimates that there have been somewhere between a hundred or two hundred thousand angels so far in America. Which to me says, oh my gosh we’ve got a great opportunity, because really only one to two percent of the accredited investors have ever done anything like this. So you really have this opportunity to really open up this asset class to a much broader range of people. And not just sort of a digitarti and people who are wired in to the tech economy. But doctors and lawyers and people who are store and restaurant owners and builders and who knows, who would like to have a part of their net assets invested in quite an exciting part of the economy


Nick : Right

Jon: And the trick is how do you do it so that they feel comfortable, so they get educated, so that they build a portfolio, because if you tried to pick one, two or three of these, I don’t care how good the site is or how good you are as a picker, you’re making a mistake, right. You got to build a portfolio with at least ten or more to get at the right time to diversification, right kind of risk abatement for this very risky asset class. And so we’ve actually set our minimum investment per deal at about ten thousand dollars a pop, so that you can build a portfolio of ten of these for a hundred grand. But what we’re finding now is that the family office set are saying wait a minute, we haven’t made that many venture commitments to the five million, ten million, fifteen million dollar variety, but we’d like to deploy a couple million, three million, five million dollars into the asset class, and maybe we can do this in amount of a hundred or two fifty. And so what they like about us is they go to a site like # OurCrowd and they find really well curated, well groomed, well managed deal flow. No ones asks them for any commitment up front. There’s no subscription fee or what not, and then they get to join what they’d like. And so we’ve got people writing not just ten thousand dollar cheques on the entry, but people writing hundred thousand, quarter million , even multi million dollar cheques for some of our companies through # OurCrowd.


Nick: So # Jon maybe you can help us out, but if we take a step back from crowd funding, thirty thousand foot level, on the show we’ve talked about rewards based and donation based crowd funding like # Kickstarter or # Indiegogo . We’ve also talked about the equity based crowd funding like # OurCrowd , # AngelList, etc. Can you give us the overview at a high level of what these major categories of crowd funding platforms are that have emerged?


Jon: Sure, I would divide it up at the moment into four major categories. And you start off with the lending category, which I still think I believe very much is crowd funding, that’s a peer to peer lending. It’s the # Lending Club and # Prosper and then guys like # SoFi and others who are doing student loans and business loans. Lendlt conference was just unbelievable I heard in terms of excitement in that area. The second area which is gotten the most attraction to date is the reward based. And reward based has essentially the leaders they are # Kickstarter and # Indiegogo . And those guys basically, what’s the reward you get? A t-shirt by and large. Or you’re funding somebody making an Indie movie, that might put you in the credits, you fund enough maybe they’ll give a walk on or something. And if you’re buying cool gadgets, they might give you a first look or an early copy of the device. It’s got a blessing and a curse associated with it. This has been a great way for people to get early funding and get money and without having to be deluded. But you really have to have a cool gadget , so you get that kind of backing on # Kickstarter to get the pebble like ten million dollars. Or we have a company that we actually provided equity crowd funding for that went on # Kickstarter, a company that makes a product called Scio, which is this cool little scanner for all matter. It’s like a real life tricorder where you can figure out is it a real diamond or fake, or how many calories are in your drink. It’s quite a remarkable little device. And they raised like 2.7, but not everyone can do that. And the problem arises on the what’s called reward based is that when you get successes like # Oculus Rift who raised two and a half million and then went on to sell the company for two billion dollars to Facebook. I bet you some of those guys don’t feel so good. Most of those guys, you know, it’s an expensive product , didn’t get the product as part of their reward. I think # Palmer Luckey is a very smart and lucky guy. He even invited them to like a party up in Malibu or something. And there took two billion dollars home. And the people who put the first money in got what they got. And that actually I think has done a lot of service to the third kind of crowd funding, which is the equity crowd funding like # OurCrowd and # AngelList. And there you’re going to see and shake out into two different kinds. There’ll be the accredited investor platforms that will stay working with people of means to start with initially, because of the either the regulations or because I’m not sure that 25 or 50 dollars makes sense as a startup thing.  When you think about some of the proposed regulations , and whats called the other kind of equity, which is broad based. Now they’re talking about thousands of people putting in twenty five, fifty, a hundred dollars in the company. These are not being managed in a partnership. These are people essentially buying stock directly. So imagine the guy and a gal and a dog in a startup with two thousand investors at fifty dollars a pop, I can’t think of a bigger nightmare, right


