The Big Value Creation Trend of 2015: Q&A with Jonathan Medved
When OurCrowd founder and CEO Jonathan Medved gives a talk about crowdfunding, as he did at the recent Stocktoberfest conference in San Diego, there is one particular slide in his deck that is something of a show stopper.
Medved says it is the one slide that tells the whole story—explaining in one bar chart why high net worth individuals should use OurCrowd’s online platform to invest in private tech startups. Founded in 2013, OurCrowd operates a hybrid online platform that combines crowdfunding with VC investments in tech startups in Israel and other countries. OurCrowd manages the deals and selects investment opportunities for about 10,000 registered investors around the world.
Beyond the OurCrowd pitch, the slide (displayed above) also offers some insight into one of the biggest trends of 2015—the explosion in private equity financings of tech companies that has led to a proliferation of “unicorns,” those once-rare private companies with valuations of at least $1 billion. As the year draws to a close, the online list of private tech unicorns maintained by CB Insights is now hovering at 144, including San Francisco-based Uber (valued at $51 billion), Beijing’s Xiaomi ($46 billion), and San Francisco’s Airbnb ($25.5 billion).
Medved likes to present the slide because it shows that much of the value creation for tech companies like Microsoft, Apple, and Oracle during the 1990s occurred after their respective IPOs. But in the current tech boom, virtually all of the rise in valuation for companies like Twitter, Facebook, and Yelp occurred pre-IPO. As Medved puts it, investors who now wait to invest until companies go public are missing out on the biggest appreciation in corporate value creation.
To Medved, it’s a compelling reason for accredited investors (individuals with a high net-worth) to invest through OurCrowd in private tech companies. During a call from OurCrowd headquarters in Jeruselem, Medved talked about his perspective on markets, unicorns, tech funding trends, and crowd-funding. The following is a transcript of our conversation, edited for style and length.
Xconomy: Let’s start with that slide. What does it tell you about tech funding in general?
Jon Medved: The bottom line on this slide, and the point I was making, is that people who buy stocks have been aware that there is this adjacent area of private company investing that exists a little bit out of sight, out of touch, out of reach. You sort of figured, OK that’s either for really rich people or people who are really well-connected, and I can’t play there. That was OK as long as you could make, you know, studly returns in the public market. It’s not OK anymore.
What’s happening is that you’re starting to see a bunch of different things all at once. At the top of the market are signs of this, call it an Uber bull market. You’ve got people coming in and buying the big private [companies] as if they were public.
People are saying, “Well how can I get a shot at getting into this when it’s [valued] at $20 or $30 million? As opposed to $20 or $30 billion.”
My sense is that we’re on the cusp of a sort of societal change, where this private investing once was really the province of a very small group of people. I mean, how many Americans buy stocks and bonds? It’s like 50 million or 100 million, some crazy number. What’s the number of people who have invested certainly in tech startup companies? It would be like 100,000.
It’s not going to be that way any more. Whether it’s going to change because of crowd-funding or different kinds of regulatory regimes, we’re going to move over the next 10 years to a situation where, when guys get around to talk about stocks, they will talk about stocks and their private company investments interchangeably. That’s the change that’s going to happen over the next 10 years in my opinion.
[Private tech investment] is going to become a more broadly held asset class. And I think this is great. It’s great for people’s checkbooks and bank accounts, and it’s good for tech companies. It’s going to bring new money into the innovation market.
I guess it boils down to whether you think tech is played [out]. I think it’s so not played. We’re in very early days of a very long-term story. If you think we’ve seen it all, we’ve seen nothing. We’ve really seen very little.
X: What’s your take on the stock market in general? Is it over-valued? Are we in a bubble? Or is the bubble confined to Silicon Valley companies?
JM: There’s a lot of froth in parts of Silicon Valley. OK? It would be hard to deny that. On the other hand, I think technology as a whole is not bubble-ish at all, but is actually well-valued. There are certain companies that are frothy, but I think in general if you look at the tech sector, it’s not.
It depends, really, on where you are investing. We’re primarily an Israel-oriented investor. We’re seeing really reasonable valuations here. That’s probably why the money invested in Israel has gone up so dramatically. In 2013, there was $2.2 billion in venture capital invested here, and this year, there will be over $5 billion. Technology just marches on.
X: Aren’t companies outside of Silicon Valley in general getting funded at lower valuations?
JM: There’s an overseas discount at work, depending on where you are. By the way, that’s where I think this crowd-funding stuff is actually going to help. Because you’re creating these platforms that allow investors to get into the act no matter where they are, and entrepreneurs are able to source capital wherever they are.
X: In some of the regional tech hubs in the United States, the thing I hear over and over again is that availability of venture capital is a limiting factor.
