Brilliant Idea: Let’s Make It Harder For Startups to Raise Money!

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According to John Maudlin, startups and new small businesses are “the job-creation engine of the US.” He is right.  In a report by the Kauffman Foundation using US Census Data, start-ups and businesses less than five years old created all of the net new jobs over the last 25 years.

It is incredibly easy to start a business and find funding in the United States compared to the rest of the world.  You can start an LLC in Wisconsin in less than 10 minutes, compared to up to over year in some developing countries.  The US has the deepest and most well developed network of Venture Capitalists and Angel Investors anywhere in the world and if new businesses are looking for angel investment, they can obtain it with minimal paperwork.   According the the Kauffman Foundation, over the last 25 years, “angel investors were responsible for up to 90 percent of the funding these businesses received.”  This angel funding allowed these startups to create jobs and bring innovative ideas to the marketplace. In 2008, angels invested $19.2 billion in over 55,000 companies.

The US innovation and “job creation engine” is the envy of the rest of the world.  So what’s the best way to destroy this engine?  It sounds ridiculous, but it seems like the politicians who drafted the Restoring American Financial Stability Act of 2010 asked themselves this question when they were writing the bill.

Hidden inside the 1300 page bill are a few paragraphs that have the potential to kill job creation and innovation in the USA.  Currently, new businesses can raise money from Angel Investors fairly easily if the investors meet a few criteria.  Investors must have at least $1m in net worth or make $250k in income per year.  If your investors meet the criteria, they are considered Accredited Investors and startups can accept their money with a simple 5 page informational filing that goes to the SEC.  Startups can potentially raise hundreds of thousands of dollars in weeks if they have an amazing idea and find the right investors.

If this bill passes, it will raise the accredited investor net worth criteria to $2.3m in net worth or $450k in annual income, eliminating close to 60% of the potential angels in the USA.  I’ve raised close to 500k in angel investment between both of my businesses and we wouldn’t have been able to accept ANY of it if these rules were in place. If anything, the rules should be changed so that the net worth requirement is lower.  We allow anyone to invest in stocks, bonds, options, futures and other exotic investments, but not in new businesses.  Says John Maudlin:

Why should 95% (or maybe soon to be 99%!) of Americans, simply because they have less than $1,000,000 (or $2,500,000?), be precluded from the same choices available to the rich? Why do we assume those with less than $1,000,000 to be sophisticated enough to understand the risks in stocks (which have lost trillions of investor dollars), stock options (the vast majority of which expire worthless), futures (where 95% of retail investors lose money), mutual funds (80% of which underperform the market), and a whole host of very high-risk investments, yet deem them to be incapable of understanding the risks…”

The other change in the bill is even more damaging.  The bill requires that all startups register with the SEC and implements a 120 day waiting period so that the SEC can approve new businesses.  Startups move in minutes and hours, not weeks and months.  Entrustet has been live for just over 1 month now and we’ve gotten real users and made real money.  A 120 day waiting period would kill companies before they even get off the ground. But the waiting period isn’t even the worst part.  Registering with the SEC would cost up to $100k in legal, accounting and other fees, not to mention lost productivity when startup founders could be working on their idea instead of battling the government for access to capital.

And what if a small project like Facebook started to grow rapidly?  It could take weeks to draft all of the legal paperwork, plus another 4 months of waiting around on the SEC.  And this is assuming the SEC doesn’t get backed up like the US Patent Office.  I also don’t want some government bureaucrat processing SEC applications while I am hurting for investment.  Facebook could have very easily died in Zuckerberg’s Harvard door room if he had to wait 120 days for SEC approval before getting his first round of funding. I have no doubt that if this bill passes, the waiting period will be over 200 days within 2 years.  After all, it takes an average of 34 months for the patent office to review new patents.

The last change in the bill devolves some of the power to regulate angel investors to the states.  This change means that instead of one filing, every state will be different.  For Entrustet, we have investors in multiple states.  We would have had to file new paperwork in each state if the rules change.

