Category: business advice

Planning a business succession

Dealing with management succession can be struggle for many companies

What happens when your Managing Director of five years standing announces he’s decided to move on?

This was something Xero’s senior management had to deal with when Chris Ridd, the company’s Managing Director for Australia, announced that after five years he had decided to move on.

In interviewing Chris and his successor, Trent Innes, last week for The Australian it was striking just how well the succession process had gone for Xero in dealing with the management change, “It has worked out well, it was our preference to go with an internal candidate,” the outgoing GM told me. “From my perspective it’s always good when you can do that but it doesn’t always work out that way.”

Much of this comes down to Chris putting together a cohesive management team, something he’s quite proud of, “Xero has a huge bench, we have a really talented leadership team. I feel really good about leaving now given that the business has gone from six staff to 295 people, three and a half thousand customers to 265,000.”

“I achieved way more than what I thought I’d be able to do in that role and after five years it seemed like the right time frame to go into something else,” he continued.

Part of his confidence in moving on was his confidence in his successor, “Trent and I go back twelve years at Microsoft,” he told me.

The other part of his confidence was that the company has a clearly defined strategy and business plan that neither he or Trent see changing.

Many companies struggle with changing their senior management and much of that is because the board and executives are in denial that people – even those at the top – will move on to new ventures.

A stable management team, a solid business plan and a realistic view about leadership succession are the keys to successfully managing a change at the top, so far it looks like Xero have managed to pull off a change that many other struggle with.

Cloudy times for the tech workforce

Autodesk’s firing of ten percent of its workforce indicates some harsh times are coming for tech workers.

For listed tech companies 2016 has been a bloodbath to date however design company Autodesk seems to have bucked the trend.

The key to keeping investors happy seems to lie in announcing major layoffs, in Autodesk’s case ten percent of its workforce which equates to 950 workers.

Autodesk’s management are painting those layoffs as being due to the company’s transition to cloud services with online subscriptions making up over half the business’ revenue.

Regardless of how valid that reasoning is, the message to the tech workers is clear; more tough times are coming.

With investors ruthlessly expecting better profits, focused leadership and leaner workforces many managers are going to have to face some tough decisions in what’s looking like a difficult year.

Don’t mess with Elon Musk

Elon Musk shows the power of being the boss

Criticise Tesla’s launch parties and your car order may be cancelled, reports The Guardian.

Stewart Alsop, an Californian venture capitalist, wrote an open letter to Tesla’s founder Elon Musk claiming the launch of the Tesla X was ‘a disgrace’.

Musk responded by cancelling Alsop’s Tesla order.

There’s a range of arguments about the customer always being correct, the customer’s right to criticise a product or the risks of making online comments but what it definitively shows is the power of being the seller of something people want.

I suspect Stewart Alsop will get his Tesla eventually, but the boss will make him squirm.

Thinking beyond the group

Varied sources of information are essential to avoid stale, group thinking

It’s nice and comfortable living in an echo chamber and we’re all guilty of it one way or another. An example of how insular echo chambers can be are two surveys done by UK company Apollo Research on who UK and US tech writers follow on social media.

The answer was each other, with most tech writers following a common core of twenty in the UK and thirty in the US. Basically the groups are talking to each other which explains how technology stories tend to gain momentum as variations on the same stories feed through the network.

While technology journalists are bad for this, it could be argued their political colleagues are far more guilty of this group think as their working in close quarters makes them even more insular and inward looking. That explains much of the political reporting we see today which often seems divorced from the real world concerns of voters or challenges facing governments.

For all of us, not just journalists, it’s easy to become trapped in our own little echo chambers and find it harder to think outside the pack as the web and platforms like Facebook deliver us the information we and our friends find confirms our own biases.

Clearly, thinking with the pack creates a  lot of risks and for businesses also raises opportunities. At a time of fast moving technology and falling barriers to entry, thinking outside the prevailing group could even be a good survival strategy.

A good example of industry group think is the US motor industry of the 1970s where they dismissed Japanese competitors as being cheap and substandard – similar to how many think about China today – yet by the end of the decade Japan’s automakers had captured most of the world’s market.

On a national level, Australia is a good example of dangerous groupthink as up until three years ago the consensus among governments, public servants, economists and business leaders was the China resources boom would last indefinitely.

Today that consensus looks foolish, not that those within the echo chamber are admitting they made the wrong call, and now governments are struggling to find new revenue streams as the expected rivers of iron ore and coal royalties fail to arrive.

