According to Steve Blank, whether your venture is a new pizza parlor or the hottest new software product, beware: These nine flawed assumptions are toxic.
1. Assuming you know what the customer wants
First and deadliest of all is a founder’s unwavering belief that he or she understands who the customers will be, what they need, and how to sell it to them. Any dispassionate observer would recognize that on Day One, a start-up has no customers, and unless the founder is a true domain expert, he or she can only guess about the customer, problem, and business model. On Day One, a start-up is a faith-based initiative built on guesses.
To succeed, founders need to turn these guesses into facts as soon as possible by getting out of the building, asking customers if the hypotheses are correct, and quickly changing those that are wrong.
2. The “I know what features to build” flaw
The second flawed assumption is implicitly driven by the first. Founders, presuming they know their customers, assume they know all the features customers need.
These founders specify, design, and build a fully featured product using classic product development methods without ever leaving their building. Yet without direct and continuous customer contact, it’s unknown whether the features will hold any appeal to customers.
3. Focusing on the launch date
Traditionally, engineering, sales, and marketing have all focused on the immovable launch date. Marketing tries to pick an “event” (trade show, conference, blog, etc.) where they can “launch” the product. Executives look at that date and the calendar, working backward to ignite fireworks on the day the product is launched. Neither management nor investors tolerate “wrong turns” that result in delays.
The product launch and first customer ship dates are merely the dates when a product development team thinks the product’s first release is “finished.” It doesn’t mean the company understands its customers or how to market or sell to them, yet in almost every start-up, ready or not, departmental clocks are set irrevocably to “first customer ship.” Even worse, a start-up’s investors are managing their financial expectations by this date as well.
4. Emphasizing execution instead of testing, learning, and iteration
Established companies executebusiness models where customers, problems, and necessary product features are all knowns; start-ups, on the other hand, need to operate in a “search” mode as they test and prove every one of their initial hypotheses.
They learn from the results of each test, refine the hypothesis, and test again—all in search of a repeatable, scalable, and profitable business model. In practice, start-ups begin with a set of initial guesses, most of which will end up being wrong. Therefore, focusing on execution and delivering a product or service based on those initial, untested hypotheses is a going-out-of-business strategy.
5. Writing a business plan that doesn’t allow for trial and error
Traditional business plans and product development models have one great advantage: They provide boards and founders an unambiguous path with clearly defined milestones the board presumeswill be achieved. Financial progress is tracked using metrics like income statement, balance sheet, and cash flow. The problem is, none of these metrics are very useful because they don’t track progress against your start-up’s only goal: to find a repeatable and scalable business model.
6. Confusing traditional job titles with a startup’s needs
Most startups simply borrow job titles from established companies. But remember, these are jobs in an organization that’s executing a known business model. The term “Sales”at an existing company refers to a team that repeatedly sells a known product to a well-understood group of customers with standard presentations, prices, terms, and conditions. Start-ups by definition have few, if any, of these. In fact, they’re out searching for them!
The demands of customer discovery require people who are comfortable with change, chaos, and learning from failure and are at ease working in risky, unstable situations without a roadmap.
7. Executing on a sales and marketing plan
Hiring VPs and execs with the right titles but the wrong skills leads to further trouble as high-powered sales and marketing people arrive on the payroll to execute the “plan.” Executives and board members accustomed to measurable signs of progress will focus on these execution activities because this is what they know how to do (and what they believe they were hired to do). Of course, in established companies with known customers and markets, this focus makes sense.
And even in some start-ups in “existing markets,” where customers and markets are known, it might work. But in a majority of startups, measuring progress against a product launch or revenue plan is simply false progress, since it transpires in a vacuum absent real customer feedback and rife with assumptions that might be wrong.
8. Prematurely scaling your company based on a presumption of success
The business plan, its revenue forecast, and the product introduction model assume that every step a start-up takes proceeds flawlessly and smoothly to the next.
The model leaves little room for error, learning, iteration, or customer feedback.
Even the most experienced executives are pressured to hire and staff per the plan regardless of progress. This leads to the next startup disaster: premature scaling.
9. Management by crisis, which leads to a death spiral
The consequences of most start-up mistakes begin to show by the time of first customer ship, when sales aren’t happening according to “the plan.” Shortly thereafter, the sales VP is probably terminated as part of the “solution.”
A new sales VP is hired and quickly concludes that the company just didn’t understand its customers or how to sell them. Since the new sales VP was hired to “fix” sales, the marketing department must now respond to a sales manager who believes that whatever was created earlier in the company was wrong. (After all, it got the old VP fired, right?)
Here’s the real problem: No business plan survives first contact with customers. The assumptions in a business plan are simply a series of untested hypotheses. When real results come in, the smart startups pivot or change their business model based on the results. It’s not a crisis, it’s part of the road to success.
