Steph Janson — OCV

Wednesday, May 25, 2022

Steph Janson joins to tell us about OCV, a $260M LA fund investing into companies that have $5M+ ARR.  He also shares some great stories about Israel’s startup ecosystem and his time at OurCrowd.

 

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OK, today I have Steph Janson from OCV with me. OCV is a $260 million fund in L.A. They write checks up to $20 million dollars into companies that have $1 to 5 million in ARR.

And before OCV, Steph was at OurCrowd, Israel’s most active VC fund. Steph, thanks so much for chatting with me today. Such a pleasure. Many thanks. You know, just to start like $260 million dollar fund in L.A..

That wasn’t totally on my radar before.

Before I learned more about it, I guess, as things as things go.

Yes. Just give me the basics of OCV, I guess. Yeah.

So, you know, when when I joined Stevie and I find fairly recently, so October of last year, I kind of started looking around for who are the big players in L.A. ecosystem. I was new in town. And it very quickly became apparent to me, you know, this is a nascent ecosystem. And I didn’t know that coming in. But it became apparent to me that OCV was one of the biggest fish in the pond over here. And, you know, I mean, here in L.A., so we have fifth wall. We think it’s bigger than us and UpFront and Greylock, but but not many others. Right. And so it’s I think we have a better job to do in terms of getting our name out there and letting people know, hey, we’re here, this is what we’re doing. And I remember when you first came to meet us in our offices, we said in this beautiful private equity fund, who’s our our sister company and the chairman of our company is also the chairman of this private equity fund.

So you walk in and there’s these beautiful marble hallways and conference rooms everywhere. And, you know, the first thing people often ask this is who the hell are you guys and how come you’ve never heard it? So, yeah, absolutely. We. This is one of the reasons why I’m out there doing podcasts and looking looking forward to getting a good message out there.

Well, it’s Fund One right now. Right? Yes.

Yeah. So we closed end of 2017 on a tender and $260 million fund. As you said, we have about 50 percent fund cycling. So we could go up to about 300 and we’ve deployed just under a third of it. So we’re two thirds deployed, sitting on a lot of dry powder, which in the post age of Covid valuations are plummeting everywhere. It’s a good place to be. You talk a little bit more about that later if you want.

But we’re very much active looking for great investments. And yeah, we’re here to play. Awesome.

So, I mean, both of those are interesting. Is is series B is sort of your sweetspot entry point or is it a series A company?

I don’t really know what Teresina Series B mean anymore. But as we define it, yes, we’re looking for revenue generating companies around kind of the $1 to 5 million in our range.

That’s what we call a series B. So there’s product market fit some validation and there’s a little bit of growth that we can extrapolate on and try to figure out how the company is going to going to perform in the future. And then we we also we’ll go earlier. So when we have a lot of confidence, we’ll do it every day.

And and as you reference, we are on video conference today. We’re both in our houses. Well, how are you guys feeling towards Covid? I mean, how is your investing being affected?

Yeah, yeah. Our existing investments, some of them are going to benefit. Some of them are going to have some hard months ahead. And we have to now, as VCs, start earning our management fees by doing some smart portfolio management and and some some good business development to try to help them get through this.

On the other hand, valuations are plummeting. Right. So there’s gonna be good deals everywhere. And a lot of the deals that we’re seeing now are recaps or down rounds. And I think valuations have been just insane for the last two years. So I think now is really a time to be in. And historically, when you look at vintages, VC vintages that came following a global financial crisis, some of the biggest companies in the world were built around these times.

So BNP was a 2008 company founding. I think Dropbox was founded one year before and right as the global financial crisis was kind of coming to a head.

You know, Scott Galloway, who hosts another podcast, so I really love him. Say my podcast. You’re right. I guess so. The NYU professor who is always putting his foot in his mouth.

But I love him. He makes this great point that, you know, these crises they give manageress cloud cover to to make a big moves.

I think it’s telling that Zoom is now worth more than all airlines combined. So we’re talking and zoom over here. And just to think that I mean, that’s that’s the crazy world that we live in right now. Wow, I’ve heard that. So, yeah. Right. So Kogut is gonna gonna affect the ecosystem up and down. You know, its Silicon Valley Bank had a webinar last week where they made the point that in the last global financial crisis valuations our investments dropped twice as much as valuations.

Right. And the reason that happens is because alky start to bail. So if you have you know, if you’re sitting on A, B, C funds, you’re Opie’s are gonna start calling you and saying, listen, don’t make a capital call because Pleasent put us in a senior position or rehab to say no to you. We can’t actually go through with what we promised you. So, you know, there’s v.c funds now who have dry powder on paper.

