Major VC player from Israel plans Asia fund, but says it'll watch out for froth

Singapore

ONE of Israel's most active venture funding outfits plans to raise between US$30 million and US$50 million with an Asian partner for its first Asia fund in the next 18 months, even as it watches with care the lofty valuations in the Asian startup scene, its top executive in Asia said.

This Asia fund will draw funds from investors in Asia, and offer access to international tech companies, including those from Israel and Asia.

Denes Ban, managing director of Asia at Israel's equity venture crowdfunding platform OurCrowd, told The Business Times he still sees for now a good supply for startups in Asia building disruptive technologies, including those from Indonesia and India. Much of such technologies are also emerging in the financial services, that is, loosely lumped under fintech.

There is innovation and strong investor interest coming out of Greater China, though it is also "a little bit overcrowded (with) investors", said Mr Ban in an interview.

"If you're not local, it's very difficult to get low valuations, because it all goes to family and friends. So it all depends on the partner we find," he said specifically on Greater China.

"The key to building venture capital is to have local due diligence, and then, more importantly and what investors often miss, is what happens the morning after. You have to sit on the board of these companies and you have to manage it, and you want to make sure that the money is not being used for the wrong things."

He also wants to avoid Asian startups, including those in fintech, that are, in effect, running platforms that aggregate services, rather than developing strong technology.

To get a better understanding of the local conditions, OurCrowd has plans to open a few more offices across Asia soon, adding to existing offices in Singapore and Hong Kong.

"Where Asia has been traditionally stronger is in scalable e-commerce and fintech platforms, which make it very easy to predict the hockey stick," said Mr Ban, referring to the commonly cited hockey stick, or J-curve, that venture capitalists project to determine a startup's pace of maturity.

"When you look at Israel, because of the deep-tech nature of the companies, the technology is bolt-on and integrated. They are not B2C (business-to-consumer) platforms, so it's much more difficult to predict the hockey stick."

OurCrowd has expanded in reaching Asian investors by partnering Asian banks that have a network of small-and-medium enterprises (SMEs) and private banking clients.

These investors seek diversification through private markets, which OurCrowd can offer to accredited investors, family offices and corporate investors.

"The most important trend today is that the alpha is moving from public to private," said Mr Ban.

OurCrowd has seen growth in enquiries from large family offices and Asian corporates in recent times, with the platform hosting four to five regional delegations every week. The interest comes mainly from Greater China, though investors from Singapore, South-east Asia, and Japan, are now sitting up as well.

Asian corporates are also looking for access to technology that can be plugged into their businesses.

The company's primary investor base remains the US, followed by Asia, though Mr Ban expects Asian investors to make up the bulk of the platform's investor base in time. As it is, flows from Asia have in the last couple of years made up more than half of the funding recently invested on their site. OurCrowd has some 30,000 registered investors from more than 150 countries.

Its first banking partner in Asia was Singapore's United Overseas Bank (UOB), which has a focus on South-east Asia. UOB has partnered OurCrowd since 2016 to provide equity crowdfunding services in Asia, through which SMEs and startups from UOB's tech incubator can seek investments from accredited investors in return for shares.

UOB has separately invested more than US$10 million in OurCrowd itself for an undisclosed equity stake.

OurCrowd has also worked with other Asian banks to build out its regional business. Mr Ban said OurCrowd would continue to partner just one bank in each country.

"We are monogamous," he said. "And the banks are looking for a way to differentiate themselves from the other competitors. That's what they are looking for - a competitive advantage in an asset class that is one of the most difficult to access."

There are two main ways for accredited investors to invest through OurCrowd. The first is in selecting pre-vetted investments and buying a stake at the same terms as institutional co-investors. The other is to participate in various OurCrowd funds with a set portfolio of startups. Both investment options come with management and expense fees. The minimum investment size on the OurCrowd platform is US$10,000, a rare bite-sized exposure to venture capital investments. The minimum investment in an OurCrowd fund is US$50,000.

OurCrowd typically looks out for startups at an inflexion point of growth, and that can offer a rich return if they are sold off to larger companies. These startups should have an annual rate of revenue of between US$2 million and US$20 million, depending on their stage of growth.

OurCrowd typically invests in companies in their Series A and Series B stages, where companies are seeing valuations of between US$20 million and US$50 million. It vets and screens investment opportunities at roughly the rate of one approved investment for every 100 companies screened. The due diligence usually takes six to 12 months.

Israel's calling card, said Mr Ban, is in understanding deep-tech capabilities in areas such as artificial intelligence, cybersecurity, smart transport technologies, and medical technologies.

"If you want to know what happens in two years, go to Silicon Valley. If you want to know what happens in 10 years, come to Israel," he said.

"We don't create BMWs, but what we create is the underlying and the most critical infrastructure."

The firm has added some Asian startups to its offerings to investors for equity crowdfunding, too.

It has added Hong Kong travel services booking platform Klook; India's car rental service Zoomcar; and Singapore-headquartered data analytics firm Near in recent times. BT understands that Near was recommended to OurCrowd by UOB.

All in, OurCrowd has raised some US$1 billion for 170 companies and 18 funds since it started in 2013. On a blended basis, the portfolio has delivered two times on capital.