In the brave new world of crowdfunding and alternative lending, uncertainty abounds about how to best create lending models that work for all parties involved and foster success.
Two investment platforms with ties to San Diego presented their approaches and what they look for in possible investments at a Connect Rock Stars of Innovation panel Friday at the Andaz hotel.
“This is still the Wild, Wild West,” said Audrey Jacobs, vice president of business development for OurCrowd, an Israeli Title II crowdfunding platform with its U.S. headquarters in La Jolla. “The venture world still doesn’t really understand crowdfunding, entrepreneurs don’t necessarily understand it, and neither do investors. And so right now this is a time of education.”
Jacobs said OurCrowd, which launched in February 2013, has accrued about 4,000 accredited investors from 54 countries looking to make investments in early-stage companies at a minimum of $10,000 per company. She said the platform has raised $40 million for 35 companies to date, funding roughly two to three companies per month now, with an average investment of $1 million.
These accredited investors are typically high-net-worth individuals (to qualify as an accredited investor with the SEC, you must either have made $200,000 a year for the last two years and expect to again, or have a net worth of $1 million not including your home) who are not angel investors, but looking for access to early stage companies.
OurCrowd funds companies from all over the world, and in all sectors.
Jacobs said OurCrowd usually has 125 to 150 startups attempt to get listed on their site every month, and gave entrepreneurs a sneak peak at the six criteria the platform looks for in a potential investment.
The first key is the team: “We want to know the entrepreneur, if they’re a serial entrepreneur, if not their expertise in field, and who’s on the board,” she said.
A large market size is the next factor, followed by who else is at the table.
“We don’t invest alone,” Jacobs said. “We’re investing alongside other major VC’s … we invest alongside corporate, other ventures, angels -- it’s a team sport.”
The fourth factor, and a real key with crowdfunding, is a product or service that’s easy for crowd investors to understand, relate to and, ultimately, choose to fund.
The fifth factor, which Jacobs said is most import, is to see that the technology in question is proven.
Lastly, OurCrowd wants to see a reasonable valuation. She said it typically invests in companies that are valued from $2 million to $15 million.
David Coats, managing director of Correlation Ventures, a venture firm with a bit of an alternative spin, said he got the idea for this new take on funding in his previous stints as an entrepreneur seeking funding and as a traditional VC, when he noticed that the role many VCs want to play in these companies is too large to allow for multiple firms to invest.
“Once you get past, in my experience, one or two, sometimes three active VCs like that, in most of the companies I’ve been involved in, the last thing we really wanted from the next investor was another active VC. At that point, what we often really wanted was professional, reliable investors to provide capital quickly without all the hassle,” Coats said.
Enter Correlation Ventures, which does the seemingly impossible: “What we offer, is we commit to making venture decisions within two weeks or less, we do not repeat any classic due diligence believe it or not, and … if we decide to invest, we automatically follow the lead investor in initial rounds until we reach the total amount we state up front,” Coats said.
Correlation Ventures also doesn’t take boards seats. Sound too good to be true? That’s the point. Coats said the firm’s mission is to be a “dream investor” to companies looking to fill a VC-led round.
Their co-investment model dictates that there is at least one other venture firm investing in the company for the first time when Correlation is, and they never lead rounds. Coats said the firm uses predictive analytics to make their investment decision so quickly.
With all of these new options -- not to mention the deluge that will no doubt surface when Title III crowdfunding becomes legal -- Howard Lindzon, chairman of the board and co-founder of StockTwits and a general partner at Social Leverage, echoed Jacobs’ plea for investors and entrepreneurs alike to educate themselves, even with the SEC attempting to craft protective legislation.
“You have to educate yourself,” he said. “You still have to use common sense and you still should invest in things you have some kind of instinct for or knowledge of, otherwise what the hell are you doing? You’ll just make the same mistakes you would on the public market, and no law can save you.”