Category: economy

Silicon Valleys of the Twentieth Century

Dayton Ohio is an example of an industrial hub rising and falling, could Silicon Valley follow?

The rise and fall of industrial hubs is a topic that fascinates this blog and the excellent BBC and US National Public Radio series Six Routes to a Richer World discusses how countries as disparate as Germany, Brazil, China and the United States are carving their own paths to prosperity in the 21st Century.

In the US segment, the show looks at one of America’s industrial centres of last century – Dayton, Ohio.

The home of the Wright Brothers, Dayton also saw the invention of the cash register, air conditioner and even the self starting motor. In the early part of the Twentieth Century it held the most patents per capita of any US city and workers flocked to the region for high paying manufacturing job.

Manufacturing, and research, is largely gone from Dayton today and the question posed is could the successful cities of California’s Bay Area follow a similar path this Century.

Whether Silicon Valley and San Francisco fade will be a matter of historical forces that are difficult to see right now, but the likelihood can’t be underestimated.

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.

Thinking through the effects of autonomous vehicles

Driverless cars and autonomous vehicles are going to change the economy and workplace. Where will the jobs come from?

The defining technology of the Twentieth Century was the automobile. While there were many advancements – antibiotics, mains electricity and mass communications to name just three – nothing changed society to the same extent as the motor car.

A hundred years ago it was impossible for a pundit to appreciate how the motor car was about to change communities, the population’s increased mobility saw the suburbanisation of cities, the creation of the consumerist society and the rise of industries such as supermarkets and drive in theatres, none of which were foreseeable fifty years earlier.

Change didn’t happen in isolation, those new industries were the result of a number of changes in technology alongside the motor car, for instance the supermarket couldn’t have happened without refrigerators becoming household items along with radio and television developing new markets through the advertising industry.

Economic drivers

The biggest driving force was economic, once motor cars became affordable for the typical worker – just before World War II in the US and in the mid 1950s in most of rest of the Western world – the cost of travelling fell dramatically.

With the cost of moving around falling, workers had the opportunity to move out of the dirty, grimy inner city to new and clean suburbs where they could commute to their jobs in offices and factories. At the same time it also meant families could travel further to buy their groceries, forcing the end of the cornershop and the milkman.

Autonomous vehicles change those economics again, as Uber founder Travis Kalanick pointed out last year, the most expensive item in a taxi or Uber fare is the driver.

During his interview at the Code Conference Kalanick went on to describe how eliminating the driver changes the economics.

“When there’s no other dude in the car, the cost of taking an Uber anywhere becomes cheaper than owning a vehicle. So the magic there is, you basically bring the cost below the cost of ownership for everybody, and then car ownership goes away.”

Changing ownership

The assumption in today’s discussions about autonomous vehicles is that car ownership will become and thing of the past, something that fits into Travis Kalanick’s view.

Should that be the case then a whole range of new industries open up. Who owns the cars, who dispatches the cars, who plans for peak and normal usage are just a few questions and opportunities that open for savvy entrepreneurs.

A changing concept of ownership doesn’t come without problems, not least who owns the code controlling the vehicles and the data being generated which in turn raises privacy issues.

Loss of jobs

The obvious other question with driverless vehicles is what happens to all the taxi drivers, couriers and long haul truckers as automobiles no longer require operators.

With truck driving being the dominant occupation in most US states, employing 1.8 million workers according to the Bureau of Labor Studies, this is a serious question. Interestingly the BLS forecasts employment to grow five percent per annum over the rest of the decade.

That scale of  job losses hasn’t been unusual over the last century. The agricultural industry itself has seen a massive fall in employment in that time period with the proportion of Americans working in agriculture falling from half the population to a tenth of that.

Creating new industries

Obviously half the US working population didn’t end up being unemployed, with the many of those displaced by the motor vehicle – either in the agricultural sector or in those fields catering for the pre-motor car market – finding work in other fields.

That the economy adapted to the loss of jobs in what were traditional fields in 1915 gives us a clue to where the jobs and industries of the future are going to come from as the changing nature of the economy means new businesses are created.

As the economics of these industries change, we see the need for workers move further up the value chain. We also see those reduced costs open opportunities for new ideas, just as the supermarket concept took hold in the 1950s as the economics of household shopping changed.

This is where the greatest opportunity lies for today’s entrepreneurs lies, in figuring out how those reduced costs will change the way consumers and society use transportation. In turn that will drive the next wave of employment growth.

Malls and the economic divide

The fate of two shopping malls illustrates the importance of skills and education for communities

Yesterday we posted on how a lack of education is contributing to the decline of America’s middle class. An article on Bloomberg’s Gadfly website illustrates the direct effects of this change in comparing the fortunes of two different shopping malls.

It’s not news that America’s malls are dying in the face of changing demographics, consumer tastes and economics but some centres continue to thrive.

