Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 221

Being Jon Medved: three decades of start-up investing

Jon Medved is CEO and Founder of OurCrowd, an Israeli crowd-funding platform that facilitates investors buying into individual companies or a fund of companies in start-up mode. The company has over 1,000 Australian investors. According to Bloomberg Business Week, “OurCrowd is hands down the most successful equity-crowdfunding platform in the world.”

Jon is a serial entrepreneur and according to the Washington Post, “One of Israel’s leading high-tech venture capitalists”. NY Times Supplement ‘Israel at 60’ named Medved as one of the “Top 10 most influential Americans who have impacted Israel”. He has invested in over 200 start-up companies, helping to bring 20 of them to exits with values in excess of $100 million. Exits include: Shopping.com (acquired by eBay), Compugen (Nasdaq: CGEN), Answers.com (Nasdaq: ANSW, acquired by Summit), Mobile Access (acquired by Corning), Native Networks (acquired by Alcatel), Broadlight (acquired by Broadcom) and Digital Fuel (acquired by VMWare).

I met Jon near his office in Jerusalem for this interview. I left feeling envious of someone who sees hundreds of exciting and potentially life-changing ideas and new technologies a year.

*****

JM: We’re a ‘next generation crowd-funding or investing platform’. We’re trying to allow people to access innovation easily. Innovation is important to everybody. It used to be a creature of the tech or digital world, the ‘in-crowd’ guys of Silicon Valley, but they integrated technology into their businesses and innovation is now mainstream.

Look at the Apple announcements. I was talking to an 11-year-old kid and he was shaking, talking about how to close apps and how it’s ready for AR and machine learning, and yet the talk from Apple was filled with tech speak. I was thinking, ”Does the broader audience really understand this now?” We’re at a special time in history. Part of it is the excitement of the new. Part of it is fear of losing your job. Part is the fear that your business will be destroyed. And there’s a FOMO, a fear of missing out.

GH: And many young people have a massive decision to make. Do they take the safe path on a career which will pay well or do they throw it in for a couple of years and try a start-up?

Why Israel is a global start-up leader

JM: In Israel, there’s an unusual attitude towards risk. We are a risk-embracing culture, almost against our will. Would I rather be at the threat of instant annihilation and have lots of start-ups or would I rather be chilled like New Zealand. I don’t know. It starts as a global attitude towards risk, and that’s Jews as well as Israelis. Why are there so many Jewish Nobel Prize winners? Why so many wealthy industrialists? Why so many authors? Playwrights, artists? Enemies would say it’s because we don’t play fair. But we also fight among each other, there’s no external conspiracy, our instincts are right below the surface. But if the world is against us, we come together at the last minute.

GH: Is there an influence from the military/industrial complex in Israel?

JM: There is danger on the doorstep, and the army role is a huge part of the startup culture. Every kid has been told from the earliest time, not only are you a special Jewish kid with all the pampering and history behind you and being told you can do anything, but here there’s a different element. You’d better be a tough son-of-a-bitch. We’ll send you to Scout camps, you’ll go overnight on Outward Bound style class outings, and you might not come back. Then you’re going into the army and a lot do extreme stuff, that could include technical units. Kids are told they need to achieve in order to protect the country, and creativity and dreaming are encouraged and failure is not punished.

[Register for our free weekly newsletter and receive our latest ebook, Cuffelinks Showcase]

Sorting through hundreds of deals

GH: In your world of identifying startups, this seems to create both opportunities and problems, in that you see hundreds of potential deals a year.

JM: That’s not a problem. As an angel investor, there’s something called ‘The Venture Power Law’. One of 10 will result in 90% of the total return. So if you don’t have at least 10, it’s hard to win, because then you’re playing roulette. So we have multiple funds, although our ratio is much better than 10%. OurCrowd has made about 120 investments, we’ve had 17 exits over the first four years. I hope to have a 20% to 40% hit ratio.

GH: What have you learned from your failures?

JM: There’s nothing more important than the people. Don’t fall in love with the technology too much. If it’s a great idea and a shitty guy, stay away. If it’s a great guy with a shitty idea, change the idea. We met two brilliant guys who came into our office with a stupid idea, back in 1998. We really liked them, we called them back and said we’re not investing in your idea but we have another we’d like you to pursue. We asked them to do a comparison shopping site, gave them $1 million of seed money, and the company ultimately become shopping.com (the url was bought later). Which we sold for US$640 million to eBay.

Next, it’s always going to take longer and more money than expected and you’d better think about that from the start. Keep some powder dry. If you decide you have $100,000 to put into a deal, don’t put it in first go. There’s a huge debate about how much to keep in reserve. For every $1 invested in the early stage, you could need as much as $5 in subsequent funding rounds. What you really want is other people to come in and pay higher and higher share prices. But beware the dreaded ‘down round’, which can corrode your own holdings through dilution.

That’s another thing to learn. While dilution can be bad, notional dilution is actually a good thing. As the cake becomes bigger, it’s difficult for you to maintain the same percentage slice.

GH: Right. 50% of $600 million is a big number.

JM: Exactly. Focus on the growth of the pie and less on your share. It’s a mistake entrepreneurs and other investors make. Focus on total return and your stake in dollar terms rather than building your stake in percentage terms.

But, have enough that if this is the ‘Venture Power’ deal, that it has the impact of covering all your other sins. If you’re going to build a portfolio, you should have some rough parity in the portfolio. If you’re wildly varying your throws, putting $100,000 here and $10,000 there, then it might turn out that the $10,000 is the winner.  It won’t cover your sins.

So we do the analysis and then we let people use our platform to build their own portfolio, to buy into these companies the way they buy public stocks, which is unprecedented. You can’t call up your broker at Macquarie and NAB and ask for some startups please. (although we are now partnered with NAB and they are offering OurCrowd funds!)

