“I think that what OurCrowd and others have done in this space until now has been quite subversive and wonderful and democratic.”
OurCrowd, which is run by serial entrepreneur and venture capitalist Jon Medved, has put at least $170 million to work in roughly 80 startups. With an average raise of $2 million and growing — one company recently secured a $16.5 million private round — OurCrowd remains one of the world’s most successful equity crowdfunding platforms. OurCrowd is a leading example of what investment crowdfunding can accomplish – if allowed. The platform invests its own money side-by-side smaller investors, giving greater assurance to smaller investors that significant due diligence and vetting has been completed. A bit of a VC hybrid model, it is this approach that has been recognized as perhaps the leading model in driving investor returns via equity crowdfunding.
Serial entrepreneurship defined: Known for his penchant for Hawaiian shirts, Medved co-founded and served as CEO of Vringo (VRNG in NASDAQ) between 2006-2012, a leading mobile social and video application. Prior to founding Vringo, Medved founded Israel Seed Partners in 1995 in his garage and co-managed the fund until January 2006. Israel Seed had $262M under management in four funds and has been an investor in 60 leading Israeli companies, including exits: Shopping.com (acquired by Ebay), Compugen (Nasdaq: CGEN), Answers.com (acquired by Summit), Tradeum (acquired by VerticalNet), Broadlight (acquired by Broadcom), Mobile Access (acquired by Corning), Cyota (acquired by RSA), Native Networks (acquired by Alcatel), Xacct (acquired by Amdocs), Business Layers (acquired by CA), Xtellus (acquired by Oclaro) and Digital Fuel (acquired by VMWare).
Prior to Israel Seed, Medved also built several technology startups. Medved was a founder and Executive Vice President of Marketing and Sales at MERET Optical Communications, Inc. (Santa Monica, CA) between 1982-1991, an early pioneer in fiber optic communication systems for video transmission which was acquired by the Amoco Corporation (NYSE:BP) in 1990. Medved then was part of the founding management team at Accent Software (Nasdaq:ACNTF) where he served as Executive Vice President of Marketing and Sales between 1992-1994. Currently active on the Boards of various non-profits including the Board of Governors of the Jewish Agency, Bnai David Eli, Ma’aleh, Michael Levin Lone Soldier Center, AMI, Aish Boneh Yerushalayim Dinner, and the Jerusalem College of Technology, Medved calls Jerusalem home base.
Last week I had the pleasure to catch up with Medved, a fellow liberal arts undergrad, via telephone between his global travels to learn more about his career trajectory, startups, Title III, hybrid offerings and OurCrowd’s future plans. And that’s just the beginning. Our interview follows:
Erin: As a history undergrad at UC Berkley, did you ever think that you would have a career in finance? What shifted your career path?
Jon: (Laughs.) I moved to Israel. The national business here is startups and I got involved with startups before they were fashionable. My first startup was way before there was even a single venture capital fund in the country.
Erin: Why? What piqued your interest in startups?
Jon: It’s an old Jewish tradition called nepotism! My father’s father was a physicist. My grandfather had a really cool startup in fiber optic communications and one day I went with him to visit an Israeli scientist who he was visiting. He showed great interest in what he was doing, and then he turned to me during the meeting and asked me what I was doing in the country. I said that I was tour guiding and lecturing about history to kids. One guy looked at me and told me laughing, “What a total waste!” I said, “What do you mean? I’m living the Zionist dream!” The scientist responded, “What your father is doing is real Zionism. We need fiber optics, we don’t need lectures.” On the ride home back to Jerusalem that day, I asked my father what the hell fiber optics were. And that’s how I started.
Erin: Did your father embrace your choice or did he want you to continue teaching?
Jon: I was the only one of four sons who went into the family business, as it were. [The second oldest] I have one brother who is a talk show host and tv commentator, another brother who works online in tech at Fandango and another brother who is a psychologist.
Erin: Would you recruit recent history undergrads to join your team?
Jon: There was a great cover story in Forbes a couple of weeks ago about how there’s a huge demand for liberal arts in the tech business.
Erin: Let’s talk about Title III!
Jon: Congratulations to the SEC who has the thankless task of figuring out how to protect the consumer, accredited and unaccredited investor and open up the world of crowdfunding. I appreciate the effort they made and I think that it’s a great step forward. I do think that we will get there relative to opening up the market for large numbers of people to invest in interesting early stage companies. The problems are still in the details; the biggest issue I see with the ruling — as I understand it today — is the inability to allow for an SPV structure. For OurCrowd, it’s not just a matter of a business model, because we don’t like placement fees, we like management fees and we like carried interest. But it’s more ideological. It’s basically, do you see crowdfunding as a sort of junior IPO, meaning smaller amounts, less regulation, hopefully quicker throughput and lower costs in terms of going public and getting it done? Or is crowdfunding democratic venture capital? Because the difference between venture capital and IPO is a very different understanding. IPOs are for companies that are basically on their own after the money is given to them. The investment bank claims that it will be involved and help, but basically it’s,”Good luck, guys, take the check and make it happen.” In venture capital, the work starts the moment you write the check.
Erin: How does this tie back to SPVs?