For Australian businesses, governments looking to raise revenues are another factor to plan for and getting one’s tax return and company paperwork in on time might be a good idea to avoid fines from overzealous public servants.

The bigger lesson for us all however is not to think like the group. While it may feel safe in the herd, we could well be galloping over a cliff.

One simple way to avoid groupthink, and that cliff, is not to copy the tech writers or the Australian economic experts who mis-called the China Boom. With the web and social media we can listen to what other voices are saying, most importantly those of our markets and customers.

A varied information diet is something we all need t0 understand what our markets, economies and communities are doing. It might be comfortable huddling down with the herd, but you’ll never stand out from the pack.

The opaque Alphabet

Alphabet’s results are impressive but the lack of detail remains troubling

Late last year Google announced it was restructuring and creating a new holding company called Alphabet, at the time I hoped it would bring more accountability into a business that’s becoming notable for easily distracted management and sprawling bureaucracy.

Yesterday the company released its latest quarterly reports and it appears far from improving transparency, the restructure has resulted in the operation of ‘moonshots’ – termed ‘Other Bets’ in the reports – becoming even more shrouded in mystery.

Other Bets, which includes Google Fiber, Ventures and Google X,  made a stonking $3.1 billion loss while 90% of revenues still comes from the advertising business.

Even within the advertising arm there’s little transparency as the division includes Apps, Android and YouTube along with the lucrative Search and Ads business. There’s little information of how these divisions are travelling on their own.

As Dennis Howlett at Diginomica points out, there will come a time when shareholders demand some accountability as the losses in the Other Bets are not trivial but it seems that time is some way off.

For Google, the biggest risk is being disrupted themselves. Their ‘river of gold’ is not dissimilar to that the newspaper industry floated along prior to the web – and Google – arriving.

Another aspect is that of culture where most parts of the business are free of accountability as the lucrative Ad division’s revenues allow disinterested management and needless bureaucracy to thrive.

While Alphabet’s revenues are impressive, this is a company dangerously reliant on one line of business. History has not treated such ventures well.

Splitting two former internet giants

The results of eBay and PayPal show how combining the two internet companies was a folly

Just how mismatched PayPal and eBay were is now becoming apparent since the two companies separated last year.

Yesterday, PayPal beat the street with 23 percent growth in its payment figures along with an additional six million new users. The company’s stocks rose 17% following the news.

For eBay’s investors the news wasn’t so good with the company reporting no increase in US sales over the key Christmas buying quarter despite the National Retail Federation reporting a nine percent gain for the entire industry.

One of the main criticisms of eBay being part of PayPal was that there were no reasons for the two companies to be joined and so it is proving now they have gone back to separate entities.

For eBay, it’s hard not think that the opportunity has passed with the market moving on from the days of households selling their unwanted items to e-commerce now being a major industry dominated by traditional chains and, most menacingly, Amazon.

While PayPal is travelling better its business is still under great threat from other payment platforms, particularly while much of its revenue is still locked into desktop software. Shifting to more API and mobile based streams is going to be essential for the company wanting to compete in a very changed marketplace.

The failed PayPal-eBay venture will go down as one of the great missed opportunities of the first Dot Com wave as both companies were distracted from growing while the industry evolved over the last decade. No doubt some of today’s unicorns will suffer the same fate as they respond to a changing marketplace.

Confessions of a serial creditor

When a business goes bust both the creditors and the proprietors are often the victims

One of the sad facts of business is that ventures go broke, and when they do there’s a trail of former customers, suppliers and employees that end up out of pocket.

The recent appointment of administrators to the recently listed Australian electronics retailer Dick Smith Holdings leaving thousands of gift card holder – including the writer of this blog – out of pocket is a good example of this.

Over twelve years of running a service business having customers go bust was a regular thing. Luckily this wasn’t frequent as once the assets had been liquidated and divided among creditors one was lucky to get five cents for every dollar owed.

Early warning signs

When a customer did go broke it was rarely unexpected. With long standing clients the payment times would blow out and often a business going bust showed the signs of poor maintenance, declining stock levels and distracted management long before the money ran out.

The other notable thing was the failing company’s staff were often on your side. At one company, a whisky broker that went under owing millions to creditors who’d effectively bought ‘time share’ in liquor, the receptionist insisted in paying for some of the work we’d done out of the petty cash.