Nick: I don’t want to see that cap table


Jon: The problem is that no VC in their right mind is ever going to take a look at that cap table. Because what you’re doing is you’re cursing to a certain degree these companies to be forever doomed to be outside of the sort of the inner circle of the chosen who get the VC money


Nick: Yep


Jon: And I think that’s one of the challenges when people start looking at broad based as an alternative. It will happen, and I bet you it’s going to be really big, but we’re pretty comfortable now staying with the accredited investors sectors, I said there are ten million households. We’ve got eight thousand signed up from about a hundred and ten countries. We estimate that there are another thirty or forty million households around the world who are suitable for this. We’ve got a big target market, trillions of dollars of potential assets. And talk to me about broad based once I’ve crossed the billion dollar a year number, and then we’ll take a look at that.


Nick: Yeah I was talking to an entrepreneur yesterday and she was complaining about how she had to jump on a call with an investor that was frustrated that they were moving their offices. So it would be harder for him to come over and see what was going on. Now she was just complaining about the number of investors on the cap table and it becomes a little unwieldy to manage.


Jon: Yeah and that’s I think the advantage of our structural innovation, which is that we do create partnerships with one element on the cap table. We look just like a venture fund. That’s not just good for the investors, because we’re protecting their rights and getting the same rights, but it’s really good for the companies. Because it’s not screwing up the cap table and that’s why we had as much luck as we’ve had in terms of co-investing with leading venture funds. Because we, you know, behaved responsibly, and there’s someone awake there. And the final fourth form of crowd funding, we talked about the lending, we talked about reward based, we talked about equities, of course donation and charitable stuff. And I think that’s going to have a tremendous amount of appeal going forward. I meet a lot of people who have already used it well for political campaigns or helping churches or helping synagogues or all kinds of charities around the world. And I think that people want to get closer and have more discretion. Crowd funding does that. So I think that’s going to also be quite big. I’ll tell you what, it’s just a great time to be in this business. We’re finding that more companies want to take a look at this as an alternative. It’s not a either-or. The cast majority of our deal, which we’re funding alongside well known angels or well known venture funds. And usually a combination of both.  This simply is going to become, call it the third leg of the stool, where it will be angel investing and there’ll be venture investing and there’ll be equity crowd funding. And the smart companies are going to go access all three, I’ve seen a reason, why not.


Nick: You know, I’ve been getting a lot of emails from angels lately about real estate crowd funding sites. Where does that fall in to these broad categories?


Jon: It’s a form of equity. Although I’ve seen some of them now that are offering their products as well, and it’s huge. Right now it’s a little bit confusing. There seems to be literally every week about five new entrants into this. Real estate as a business is a pretty darn big business, right


Nick: Right


Jon: I mean, it’s huge. And we get people calling us all the time wanting access to our investor base, and how come you guys don’t add it to # OurCrowd. And we’ve thought about it, but we really want to stick to our core components to use a buzzword compliant term. We’re good at picking startups and we’ve got people who come from that world. And as it is we’re awfully broad to begin with. I mean we’re making investments in medical device companies and clean tech companies and act tech , internet security, and big data and the internet of things, ecommerce and ad tech, you name it. Trying to handle this breadth, that’s plenty for us and we’ll let other people make money on real estate.


Nick: I’m with you. I’m not a real estate expert. But I get a lot of questions on it and have to differ on that one. So Jon, can you talk about what are the major growth drivers and enablers of this crowd funding movement, not so much on the legislative side but more on the market side.


Jon: I still think that we’re in a situation in most of the world where there’s too much innovation and not enough money chasing the deals. In places like Silicon Valley, that one’s might be a little bit different, there’s a lot of money chasing deals in Silicon Valley


Nick: Right


Jon: But when you get outside of the valley or Israel, it’s pretty hard to raise money because there isn’t that much. I’ll give you an example. We had a company approach us that was building this really cool simulator for a brain surgery or neuro surgery. There were some guys, ex-Israeli pilots with land up in Cleveland. And they’d hooked up with a neurosurgeon and they were basically building this flight simulator for neurosurgeons. We heard about this , and we got really excited, we sent people out there, we made the investment, done a couple rounds in # OurCrowd . The company is called # Surgical Theater. It’s an unbelievable company, it’s really, I think, very exciting. But I remember early on I was sort of wondering and I said how am I getting into this deal, right. In other words, we’re based in Jerusalem, we happened to have a staff guy whose family is in Cleveland, so he was happy to be sent out there to do diligence. But it was like weird, like why are we to get in this deal  because we’re really early in our process. And I called them and they said we called a whole bunch of venture guys and they all liked the deal when they heard about it on the phone. Then somewhere in the middle they said where are you guys based? And then we said yeah we’re based in Cleveland. And usually the call would last about 2 or 3 minutes afterwards and then would end abruptly.