So why is Congress attempting to change the one part of the US economy that is creating jobs?  The US currently regulates angel investors as if they were investing in hedge funds.  We do need more regulation on hedge funds, but the problem is that angel investors are getting caught in the net.  This is a huge mistake.

There is a fundamental difference between hedge funds and startups.  While both are risky, hedge funds generally shuffle money around to make money and don’t create much, if any, value, whereas startups spark innovation, create jobs and improve society as a whole.  Startups use the money to create new jobs and innovate.  Think betting that the South African Rand will fall in value vs. funding the next Google.  Here’s Maudlin’s solution, which I agree with 100%:

Here’s what needs to happen. Get rid of the disastrous rule requiring filing with the SEC. It makes no sense and will cost hundreds of thousand of jobs and divert the SEC from their main tasks. Angel investing has not been a problem to date, and there is no need to fix something that is not broken.

Second, if you really think we need to raise the accredited investor limits, then carve out an exemption for venture capital.

And keep the clause that gives startups federal exemption.

And, if you really want to create jobs, then cut capital-gains taxes on new ventures and angel investing to 10% or less. Let’s create some incentive to get America moving!

If passed without any amendments, these rule changes will be a huge detriment to the US economy.  They are short sighted and attempt to protect us from ourselves.  By lumping angels with hedge funds, the government is painting with a broad brush and there will be all sorts of unintended consequences.  This issue is not a republican vs. democrat issue either.  Everyone should want to make it easier for startups to create new businesses and new jobs, especially in this economy.  This bill does the exact opposite and would be terrible if it passes.  I hope that there is enough negative publicity so that this part of the bill never makes it into law.

Do you think this bill will pass as is?  Do you think hedge funds and angel investors should be treated the same way?  What do you think will happen in your own startup?

HT: Forrest Woolworth and the PerBlue Blog

March Books

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I got a bunch of reading done this month, mostly because I found myself on an airplane fairly often.  Of the four, The Last Lecture was the best.

Rework – Rework is the newest book by 37 Signals founders Jason Fried and David Heinemeier Hansson.  They are well known for creating simple, easy to use online products that help business get things done.  Rework is the follow up to their first book, Getting Real, and attempts to show people how to work more efficiently and effectively.

I first became interested in 37 Signals when I heard Jason Fried speak at an entrepreneurship conference in Milwaukee where I was also speaking. Fried stressed simplicity, focus and building something you would use because if you are building something you’d use, you are already an expert.

My favorite chapters were Go, Progress, Promotion and Productivity.  They explain how to get started, make progress and then promote your business.  They also have a ton of great tips about how to be more productive.  My biggest take away is that companies should be teaching instead of promoting.  Most companies do not teach, they promote.  Companies that teach lessons to their customers have bigger followings, which leads to free promotion.

The book is a little repetitive at times, but is worth reading.  I’m fairly familiar with 37 Signals because I read their blog regularly, so most of the ideas weren’t groundbreaking, but it was nice to hear everything in a single place.  If you don’t read their blog or haven’t heard about 37 Signals, this book is a must read.  If you are familiar, you can save the money and just read their blog again.

Mark Cuban recently said “if I had to choose to invest in someone who’s read Rework or has an MBA, I’m choosing rework every time.”  While I wouldn’t go that far, I’ll want any new Entrustet hires to read the book as part of their initial training.

The Checklist Manifesto – I heard about Checklist by Atul Gawande while reading Switch last month.  It sounded interesting and I planned on picking it up.  Luckily, my Aunt came to visit and happened to have the book.  I read the book on the plane to SXSW and really enjoyed it.  Gawande is a brilliant surgeon who wanted to know how he could improve medical care.  He got interested in checklists after marveling about airline safety.  In the book, he investigates how checklists can be used to prevent mistakes in any industry. He first helped implement a clean IV lines program that help Michigan hospitals reduce infections almost entirely, which saved lives and millions of dollars.  He later helped the WHO implement a standard checklist for surgeries that has saved countless lives and money.

The book is a quick read because it is written more like fiction than non fiction and provides tips to increase productivity and help you get things done, while avoiding mistakes.  Highly recommended.