Five years later the remaining outstanding invoices were settled and, as expected, we received almost nothing apart from the entertainment of reading the administrator’s reports detailing the struggles of angry creditors trying to get their drinking money back in the face of what had almost certainly been a scam.

Ethical proprietors

Most business owners that go broke aren’t crooks however, most are honest people who made bad decisions or were just plain unlucky. Often these people suffer far more than the creditors.

One pleasant experience we had with a failed customer was a dance studio on Sydney’s Lower North Shore. The business went broke, the proprietor fled to her native New Zealand and I resigned myself to never seeing the outstanding thousand dollars.

Two years later the formal liquidation proceedings had finished and unsurprisingly we received none of the monies owing. A few months after a cheque from the business owner arrived for the entire outstanding amount with a note apologising.

A tough life

While the former dance studio owner probably broke the rules in paying back the debts outside the official channels, she illustrated most failed business people are good people who were caught out by their own mistakes or being on the wrong side of lady luck.

Business failure for those running startups or smaller enterprises often comes at a high personal financial, mental and relationship cost so it’s not surprising those sinking trying to hold on later than they should and then take personal responsibilty for the damages they cause.

Sadly the same doesn’t hold true at the corporate level and in the case of Dick Smith Holdings the executives, the institutional shareholders frittering aways investors’ money, the private equity swashbucklers and the staid corporate managers responsible for the firm’s failure probably won’t see a hiccup to their stellar careers.

The moral for anyone in business remains never to be too exposed to any one creditor. Regardless of how well a client’s management means, when things go bad it’s unlikely you’ll see most of the money you’re owed.

Value versus valuation

The story of Skift illustrates how businesses can add value without courting venture capital investors

“There are people who build media companies for valuation, then there are others who build media brands for value,” writes Skift c0-founder Rafat Ali in his account of how the business stopped worrying about raising venture capital and focused on bootstrapping the travel industry website.

Ali’s story of how Skift’s founders gave up on finding investors, refocused their business and found revenues to bootstrap the organisation is worth a read for anybody starting a venture, not just a tech or media startup.

Notable is Ali’s distancing Skift from the startup label, claiming it’s “a meaningless word that comes with too much baggage”.

The story of Skift is an interesting perspective on growing a business outside the current focus on external investors, instead focusing on the value it adds for customers, users and readers. Just as Skift went back to basics, many of us should also focus on how we and our businesses add value.

An entrepreneurial paradox

Having a nation of entrepreneurs may not indicate a vibrant economy

Being an entrepreneur has become fashionable in western countries, but according to the Global Entrepreneurship Monitor it’s not the developed nations which are the most enterprising.

UK purchasing platform Approved Index took the GEM’s 2014 report and looked at which countries have the most entrepreneurs, defined as being “the percentage of an adult population who own (or co-own) a new business and has paid salaries or wages for at least 3 months.”

Surprisingly Uganda came out on top with 28.1% of the population meeting the GEM’s criteria for being entrepreneurs with Thailand and Brazil in second and third place. Of the developed nations, Australians were the most entrepreneurial at position number 26.

This raises the questions of what is the definition of an entrepreneurs and what drives people to become one?

What drives entrepreneurs?

Part of the answer to the second question is necessity. In Nigeria, a part time business is known as the “5 to 9 job” and, as the BBC reports, those evening enterprises are the way most Nigerians see as being a pathway to the middle classes which wouldn’t be possible for most wage earners.

That becoming an entrepreneur is often a result of necessity is borne out by Uganda’s profile in the GEM report where the authors note are scathing about the government’s support of business.

The biggest enabler of entrepreneurship in Uganda is its internal market dynamics. The most significant constraints are the unsupportive government policies, in terms of bureaucracy and taxes, and a lack of financing.

Indeed, the GEM itself noted in its 2014 report on global entrepreneurship that “there tends to be more entrepreneurial activity in less competitive economies” and Uganda ranked 122nd of 144 economies in the World Economic Forum’s 2014/15 Global Competitiveness Index.

Comparing the indexes

Looking at the Countries listed in the GEM’s top ten and listing the countries by the World Economic Forums competitiveness index ranking and the World Bank’s ease of doing business index starkly illustrates the correlation between business strangling bureaucracy and people setting up their enterprises outside the regulatory strictures.

