OurCrowd: Changing the way startups are funded
Investment crowdsourcing platform that lets a closed network of investors pick and choose which startups (sourced by an experienced VC team) to invest in, at a minimum of $10k.
Background: OurCrowd is an equity-based investment crowdfunding platform. It was founded in Israel by an experienced venture capitalist and serial entrepreneur. The company now has offices in the U.S. as well. It began as a new way to invest in the many ventures coming out of the “startup nation.” To date it has raised ~$150 million.
How it works: Accredited investors with net worth >$1 million can apply to join OurCrowd’s private platform. Once accepted, investors can browse the deals OurCrowd’s team has sourced. Investors then choose which startups they would like to invest in, at a minimum of $10k. OurCrowd’s management team does heavy due diligence on each startup before it is added to the platform. All term sheets are pre-negotiated.
What is innovative?: Typically, someone looking to invest in early-stage startups has two options: angel investing or VC. To find an angel investment opportunity, the potential investor must do a fair amount of work to source and vet the deal. Alternatively, to get a VC to even answer your phone call, you need to have many millions of dollars that you are prepared to cough up. And even if you do get into a VC fund, you do not have control over the specific startups in which your money is invested (and you also pay a hefty amount in fees). OurCrowd uniquely combines the benefits of angel investing (flexibility; size of investment) with the benefits of VC (vetted deals; ongoing mentorship and guidance for startups).
How to incentivize participation / manage the crowd: Investors are incentivized to participate by the relatively low amount required for each investment ($10k) combined with the opportunity to invest early in top-quality startups without having to do all the leg work to source these kinds of deals. Startups like OurCrowd because it is an extra source of cash to which they would not otherwise have access. Moreover the startups do not have to deal with thousands of individual investors who may want to give only $100. To manage the crowd, OurCrowd does not give the public access to its platform. Limited information on the startups in its portfolio is available until you actually “join” OurCrowd. Because early startups are a risky investment for anyone, only accredited investors with net worth of >$1 million can join.
Challenges: The greatest challenge for OurCrowd would seem to be its ability to source deals. It needs a constant pipeline of promising early stage companies who are willing to agree on the terms of the investments. I imagine there are some issues with scaling, as well.
Value creation and value capture: OurCrowd literally creates millions of dollars of value for startups, and hopefully for investors as well. Its platform enables investors, who otherwise would not have access to early stage deals, to put their money in exciting young ventures. In terms of value capture, OurCrowd seems to be doing a good job thus far by leveraging its experienced management team and choosing to start with Israeli early stage companies. Israel is a breeding ground for successful startups, as well as an area that the founding team knows well.
Growth potential of this business: I believe there is growth potential for OurCrowd. One piece of evidence is the company’s recently-announced partnership with Cintrifuse in Cincinnati. Cintrifuse is a non-profit which funds and guides top startups in its region. The two organizations will collaborate to bring Israeli startups to the Cincinnati area while helping startups in Ohio get access to funding. OurCrowd certainly could increase its scope beyond Israel and Cincinnati, either through partnerships or through hiring more management to identify and carry out deals.
Example of an OurCrowd-funded company that went public on NASDAQ:
I think this is an interesting concept but some of the pitfalls discussed in class regarding crowdfunding real estate come to mind as problems with this model as well. For instance, what sort of deals would this bring to bear, since it almost seems like an avenue that may be explored by entrepreneurs who were unable to get funding/were passed up by more traditional VC and angels.