Leadership and Self-Deception – Someone gave me this book right before I got on a plane when I was complaining that I didn’t have anything to read.  It’s a self help book, styled as dialogues between an employee of a company and his bosses.  Written in 2002, the main idea is that it is not what you do, but why you do it that matters.  The central advice is that whenever you want to do something to help another person, you should do it, otherwise you make excuses for yourself and it starts a downward spiral.  I don’t agree with everything from the book, but I believe that the world would be a better place if people were motivated to help others more often.

The Last Lecture– I had seen Randy Pausch’s last lecture on youtube before, but had not read the book.  For those who don’t know, Randy Pausch was diagnosed with terminal pancreatic cancer and was given 6 months to live.  He spent that time trying to make life better for his wife and his three young children.  Pausch was a professor at Carnegie Mellon and was given the opportunity to give a “last lecture.”  It was recorded and Pausch used the time to talk about how to live life, pursue your own dreams and enable the dreams of others.  It is a sad and uplifting book at the same time.  It is well written and funny, informative and wise.  I especially liked the section about enabling the dreams of others.  The Last Lecture is one of the best books I’ve ever read and should be required reading in high school classes.

Introducing Entrepreneur 101

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A few different people have asked me “what sorts of things should be taught in a college level beginning entrepreneurship class?”  I always had a few answers, but never came up with a comprehensive syllabus.  After speaking in a class earlier this week at the UW Business School, I decided to write up a basic syllabus for a 16 week college course that I’d call Entrepreneur 101: A Practical Guide to Starting A Business and added it as a page to my site.  I would love to teach a class like this on the college level for interested entrepreneurs.

Introduction to the Course

Too many classes focus on theory and large, overarching issues instead of practical things that you will need to know to start a business.  Hopefully this class will prepare you to actually start your business by giving you the tools to do all of the nitty gritty work that is necessary to get started.  At the end of the semester, students will compete in a business plan competition in front of a panel of judges.

Week 1 – Introduction to Entrepreneurship

Class: There are many types of entrepreneurship, not just high tech.  It’s easier than you think and college is the best time to start. How to Live Before You Die.

Required reading: How to Start a Startup, What Startups are Really Like, The 3 Advantages of a Startup, Entrepreneurs Come in All Shapes and Sizes

Week 2 – Idea Generation and Business Plans

Class: How do you take an idea to a business plan?  How do you write a business plan? Malcolm Gladwell on Spaghetti Sauce

Required reading: The World is Flat, 9 Business Selection Criteria, 13 Sentences, College is the Best Time to Start a Business

Homework: Start thinking about a business to start for the business plan competition.

Week 3 – Types of Businesses Organization

Class: What type of entity should I use? LLC, Corporation, Non profit?  Learn how how to sign up for LLC.

Required Reading: 18 Mistakes that Kill Startups , The Top Ten Lies of Entrepreneurs

Homework: Sign up for an LLC, but don’t pay for it.  Start working on your business plan.

Week 4 – What are the Necessary Legal Docs Required?

Class: Operating agreements, partnership agreement and their  importance.  Guest speaker: A lawyer familiar with these issues.

Required Reading: Top 10 Geek Business Myths, The PayPal Wars

Week 5 – Taxes, Banking, Accounting

Class: How to setup a FEIN, get a free business bank account and start learning about Quickbooks.

Homework: Go to a bank and get a free business bank account set up (you don’t actually have to sign up), start exploring Quickbooks.

Week 6 – Quickbooks

Class: How to use Quickbooks in a small business or startup

Homework: Create a Quickbooks file for a hypothetical startup.

Required Reading: How to Get Taken Seriously Running A Startup Under 25

Week 7 – Credit Card Processing

Class: Teach how credit card processing system works, fill out forms

Homework: Call multiple resellers and see who can get the best rate.

Week 8 – Servers and SSL

Class: Overview of types of servers, server companies.   What is an ssl? Overview of ssl companies.  Test on first half of class.