GEM rank

Country

WEF rank

World Bank rank 

1

Uganda

122

122

2

Thailand

31

49

3

Brazil

57

116

4

Cameroon

116

172

5

Vietnam

68

90

6

Angola

140

181

7

Jamaica

86

64

8

Botswana

74

72

9

Chile

33

48

10

Philippines

52

103

 

Of the top ten countries by their entrepreneur ranking, only Chile and Thailand make the top 50 of either the World Bank’s Ease of Business index or the World Economic Forum’s Global Competitiveness Index. To summarise, the urge to be entrepreneurial is a reaction to a poor business climate.

Defining entrepreneurs

What we could be seeing is a poor definition of an entrepreneur although it’s hard to draw the line between a Ugandan housewife who sets up a market food store and an Australian family that buys a fast food franchise. Is one more entrepreneurial because they have more access to capital?

Perhaps the Silicon Valley definition of an entrepreneur – the founder of a technology startup – is a more appropriate however that excludes vast tracts of western economies and almost all the developing world.

On many levels the Global Entrepreneurship Monitor’s definition is probably the fairest as it indicates how many people are starting their own ventures regardless of their capital position or the nature of their business.

If the GEM’s definition is fair then the leader board indicates that maybe having a nation of entrepreneurs is actually the symptom of a constrained business community rather than that of a vibrant economy.

Maybe political and business leaders need to be careful what they wish for when they call for a more entrepreneurial nation.

Apple opens the kimono

Apple’s new openness is part of a shift to a new business model

Something strange is happening at Apple, the once secretive company is now becoming far more open in its plans and relations with the media.

The latest example is the company inviting Sixty Minutes and Charlie Rose into its inner circles to interview CEO Tim Cook and go on tour of a future concept store with retail chief Angela Ahrendts.

Apple’s media friendliness marks a big change for the company that’s reflected in its markets as engaging with other partners becomes critical for future success. Successfully achieving this will mean another fundamental shift in the organisation’s management.

 

How banks will survive the fintech onslaught

Fintech startups threaten to disrupt the banking system but the banks are well placed to survive and prosper

Earlier this week the Financial Times reported how the eleven biggest North American and European banks had shed 100,000 jobs this year, so it when I was asked to do a segment on the future of banking for radio station ABC666 in Canberra I was more than delighted.

The ABC producer’s interest had been piqued by an Ovum research paper detailing the IT spending of banks and their increasing focus on security.

Rethinking payments

In Ovum’s view much of the banking industry’s security  comes from the diverse range of payment options coming onto the marketplace. Another factor in the increased spend are the US credit cards moving to contactless payments.

Certainly the increased focus on payments security is being driven by the range of new devices with smartphones, wearable technologies and the Internet of Things opening up a whole new range of commercial channels. This is something driving the development of services like Apple’s and Google’s payment system and part of a wider battle over who controls those channels.

Underpinning much of the security focus is the interest in blockchain technologies which move the authentication records off central ledgers – historically one of the core functions of banking – onto a distributed network of databases.

Core challenges

That shift in record keeping is just one of changes affected the banking industry’s core functions, crowd funding and peer to peer lending threaten to displace banks from being the main providers of business capital, one of the fundamental reasons for the banking sectors existence.

It should be noted though the banks have largely stepped away from being the providers of small business capital over recent decades as the ill conceived ‘reforms’ of the 1980s and 90s saw the finance sector being more focused on housing lending and doing mega M&A deals with the big end of town.

The Financial Times report notes a decline in M&A deals is one of the drivers for the staff lay offs at the major banks, it’s notable that technology is changing that business function as much of the due diligence can be better done by artificial intelligence and algorithms rather than highly paid corporate lawyers and bankers.

Where have the bankers gone?

As the banks lay off senior staff, it’s notable many are finding their way to fintech companies. The Wall Street Journal however describes the relationship between incumbent banks and their would be disrupters as far more complex than it seems.

Increasingly banks are buying or taking stakes in promising startups along with establishing their own investment arms and running hackathons to identify potential disruptors. Many in the banking industry are quite aware of the changes happening.

That the banks are adopting the new technologies and identifying the threats shouldn’t be surprising, over the past fifty years the sector has been adept at applying technology from batch processing on mainframe computers through to deploying Automatic Teller Machines and rolling out credit cards to improve their business operations. Banking is one sector that’s proved itself fast to identify and adopt technological changes.

Are the banks going away?