Nick: Right


Jon: Because how many VCs are flying to Cleveland? They’re just not. And there is a lack of money there. But it’s not just Cleveland, it’s San Diego. We got an investment in a company called # StackIQ , which is doing doing big data stuff. It’s a great company. Except that guess what they’re not there’s not enough money to fund innovations in San Diego, believe it or not. Because it’s such a long flight from the valley. There’s not enough money to fund innovation in DC or in Florida, but forget America, go look at the rest of the world. I’ve been in Australia a couple of times. Australia has got this unbelievably vibrant sort of innovation culture and cool startups and great technology. And it’s going to reduce that hyper locality that you just spoke about. Well, I like to be close to be able to watch the deal. We think of angel investing in these angel groups , with all due respect, they’re going to sort of in my opinion either get with the new trend or become sort of like the elks and the moose with secret little handshakes and stuff. Because this hyper locality doesn’t work anymore, right. In other words, there’s no reason why if I am living in London that I can’t invest in a valley startup or in a Austin based startup or an Israeli startup or something in Hong Kong. And the web brings us all together that way. You need to create a structure that manage the investments with  diligence. This is going to ultimately be really good for innovators everywhere. Because they’re going to be able to access the capital and the strength and the connections they need. Because if you build truly global platforms, then all of a sudden you can use the platform to not only raise money for entrepreneurs in a place like Cleveland, but actually start getting help with introductions to distributors in New Zealand or Australia, which you never really think about, right. When you’re starting your company you’re focused on your sort of local market. But all of a sudden now we’ve got people from a hundred and ten countries on our site, and we’re figuring out ways to incent them and encourage them to help the companies. You would be surprised what’s going on, and it’s really quite cool.


Nick: Jon, for startup investors specifically, whether they are LPs in venture funds or they’re making angel investments, as well as investors that have not made the move into venture but are very interested, what are some of the key factors that they should be assessing when they are evaluating different crowd funding investment platforms?


Jon: First of all, the number one issue to look at is what is the quality of the diligence and the deal selection process. Is it being outsourced to angels, for example, then are sort of your proxy that’s fine. But then how do you diligence the angels and their track record and what they’ve done. You’ve got to understand how the companies are getting up there and what work is being done to rank them, select them and what not. That, by the way, is where I think there’s the hugest and biggest difference. There are a lot of sites that don’t do much and there are some sites that do quite a lot. And I think you need to look at what is done. And the best way to check it out, by the way, is to pick up the phone and call one of the portfolio companies. Go find a company that they’ve funded and say what do these guys do? We have people publicly, we have the CEO of one company that went public , # Larry Jasinski at #ReWalk who on a public forum said look I don’t know about other guys but this # OurCrowd the diligence they did was as good as any other diligence done by our venture capital firm. We pride ourselves on that. I think that’s a big differentiator. The second question you have to look at is to what extent is the platform set up to provide not just one round of funding for the company , but multiple rounds to participate in future rounds. And again on our site , of our 66 companies, I don’t have the exact number in front of me but I think we’re approaching 40 companies that have actually raised follow on rounds on our site. That’s a real shocker. Most people again think of crowd funding as okay, it’s the first round we’re in , then we ride. And that’s not the way it works. So these companies need more money. And if you’re a smart investor, you want to double down or triple down going forward on your winders