Required Reading: Don’t Be Afraid of the Competition, My Rules for Startups

Homework: First draft of business plan due

Week 9 – Overview of Programming

Class: Types of programming languages, how programming works works, explanation of databases, what to look for when hiring a programmer.  How to register a domain name.

Required Reading: The Tipping Point

Homework: Register a domain for under $8.

Week 10 – Legal

Class: What to look for in a lawyer, what you need from them and the importance of a legal advisor.

Week 11 – Mentors

Class: Overview of why you need a mentor, who is willing to help, how you should look for a mentor.

Required Reading: Every Startup Needs a Mentor Team, The Entrepreneurial Push

Homework: Connect with a potential mentor on Linkedin, Twitter, email or phone.

Week 12 – Networking

Class: Why you need to network, strategies for successful networking, how to stay in contact with people.

Required Reading: The Business of Meeting People, Freakonomics

Homework: Get business cards for yourself, check out Brazen Careerist.

Week 13 – Blogging and Online Stores

Class: How to set up a blog, overview of WordPress, Blogger etc.  Overview of online shops.  Intro to Shopify.

Homework: Set up free wordpress blog.

Week 14 – Online Advertising, Social Media, Analytics, Document Sharing

Class: Overview of online advertising, CPM, CPC, Twitter, Facebook.  Intro to Google Adwords, Analytics, Docs and Calendar.

Required Reading: Made to Stick

Homework: sign up for Google docs, share a document with me.

Week 15 – Guide to Raising Money, Office Space

Class: How to value your business? Overview of friends & family, angel investors, VCs.  When is the right time to get an office?  How do you get the best deals?  Where should you look?

Required Reading: The Top Ten Lies of Venture Capitalists, To Office or Not to Office

Week 16 – Business Plan Competition

Final Exam – Business Plan Competition with panel of judges, based on Burrill Business Plan Competition.

I really think that this sort of course would be incredibly beneficial to a student who is thinking about starting a business or even thinking about working for a startup.  These types of skills will give students a nice foundation so that they can start their own business.  Check out my full list of resources on my Entrepreneur 101 page for links to all of the companies I would use for each of these lessons.

So help me out: What am I missing?  Would you take a class like this?  Do you think universities would be willing to offer a class like this?

Entrepreneur Profile: Justin Beck, PerBlue

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Note: This post is the third in a new series called “Entrepreneur Profiles.”  These posts focus on an interesting entrepreneur who I’ve gotten to know and hopefully provide a window into their business that you might not otherwise find in a newspaper or magazine.

Justin Beck is the co-founder and CEO of PerBlue, a software startup in Madison.  PerBlue’s flagship product, Parallel Kingdom, is the first location based game built for the iPhone and Android and has over 80,000 players worldwide.  Founded in January 2008 while he was still in school, Beck and his team have worked to create a successful game and an interesting business model.  Beck graduated with a degree in Computer Engineering from the University of Wisconsin.

Nathan Lustig: Hi Justin, thanks for taking the time to answer my questions.  Can you give me a brief overview of your company?

Justin Beck: Sure.  PerBlue was created when we started developing our flagship game, Parallel Kingdom, in January 2008. The first version was released in October 2008 and we’ve been steadily gaining players and improving the game ever since. The game is on its 3rd major version and we currently have over 80,000 players.

We have 7 more or less full-time people working for us and are growing nicely. We have also developed several other applications for the iPhone and Android platforms but our most successful app remains Parallel Kingdom.  As we’ve grown we have found our business to be building great multiplayer games for mobile platforms.

NL: What kind of background did you have to be able to start a mobile gaming company?

JB: I have been programming since I was 12 years old and love to do it.  I graduated from UW-Madison with a Computer Engineering and Computer Science Degree and I interned as a software engineer at Google and as a program manager at Microsoft on their ASP.NET team.

NL: Many founders of startups have some sort of an “ah-ha moment” when they first got the idea for their company.  Did you have one and what was it?

JB: I’m thinking that could be true for us.