JM: Yeah, it really is. This crowd-funding thing has the potential to really bring more capital out to these parts of the world. Big Time. We’re very focused on that, and we’re really looking there.
Now, when you’re looking at crowd funding, there are two camps.
One camp says, “OK, we’re opening up this thing to everybody, let’s let the crowd decide. Let’s maintain this public offering metaphor, so let people do a sort of junior IPO and let people buy stock directly from the company. The [Web] portals will sort of take the role of the underwriter investment bank. They’ll get paid a placement fee or a success fee for getting the money raised, and the company will have a bunch of individual shareholders and it’ll sail off nicely into the sunset.”
That’s one vision, but it’s not mine. I mean it’s going to happen, I’m just not sure that’s the way it should happen. I think companies are private because they’re not ready to go public yet, because they need added value investors, and not just a check.
So the other model is to take the money from people, maybe it’s not from the broad masses. Maybe it’s just from accredited investors, which you know is a restricted part of the universe, and aggregate that and manage that process so the company gets a single check. It gets a check in a way that won’t hurt its ability to get quality venture capital or quality corporate money. If you stick 500 individual investors into a small company, that might hurt it.
One metaphor is kind of junior IPO and the other metaphor is democratic venture capital. On the democratic venture capital we don’t get paid placement fees, but we get our interests aligned with the investor. We don’t take money from companies, which means you don’t get a negative feedback loop.
X: The important thing is to make sure that the interests are aligned, right?
JM: Yes, the interests are aligned. So you’re not taking a placement fee. You’re taking a management fee and a carried interest, a success fee, when the investor makes money.
X: Are you affected by the fact that many investors in Silicon Valley won’t invest outside the Bay Area?
JM: I get the reason for that, but I think it’s a little quaint for today’s world. We’re dealing with this global reality now, where there are all kinds of innovation everywhere. Some of the most exciting companies are the ones that are building in multiple locations, whether it is in India, China, Israel, Russia, or Southeast Asia. There’s just all kinds of innovation out there.
I live in Israel, which is hyperlocal too. Here the joke is that we live in one big swimming pool, and if anybody takes a leak, you see it. That’s a good thing, because it’s easy to do due diligence.
Far be it for me to talk about not having strong communities, but on the other hand, if you just get your investors from around the corner, you’re sort of losing the opportunity to get help outside of the country. We have this network of people from 110 countries. They’re from all over the world and we bring them to the local company here by virtue of the Web.
It’s kind of a corny thing, you know, ‘Think globally. Act locally.’ But it’s that interplay of knowing people in the ecosystem, but [also] really being part of a global network.
X: What percentage of your portfolio are Israeli companies?
JM: About 70 percent right now. About a third of our companies are outside Israel.
X: And most of the rest are in the United States? Are they concentrated in any particular place?
JM: They’re all over the place. Most are in the Valley. The cool thing is that we co-invest with known U.S. venture capital funds. Andreessen Horowitz, Sequoia, Eric Schmidt, Marc Benioff, Mark Cuban, and you name it. We’re trying to invest in Grade A companies, alongside known venture and angel syndicates.
X: What percentage of your investors are outside of Israel?
JM: About 80 percent. So it’s an inversion.
X: I’m not sure how to put this question, but I’m curious —
JM: — What percentage of our investors are not Jewish? I think that’s a completely legit question. I’ve never asked that question. We don’t have that on our registration form (laughs), tell me your synagogue affiliation. But my guess would be that half are not.
X: If the appreciation of value is all pre-IPO, with very little appreciation post-IPO, why would a small individual investor buy stock in a public tech company?
JM: Good question. The real question would be, if you took all 150 unicorn tech companies, and count up how many individual angel investors there are in these unicorns—my guess would be that we’re talking no more than a thousand people.
X: In each one.
JM: No! I’m saying total. How many outside investors do you think there are per company? Do you think there are more than 10 or 20 angels per company? My guess would be on average, 10 or 20.
Altogether, the total might be 2,000, but that’s it! And they get all the value! Talk about the 1 percent! This isn’t right. I mean, this is right for them. But opening this up to make it more democratic is really important, and it’s going to happen.
X: How much is the average OurCrowd investor investing?
JM: It’s approaching $150,000. The guys who are active on our site, who are writing checks, are investing about 150 grand, and they’re doing that over about five deals. So roughly $30,000 per deal five times. The minimum is $10,000. We have an instrument called the portfolio reserve, where you can actually buy 10 deals for $50,000.
Investing in private companies is fun and profitable if it’s done right. There is an inexorable movement. When we check back with each other a decade from now, there won’t be a couple thousand angel investors only in the 150 unicorns. There will be a lot more than that.