So with fintech startups snapping at their heels, is it likely today’s banks are heading for extinction? Probably not suggests the CEO of fintech startup Currency Cloud, Mike Laven who describes such talk as being part of the “Level 39 bubble”, referring to the financial services startup hub based in London’s Canary Wharf.

Laven’s view is some banks will evolve while others won’t do so well and historically that’s what we’ve seen with other technological shifts – some of the incumbents adapt and reinvent themselves while others are not so adept and wither away.

Some of the bigger threats to banking may be social and economic change. Today’s rising of interest rates by the US Federal Reserve may mark the end of the last decade’s ‘free money’ mentality that’s been so profitable for them in recent times. The end of the consumerist era also challenges those financial institutions basing their business models on a never ending growth of consumer spending and household debt.

Almost certainly the banking industry is not going to vanish, however it is going to be a very different – most definitely a much leaner – beast in a few years time. What is certain though is the days of banks as we’ve known them in the second half of the Twentieth Century are undergoing dramatic change in the face of technological and social change.

Being invited to the investment party

Jon Medved is one of those credited with driving the current Israeli startup boom having been involved as either a founder or investor in over 100 startup companies over the past two decades.

His current venture, OurCrowd, is a fund raising platform for startups seeking investors. Since being launched in 2013 the service has raised over $34M for 31 portfolio companies.

At the Australian-Israeli Bridge Investment summit in Sydney last week, Jon was a keynote speaker and panellist describing the startup and technology landscape of Israel. Following his morning sessions, he spoke to Decoding the New Economy about Crowdfunding, investment regulation along with both Australia and Israel’s place in the world.

Thanks Jon, let’s start with what OurCrowd do

We’re the world’s largest equity crowdfunding platform. We focus on sophisticated investors. What they call in America an accredited investor, which means that you have to have substantial assets in order to crowdfund at this point because we’re offering shares in private partnerships that then are essentially investing on a per company basis so it’s more like democratized venture capital than it is classic Kickstarter crowdfunding.

You, as an individual, to get into one of my deals have to commit $10,000 per deal. So that’s real money. You get complete choice. We sift through thousands of companies, select about 2% of those that we look at. We put them up on our website. We invest our own money and then you just choose to join us. We aggregate the variety of the investors and join us from 110 countries around the world and then we write a single check with the aggregated amount and that’s often millions of dollars so it’s not like couple 100k or 50k. This is real money.

Our biggest round has been $16 million with the other money. We invest in companies across all sectors and all stages. We’re sector agnostic as well as stage agnostic and we’re now geography agnostic. We’re from Israel and the majority of our deals are in Israel, but we’re increasingly investing in the States. Here in Australia, we’ve done two deals. Our first was launched, our first deal in India, deals in the UK, soon Latin America, etc., etc.

So where are the areas that you’re seeing the biggest growth?

The Internet of Things is just unstoppable.

On the hardware side or on the software analytics side?

Both, we have software for inter-device connectivity. We have software for big industrial control of the Internet of Things. We have devices themselves that are really cool. Things that are doing location of things, things that are doing analysis of non-connected devices. We have companies that are linking the physical world to the virtual world. I’m just a huge believer. I think this is such a big trend, and we haven’t even seen the beginning of it. It’s just getting started.

How did the idea of OurCrowd come about?

I’ve been 30 years on the tech business as an investor and as an entrepreneur, taking companies public, have been bought. I ran venture capital funds. I’ve been an Angel Investor, so I’ve been around the block several times.

I’m too young, at least in spirit, to hang up the spurs, and I wanted to do something that would combine three distinct loves that I have. One is I love investing. Two, I love disrupting and being an entrepreneur. And the third is I love Israel. I live in Israel. But I really believe that Israel has a role to play in history and the world beyond its small population.

I tried to mix up investment, entrepreneurship, and Israel, came up with OurCrowd because the idea is that today, the whole venture capital angel investing thing is very important in terms of powering innovation, but no one has disrupted that or changed that methodology for 50 years.

Some old venture funds, some old angel investments and some of the disadvantages of current practice is number one, you’re limited typically regionally or city. There’s the Boston Common Angels or South Coast Angels or the Melbourne Angels that, God forbid, don’t invest in Sydney. That’s fine for that period of time. That doesn’t work anymore. Basically, you’ve got to be global. The companies need global help. I’m here. Are they okay?