Nick: Yep


Jon: And so we’re very focused on staying in tune with the company and measuring their success and then putting it back up. Now, by the way, we just completed today a down round for one of our companies. And people often say how are you going to do this with crowd funding , how are you going to do all the stuff that the venture guys do? And believe it or not, we participated in this and we’ve saved a bunch of our companies. So the follow on round criteria is at number 2. Number 3 is what is the platform doing in terms of governance and literally sitting on boards. Is your money going to be represented by a board member on the company? And I would dare say that we’re almost alone in that area. I’m not sure , I don’t know of other crowd funding platforms. Because most of the angels who were out there in # AngelList, I’m not sure they get board seats. We don’t get them in every single company, but we negotiate hard to get them where we can, and in the vast majority of our companies we are sitting on the board. And I think that’s really important to represent the interests of our share holders and to provide assistance that we don’t generally have our internal teams set, we recruit among our investors and experts out there, former entrepreneurs who built successful companies, people we call mentors. We then go sit on the boards and represent #OurCrowd on those boards. And then the final criteria I would look at is what sort of structure or methodology does the platform have to support the companies in critical areas where they need help. Whether it’s recruiting or providing strategic introductions, contacts with the press, how much active support these companies are going to get from the crowd funding platform or the people who are representing it. Now I think if you look at those 4 criteria, the diligence up front, how much money is being raised in subsequent rounds, who is sitting on the board or representing the interests, and then what kind of what I would call crowd building activities. Those are 4 criteria which I think sadly investors should look at. And then of course, they have to look at the performance right. At a certain point this is all going to boil down to who makes the most money for their investor and choosing companies in its early days. So a lot of the stuff out there people talk about unrealized IRR and that I’m not a believer. Because if unrealized IRR is about as good as the paper it’s written on , right. In other words, you really need to get to the get to the exit and return the cash or the stock. But it’s ultimately going to boil down to performance. One of the things which we’re lacking in the industry at the moment is transparency. I look at a bunch of the sites, I’ll see how much money the company is raising. And it will say on this it’s raising four million dollars. And you’d think that that crowd funding platform is actually investing four million dollars, so then you have to either click on that or sometimes it doesn’t even show up. And you realize that the actual round that this platform is participating in. Or we put up that we’re raising two million or three million or right now we have an unbelievable company up in the medical cannabis area. I’d be happy to talk about it in a second. We’re raising up to eight million dollars. That’s eight million dollars from # OurCrowd. That’s not the additional seven million dollars that’s coming in from other people in that same round. And that’s another thing. It drive me a little bit crazy. People say yeah , on our site people have raised a hundred million dollars. And you look at that, and there’s 20 companies that’s 5 million each, you say wait a minute I don’t see it. And what they were referring to is the companies actually raised 5 million dollars on an average basis, but about 10% of that came from the crowd funding site. So even though at a certain point the consumers are going to demand I think more transparency, it’s going to be the good actors are going to emerge and the bad actors are going to fade hopefully. And people will figure this out.


Nick: Hopefully. The show in certain ways helps bring more transparency to an industry that has sort of been classified as a black box for many years. So Jon, what are your thoughts on the future of equity crowd funding, both for the accredited and maybe even for the non-accredited, let’s say in the next 5 to 10 years?


Jon: Well, I think the future is really bright. There’s no question in my mind that crowdfunding gets much bigger than it is today. And it really earns a place as the third pillar of innovation, finance, alongside venture capital and angel investing. If you look at some of the studies, it keeps on becoming a pattern that every time someone tries to actually size the market, it becomes bigger than that. And I think that equity crowdfunding is one of those few areas that is actually under hyped. Despite the fact that everyone’s thinks it’s not as things this widespread. I don’t think people realize how big it’s going to be. Now, the world bank just released numbers that they felt over the next decade it’s going to be a hundred billion dollar business. If you look at what # Goldman Sachs just released in their study on shadow banking and what not, they talked about a 1.2 trillion dollar opportunity in the overall # FinTech sort of shared economy meets financial services market. But they also talked about how huge the equity crowd funding opportunity is going to be. So I don’t really know exactly whether it’s going to be a 100 billion or 200 billion or even 50 billion. But from my standpoint, what I’m looking at this year, doing a hundred and twenty or so  million dollars on our platform , my sense is that it’s going to get a lot bigger and we can grow to be a kind of company that will invest billions of dollars a year. When I continue to extend our leadership and continue to be a leader in this industry. And I think we’re talking about probably orders of magnitude growth. And that’s good enough. People didn’t think that Moore’s law would keep on growing as long as it has an end. I don’t know if equity crowd funding is like Moore’s law. But I think that once you deploy this kind of weapon of mass disruption, there is a lot of ancillary benefits that’s going to come out of it. And you’re going to see not just it bringing new money and new investors into the market, but new value to the companies that are taking advantage of the equity crowd funding platforms.