Bloomberg’s Shelly Banjo and Rani Molla put the success of some malls down to the affluence of their customers. A centre that boasts Tesla, Apple and Louis Vuitton stores such as Atlanta’s Lenox Square thrives and charges high rents to its tenants.

Just the presence of an Apple Store boosts a centre’s rents by 13% claim the authors.

Eight miles away from Lenox Square is Northlake Mall which only attracts a quarter of the rents on a per square foot (psf) basis and doesn’t boast the high quality names but rather a range of fading chains and department stores.

Northlake’s woes lie in demographics with its shoppers scoring poorly compared to Lenox Square’s on all measures.

atlanta-mall-comparison

The key points are per capita income and the education level with only just over half of Northlake’s customers having a college degree or better with the result earning only 2/3rds of that of Lenox Square’s shoppers.

Northlake’s lagging educational and income levels isn’t unusual as this is exactly the problem facing most of the lower middle classes as their earnings fall as their skills are left behind by an increasingly technological society.

The decline of Northlake, and most of America’s malls, illustrates the effects of an undereducated workforce on the local economy. Making sure the population has the skills to compete in the 21st Century is more than just a problem for the individuals affected.

Rethinking education in a time of a declining middle class

Reskilling the workforce is essential to address middle class decline

The role of higher education is changing in the face of technological and economic change as this World Economic Forum article describes.

Education is one of the keys to staying competitive in an increasingly technology driven society on both a personal and societal level. Individuals and nations that neglect their education investment risk are left behind.

One of the starkest examples of this are America’s lower middle class and the rise of Donald Trump.

In an article for The Atlantic, former George W. Bush adviser David Frum, describes how economic uncertainty for America’s relatively unskilled workforce are pushing back against their falling living standards.

The angriest and most pessimistic people in America are the people we used to call Middle Americans. Middle-class and middle-aged; not rich and not poor; people who are irked when asked to press 1 for English, and who wonder how white male became an accusation rather than a description.

You can measure their pessimism in polls that ask about their expectations for their lives—and for those of their children. On both counts, whites without a college degree express the bleakest view. You can see the effects of their despair in the new statistics describing horrifying rates of suicide and substance-abuse fatality among this same group, in middle age.

That these people are supporting Donald Trump – and their counterparts in almost every Western democracy – is not surprising as they losing in the new economic order and the technological changes which are eliminating or devaluing their jobs.

For governments and communities, the question is how to restore these folks’ fortunes or at least maintain their living standards. With protectionism almost certainly guaranteed to fail, the obvious answer is to give these workers the skills to compete and contribute in the 21st century economy.

Sadly, most Western governments still locked in a 1980s Reagan/Thatcherite mindset see education as a cost to be reduced rather than an investment in both their communities’ collective wealth and society’s cohesion.

Education, like the rest of society, is changing. A rethinking of both how it is delivered and its role is essential for nations to be successful in today’s economy.

Building a European Silicon Valley

Europe’s development of an equivalent to Silicon Valley faces many hurdles

The World Economic Forum asks can Europe build its own Silicon Valley?

It seems the answer lies in money, investors’ money to be precise, with a lack of VC funds to finance emerging businesses and a lack of acquisition hungry corporates providing high profile experts argues the WEF piece’s author, Keith Breene.

That appears to be a strong argument although there’s still some strong contenders for European tech hubs with the WEF identifying Munich, Paris and London as being major centres.

London’s claims are reinforced by the city’s strength in financial technology with KPMG nominating 18 of the world’s top 50 fintech startups being based in the British capital.

Interestingly, the Belgium town of Leuven which has styled itself as a centre for 3D printing and beer features on the WEF list of European startup hubs as well.

While it’s unlikely Europe can create a ‘Silicon Valley’ – even the post Cold War US would struggle to do so today – the presence of major centres like London and specialist hubs like Leuven indicates another important aspect of creating a global centre, that of having an existing base of businesses and skills.

That skillbase isn’t built up overnight, it’s a decades long process of commitment from industry, investors and governments and often as much the result of a series of happy accidents rather than deliberate planning.

It may well be the question of Europe creating a Silicon Valley isn’t really relevant with the bigger issue being how the continent’s cities and nations put in the conditions to develop long term industrial hubs. Trying to ape today’s successes for a project that will take decades to come to fruition could be a big mistake.

America’s fading middle class

America’s fading middle class is bad news for businesses run on old models.

The US middle class is losing ground reports the Pew Research Center citing its latest report that finds less than half of all Americans identify as middle class.

A fading middle class is bad news for companies basing their businesses on increasing consumer spending such as old school retailers, big box stores and fast food chains. The affluent youth culture of the 1960s consumerist model is particularly under threat as the falls in income have fallen disproportionately on the young, as this New York Times examination of American social trends shows.