I was working on a different startup with some friends from Google.  We were going to build a community bar and real-time chat for webpages as a script mashup, which was going great.  But when Andrew Hanson (my partner) and I were doing homework one night, we starting thinking about the next game we should make.  I was like, we should build something mobile, something people actually would play, simple, and we should throw GPS into it somehow to make it interesting.

From that conversation, we started with Parallel Kingdom.  It was about a month later when I realized the mobile space was really growing and I should invest myself into build a company around that space.  This was before the iPhone Appstore even existed.  I would say that was my “ah-ha” moment.  I just knew it.  It wasn’t a tough choice.

NL: What is the biggest reason you founded your startup?

JB: I love adventure.   I saw building a company as the next challenge in my life.  Two of my life goals were to work at Google and Microsoft.  I had been there and gotten offers from them, but this opportunity came up and the timing couldn’t get much better.  Many people assume lots of things about people who run their own business, many of these are explicitly not true with me.

I actually really like working for someone else and trying to make them as successful as possible.  I also really have no interest in the money.  I took a 2 year pay cut to do PerBlue.  So for me, it’s the adventure and challenge.

NL: What is the biggest unexpected challenge you had to overcome?

JB: I would say my biggest unexpected challenge was how hard it is to be a really good manager of a creative team. I am still working on it, but doing it well is very hard.

NL: What advice would you give to someone who is thinking about starting a startup?

JB:

1.       Play to win, commit yourself to playing the game and be willing to be very flexible in how you navigate the pathway.   Watch and model people who have built successful companies and learn from them.  (Watching failure doesn’t teach you how to succeed)

2.       Have a specific goal: we are going to do “this.” Drive yourself and your team to this goal.

3.       Have a schedule, (roadmap) that is a reasonable plan of getting to that goal.

4.       Commitment and talent are the 2 most important traits of your teammates.

5.       Stay focused.  You can only build one business at a time.  Choose your business and stick to it till its done.

6.       It’s a marathon not a sprint, pace yourself emotionally, mentally, physically

NL: What are three websites you check everyday?

JB: Not many. Pandora, Facebook, Google Analytics, PKStats, Bug Tracking is my honest list. But websites I check weekly bi-weekly when I am thinking about strategy or competitive research.

http://techcrunch.com
http://news.ycombinator.com/

I have my executives I try to watch.  Marc Pincus (Zynga), Eric Schmidt (Google), Jason Fried (37signals)

I like watching talks, Google Tech Talks are amazing.

NL: Do you have any funny stories or amusing anecdotes about starting or running the company?  Do people ask you “when are you going to get a real job?”

JB: There are lots of funny stories.  One of the easiest ones to explain is DB Death Day and yes it is a PerBlue holiday.  We had some problems with the database and issued a statement that:  “There was a massive forest fire in PK, resulting in every tree in the western hemisphere being burnt to the ground.”  Along with the loss of every GeoBuzz post.  It was a sad day, but somewhat comical looking back.

I have actually never heard that statement about getting a real job.  Most people are very encouraging.  Most people don’t understand what it takes to build a business. So that makes their empathy hard. I think the most negative person towards PerBlue was my recruiter at Microsoft when I turned down their offer and counter offer, but that was her job.

NL: What/who has been the biggest help to you and your company?

JB: My mentors have been amazing.  During PerBlue’s life I have now had about 7 mentors, as the life stage of the company changes the mentors I use and depend on also changes.  But I can’t imagine doing this without mentors.  My partner Andrew has also been an amazing asset, starting a company with a partner is an extremely wise idea.  Team is what makes the company, without the PerBlue team, we would have never gotten off the launch pad.

NL: What is the most fun part of running your company?  The least?

JB: I would say the most enjoyable parts of running PerBlue, are working with the team, building and solving big problems, having things work, and seeing players love the game and play it so much and actually see our business become successful.  I personally get a lot of gratification when I see my co-workers growing and become excellent at what they do.  I think the least enjoyable part of my job are the days when it seems like everything “breaks” or when things just don’t go like you need them to.

NL: Thanks for taking the time to answer my questions, you had some great advice.  Good luck in the future.

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