Investing in money-making ventures has been a traditional route to making more money – and for decades, the vehicle of choice for that kind of investing has been via buying shares in public companies traded on stock markets. But stock markets aren’t what they used to be. Returns are generally flat these days, even negative – and even on their best days, stock markets return just a fraction of what the “real” investors in a company make.
That’s bad for investors – and for society. The middle class in countries around the world, and especially the United States, is being squeezed not only by a lack of employment opportunities, but a lack of investment opportunities. Where in the past stock market investors had an opportunity to realized significant returns from stock investments, that has changed radically over the past decade – closing off yet another income-earning channel for the middle class, contributing to its erosion, and to ever-increasing income disparities between the top and bottom, many experts say.
But there’s a new investment vehicle in town – one that promises to democratize investing, in the sense that it distributes the proceeds of successful companies much farther and wider than traditional investment vehicles. “Equity crowdfunding is finally going mainstream,” according to Jon Medved, the CEO of OurCrowd, the Israeli investment firm that invented crowdfunding as the world knows it today. “Done right, it works. And it is changing the landscape of investing. Ordinary people with only tens of thousands of dollars to invest now have the same opportunities for major returns that were exclusively reserved for well-heeled venture and angel investors.”
Call it the democratization of venture capital, said Medved at a press event announcing outlining a report on the firm’s 2015 activity. “For the first time, ordinary people with $10,000 to $150,000 to invest have a shot at the enormous potential riches from investing in private companies. Crowdfunding is a way for millions of ordinary investors to get into the game and to realize some of those outsized returns from private companies. This new way is called equity crowdfunding. It promises to democratize the world of innovation finance and create a new model for building companies.”
That crowdfunding is the new way to get rich is evident in the numbers, Medved said. “Venture capital and merger/acquisition activity was great in 2015, and crowdfunding, OurCrowd’s specialty, ‘arrived’ last year as well. That’s in contrast to investments in public companies, where the returns are much less, if not stagnant.”
Medved is talking not about “regular returns” from investments – on average, blue chip stocks have provide a ten percent return annually over the past several decades, taking into account the ups and downs of the market – but about the “killer” investments, the ones that in the past could make a stockholder rich, if the investor “got in” early enough. If you bought Apple stock in 1980 and held on to it, for example, you would 400 times your investment today; if you got in on the Amazon IPO when it was first issued in 1997, you would have about 350x your initial investment now.
Those companies received financing not only on public exchanges, but also from private equity investors – the venture capitalists who put up X amount of money in exchange for a portion of the profits, if not the company itself. The VCs who invested in Apple saw their money grow 600 times since 1980; for Amazon it was 200 times. In some tech companies, like Oracle, the returns were much better for stock market investors than private equity investors (350x vs 50x). As long as average investors could get in on the party as well, everything worked out fine for everyone.
A changing equation
But in recent years that equation has changed dramatically. Almost all the returns for big tech companies that went public after 2000 – including Google (2004), Facebook (2012), and Twitter (2013) – have accrued to private equity investors. “IPOs are messy, because you have to comply with a lot of regulations and issue public reports and the like,” said Medved. “If you can raise $60 billion without going public – that’s the current valuation of Uber – then why would you want to go public? There are currently about 140 billion dollar-plus valuated tech companies that are still not public – and all the value those companies create are going to private investors.”
And that group is an extremely limited one. Only an estimated 300,000 people have made at least one angel investment in the last two years in the US, according to the report. “That’s a tiny number compared to the more than 130 million Americans who own stocks, or the estimated 10 million American accredited households with more than $1 million of investable assets, or $200,000 in annual income,” Medved said.
“Suddenly, the estimated 130 million ordinary Americans who buy stocks and bonds (and scores of millions more around the world) have been shut out of the greatest current opportunity for building wealth. Instead, the gains are going only to a few thousand people who are rich and well connected enough to be private investors,” he said.
Enter crowdfunding, the system whereby investors pool resources to reach the sum a start-up or more mature firm is seeking in a funding round. A crowdfunding platform essentially creates a venture capital fund with not just a few rich members’ money, but with funds supplied by hundreds or thousands of individuals.
Recent rule changes in the US and other countries allow accredited investors (who have at least a specific minimum net worth) to join a fund that lets them invest relatively modest sums in promising tech companies, instead of the millions of dollars that angels or venture capital funds invest in tech companies. While there was some debate in the US Securities and Exchange Commission about whether crowdfunding was a viable investment method – or a safe one, given that shysters could pose as entrepreneurs and relieve widows, orphans, and other vulnerable investors of their life savings – the numbers prove the case for crowdfunding, according to Medved.
As the Start-Up Nation, Israel has played an important role in building the world’s tech economy – and a crucial role in developing crowdfunding as a way for ordinary investors to get in on the VC money-making party. Medved’s OurCrowd was one of the first crowdfunding platforms in the world, established in 2012 just after the SEC in the US implemented rules allowing it.
In just two years, OurCrowd has invested over $200 million from accredited investors in 91 Israeli tech firms, “making us one of the largest investors in the Israeli tech ecosystem and one of the largest equity crowdfunding platforms globally. We are driving the democratization of venture capital, opening the door to tens of thousands of accredited investors who want to invest in the next generation of tech leaders,” said Medved.
That democratization offers a way for those ordinary Americans – and ordinary people around the world – to benefit from the enormous profits generated by investments in tech firms, said Medved. “ “We are still in the very early days of equity crowdfunding. While we are excited by the rapid progress to date, I think most of us are still unaware just how big this opportunity can ultimately become. I think we will all be surprised by the eventual size, importance and acceptance of equity crowdfunding. As access to capital is flattened around the globe, as deal flow is democratized, and as huge amounts of new money flow to great entrepreneurial companies,I think equity crowdfunding will take its rightful place as the fourth pillar of innovation finance —joining together with corporate finance, venture capital, and angel investment.”