Will Equity Crowdfunding Be The Next Big Thing?

Surgical Theater is one of 14 start-ups that have raised some $14 million in capital since the February 5th launch of OurCrowd, a Jerusalem-based hybrid venture capital and crowd-funding platform. Some have used the platform to close rounds in a matter of days. It is an example of how equity crowdsourcing platforms are starting to have a potentially important impact on the tech industry by helping to solve the seed and Series A funding crunch and transforming the way angels and VCs syndicate deals.

Former Israeli military officers Moty Avisar and Alon Geri have teamed with neurosurgeon Dr. Warren Selman, MD, to co-found Surgical Theater, a company that has developed a program that helps surgeons virtually simulate intricate surgery, just like a flight simulator helps the Air Force practice a critical mission.The technology can be used to perfect the delicate process of removing brain tumors and treating aneurysms before doing the actual procedure. It is already being tested at several U.S. hospitals, including the prestigious Mayo Clinic, and appears to have plenty of potential.

Luckily for Surgical Theater the company’s first fund-raising round was a smooth operation.Unlike most entrepreneurs, who spend many months searching for funding to the detriment of their businesses, Surgical Theater’s founders were able to quickly raise half a million dollars from accredited investors. The whole process — from the first phone call to the pitch, due diligence and money in the bank — took just five weeks.

Surgical Theater is one of 14 start-ups that have raised some $14 million in capital since the February 5th launch of OurCrowd, a Jerusalem-based hybrid venture capital and crowd-funding platform. Some have used the platform to close rounds in a matter of days. “The next time we raise money we are definitely going through OurCrowd,” Avisar said in an interview with Informilo. “The process is so quick and we are getting so much more than money.”

Equity crowd-funding platforms like OurCrowd, FundersClub (which has attracted the likes of Y Combinator, 500 Startups, Andreessen Horowitz and Charles River Ventures as co-investors), Angel List, Seedrs, Crowdcube and Crowdfunder offer investors an actual stake in the company rather than rewards for donations as sites like Kickstarter and IndieGoGo do.

A wide group of investors in the UK have the opportunity to invest in start-ups online in exchange for equity via sites like Seedrs and Crowdcube. And China’s SeedAsia, which launched in May and is being billed as the first equity crowdfunding platform in that region, aims to make angel investing in start-ups possible for a broader segment of the population, according to press reports.

But U.S. regulators have not yet given equity crowdfunding a clear green light. The U.S. Securities and Exchange Commission (SEC) is expected to make a ruling but had not done so by the time Informilo went to press.

The lack of legal clarity is holding back the market, keeping the percentage of equity crowdsharing deals low compared with those on other types of crowdfunding platforms.

Still, equity crowdsourcing platforms are starting to have a potentially important impact on the tech industry by helping to solve the seed and Series A funding crunch and transforming the way angels and VCs syndicate deals.

Take the case of Israel’s OurCrowd. The OurCrowd core team chooses the most promising start-ups from a pool of applicants and then puts money from its own fund behind the best of the bunch. OurCrowd’s average investment is $50,000 or 5% of the total amount of funding sought, depending on which is lower. The opportunity to join the deal is then shopped around to members of the OurCrowd club. An investor must be accredited in his home country and is required to invest a minimum of $10,000 per deal. Entrepreneurs pitch and answer questions from interested investors during invitation-only webinars.

Once the deal is done, OurCrowd takes a 2% annual management fee for three years in exchange for mentoring the start-up; monitoring its progress; and helping decide when to exit, says OurCrowd Founder and CEO Jonathan Medved, who is best known for his role as a founder and General Partner at Israel Seed, a $260 million fund, and for co-founding Vringo, a provider of software platforms for mobile social and mobile video services that went public in 2010. Ten other tech industry veterans make up the OurCrowd team.

The attraction for angels is that a professional diligence team has sourced and negotiated deals and published them online only after OurCrowd has already invested its own money, says Medved. VCs such as Accel Partners, Index Ventures, Khosla Ventures, Jerusalem Venture Partners and Carmel Ventures have also co-invested with OurCrowd on deals over the last few months.

And serial entrepreneurs are flocking to the site. Start-ups recently funded through OurCrowd include:

  • Zula, which plans to offer a mobile-focused team messaging service for business use, including real-time text, voice, document sharing, and multiple other team productivity-oriented features. The company was co-founded by American VoIP pioneer Jeff Pulver, the founder of Vonage, Vox and FWD, and Israeli Jacob Ner-David, founder of Nomadiq and Delta Three, which raised $1.8 billion on NASDAQ.
  • AE Squared, which provides enterprises with the means to achieve centralized control and security of corporate data used on smart devices. The company was co-founded by Israeli entrepreneurs Eitan Bauch and Avi Yehuda who previously sold start-ups to Intel, F5 and Salesforce.com.
  • Curiyo, a social media start-up that aims to make it easy for users to instantly get in-context information on topics they want, all in one place and without having to go after feeds across the web. Curiyo was founded by American entrepreneur Bob Rosenschein, who previously founded Answers.com, which was sold to Summit Partner’s AFCV Holdings for $127 million, and Accent Software, which raised $400 million on NASDAQ.
  • Abe’s Market, an online marketplace for natural and organic products. The company was co-founded by Jon Polin and serial entrepreneur Richard Demb, who previously founded e-commerce payment solutions provider Global Commerce Zone and a popcorn gift tin business called Dale and Thomas Popcorn.