So, this was very disruptive I think of the existing way the people invest because it was going to turn something which had been very hyper and local into a global event, but it was also going to disrupt the business by bringing in completely uninvolved people. It turns out that in America, which I know very well, there are 10 million of these accredited households. About a hundred thousand have ever made an angel investment.

Literally, 1% of the rich people have ever done this kind of investing. So, I said, “Before we bring the whole world then which is going to happen, and people are working on legislation here and elsewhere, let’s first empower the wealthy to get access to these deals because really, if you look at who are the guys who’ve been investing in the next Facebook or the WhatsApps of the world, same couple of hundred angel investors in Silicon Valley and maybe the same 50 funds and everybody else has been screwed.

Basically, you’re not invited to the party. You know when you can get to the party? It’s when these companies get public. That’s what they’re called private companies. They only problem is that these companies go public and they are already at $50 billion valuation. Who wants to come to that party? It’s not a fun party. I want to get people into the company when they’re being priced at $10 million or $5 million or $20 million so you can ride it to the billion dollars and the individual can make a hundred times his money or hundreds of times the money.

I think we are disruptive both on the global thing in terms of being inclusive and giving people choice because until now, the Faustian bargain you had to make was either I’m going to have a choice, therefore, I am an angel which means I’m on my own. If I’m the newbie, figure it out, read a book, get a mentor. How do I make an investment like this? What’s a term sheet? What’s preferred stock? Who’s the lawyer I should use? How do I…That’s very hard for somebody who doesn’t grow organically in the system to access that.

You could go to a venture fund, but at a venture fund get ready to write a million or $5 million check. Get ready to be turned down by all the good funds in the valley who don’t need your money, and get ready to not have any discretion or fund. You can’t choose a deal. You basically hand over the money and say, “See you in 10 years.” It becomes like another investment. I said, “No, let’s go find a way to let people choose their own investment but within a safe platform in context where we’ve done the work, where we handle the legal, we protect the rights, we aggregate everybody so when we invest, we’re treated like the big boys. We get the same stock that a General Electric or an Andreessen Horowitz or a Telstra will get, we get for that individual. And you can get in for 10 grand. That’s where the subversive part comes.

I came up with this idea, figured that it would also be a really cool way to help Israel because all these people that get hot and bothered about startup nations, “Okay, yeah. I want to invest.” Good luck. How do you do it? They still have that same problem. They’ve got to go do it on their own and figure out, especially if they’re living abroad, how do you do that? Or find a venture fund. This is a different way, and it’s got legs. And we’ve managed now to cross the $200 million threshold. We’re $50 million Aussie dollars raised here, which is pretty cool. So it’s a big chunk of the money coming from Australia. Got a thousand investors here, 10,000 around the world, 90 companies and growing fast.

Were there any specific reason, apart from your own passion about Israel, for setting up there?

No, because our regulatory approach, which I think is the right one has been based on…In the U.S., they call it Reg D 506, but it’s all based on the exemption you get for being a venture capitalist or the exemption you get to do private placements among accredited or sophisticated investors. The regulators worldwide basically say, “You know what? If you got bucks, we leave you alone as long as you play by the rules, but we’ll not regulate these private in place because otherwise, how the hell will your companies grow to get ready to go public?”

We threaded that needle if you will, and restrict our platform to those who are accredited or sophisticated according to their…Is it they call it qualified. Each area is different. In Israel, at the moment, it’s like almost $4 million of assets. The test here in Australia is two and a half. In the U.S., it’s only 1 million outside of your home. There are different income tests, and we essentially geolocate our websites. We flow those requirements down based on where you’re from. We spend a boatload of money on our friends, the lawyers. We have a lot of lawyer friends.

We talk to the regulators regularly because they’re really trying to figure this out and want to open this business up except they have a series of difficult decisions to make. So their first big decision is whether or not they want to do this according to a junior IPO model which says, “Okay, go ahead and let the crowd into invest in startups but, they’ll buy stock directly in the company.” They’ll call them issuers. For example, the proposed regs here in Australia demand that the companies become non-listed public companies.

They demand 20 or more shareholders already, then we’ll let you crowdfund. Our whole approach is no, these guys should all go directly on the cap table. With all due respect, that screws it up. It prevents venture capitalists of note to really come. In other words, if they’re serious VCs, a company with a hundred or 200 individual investors, some with couple hundred dollars, forget it.

They’re going to go, “This is too hard.”