Jon: That understanding means that someone must manage the investment. When you don’t have an SPV, you have a hundred or a thousand individual investors who have just bought stock in ‘Company A’ and is someone representing them on a Board? Is somebody making sure the company can raise additional funds? Is somebody helping to hire management for the company? Is someone making introductions to strategic partners? Media? Is somebody giving guidance? The biggest issue is now that you have a cap table which basically has a thousand individual investors on it. How is that going to play with potential venture capitalists? Let’s say the company succeeds, grows up and wants to raise money from big boys, how are they going to look at this? When we invest, at the moment with our accredited platform, we basically aggregate all of our investors into an SPV, we manage it, and because we manage it, we take management fees and we take carried interest on the upside on the investment.
Erin: Seedrs has tried to find a way around SPVs by introducing its nominee structures.
Jon: Some people are building nominee structures, potentially stripping individuals of voting rights somehow. We’re looking at the nominee structure issue. That might be a way to do this, but there’s a problem. Nominee structures might solve the question of the cap table, but it’s not clear to me if a nominee structure would work in the US’ Title III. We’re having our lawyers look at it. Number two is, and this is really the most important point, the fee model at the heart of Title III is simply inconsistent with our existing fee model. No one knows exactly how much FINRA will allow portals to take yet, the estimates are somewhere between five and ten percent, cut in the middle.
Erin: Would OurCrowd consider incorporating Title III?
Jon: The question becomes this: right now, I take two percent management fee per year, I take it upfront for four years, we take twenty percent carry. How do I make that model work with Title III, especially if I’d like them to invest in the same deals? One of the questions we’re looking at is, do we want to do hybrid offerings, which means the same company will get money from Title II 506c and it will have a Title III component next to it.
Erin: How long does something like a hybrid offering take to come to fruition?
Jon: We’re ready to go, as long as we have the regulatory and the approval. We don’t know what it’s going to take, i.e. what the FINRA process will look like, how to get approved, but assume that we’re willing to accept the rules and say okay, whatever the fee is, you can take that, you don’t take management fees, you don’t take carried interest because you know longer have the SPV structure, you’re just going to let people buy either the same stock or a different class of stock for the same company or maybe it’s a different company. One of the questions we’re asking ourselves is, do we?
We raise now lots of money for our companies, our average raise is now $2 million and growing. We just completed a round on the site that was $16.5 million — for one company. When we’re looking at a company and we want to invest $3 or $4 million, $1 million goes to Title II or III and the balance goes to the other guys, the Title II people, the accredited investors. Together they invest. The question is, how do we make that work?
We’ve got a business running. It’s running really well and it’s growing really fast, and we all dream of the ultimate democratization of this business, where everyone can participate and now the SEC has passed regulations and it looks like they’re not bad! The SEC fixed some of the things that people were concerned about i.e. the audit requirement, but now we have to deal with the reality of –uh oh! — we already have a business model! How do we now expand it to include this new horizon? When we’re raising already on an average basis more than what is allowed for the existing Title III, we think that by reading the laws, that you can add Title III to the existing business and the SEC won’t force us to take a step backward, but how do we make these two things play together in sync? So, we’re busy studying and looking and hopefully we’ll be ready when things are starting to roll out next year to join in one way or another. And if not, we’ll continue to do what we do now, which is raise lots of great money and make good investments for the accredited investors.
Jon: I think that Title III is going to bring capital into this market for sure. I don’t know how significant it’s going to be. I’m hearing a lot of people talking about interest in 504 as well, all of a sudden. We’re insiders. We live this stuff. I think most people hear ‘crowdfunding’ and get confused. The regulations are tough, trying to understand the law and what’s now doable with various raises on different business models. It’s a lot of fun to watch this stuff roll out. In general, I think that it’s very good for the market. This is great. This is what we all wanted to see and that’s what makes great companies: their ability to transition. Right now the SEC has opened up a path to bring everybody in and I think that’s an important path. We’re quite interested in allowing larger number of people to access our deal flow. We just have to figure out how to make it work without disturbing our existing business.
Erin: Would you consider a separate platform or sub-portal for this idea?
Jon: We might. We’re looking into that as a possibility as well. A separate platform with separate companies, or with the same companies. We’re looking at all of those options.
Erin: Where do you see crowdfunding going over the next 2 to 5 years? How do you think crowdfunding will grow and expand?
Jon: Crowdfunding is getting big! There’s an almost insatiable demand for people to invest in private companies. And for good reason, because most of the value today are created in the private companies. You look at these big companies today that don’t even go public, consider the Ubers and the Airbnbs. The value today is created in the private realm and that’s why this is such an important move. Accredited crowdfunding, the type that we’ve been doing the last couple of years, has been important since it opened up the asset class, to wealthy people and to angels, even they were frozen out by the small circle of people who really kept or had almost exclusive access to the existing deal flow. I think that what we and others have done in this space until now has been quite subversive and wonderful and democratic. And Title III promises to take this to a new level, and that’s good. The question is that people need to be able to make money doing it and I think that you have to look seriously at not just how do I raise the money for the company, but how do I help the company, how do I help build the company, how do I manage this group of investors the day after the check has been written.
Erin: With offices open in Israel, the United States (New York and California), Canada, Australia and with new offices planned in Asia, please share some additional next steps and updates for OurCrowd.
Jon: We’re opening some new offices which will be announced soon, but next year you should see three or four more OurCrowd offices. We hope that we continue to grow at the same pace we have, which is roughly to double year-on-year. There will also be an unbelievable Global Investor Summit in Israel in 24-26 January 2016 with 100 companies, 2000 investors and a whole bunch of excitement!