Have you seen any companies on our website that you like?

GH: I don’t have the knowledge or time to read and analyse all the information on a particular company. What do I know about face recognition software? I need a fund of endorsed and researched companies, where you have already done the work.

JM: That’s your best approach. The OC50 fund of companies gives you huge diversification, you could have four or five ‘powerball’ returns, no guarantees of course.

Identifying resilience against setbacks

GH: Back on the people, how do you determine how resilient a person will be? Nothing goes perfectly and there will be setbacks along the way.

JM: You never know, there’s no real test. One good thing in Israel is it’s a small place. To check into someone’s background, the joke is asking, “Who is your kindergarten teacher and how do we contact them?” Everybody knows each other, we’ll find out if this is someone who cuts and runs.

But you can have too much resilience. In this business, the majority of companies will give you an indication in the first couple of years whether it will work or not. The minority who hang in limbo, most will go down, although some come back. And then there are those we call zombies which stay alive forever, the walking dead, but even some of these suddenly come back.

The biggest problem is not so much picking the right market trend, but getting the timing right. Timing is critical. For example, we all know that autonomous driving is coming, but we don’t know how fast and how big. When will there be tens of millions of autonomous cars? It’s critical for any company selling into that market. If you are off by three or four years, you’re gone. Back in the day, I invested in a company in 1998 called iscraper, an internet portal to help builders and planners and designers to move the whole process online.

GH: There’s a successful Australian company, Aconex, which does that.

JM: Right. This company iscraper failed miserably, because in 1999, forget it. There were no smartphones, no cloud, the right idea was not ready. The right time for that investment was probably 2005, two years before the iPhone. Remember, these companies are burning money, they’re not profitable. Growth is the primary driver, not initial profit. We want triple digit growth, not 10% or 20%. You can’t make your money back in this risky business on 20% growth.

When you raise money, you want to cover one to two years of growth. You don’t want to raise more than two because then you’re taking too much dilution at a lower price. If you’re doubling every year, you’re four times the size in two years. Running out of money is fatal. You can fix the human problem.

Unanimity versus majority

GH: Tell me more about the pitch. You are hearing hundreds of ideas, you’re sitting around listening to them all the time. What if you love an idea and your colleagues don’t, and vice versa? How do you come together?

JM: Most venture capital firms require unanimity. They say, there are so many deals, if someone has a serious objection, we’re not doing it. We work on a majority, but if someone has a serious objection, we double check it. We have a formal investment committee process where we vote, and if there’s a significant minority objection, we will sit and reconsider. We don’t like a 4-2 vote.

Remember, we have a second level of assessment in our investing process, where external investors essentially decide whether to participate. We might decide to put $2 million into a company, as we put 5% of our own capital in on the same terms as the crowd, and then we take it to the crowd. Sometimes, the crowd will say ‘No, thank you.”

GH: Although the crowd will significantly trust you.

JM: Generally. And we’ve knocked back lots of deals which have become great successes. Or some we have tried to get into and missed. The really good deals are not companies that are begging you for money. You are begging to put money into them. If you sit back and wait for people to come to you, you’ll miss out.

You start this business with a network of people. In my case, I’ve been doing this for over three decades. I’ve made over 200 investments, had dozens of exits, I know thousands of board members and entrepreneurs, so people call me and say, “Look at this.” More important, I might hear someone is about to leave who sold his last business to Intel, so how do we talk to him?

Backing your judgement

GH: How do you ensure your personal preferences don’t come into the decision-making, your basic beliefs on what will work or not?

JM: Follow your instincts. Some people will take issue with this, but believe your gut and check it. It’s just like love. How many people meet somebody and are not really excited by them, and then fall in love and marry? It happens, but not that often. For most people, there’s some kind of chemistry first up. When you sit down and engage, you’re either there or you’re not. The difference is that most people in love don’t do due diligence. We’re always checking but there’s an instinct about the person and the idea and the blue sky. It’s a noise and signal recognition problem. The more data I collect, the more meetings I attend, the more deals I’m pitched, the stronger the signal on those rare deals we want to do. We do 1% to 2% of the deals we are pitched, 50% or 60% are triaged out before reaching a meeting. We get down to five or six and we talk money and what they are looking for, and you might get one or two or three done. Then we put them up on the site for others to invest in.

GH: Do you have rules about minimum ownership percentage, maximum investment amount, etc?

JM: Our clients can start at $10,000, but with the companies on the platform, our initial throw is typically not less than $1 million, but it could be as much as $20 million. We like to have a healthy minority stake, somewhere between 10% and 25%. Above that, we’re edging out other investors as we want to be part of a syndicate. So if the company reaches a $500 million valuation, we have a chance of making $50 million or $100 million for our investors. And we take 20% of the upside, so that might be a $10 million cheque to us when our investors make $50 million. Each year, about 100 Israeli companies will exit private ownership, many in the hundreds of millions, and those are good numbers. You need those home runs to make this stuff work.

 

Graham Hand is Managing Editor of Cuffelinks. Cuffelinks does not have a sponsorship or business relationship with OurCrowd. This article is general information and does not consider the circumstances of any investor, and investors need to understand the high risks of start-up businesses.

RELATED ARTICLES

How to invest in early-stage tech businesses

How angel investors give birth to disrupters

Private equity’s role in a well-constructed portfolio

banner

Most viewed in recent weeks

Vale Graham Hand

It’s with heavy hearts that we announce Firstlinks’ co-founder and former Managing Editor, Graham Hand, has died aged 66. Graham was a legendary figure in the finance industry and here are three tributes to him.

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

Sponsors

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.