The end of the 20th Century miracle

It’s hard to see this trend being reversed as the bulk of the Twentieth Century middle class miracle was the surge in well paid manufacturing jobs during and after World War II. After thirty years of seeing those roles going offshore, the next wave of technology threatens to do away with them altogether.

That next wave of technology doesn’t promise to be good for middle class professionals and managerial workers either as automation and artificial intelligence promise to do away with many of their well paid jobs as well.

A large middle class is historically an aberration, when the term was first formally used in Britain just on a hundred years ago only 20% of the population fitted the criteria – incredibly the US only started studying the nation’s middle classes in the 1950s – and prior to the industrial revolution only a tiny group of merchants and professionals could fit the description.

A wartime boom

It was the economic boom after the Second World War that saw the assumption of everybody except the most chronically disadvantaged becoming middle class.

That idea really started to pass in the early 1970s but as a myth it’s continued to hold on, partly due to easy credit that’s allowed workers on declining real incomes to keep up the charade of an ever increasingly prosperous middle class lifestyle.

However that charade is increasingly becoming harder as the Pell survey shows and that is bad news for those retailers, fast food companies and other businesses based on the 1960s consumer model.

All is not lost though, the vast majority of those falling out of the middle classes in 21st Century America – or Australia, the UK, Canada and New Zealand – will still have lives far richer and healthier than those of the middle classes a hundred years ago.

Changing the Australian investment mindset

Can the Turnbull government’s Innovation Statement reset Australia’s investment mindset?

“Of course I’m minimising my tax. If anybody in this country doesn’t minimise their tax they want their head read,” media tycoon Kerry Packer growled when asked about his financial affairs at an Australian Parliamentary committee in 1991.

Kerry Packer’s attitude towards tax minimisation runs deep in the Australian psyche so the announcement of a range of concessions to encourage investment in startups as part of the Federal government’s Innovation Package, branded as The Ideas Boom, may well succeed in unexpected ways.

The National Innovation and Science Agenda should be welcomed by any Australian concerned about the nation’s role in the 21st Century. After 25 years of neglect – if not wilful ignorance – by successive Liberal and Labor governments there is now at least a recognition that developing new industries and businesses is essential to maintain first world living standards.

Many of the proposals in the package are long overdue such as a commitment to open government data, initiatives to support STEM education, programs to encourage women in the IT industry and recommitment of funding for the government scientific agency, the CSIRO.

Australia’s quiet tragedy

The defunding of education and CSIRO research by successive Liberal and Labor governments has been one of the quiet tragedies of Australia’s turning its back on the 21st Century. The reversal of the focus on property speculation and mining is hopefully the start of renewed government efforts to restore the long term competitiveness of the country.

While many of us hope this is part of a broader, bipartisan vision of where Australia should be in the connected century, at this stage no-one can have confidence that these long term measures won’t be the victim of short term political expediency.

Short term gains

In the short term however the focus will be on the immigration and investment incentives. In some respects they are disappointing – the $200,000 annual limit for tax benefits should be contrasted with there being no such restrictions on property speculation – and both the investment and immigration proposals are still overly complex and will be a boon for well connected advisors and consultants.

However the changes are a start in shifting the attitudes of the nation’s risk averse investment and business culture and may well be well timed as the real estate price bubble starts to deflate forcing investors and speculators to look elsewhere for returns and tax breaks.

That chase for tax breaks could well mark the change for Australia’s investment starved small business and startup community, at the time Kerry Packer made his comments to the Parliamentary committee one of the most popular tax minimisation strategies was investing in locally made movies under the 10BA scheme that allowed generous deductions for investors.

Following film

Most of the films made under the 10BA regime were at best forgettable and the scheme was wound up in the mid 2000s but the wave of money that flowed into the Australian film industry helped launch the careers of many of today’s globally actors, producers and industry professionals.

If these changes can have similar success in the technology industries then they may be well worthwhile.

Another aspect to the Innovation Statement may well be the shift in Australian government industrial policy from a failed ‘think big’ mindset that assumed local businesses had to dominate their domestic markets to compete globally into a view where smaller, nimble operations can succeed internationally.

Welcoming change

Overall the Turnbull government’s Innovation Statement is a welcome change from the last twenty years of complacent policy around Australia’s economic development. One big challenge remains though in changing the nation’s complacent business culture.

Ultimately, the biggest challenge is move Australian households and investors on from the tax minimisation mindset. While Kerry Packer may no longer be with us, his mindset remains the driving force of Australian business.

Innovation and the Australian investment paradox

The Australian government’s Innovation Statement hits an obstacle in the nation’s risk averse culture of regulation

Even before its breathlessly awaited release it appears the Turnbull government’s innovation statement seems to have hit rough water as industry figures and the opposition criticise the proposed requirement for companies to be public before they can raise money through crowdfunding.