And then there’s v.c funds now that can actually move the money and make investments right now. Unfortunately, we find ourselves in a position where our fees are pretty recession. So and by the way, that’s also true for private equity funds and corporate development teams. And those are the big dry powder are going to be making moves. The ones with strong balance sheets are going to be doing a lot of M&A. Right. So it’s going to be interesting landscape shifts in terms of how startups exit.

So, yeah, kohver is changing everything. And it’s it’s hard to know where it’s all going. Right.

So you efron’s a little bit your LP.

He’s you guys are you’re investing at a fund one two hundred sixty million dollars. That’s a lot to raise for a, you know, emerging managers.

So tell me more about who who who is part of OCV.

Yeah. So our largest LP is a group called J2 Global, which is a public listed company based here in L.A.. And that comes from one of our founding partners, Hemi Zucker, who is really the co-founder and the eventual CEO of J2 Global and J2 Global is pre-code of it. I think it was five billion dollar market cap, about a billion and a half in revenue, half a billion in profits. Right. So big cash cow. That is very resilient.

And it certainly is. Yeah. To turn the light. Sweet, it’s.

What do you say? A $5 billion market cap. Yeah.

Yeah. What it was like right before covered. I’m not sure where it’s at today. But but yeah, its largest tech companies in L.A. then.

Yeah. Yeah. And so there’s there’s a registry of companies. Most companies that you think of as being based in L.A. like Disney are actually registered, not in L.A. County proper. And I think in L.A. County proper j2 I think is a tough time to get listed companies. So, yeah, it’s it’s it’s a large company over here. And what is J2 do? Yeah. So J2 is a company that holds the five digital media solutions and cloud services and a range of different solutions.

But probably the product they’re best known for is effects. So one of those you know, the first of the first solutions that let you basically get facts in your email. Right, or send fax from your email to J2 bought them and then scaled the company up and they bought something while Hemi, our partner, was CEO of the company. He grew the company by buying something like 160 different companies. Today that’s over two hundred and basically merging all their all their customers list and merging all their overhead.

Okay. So that makes me do a large range of things.

Yeah, that makes more sense than eFax being a $5billion. Yeah.

Yeah, yeah. Yeah, yeah, yeah. So so they they do a lot of things and then this also ties in to kind of our value add offer for entrepreneurs. We are you know when we’ll try to I’ll go our way into competitive deal, we’ll set entrepreneurs. Listen there’s this company J2, they’re our largest LP. They’ve made over 200 acquisitions. There’s probably a customer somewhere inside J2. So it was probably one of those acquisitions. One of those companies and subject SJT that could be a customer.

That could be a distributor, that could be a partner or that could be an eventual acquirer for you. And so we use that very much as leverage to get ourselves into into hard to get into deals. Got in.

Hemi, who was the founder CEO, is now partner at OCV.

Yes. And is now a partner and SUV runs the team over here, runs the the tech team in which I’m OVP. And that’s about two thirds of our fund is dedicated towards making investments in technology and prop tech. And then the remaining start of the fund is dedicated to making investments in life sciences, biotech, a bit of pharma, things like that.

Area number two, where we can be smart money, anything to do with PopTech. And yes, this ties in. Our sister company, which is a large 30 billion dollars real estate focused private equity fund. Their assets include solar parks. Empty land. Commercial real estate. Car parks, multiple hotels, several data centers. And so when we look to make an investment in PopTech. The first question we have is how can our sister company add value?

Can we roll this technology out through their portfolio in order to give our startup some kind of unfair advantage? So, for example, that could be and we use the term profiting very liberally here. Right. So that could be, for example, a sensor for a smart building that could be, you know, 3D printing for construction. It could be new construction materials.

But if our sister company could be a user, then we can do something really cool. We can on day one say, hey, listen, give us a sweetheart valuation because we can arrange this amazing. SYDELL And then on day two, we can immediately mentally markup the valuation that we assign to the startup because we know that the startup is going to hit all of its milestones for its next two financing rounds because we’re going to be the customer. Right.

So that lets us kind of play very aggressively in that area so that there is two or three go. And that that.

What did you just say, $30 billion or PE fund? Are they based in L.A. as well? And that’s our headquarters that I’ve been to. Yeah, yeah.

They’ve until and that was their headquarters and as OCV, how do you have a philosophy about your your geographic focus?

So we are, I think, about 50 percent deployed in L.A. and 50 percent deployed outside of L.A. We tend to focus on U.S. only companies, although a few of us at OCV, myself included, are Israeli. So because we know that market very well.

