Water enters the great crowdfunding debate
Crowdfunding has the potential to revolutionise the way global capital flows into early-stage technologies. How applicable is it to the water industry?
The announcement by the US Securities and Exchange Commission (SEC) on 23 October that it had voted unanimously to propose rules which would permit companies to sell securities through crowdfunding could make it dramatically easier for start-ups to raise capital from high net worth individuals.
While the proposed rules would allow US companies to raise up to $1 million via crowdfunding in any 12-month period – whilst limit individual investors’ exposure to a fixed percentage of their annual income or net worth – the move is part of a global revolution in the way early-stage companies are accessing funding, and has the potential to unlock a meaningful portion of the estimated $45 trillion of funds held by high net worth individuals worldwide.
“There’s tons of money available in the accredited investor world,” confirmed Jon Medved, CEO of Israel-based crowdfunding platform OurCrowd. Since launching back in February, OurCrowd has launched 29 projects and signed up over 2,000 accredited investors.
“There are individuals with significant amounts of money worldwide who are passionate about water, and I think that crowdfunding is going to form a huge part of the funding for this sector,” Medved told GWI.
OurCrowd’s first exposure to the water sector came earlier this year, when it funded Lucid Energy, a provider of an in-pipe hydropower system that generates electricity from water moving through large-diameter pipes.
“I hope that Lucid is just the first of what will be many investments in the water area for us,” said Medved. “We are proactive in terms of trying to track companies, and we also get referrals from our investors and from our venture partners. We got at least a dozen business plans as a result of being at the WATEC conference [held in Israel in late October], and we’re looking for more. We’re seeing interest across the board – in smart water, analytics, treatment, desal [see box] – and I hope that we get a couple of really great water deals on the platform next year.”
While many crowdfunding portals enable the man on the street to invest pocket money in almost any kind of venture, OurCrowd only negotiates with accredited investors, and has a minimum commitment threshold of $10,000.
“The difference between us and classic crowdfunding is that we actually provide the deal curation,” Medved explains. We typically select one or two out of every 100 propositions that are brought to us or that we find. We then negotiate terms with the company, deploy our own money, and put the deal up as an opportunity to the members who have signed up to our platform.”
Traditionally, early-stage technology investment has tended to be very parochial in nature, but Medved believes that crowdfunding has the potential to revolutionise the flow of global funds in the water sector.
“One of the problems of investing is it’s really been a local thing, especially for early stage. That’s got to change. It’s hard for me to know what somebody is cooking up in their lab in Sweden or in Taiwan or over in Michigan, but that’s what makes our platform so attractive. We’re interested in accessing deals globally, and while the bulk of our deal flow has been Israel-oriented this year, we hope that next year we’ll dramatically increase the number of deals that we’re doing worldwide.”
Given OurCrowd’s fledgling status, only a fraction of the deals it has brought to market so far have raised in excess of $1 million. “I hope that in the next couple of years you’ll see our deal size go to two, three, four, maybe even $5 million as we add more and more investors to the platform,” says Medved.
He acknowledges that the commercialisation lag which is so often a feature of new water technologies will not align with every individual investor’s investment strategy. “I think we’d look for companies where there already is some degree of commercialisation in hand. We typically don’t provide the first seed money; we’re usually series A or series B – that’s our sweet spot at the moment,” Medved told us.
As well as accessing new pools of liquidity, crowdfunding also has the potential to reduce the marketing budget of entrepreneurs significantly by providing a virtual shop window, allowing more time to be directed toward R&D and commercialisation. The speed of a deal from first contact to reciving funds is also typically shorter than going down the traditional VC route, Medved argues. “It could be as short as three, four or five months, which is faster than many funds are operating today.”
OurCrowd’s due diligence procedure, coupled with its strict focus on accredited investors and the fact that it invests the lower of $50,000 or 10% of every deal it supports, mean that it is already being taken seriously by seasoned venture investors. It has co-invested with Khosla Ventures – one of the backers of nanocomposite membrane manufacturer NanoH2O – as well as 3M (which backs TaKaDu) and Israel Cleantech Ventures (whose water investments include Aqwise and Emefcy).
Earlier this month, OurCrowd announced a strategic partnership with GE Ventures, whereby GE Ventures will have the right to co-invest with OurCrowd in select early-stage companies in the areas of energy, healthcare, software and advanced manufacturing. “This is a really exciting moment for us, and provides huge validation of our methodology,” said Medved.