In itself this requirement isn’t a major barrier as prominent industry figures have pointed out although it will have the effect of making crowdfunding an option for more established ventures rather than early stage startups, which probably won’t be a bad thing for investors, employees and founders.

The requirement though does show a deeper seated problem in Australian government and regulation – a desire to legislate risk out of the system.

An Australian paradox

For tech startups, along with other businesses in new industries this creates a paradox as most of them will fail and their investors lose their money. Trying to protect backers of these ventures guarantees they won’t raise money.

So in trying to create a risk free environment, regulators end up killing the ecosystem.

From an Australian perspective, the risk free environment makes sense to a mindset that believes property is guaranteed to double every decade. Why invest in something that will probably fail when borrowing to speculate on an apartment is certain winner?

Protecting property

Strangely that attitude towards property has created another Australian paradox where the real estate industry is exempt from most consumer and investor protection law. The sad truth is the average Aussie has more protection in buying a smartphone case from a two dollar shop than they do when purchasing a two million dollar home.

Because property speculation is seen as risk free, there are few regulations or barriers to Australians gearing up into houses and apartments but for productive businesses and startups the obstacles for raising capital are substantial.

Ultimately, if Malcolm Turnbull and Wyatt Roy want to change the focus of Australian business and investors they are going to have to change the mindset of regulators and voters.

To change that mindset will take some brave steps, for the moment it’s far more likely the budding Australian innovation renaissance is likely to be suffocated by risk hating regulators.

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.

Ending the consumerist era

Changing consumer habits mean governments and businesses have to adapt

Quartz magazine describes how the American middle class has lost its taste for mindless consumerism. Companies in sectors as diverse as department stores, motor manufacturers and restaurant chains are being caught by surprise as consumers turn away.

As a result business models based on selling ever increasing amounts of cheap products are now being questioned as consumers look for better quality goods and experiences over volume.

This change in consumption patterns should concern both governments and businesses as the mindset the assumptions underpinning planning decisions, infrastructure provision and revenue projections are based upon known public behaviour.

Changed consumption patterns mean new business models, the old thinking is going to fade with the old customer mindsets.

High hopes for the innovation dreamtime

The Turnbull government and its ministers face a big test in the upcoming innovation statement this week and will need to follow through with tangible results.

The Turnbull government and its ministers face a big test in the upcoming innovation statement this week and will need to follow through with tangible results.

In 1976 Clive James visited Sydney fifteen years absence from his hometown. In his book Flying Visits he described the changes that had happened during his time away including some observations on the nation’s thriving movie industry with the comment “premature canonization is the biggest threat facing the young Australian film director today.

James’ words came back to me at an Australian Israel Chamber of Commerce in Sydney last week where the hosts were gushing over 25 year old Wyatt Roy, the Federal Assistant Minister for Innovation, last week.

There’s a lot to like about Wyatt Roy, he’s an intelligent and articulate minister with a self depreciating sense of humour and a touch of humility – qualities generally not associated with Australian politicians – though the old guard gushing over his youth and the achievements of his two months in office can be embarrassing.

In many ways the fawning over Wyatt Roy is emblematic of the general sense of relief in Australian business now the Turnbull government has left behind the nightmare of the vindictive and petty middle aged adolescents who made up the Abbot administration while also being a world away from the backward looking grey Liberal Party stalwarts of the Howard era and the self interested suburban Labor apparatchiks of the Rudd and Gillard years.

The question though is whether the hopes pinned on Turnbull and Roy can be realised which is why there are so many hopes being pinned on this week’s expected release of the government’s Innovation Statement laying out a policy framework for the nation’s economic pivot.

For Australia the stakes are high, the resource sector is collapsing and the property market – the real key to the nation’s suburban prosperity – is looking brittle. Policies that encourage new businesses and industries are now essential to maintain the country’s living standards.

To date Canberra’s policy makers have not managed the economic changes well; the Intergenerational Report earlier this year blithely ignored the effects of technology on the future workforce and its implications to incomes, jobs and government budgets, while three years after the Gillard government’s Australia in the Asian Century report it’s remarkable how dated the document with its underlying assumption of never ending resources demand now looks.

So the Innovation Statement matters in laying out a strong view for the future of Australia however even if it does prove to be a strong, forward looking document, the Turnbull government will need to follow up with substantial actions.

The real risk with all the talk of innovation is that it will be siloed, along with IT, as “something the geeks and young kids” do. For the this week’s announcement to be anything more than more fine words from the Innovation Bureaucracy then it has to be backed by strong reform to taxation, social security, immigration and corporate governance regulations.

While the canonisation of Wyatt Roy and Malcolm Turnbull may well be premature many Australians, including this one, are hoping those hopes are well founded. This week’s Innovation Statement will be the first test.