We we feel very comfortable investing in Israeli companies who are kind of offshoring to the US and setting up offices here. But that’s just a little bit of a quirk that comes from who we are. So anyway, just to finish your your previous question.

Area 3 is around anything to Lifesciences that comes back to one of our partners who’s a very experienced life science such partner, who is the co-founder.

You know, you’re you’re of the right age to remember those I fell in. I can’t get up life alert ads, infomercials. Said, yeah. So he was the co-founder and managing director at LifeAlert. And I asked the CEO and board member of multiple public companies. And so we’ve hired a team that brings a lot of that knowledge in-house.

So we have to p_h_d_ on the team, one neuro pharmacologist and one a biochemist who are helping us to do prospecting and in life science tools for a biotech and pharma and some digital health as well. Got it. OK. So those are the three years of focus. But then your Web site says OCV invest in, owns and operates. I forget to differentiate companies with differentiated technology.

And so that is actually fairly different phrasing than most v.p.’s would talk about their funds. Can you explain that difference?

Yeah. So we are you know, we have the three areas where we feel like we can be smart money. But we’re also kind of first and foremost, opportunistic. Right. So when when we see the opportunity to go outside of those three areas. Right. And invest, you know, like I said, not necessarily be able to it when we see the opportunity to make an investment through venture debt will do it. Right. And in one case, you know, we saw a gap in the market and we incubated at a company internally and we own 80 percent of it right to where we are a majority owner in this company.

And so, yeah, by definition, we own and operate that company. So, yes, in many ways we’ll also break the VC rule book when when we feel like it makes sense to do that. So that’s kind of something that’s a little a little unique to our phone call.

How did you know you were at our crowd in Israel before this? How did you end up at our crowd and OurCrowd?

OK. Some crazy story. So I was I was traveling home on a flight from Israel to New Zealand. So I was born in Israel, am Israeli. But my parents moved to New Zealand when I was 12. Long story. You know, we all collected five passports, passports along the way. You know, we all speak multiple languages. My parents back five and six languages. And. Yeah. And so I know where I was flying home to to visit my parents.

And I am sitting on the plane next to this guy who we get talking.

And he always said to me, listen, if you’re ever in Israel, look me up and I’d love to grab some lunch. So we stayed connected over the years. And a few years later, I find myself in Israel. And he says to me, listen, you know, I would love to introduce you. You have this interest in startups right above to introduce you to my friend Alan. And so I’m making an appointment for you. Just be at this address at this time.

Right. And go meet Alan. And so I shop at this house. But but, you know, this house was like this mansion in downtown in the middle of Jerusalem in a very expensive neighborhood. So straight away, you know, like some some and this guy is someone and big walls and cameras around the house.

And he opens a door for me. And as I’m walking and I get a call from a friend from the plaintiff, says, listen, I can’t be there. Meet this guy. It’s gonna be fine. It’s going to lead me into his office, which has a few stories underground. And I’m walking downstairs, you know, behind this tall wall. I started wondering myself, how well do I know this guy? I went on a plane and he like this isn’t really a harvest, the organs like that.

Thank you. And anyway, he he asked my yeswe what’s what’s your name?

It’s. And he says to me, it’s Exton. I know that name from somewhere.

We were the only other Jewish family on the same street in Johannesburg, South Africa. And he goes and he names my aunts because they went to high school together. Being religious kind of takes it as a religious sign and says, OK, you know, it’s it’s gonna help us get out. Unbeknownst to me, he was the latest LP in OurCrowd. And he picks up the phone to the CEO of our crowd, John Medved, and says, you’ve got to interview this kid.

That’s how I got the interview. That’s amazing.

It’s a sign. It was a sign, a great story. I ask a lot of people this question.

Most people have, you know, they started investing in syndicates or something far more mundane.

That’s awesome. OK. So OurCrowd is the largest, most active in the investor in Israel. Tell me a little bit about our crowd.

Yeah. So, I mean, it wasn’t when I joined. I guess I should say, you know. So when I joined, we were a scrappy little team under 30 people. But over the time that I was there, you know, it grew to about 1.5 billion dollars deployed today.

I should take a step back and explain how this was called equity crowdfunding platform, which means that there is a website where you go to sign up as an investor, you have to be what’s called an accredited investors.

You have to prove a million dollars in liquid like liquid assets and then you want to join that list. You know, you can go into the backroom and see all the deals that accredits. Currently raising for Alcoa puts up about 5 percent of the value of the deal from the money of the partners who create the fund and then they crowdfund the remaining. Ninety five percent sort of similar to enlist.

Yes. Similar to AngelList. The big difference between AngelList and OurCrowd is that Ángeles is, um, curated. So anyone can go onto AngelList and say, you know, this is who I am. Here’s the deal.