More restaurants startup every year and it is one of the primary businesses that Americans start across the country in pursuit of their American Dream. The NRA show, with classes and educational programs, offers exhibits and learning opportunities for all the would be restauranteurs and all those with a new idea that call sell into the Foodservice Industry.
NRA Show – Chicago McCormick Place, May 5 – May 8th.
The JOBS Act, including the crowdfunding provision, was signed into law by President Obama. While the bill has some flaws, and many critics, it is a significant step forward for startups and small businesses to raise the capital they need. Jenny Kasson of Cutting Edge Capital was at the White House to cover this event and the following details are provided from the Cutting Edge Capital Blog.
For nearly a century local investing has been essentially illegal, and Wall Street has controlled all the investment options for the average investor. Thanks to the JOBS Act that President Obama signed in the Rose Garden last week, local investing is now legal. Like all legislation, this bill is not perfect, but for local economy advocates, it’s a great game-changer, and one we should not only be enthusiastic about but also play an active role in implementing effectively.
There has been a tremendous amount of misinformation spread about this Act, much of it by liberals I usually admire. Jim Hightower, for example, condemns the bill for “deregulating Wall Street.” In fact, the bill spells the end of Wall Street as we know it. It allows the 99% of us who are not wealthy (“unaccredited investors”) to put our money in the local businesses we love, by removing what were once impossibly difficult and expensive legal barriers. Those barriers had been so high, so poorly designed, so targeted against small business and small investors, that they have resulted in almost none of our long-term savings – now totaling $30 trillion – going into the local half of our economy. The JOBS Act ends this monopoly for good.
To me it’s ironic, and disappointing, that folks like Hightower, Robert Kuttner, and Eliot Spitzer were committed to the status quo and to maintaining Wall Street’s monopoly on capital. How could such great thinkers get this issue so wrong? Here are my top five reasons:
First, the critics misunderstood who was pushing this bill. Kuttner, for example, blames Obama for being “always eager to curry favor with Wall Street donors…” In point of fact, Wall Street lobbyists played at most a peripheral role. Small business owners and “makers,” like Woody Neiss and Paul Spinrad, led the charge. Innovative thinkers in the White House, like Doug Rand at the Office of Science and Technology Policy, played a pivotal role in shaping the President’s views about entrepreneurship. Non-Wall Street insiders like IndieGogo, a crowdfunding web site, and the nonprofit Sustainable Economies Law Center, pushed hard as well.
Second, the critics, justifiably skeptical of wholesale deregulation, don’t like to concede that any regulation has been a failure. But any honest assessment of the history of securities law would observe that we basically regulated local finance out of existence while permitting Bernie Madoffs to operate freely. For decades, the SEC has held annual meetings where small businesses have urged reforms – modest deregulations that could open up capital to small companies – and none of the suggestions have been implemented.
Here’s an example of the SEC’s intransigence: Three years ago, I recommended in a journal published by the Federal Reserve a $100 exemption from securities filings, on the argument that $100 “risked” on a small business was no more dangerous to an investor than a dinner for two at a Chinese restaurant. A year later, Jenny Kassan, co-founder of the Sustainable Economies Law Center, and Paul Spinrad of Make Magazine, sent a petition to the SEC to request the $100 exemption, and 150 people wrote letters of support. Last May, at a House hearing, the head of the SEC, Mary Schapiro, was asked if she supported this exemption, and she stonewalled, saying that the SEC was convening an internal group in the autumn to “study” the issue. It was clear that the entire securities law establishment needed to be shaken up, and to their credit, that’s what Congress and the President did in enacting the JOBS Act—Republicans and Democrats alike.
Third, the critics have tremendously exagerrated the dangers of fraud. The casual reader of the liberal critiques might conclude that the sale of fraudulent securities is now legal, and that “boiler room” operations can bilk grandma of her life savings. Yet state and federal laws against securities fraud are still in effect. In fact, the JOBS Act adds a number of new provisions for preventing fraud (through registered intermediaries). Why, moreover, should anyone be banned from spending, investing, or donating a couple of hundred dollars any damn way they please? The JOBS act exempts grandma from investing $2,000 (higher amounts, if grandma is wealthier). I was not thrilled with the $10,000 number in the original House bill – again, I originally advocated $100 – but I think $2,000 is fine. The law does not permit any business to take more than 10% of an unaccredited person’s income or wealth.
Fourth, the critics do not appreciate that there are other approaches to preventing fraud. E-Bay has all but eliminated fraud through consumer and business evaluations of one another. So have other crowdfunding sites in the United Kingdom. In other words, the SEC’s premise – that the only way to prevent fraud is by banning unaccredited investors from making their own judgments – is flat out wrong.
