http://www.wiredevent.co.uk/wired-money-2016
When Aileen Lee coined the term ‘unicorn’ in 2013 to refer to startups worth a billion dollars or more, it made sense. There were only 39 unicorns back then – the phenomenon seemed suitably rare and magical. Not as rare as actual unicorns (current count: zero) but close enough.
But three years is a long time in the startup economy. There are now 166 private startups with valuations of $1 billion or above. Collaboration tool Slack recently closed a funding round that set its value at $3.8 billion. Its list of investors reads like a who’s who of venture capital firms: Google Ventures, Andreseen Horowitz and Accel Partners have all jumped on board since the company’s first funding round in April 2014.
These same names – and others like them – appear again and again in the lists of shareholders of the top high-growth, high-value startups. The cumulative value of those investments is huge – the 166 unicorns are worth $589 billion – but that wealth is concentrated in the hands of a select group of venture capital firms, high net-worth angel investors and corporate backers.
OurCrowd wants to change that. The Israel-based equity crowdfunding firm has already raised $220 million for 93 companies in just three years and in doing so has opened up early-stage investing for thousands of investors who might otherwise have been shut out of the club.
“The idea that venture capital and investment stays a cottage industry with no automation and no scale, no change really in fifty years is crazy,” OurCrowd founder and CEO Jonathan Medved tells WIRED. After seeing the success of crowdfunding websites such as Kickstarter and Indiegogo, Medved saw an opportunity to apply the same logic and open up investment “to the power of the web.”
OurCrowd lets accredited individuals invest in early-stage startups for as little as $10,000. Medved and his team hand-pick startups and launch funding rounds that are open to anyone from OurCrowd’s pool of 13,000 users. The investors’ stakes (which have ranged from the $10,000 minimum to seven-figure sums) are pooled and used to buy equity in the startup. Once the funding limit has been reached the round is closed and an OurCrowd representative takes up a place on the startup’s board on behalf of the investors. Instead of a startup having to negotiate with hundreds of small-stake shareholders, they now have one large investment crowdsourced from a broad base of people.
“If you really want to have output from your investment, you’ve got to be in private company investment,” explains Medved. Early-stage startups, he points out, tend to accrue value much, much faster than public companies. In the four years since Facebook went public on the NASDAQ, its share price has tripled from $38 to $118 per share. But in the four years before it went public its valuation increased tenfold, from $10 billion to its IPO valuation of $104 billion.
“Today, Uber is still thriving and raising money above $60 billion dollars,” says Medved. “What will its value be when it’s public? How much additional upsizing will you get?” If investors want to make big money from startups, he adds, they have to get in there while they’re still private companies.
OurCrowd aims to secure its investors the same price per share as some of the biggest investors in the world by giving them access to startups at early funding rounds – most of them at series A and B. After securing $3.3 million in funding through OurCrowd, Israeli robotic exoskeleton startup ReWalk went on to raise $36 million when it went public in September 2014. Its share price soon doubled in the hours following its IPO.
The success of equity crowdfunding is spreading – in 2013, UK-based electric-car sharing startup E-Car Club raised £100,000 through equity crowdfunding site CrowdCube. Two years later the startup was purchased by Europcar, one of Europe’s largest car rental companies. The 63 investors involved in the initial crowdfunding round contributed an average of £1,500 each, but investors can get involved in a crowdfunding round with Crowdcube for as little as £10.
In the United States, legal restrictions on who can invest through equity crowdfunding are easing and bringing startup investment to a larger audience. In January this year, Title III of the Jobs Act came into effect, allowing non-accredited investors to get involved in startup investing for the first time. This removed restrictions that required equity investors to have a salary in excess of $200,000, net worth above $1 million or to fulfil other requirements.
To start investing with UK-based crowdfunding site Crowdcube, users create an account and answer seven questions to check their knowledge of the risks involved in investing. If they get too many wrong, investors are directed to a short ‘risk tutorial’ before being asked to retake the quiz. The entire process, from signup to investment, takes less than three minutes.
OurCrowd is more measured in its approach. In accordance with Israeli regulations, all its crowdfunders must be accredited investors and rather than just channeling funds into its startups, OurCrowd advises and part-manages them too. Medved describes the approach as a striking a balance between crowdfunding and venture capital-style startup management.
Many of those startups are based in Israel, but OurCrowd’s investor pool is global, spanning 110 countries. This diverse spread is disrupting the tight link between geography and venture capital that concentrates startup wealth on cities such as San Francisco. Now an investor in Beijing can put money into a promising Israeli medical diagnostics startup, no insider tips or limitless wealth reserves required.
Startup thinking has finally started to rub off on the venture capitalists funding the tech boom.
http://www.wiredevent.co.uk/wired-money-2016
This article was originally published by WIRED UK