Because all these guys got to sign documents. It’s a mess. They got to vote. Our structure, which is to have a SPV (Special Purpose Vehicle) or intermediary partnership whereby we act as the nominee, we’re managing the process, we have a board member, that first of all, affords protection to the investor so they now have the right to get over a certain percentage of holding, which gives them anti-delusion, anti…They get preemptive rights. They get information rights to all the good…which the VCs have.

Now, we flow that down to our individual investor which no standard crowdfunding platform would have. More importantly, it’s good for the company because they now got a single shareholder who looks just like another VC fund and so we get to bring the company the advantage of having thousands of investors interested on the platform and pushing them forward but none of the headache of having to manage them all directly.

The regulators hopefully will figure out that our kind of structure doesn’t have to be mandated but should be at least allowed and in certain parts of the world, the regime as they are foreseeing it transform from accredited only to non-accredited broad based from what they call wholesale to resale, wholesale to retail, they are not allowing this, at least for the retail. If that’s the case, we won’t be in the retail again. We’ll stay with the accredited supposed to get it because we believe this is a sine qua non.

We don’t want to get a placement fee that the company pays or a slotting fee to go raise money. That’s going to get a negative selection process. It’s basically going to say that, “You know what, crowdfunding, you get the remainders,” the type B, like the socks or the underwear that have a defect. The better companies will go to venture capital. The worse ones, you’ll have to deal with that. Maybe you’ll get lucky.

That’s totally not our approach. Our approach is, we want to invest alongside Sequoia, Andreessen, Excel, and we do. In other words, we get OurCrowd into those deals which you really want to get into and in order to do that, it has to be managed. It has to be aggregated into a venture partnership, and then we want the focus of the whole process to be not ending at funding, but beginning at funding because the biggest mistake that the junior IPO approach makes is when you do an IPO, you hand the check over to the company. It’s gone public. You say, “Good luck.” Maybe you cover it.

In research, if you’re an investment bank, maybe you’ll try to do a secondary later, but you’re not involved. You don’t sit on the board, you don’t give guidance, you’re not trying to add value all the time. Whereas in venture, if you don’t, that’s the definition of dumb money. You don’t want to be dumb money. You want to be involved and we want to use our special asset, which is the fact we got these 10,000 global investors that can provide access and assistance to these companies like nobody’s business.

Going back to that regulation side, which jurisdictions do you think are ahead of the pack in this?

Look, UK is really ahead because they have just basically almost chosen not to regulate. I think that’s interesting. I think that this whole business can be fraught with danger, and I think there is regulation in the UK but very, very light handed. I think that’s the right approach.

I think that we’re going to have to experiment, we’re going to break some eggs and let the market figure out which model works. Hopefully, people will not get ripped off. By the way, just recently there was a terrible fraud in the U.S. from a guy who put together an oil and gas deal that seems to have gone on the lam and that was one of these platforms where they don’t do diligence.

Part of our whole gestalt is that we not only curate the investors and manage the deals and build SPVs, but we carefully diligence every company. We make mistakes like anybody else, but at least we hope we’d be able to weed out the obvious frauds unlike other sites that just allow people to put up whatever they like. The UK seems to be letting a lot of stuff there. The US has got this wonderful 685-page new decision that the SCC just passed.

Under the JOBS act

Under the JOBS, took them four years of work, almost. We’ll see who’s out there, but everybody is working on it. I think that you guys will get it right. I don’t think anybody feels that what will come in the first go round will be what will be ultimately. This is new stuff and for us, the major issue is that we got a thriving, rolling, wonderful business based on sophisticated, accredited, qualified investors. It’s growing really well.

There’s a ton of additional growth that we can have here, and while we would like to be with the wave of history and let everybody in, we don’t want to sacrifice our principles. If the jurisdictions won’t allow us to create intermediary structures where we can manage it, where we can be essentially incentive not at a placement to get the deal done, but we get incentive primarily on the success of the investment. In other words, we believe that we should be taking our fees from the investors, not from the companies because if we take money from the companies, we’re going to get the worst companies.

Then the companies say, “Hey, I don’t need you. I’ll go to a venture fund.” But I want to be able to compete and cooperate with the venture fund where the guy says, “Hey, I’ll take money from these venture funds and take money from you but at least I don’t have to pay either of you, right?” Then the investor pays for the privilege of hopefully making money. If we don’t make money, it’s not going to work. If no one makes money in this, none of these models are going to work. I think that our approach at least stands a better chance at returning real money because we’re getting good companies. You don’t need to pay us to get them up with the site. They have to convince us that they’re worthy.

