A passion for Israel and 6,000 tech startups make a pretty good recipe for crowdfunding.
That’s what Jon Medved discovered when he founded OurCrowd, an online platform that connects mostly Israeli companies with investors around the world.
Jerusalem-based OurCrowd said it’s funneled $120 million in investments to 67 startups since 2013. That makes it one of the world’s fastest-growing firms in the fledgling universe of equity crowdfunding, according to Richard Swart, a resident scholar on the subject at the University of California at Berkeley.
“OurCrowd is hands down the most successful equity-crowdfunding platform in the world right now,” Swart said. “The Jewish diaspora has the special secret sauce for crowdfunding -- political passion and awesome tech.”
The secret sauce has translated to success for the tech scene in Israel, which is home to more startups per capita than any other country, according to the country’s Ministry of Trade and Commerce. Israel’s tech reputation has been buoyed by two developments: Google Inc.’s $1.1 billion purchase in 2013 of Israel-based mapping application Waze Inc. showed what was possible, and data breaches at Sony Pictures Entertainment and Target Corp. heightened interest in Israeli cybersecurity startups.
Medved, 59, is part of OurCrowd’s secret sauce, too. A San Diego-born serial entrepreneur who’s lived in Jerusalem for most of the last 34 years, he’s an unofficial ambassador of Israeli tech, jetting to places like Singapore and Sydney to woo investors. He has a string of successful ventures under his belt. He co-founded Vringo Inc., a mobile-video app maker that now trades on the Nasdaq Stock Market, and was an early investor in Shopping.com, which was sold to EBay Inc.
He said he started OurCrowd to deal with his “shoeboxes full” of business cards from people wanting to put their money into the companies he touts at conferences.
In February, Medved hired Anthony DeChellis, former head of private banking for the Americas at Credit Suisse Group AG, to expand his 8,000-person network of investors. He’s also branching out to fund non-Israeli companies, and talking about offering shares of OurCrowd to the public. He plans to raise $90 million this year.
Israel “certainly was a critical propellant of our early meteoric rise” he says. “But we’d like to be global. That’s the challenge that’s in front of us now.”
There are reasons to be skeptical of crowdfunding. First, the industry has only existed in the U.S. for about two years, resulting in untested business models, said Swart of Berkeley.
Then there’s the risk associated with investing in early-stage companies, online or offline, something retail investors may forget given the meteoric rise of companies such as Facebook Inc.
Finally, there’s “social impact” -- investors’ motivations can be political or personal as well as profit-driven. It’s a key ingredient for a successful platform, but it can create blind spots, said Joseph Barisonzi, co-founder of Minneapolis-based CommunityLeader, which builds and services crowdfunding platforms.
With new Israeli tech companies popping up all the time, there’s plenty of competition for capturing crowdfunded investments. Yapping at Medved’s heels are Nathan Low, a former mortgage-bond trader for Salomon Brothers Inc. who’s enlisted an ex-Mossad agent to help vet cybersecurity ventures for his platform, ZionTech Blue Initiatives LLC, and Tel Aviv-based iAngels, founded in January 2014 by Shelly Hod Moyal and Mor Assia, which has financial backing from Russian billionaire Roman Abramovich and U.S. hedge fund manager Boaz Weinstein.
Each company has adopted different ways of doing business. OurCrowd functions like a venture capital fund in that it puts up its own money and takes a 2 percent annual management fee and a 20 to 25 percent cut of returns once the original investment is repaid. Low’s ZionTech operates like an investment bank, charging startups for the service of raising capital. IAngels takes a 15 percent cut of returns and makes co-investments with a prominent angel investor a prerequisite for its startups.
Then there’s Lou Kerner. A former Goldman Sachs Group Inc. stock analyst and member of the pro-Israel American Israel Public Affairs Committee, he uses AngelList, a crowdfunding bulletin board catering to Silicon Valley, to attract investors to what he calls the “Israel Syndicate.”
Kerner, 53, who achieved Wall Street fame by correctly predicting the value of Facebook in early 2010, said he sees himself more as an investor in private shares than a venture capitalist -- he won’t offer companies advice unless they seek it.
“I want to make money and I take being a steward of other people’s capital very seriously,” he said. “But the reason I’m doing this, with the limited amount of time that I have, is I want to help Israel.”
Low said he’s had some success with wealthy evangelical Christians, who support Israel because they believe its existence will hasten the second coming of the Messiah, as well as American Jews. ZionTech has invested $10 million with another $6 million pending, he said.
To keep things in perspective, the top 10 U.S. equity-crowdfunding sites recorded fundraising commitments of $655 million from September 2013 through March 2015, though some of them were to buy real estate and not for startups, according to New York-based research firm Crowdnetic. By contrast, Israeli tech companies raised a record $3.4 billion in 2014, with $2.36 billion coming from venture-capital investors, according to Tel Aviv-based IVC Research Center.
As long as the number of companies looking for funding dwarfs the amount of available capital, Israeli startups will be a cheaper bet than their Silicon Valley peers, Low said.
“Right now it’s the single cheapest asset class in the world,” he said.