Nick: Do you see # OurCrowd continuing with it’s current strategic model, or do you see it adapting and empowering others to be leads and sort of anchor arounds as a syndicate leader?


Jon: First of all, one thing I can tell you with complete certainty is that we will change and change and pivot and change, and we don’t believe that you get this right from the beginning day 1, with all due respect, making up a bunch of it as we go along, okay.


Nick: The only guarantee is change, right?


Jon: Yeah, that’s it. That’s the only constant , is change. Look we’re very interested in creating a market place and a platform that leverages a lot of different strengths, both the strength of our investor base, the strength of our growing entrepreneurial community. In fact, we’ve got almost 70 portfolio companies now. And we think there are a lot of smart managers out there, and we’d like to partner with them and to provide them access to this. Right now we have not adopted sort of the # AngelList syndicate model because we want to keep a little bit tighter diligence control and curation on the deals that go up on the site


Nick: Sure


Jon: And we’re focussed again not just on raising money once, but on multiple rounds. The majority of our companies have already raised follow on rounds at # OurCrowd. We take board seats and there’s a whole bunch of stuff that we need to figure out how do we continue to do that which we think is strategically important in the long run of the same time and how are other managers. You might indeed see us at some point working with other funds and all kinds of other entities and partnerships and we’re open to that. But we’ve got so much to do with just the deal flow that we’re addressing now and the kind of hyper growth that we’re experiencing , that we’ve got to be careful about trying to bite off too much. And we think that we’ve got a good model and we have got to sort of stick to it and make it work.


Nick: Yeah , why not. So while we’re on the subject of # OurCrowd, can you talk about what the future is and maybe some of your key strategic areas of focus.


Jon: Well, we like hard stuff. We really haven’t been as good as others if you will , and pets.com or toys or that kind of stuff. We like siteware security, big data, the internet of things, robotics, medical devices, semiconductors, optics, machine vision, things that require technology advantage. Now part of this is the fact that still the bulk f our companies are out of Israel. And these are disciplines that Israel’s good at. But I also think that that provides a rather strong argument for why are companies seeming to be surviving the way they are. Many of them are flourishing, but the thing which is I think most exciting at #OurCrowd is that we’ve made, again I think it’s 68 investments, literally it changes almost every week, more or less out there kicking. We have one that’s on life support and looks like it’s probably a caput. But what’s remarkable is that having made all these investments in 2 years that we’ve got such a thriving sort of a live group of companies. Now not to say that many of them don’t have issues, they do. But that’s what we’re really proud of. We seem to have done a good job of curating them Sometimes startups take longer. I mean, one of this, I think the misunderstandings people have of this kind of business is that they they that startups are sort of instant fresco, you know, sprinkle some water or sprinkle some money and watch the thing grow and collect your coupon at the end of the process. And that’s not the way it works. So if you look at some of the successful companies that have come out of Israel and my prior portfolio, they sometimes have to pivot once or twice or more often. They take not just year or two, they can take many years. I mean, I’ve had excepts happen. There’s a great company I wish I invested in here in Jerusalem, I think called # Mobili , which is now up over a I think a 5 million dollar market cap. And that thing took around 15 years, 16 years to get to assent. But wow what a , it’s great to have that kind of outcome. And it’s still a hell of an IRR. And you’ve got to be patient. So we’re looking at this as a long game, and we’re very hopeful that as we build our portfolio and people build their portfolios within # OurCrowd, they’re going to get some good diversification and some good outcomes.


Nick: So Jon, what is the best way for listeners to connect with you?


Jon: My email, I still use that old fashioned method of communication. It’s jon@ourcrowd.com  . I urge our listeners to come to #OurCrowd, sign up. If you’re an accredited investor we’d love to have you join us. If you’re not then join our newsletter list. We’ll stay in touch with you. And when the world changes and non-accredited crowd funding is legal we’ll invite you then to join us as well.


Nick: Well Jon, thanks so much for sparing the time. I know you had to squeeze this in amongst a lot of family commitments, so we really appreciate you sharing your thoughts with us.


Jon: Thanks Nick, and look forward to spending time with you shortly.