So our crowd the big differentiator is that it’s a curated equity crowdfunding platform. What that means is that there’s a team over there of investment professionals. They do institutional great diligence. And so that’s something that an individual who syndicating a deal in Angeles would struggle to do. They have a team of in-house lawyers who can legal diligence in a way that it would be very difficult for a single person to do as well.

I should say also that today our credit is no longer solely in equity crowdfunding platforms. So today our credit also has got traditional funds, which it raises. Richard raised the fund with specific management team and has a beginning and an end date. The deployment period and all that. And then had also at some point started seeding other VC funds.

And there’s been a lot of, I don’t know, people trying to sort of study Israel to understand what has made it, such as startup’s success story.

Yeah, for sure. So maybe just to give your listeners some data points for people who are kind of not familiar with it.

It has almost twice the Vichy doctors per capita than the US. Right. And has. Yeah. And has more R&D per capita, higher highest per capita, non-military R&D per capita in the world, actually. So these are both VC funded companies and other companies, R&D departments. When you add that all up, highest number of patents per capita in the world. And then when you look at Nicaea Nasdaq listings. Right. This was true a few years ago.

I dunno if it’s still true today, but the U.S. tops the list, which makes sense in the largest economy in the world, followed by China, which is large population in the world. Then comes Canada, which punches above its weight. But then in fourth place is Israel. Britain, which is insane because this is in absolute terms, right? That the most number up nice in Nasdaq listings, in absolute terms is this tiny country with just over 8 million people in the middle of the Middle East.

Right.

What attributes to all of that success? I’ve heard people say things like the Israeli mandatory military service, but I don’t necessarily understand the tie between mandatory military service and why you have so much success in all of those different industries.

Yeah. Yeah. So let me see if I can if I can tie it make make that tie for you. So what is the military right? vis-a-vis investments at least. Right. And vis-a-vis innovation. Well, the military is an organization that can make. Extremely long term investments in research with no ROIC considerations, right? Not not beholden to any LP, so they can they can say, listen, we want to make an investment in nanotech right over the next twenty five years.

And we don’t and we don’t really it doesn’t really matter to us whether it’s gonna be profitable or not. We’re doing this for strategic reasons. Right. So that definitely helps kickstarts industries. Right. Then the industry is also very it plays a big role in in in talent. Prince of the Swan phrase that gets thrown around is that in the Israeli military, you’re trained to work in teams to accomplish mission critical objectives while adapting to unknowns. So let’s break it down.

Each of those things. Right. Okay. So you’re trained. You to the military. You’re a 19 year old and you’re trained to hack into Syrian computer. Right. That turns out to be quite useful when you then later go on to found a cyber security company. Right. You’re trained to work in teams. Why is teams relevant? Because, as it turns out, many startups. Right. 500 research to 500 startups did this research that showed that many startups fail because of founder infighting.

Right. But if you’re founding a startup with someone who you served in the Army. Right. There are no one entity there already. Someone you know, you’ve already been through a lot with this person. You probably already know what annoys you about them. It’s a known risk. Right. So so your chance of of just kind of like discovering something about this person that makes it intolerable to work with them is much lower at that point. And then that last bit adapting to unknowns that transfers very well to startups where everything is chaos time.

Right. And that’s true, by the way, even if you are not military. Right. So if you’re an Israeli population, every few years, you come under fire. There’s like there’s like rocket attacks that happen in Israel. And so by comparison, the idea of failing in business seems a little, I guess, trivial compared it to living in that reality. And yeah, and you know, my whenever I go down this line with people, by the way, I always kind of feel responsible to sort of plug Israel and put things in perspective.

So, you know, the risk of terrorism in Israel is negligible compared to the risk of getting on in your car on the road here in L.A.. But so that’s just kind of worth throwing in there as well. And then you go back to kind of the military. So necessity absolutely breeds, you know, some some innovation. Right. So using the satellite industry I was talking about before, the satellites are typically launched from west to east. Right.

And the reason is because the earth rotates in that direction about a thousand miles per hour. And when you launch satellites with the rotation of the earth, you give them that boost. Right. But in Israel, if you launch a satellite west, you’ve hit a problem because that satellite is going to fly over Iraq and they’re running Syria. And there was a fear that they would shoot this extremely expensive piece of equipment down. So what was the innovation as Seattle?

What if we can miniaturize this to the point where we can actually launch it westwards? Right. We can launch it against the rotation of the earth. And the whole CubeSat industry basically came out of that. And now you can actually launch a satellite news-wall for about a hundred thousand dollars. That’s less than the cost of developing an app. Right.