Perhaps their most appalling misunderstanding is how fraudulent the status quo is. Every day the SEC allows the Ric Edelman’s of the world to sell people on the stock market, promising 10-20% annual returns, when in fact the returns – once inflation and compounding are taken out – are closer to 3%. These misrepresentations have convinced Americans that putting 100% of their savings into Fortune 500 companies is safer and provides a better return than investing in local business. In reality, the stock market is becoming an increasingly dangerous and unregulated casino where trades are done by computers that cause flash crashes when they malfunction. The JOBS Act will allow local businesses to begin to compete for a fair market share of investment dollars.
I said at the outset that the bill is imperfect. For example, the bill legalizes all kinds of crowdfunding, local and nonlocal. I believe that local economy advocates now must start educating the public about the importance of favoring local investment. Our argument should be that knowing the business in which one invests – knowing the products, the entrepreneur, the workforce, etc. – is the best way to prevent fraud.
It’s worth adding that after the bill was signed yesterday, 25 of the people who were most instrumental in passing the bill – none from Wall Street, by the way – got together to discuss ways we could create internal checks and balances on the marketplace, to improve quality control and help identify hucksters. I hope that similar groups form in every community to create an honor roll of local businesses they know and trust – perhaps businesses that embrace open-book accounting – and that they then encourage residents to prioritize for their crowdfunding.
Like it or not, Wall Street’s stranglehold on investment is over. We now have a new legal landscape that we can play a pivotal role in shaping. Local economy advocates everywhere need to step up, not out.
Our own Jenny Kassan is there at the White House today for the signing of the JOBS bill. Jenny wrote an article that was published in the Huffington Post today.
The President will be signing the Jumpstart Our Business Startups Act on Thursday. The CROWDFUND Act is part of the JOBS Act. Here is a brief summary of the seven parts of the JOBS Act.
TITLE I—REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES
Exempts something called “Emerging Growth Companies” from many of the disclosure, governance, and other regulations on public companies; an emerging growth company is defined as a business with total annual gross revenues of less than $1,000,000,000
TITLE II—ACCESS TO CAPITAL FOR JOB CREATORS
Eliminates the prohibition on public solicitation and advertising for securities offerings made by private companies as long as all purchasers are accredited investors
Exempts platforms that sell securities under this rule from the requirement to register as a broker as long as they receive no compensation in connection with the sale of the securities
Increases from $5 million to $50 million the limit on the dollar amount that can be raised in an offering under Regulation A
TITLE V—PRIVATE COMPANY FLEXIBILITY AND GROWTH
Under current law, a company that has 500 investors in any class of equity securities and $10 million in assets must register as a public company – this title increases the number of shareholders needed to trigger this requirement to 2,000 as long as fewer than 500 are unaccredited
Excludes employees that received securities as part of a compensation plan from the total investor count
TITLE VI—CAPITAL EXPANSION
Similar to Title V but applies to banks and bank holding companies
TITLE VII—OUTREACH ON CHANGES TO THE LAW
Requires the SEC to provide online information and conduct outreach to inform small and medium sized businesses, women owned businesses, veteran owned businesses, and minority owned businesses of the changes made by this Act
President Obama will be signing the legislation on Thursday!
The name of the law is “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012″ or the CROWDFUND Act.
Here are the basic provisions:
Maximum aggregate amount that can be raised under the exemption: $1 million
Maximum amount per investor:
For investors with less than $100,000 in annual income or net worth: the greater of $2,000 or 5 percent of the annual income or net worth of such investor
For investors with $100,000 or more in annual income or net worth: 10 percent of the annual income or net worth of such investor
Intermediary required: The transaction must be conducted through a broker or funding portal (aka intermediary) that complies with the requirements of the Act
Requirements for intermediaries:
register with the SEC
register with any applicable self-regulatory organization (as defined in section 3(a)(26) of the Securities Exchange Act of 1934)
provide such disclosures, including disclosures related to risks and other investor education materials, as the SEC shall, by rule, determine appropriate
ensure that each investor—
reviews investor-education information, in accordance with standards established by the SEC, by rule;
positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor could bear such a loss; and
answers questions demonstrating an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers; an understanding of the risk of illiquidity; and an understanding of such other matters as the SEC determines appropriate, by rule
take such measures to reduce the risk of fraud with respect to such transactions, as established by the SEC, by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person
not later than 21 days prior to the first day on which securities are sold to any investor (or such other period as the SEC may establish), make available to the SEC and to potential investors any information provided by the issuer
ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount, and allow all investors to cancel their commitments to invest, as the SEC shall, by rule, determine appropriate
make such efforts as the SEC determines appropriate, by rule, to ensure that no investor in a 12-month period has purchased securities offered pursuant to the crowdfunding exemption that, in the aggregate, from all issuers, exceed the investment limits of the exemption
take such steps to protect the privacy of information collected from investors as the SEC shall, by rule, determine appropriate
not compensate promoters, finders, or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor
prohibit its directors, officers, or partners (or any person occupying a similar status or performing a similar function) from having any financial interest in an issuer using its services
meet such other requirements as the SEC may, by rule, prescribe, for the protection of investors and in the public interest.