Abe’s Market, which has offices in the U.S. and Israel, had already secured some funding from traditional venture capital firms when the start-up was introduced to OurCrowd. The Israel-based equity fund-raising platform helped it raise the rest of a $5 million funding round earlier this year. “The efficiency and speed of working with OurCrowd was very impressive,” says Polin. “In our case the whole process only took a couple of days. This is amazing for an entrepreneur.”

Polin says he has recommended OurCrowd to entrepreneur friends for three reasons: “Number one is speed and efficiency, number two is the advocacy you get from the community of investors — you have feet on the street who are excited and are willing to be your advocates‚ and number three for the broader support: there is an appropriate balance between hands off and hands on. If we need something — an intro or just someone with whom to discuss a particular issue — we know we can call Jon and the team.”

So far most of the deals have been in Israel but OurCrowd has global ambitions, says Medved.

Regulators are scrambling to catch up. The UK’s Financial Conduct Authority advises that “most crowdfunding should be targeted at sophisticated investors,” but its stance is still more permissive than that of the U.S., where regulators have expressed concern about fraud.

“The UK has an innovation lead in this area,” says Chance Barnett, CEO of Los Angeles-based crowdfunding platform Crowdfunder, an active lobbyist for legislation that would allow members of the public to participate in equity crowdfunding in the U.S. “Often times the [U.S. Securities and Exchange Commission], when we’re in talks with them, says, ‘you’re giving me a bunch of anecdotes about why (equity crowdfunding) would be fine, where’s the data?’ And we can literally point to the UK and say, ‘There’s data. It’s in the wild.’ Let’s talk about how much fraud is going on there and to my knowledge, and the data and stats I’ve looked at, there hasn’t been any. That’s probably been the most significant and helpful thing.”

Examples of equity crowdsourcing platforms in the UK include Seedrs, an FSA-regulated and authorized platform that allows direct, online investment in the equity of seed-stage start-ups. It opened for business in July of last year and allows any UK resident to invest from £10 up to a maximum of £150,000 in seed-stage start-up companies. So far, 25 start-ups have collectively raised a total of £1.3 million in investment through the platform.

“For £100,000 it is not uncommon to give up 20% or more, explains Carlos Silva, Seedrs’ chief operating officer. “With a VC you usually give up much less for a large chunk of money but you’re also in a different stage in your company,” he says.

Risk for UK investors is minimized because it coincides with the launch of the UK’s Seed Enterprise Investment Scheme (SEIS), which gives investors in eligible seed-stage companies up to 100.5% of their investment back in income and tax reliefs. Most of the start-ups listed on Seedrs are eligible for the scheme, so investors can easily take advantage of the reliefs.

The UK is also home to Exeter-based Crowdcube, which claims to be the first equity crowdfunding platform in the world, having launched in February 2011. It funded its first business, Bubble and Balm, in July of the same year. Crowdcube CEO Darren Westlake says the platform has so far invested in 45 start-ups. None have gone bust so far.

Westlake helped to found the UK Crowdfunding Association (UKFCA) to encourage platforms to adhere to a code of practice. “We know, having spoken to the FCA, that they’re likely to consult on crowdfunding legislation later this year and we need to be involved in that with one voice,” says Westlake. A spokesman for the FCA confirmed to Informilo that the financial watchdog is planning to consult on amendments to its handbook relating to investment-based crowdfunding activities and says it’s “keeping an open mind.”

In the U.S. equity crowdfunding is still viewed as “prelegal,” says Crowdfunder’s Barnett. For many years, only accredited investors have been allowed to make equity investments in private companies. To receive accreditation in the U.S. individuals must meet certain criteria such as having a net worth in excess of $1 million. The JOBS Act signed into law in 2012 contains passages that remove that restriction, allowing virtually anyone to invest in private companies. The crowdfunding portion of the JOBS Act has not taken effect. However, in March the U.S’s SEC issued no action letters to the fundraising platforms AngelList and FundersClub, meaning that it will take no action to block them from operating, potentially paving the way for equity crowdsourcing platforms to become the Next Big Thing.

“The biggest challenge for entrepreneurs is to raise money and to do it as fast as possible,” says Shai Magzimof, CEO of Nextpeer, a two-year old Israeli company which makes tools that allow independent game developers to create multi-player mobile games. Nextpeer closed a $1.8 million round on OurCrowd earlier this year from business angels and family offices. “On OurCrowd we finished the whole round in a week,” says Magzimof. “You can’t beat that.”

— Matt Cowan contributed to this story



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