And that’s true in non-military situations, too. Right. So Israel is a place with water security issues. So it’s huge innovation in, for example, water dissemination and in Israel or in water recycling in Israel. Right. Like Israel recycles over 80 percent of their water, then it’s the highest in the world and the next highest country in the world. In terms of recycling, I think is Spain with something like eleven percent.

I think today also when you look at Israel, it’s easier to explain why. Right. So today there’s fewer drives from Tel Aviv up to Haifa. Right. You see parts and parts of, you know, tech parks.

So Google, Yahoo, Intel, they all have huge R&D offices over there and all those who are producing great talented engineering workforces for the startup nation. And then the presence of those large companies that we talked about is also very important for for the creation of startups, because there is this.

Cycle that I like to talk about. I used to I used to lecture at the Technion in Israel as a guest lecturer. Which is kind of the Israeli tech Caltech. Right. Or am I? And, you know, I used to make this point that the what happens in these large companies is you join us, an engineer. They train you one man. One day you see a problem which you you really want to solve. You go to your boss.

Your boss says, no, no way. I can’t. I can’t help you with this. You know, you have your own KPIs and I need you to meet these timelines. So then you as a as a budding entrepreneur abutting engineer, an entrepreneur. So can then leave and do this myself. So the company is needed. The large company is needed to train you. The bureaucracy of large company is needed to frustrate you into leaving. And then once you’ve created your own startup, the presence of a large company is necessary to be your eventual acquirer.

And then the last element of that is cultural. Right. So culturally speaking, Israelis are notoriously informal and disrespectful of authority and and hierarchy.

And then I would say culturally, you know, also openness to immigrants. Right. So Israel in the 90s absorbed something like 1 million Russians, which to put that in perspective for it for the listeners.

That would be as if the US absorbed the entire population of France. Right. I mean, that’s that’s just inconceivable in the US today.

And the last thing I’ll say is that being a small country often means that you have to think global from day one.

Pretty much from day one, you have to start asking yourself, how do I move to the U.S.? Right. And so that orated just kind of it’s it’s part of the machine over there which makes you think big before you even get started. What do you notice?

So you have lived in a variety of different places.

What do you notice about L.A. culture, sort of in contrast to the Israeli culture?

Yeah. You know, I’ve been very pleasantly surprised with the L.A. culture. And, you know, L.A. has I guess there’s like stereotype for outsiders, right? l.a.’s mostly associated with Hollywood as opposed to being associated with tech and venture and investments. And so I think, you know, it’s like I fell into that trap of judging a book by its cover, but I thought most people in L.A. would be kind of like very vain and very, you know.

Yeah, but but I am very pleasantly surprised to find that the L.A. startup ecosystem, in my opinion, actually resembles what I would imagine the Israeli ecosystem looked like in the 80s and 90s, and that it’s kind of like it’s a little grungy. It’s got like this big brother up in San Francisco that gives the kids a bit of a bit of a nogi every now and then. But I think but I think that I think that L.A.. Right.

If I look in the long term. Right. There’s nothing. al-Ain If I look at the fundamentals, read Lessing’s very well set up to become huge. I mean, if you believe demographics are destiny, right, the population now is much bigger than the population of San Fran, right.

I think in the next few decades, I think I think this is a great place to be in. I’m excited to be here. While it’s early so that I can grow in this ecosystem. Right.

Anything else on the personal side? Sounds. I’d like to ask people for like a piece of advice that they’ve been given that that has touched them, stuck with them. Yeah.

Well, you know, so for me, I like to tell people, if you want to be in venture capital, one of the things kind of that’s important to realize is that venture capital is this really weird place where people people’s career is just kind of getting rocket ships and take off for example, you know, you fund these entrepreneurs back when they’re these, you know, little scrappy kind of jeans wearing. I have a dream kind of people, but then they sell their company for half a billion dollars. And suddenly this person who, you know, is there a hundred million dollars, right? Yeah.

And, you know, you work with these extremely capable people. Right. So if, for example, as I mentioned to one of the partners at our fund created a five billion dollar company. Yeah. One of the other partners at our fund is a billionaire. Right. So you have to absolutely know how to manage your ego so that, you know, you don’t kind of get drowned out by all of this like challenge around here. So I would say that’s kind of one piece of advice that I give people who are are trying to get into venture.

Yeah. All right. Well, it’s really good to get to know you and gets no OVC better. As I said, I will I will be sending you all our companies as they they grow into into their series A, series B.

Absolutely. Great. Well, Steph, thanks so much for chatting with me today.

That’s a pleasure.