Money makes money

We all know the expression “you need money to make money”. This could explain why the past decade has witnessed a large increase in the number of everyday investors – those who earmark part of their disposable funds for investment in various channels that may yield profits. Correspondingly, the public’s financial assets portfolio has been steadily increasing, and as of the start of 2016 is estimated at 3.4T NIS.

Until recently, the prime investment channels available to the public were mostly bonds, stocks, trust funds, foreign currency, pension savings and real-estate, with each of these channels having its own characteristics regarding the method of investment, degree of risk and potential for profit.

If Israel is the start-up nation, why couldn’t we invest in start-up companies until now? 

Viber, Waze and Wix are just part of the Israeli high tech industry success story. In the last decade alone, over 960 Israeli start-up companies have been sold, earning their investors over 55 billion dollars in profits. In 2014, the M&A return on equity ratio reached an exceptional average of 6.22, meaning that over 6 dollars were earned for every dollar invested, (IVC, 2014).

However, until now the option of investing in the most worthwhile and potentially profitable start-ups was not available to the everyday investor, due to four main reasons:

1. High minimal investment sums.
2. Complex contracts.
3. Non liquid shares.
4. A long and pricy negotiation process with the companies in order to ensure a good deal.

All these factors created a reality in which only a select group of professional investors benefited from the start-up nation.

The rise of collaborative consumption

The economic crisis, high living expenses, technological advances and social media have all contributed to the rise of worldwide collaborative consumption.

The term “collaborative consumption” refers to a new economic method, which allows the optimization of resources through direct trade between sellers and buyers, without the use of mediators.

This method innovates traditional markets by opening them up to new crowds and increasing the supply of buyers, sellers and business deals.

Over the last decade many collaborative platforms have appeared, revolutionizing our consumption habits and improving our lives.

One excellent example is the Airbnb platform. This company very successfully uses the collaborative consumption method by enabling the owner of an unused resource – a temporarily empty apartment (let’s say, during the owner’s vacation) – to generate extra income by subletting the residence for a short period of time, whilst providing tourists with a considerably less expensive and possibly more convenient alternative to a hotel.

Another example is UBER, which allows anyone to be a part-time taxi driver and increase their monthly income by offering transportation services at competitive prices.

The Israeli company Fiverr is a global trade arena which has successfully bettered our lives by creating a global community of consumers and providers of various services, from design to legal counsel, for the low starting price of only $5.

Collaborative consumption is creating a real revolution in our consumption habits, exposing us to new ideas and saving us a lot of money.

Collaborative consumption reaches the investment world

Crowd funding is a method of raising money from the general public through an Internet platform, the basic idea being to receive small sums from a large number of people. The use of crowd funding began in the late 1990’s as a means of funding art projects. Today it is used as a common means of fundraising for artists, politicians, humanitarian assistance, environmental causes and, recently, small businesses and start-up companies.

In 2008, Kickstarter succeeded in spreading the concept of crowd funding worldwide and created a large community of people who support and help fund innovative ideas. To date, over 99 thousand campaigns have been successfully financed through Kickstarter, over 2 billion dollars have been raised, and the number of supporters (investors) currently exceeds 10 million.

But while Kickstarter is clearly a great success, it does not offer investors the chance to be actual shareholding partners in the projects they invest in. Consequently, if a project becomes a global success, all you are left with is a thank you card or, at best, the product you helped fund (as in the case of Oculus).

Investing in start-ups: The era of the new investors

The passing of the new “jobs act” legislation in the USA in 2012 ushered in the era of the new investors. This legislation paved the way for equity-based crowd funding, allowing start-up companies to raise funds from the general public via Internet platforms, in exchange for company shares. Other countries, such as Britain, have joined this trend and, as a result, new online fund-raising platforms have emerged, allowing new investors to commit relatively small sums in start-up companies in exchange for shares.

The opportunity to invest in promising start-up companies was once available only to a small and exclusive group of investors. That opportunity is now open and accessible to the everyday investor, who has so far been able to navigate only through traditional investment channels. These new investors can now allocate part of their disposable income to start-up companies, which offer a potentially high return, and to be involved, to the degree of their choice, in projects that interest them.

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Written by Nir Meital, CFO at Exitvalley.

www.exitvalley.com

Nir@exitvalley.com