You mentioned due diligence before. What happens when I’ve got a business, I come to you and say, “I’d like to fund my business through your funding.”

We run you through the wringer. We first ask, “Where is your kindergarten teacher and how do we reach her?” That kind of stuff. In Israel, by the way, it’s very easy because…Excuse me, if you pee in our pool, people know.

It’s not like people, the whole country knows. Diligence is rather easy. It’s little harder for us outside of Israel, but we rely often on our investor base to help us because we have deep tied investors who are from around the world.

We like to co-invest with other funds, and other family offices and corporations. We share diligence information, but we have a whole team that runs these companies through, I would say, a very rigorous diligence process. That includes not only checking out the team but also talking to their customers, verifying the data they’ve told us is correct. Speaking to technology experts, market experts, competitors, etc.

Going on to the Australian side of it, how do you find the Australian business culture versus the Israeli business culture.

I think Australia is amazing. I’ve become a real fan of this country and a huge fan of the current prime minister. I think you guys got an amazing guy there (new Prime Minister Malcolm Turnbull) who’ll actually have the potential of making a significant impact on the business culture and national culture of the country.

You got everything in place more or less. You’ve got great technology, world-class universities [inaudible 00:21:42] billions of dollars exporting education. You’ve got progressive, interesting big enough size companies in the Telstras and the Qantases and the Commonwealth (Bank). These are not small businesses.

Great, unbelievable pool of capital and it’s second in the world in terms of superannuation funds. I think it’s a matter of time until the stars align and you break out in terms of realizing your innovation potential. We’re betting on it.

That’s why we’re spending so much time down here. We’re fans of everything Aussie, and I think that the sense of isolation and a little bit like we’re out of the mainstream and we’re far away and all that stuff, that goes away, not only when hopefully planes will fly twice the speed they do today, but I think it goes away notionally [SP] and culturally and what not.

We’re just a small world. You have a lot of great Aussies who are in the valley so there’s a good money here and there’s a good. I think this is going to happen fast. I bet you that if the number is 200 million or so being invested in Australian VC, that grows tenfold over the next couple of years.

So in the Australian market, what’s your priority at the moment? Are you looking for investors putting money in or are you looking for businesses to invest in?

Yes and yes. It starts with the investors because our strategy is once we build an investor community like we’ve already begun to do here, we have a thousand investors, ain’t too shabby when they’re all sophisticated investors. I think it makes us probably…We’re now the largest crowdfunding for equity platform in Australia. That’s where it starts, but it certainly doesn’t end there. What happens is, through that network, a lot of these are investors who have deals, and they start sourcing us deals. They provide the diligence infrastructure for looking at deals and they more importantly, provide this business development shock force that can help our deals grow here as well as help our companies from Israel around the world enter this market.

This is a very interesting market. It’s big enough to actually make some money and it’s small enough to get in. The people here are nice. They’re not cut-throat. They don’t steal from you. I think it’s actually an interesting place to prove a product. It doesn’t have the explosive scale of the U.S. or European or an Asian market, but it’s a good place to make your initial mistakes and to find high standard customers who will get you through your paces.

Listening to a number of your conversations today, you seem to be fairly down on the more traditional, if you like, type of crowdfunding.

No, I like Kickstarter and Indiegogo because they don’t pretend to give you, the investor, any upside. You got a t-shirt. If you’re expecting more, then you’re a fool. It’s just the fun. It’s just like going to a…I don’t know. It’s about charity. It’s about backing somebody. You get a cool product early. In other words, if you’re a gadget guy, you get to buy them for half price. Maybe they ship and maybe they don’t but that’s the risk you’re taking. That’s fine. And anyway, you’re only talking about a couple hundred bucks. People can afford that.

What I’m afraid of is uncontrolled equity sites where people think they are buying stocks and not having the control that would prevent fraud from happening, as well as even good intentioned guys who are just letting companies put cool video up and then people start putting real money, and there’s nobody there. Forget the fraud, just nobody to help the two guys and a dog build the company, to find additional money, to provide support. That can screw it up for all of us because the consumer is not necessarily, wealthy or not, that sophisticated to say, “Oh, this crowdfunding is right. That’s what crowdfunding is…” As soon as crowdfunding gets a bad name, you hurt everybody.