The SEC will exempt funding portals, conditionally or unconditionally, from the requirement to be licensed brokers, as long as they become members of a national securities association and do not
offer investment advice or recommendations;
solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal;
compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;
hold, manage, possess, or otherwise handle investor funds or securities; or
engage in such other activities as the SEC, by rule, determines appropriate
Requirements for issuers:
file with the SEC and provide to potential and existing investors and the intermediary—
the name, legal status, physical address, and website address of the issuer;
the names of the directors and officers (and any persons occupying a similar status or performing a similar function), and each person holding more than 20 percent of the shares of the issuer;
a description of the business of the issuer and the anticipated business plan of the issuer;
a description of the financial condition of the issuer, including, for offerings that, together with all other offerings of the issuer under the crowdfunding exemption within the preceding 12-month period, have, in the aggregate, target offering amounts of—
$100,000 or less—(I) the income tax returns filed by the issuer for the most recently completed year (if any); and (II) financial statements of the issuer, which shall be certified by the principal executive officer of the issuer to be true and complete in all material respects;
more than $100,000, but not more than $500,000, financial statements reviewed by a public accountant who is independent of the issuer, using professional standards and procedures for such review or standards and procedures established by the SEC, by rule, for such purpose; and
more than $500,000 (or such other amount as the SEC may establish, by rule), audited financial statements;
a description of the stated purpose and intended use of the proceeds;
the target offering amount, the deadline to reach the target offering amount, and regular updates regarding the progress of the issuer in meeting the target offering amount;
the price to the public of the securities or the method for determining the price, provided that, prior to sale, each investor shall be provided in writing the final price and all required disclosures, with a reasonable opportunity to rescind the commitment to purchase the securities;
a description of the ownership and capital structure of the issuer, including—
terms of the securities of the issuer being offered and each other class of security of the issuer, including how such terms may be modified, and a summary of the differences between such securities, including how the rights of the securities being offered may be materially limited, diluted, or qualified by the rights of any other class of security of the issuer;
a description of how the exercise of the rights held by the principal shareholders of the issuer could negatively impact the purchasers of the securities being offered;
the name and ownership level of each existing shareholder who owns more than 20 percent of any class of the securities of the issuer;
how the securities being offered are being valued, and examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions; and
the risks to purchasers of the securities relating to minority ownership in the issuer, the risks associated with corporate actions, including additional issuances of shares, a sale of the issuer or of assets of the issuer, or transactions with related parties; and
such other information as the SEC may, by rule, prescribe, for the protection of investors and in the public interest;
not advertise the terms of the offering, except for notices which direct investors to the intermediary’s web site
not compensate or commit to compensate, directly or indirectly, any person to promote the offerings without taking such steps as the SEC shall, by rule, require to ensure that such person clearly discloses the receipt, past or prospective, of such compensation, upon each instance of such promotional communication
not less than annually, file with the SEC and provide to investors reports of the results of operations and financial statements of the issuer, as the SEC shall, by rule, determine appropriate, subject to such exceptions and termination dates as the SEC may establish, by rule
comply with such other requirements as the SEC may, by rule, prescribe, for the protection of investors and in the public interest.
Transferability: Securities issued pursuant to the crowdfunding exemption may not be transferred for one year after purchase except back to the issuer, to an accredited investor; as part of a registered offering; or to a family member
Automatically becoming a public reporting company when a certain number of shareholders and asset amount is reached: securities acquired under the crowdfunding exemption will be exempted, conditionally or unconditionally depending on what the SEC does in its rulemaking, from this cap (which was increased from 500 investors to 2,000 by the JOBS Act – see future blog post on this subject!)
State preemption: the states are not allowed to require registration of offerings that are exempt under the crowdfunding exemption; however the can require notice filings and fees in the state that is the issuer’s principal place of business and in any state in which purchasers of 50 percent or greater of the aggregate amount of the issue are residents
Adjustment for inflation: Dollar amounts under the exemption will be adjusted not less frequently than once every 5 years to reflect any change in the Consumer Price Index
How long until the SEC finishes its rulemaking? You’ll notice numerous places in the law that mention rulemaking by the SEC; until the SEC completes the rulemaking process, the law cannot go into effect; the statute gives the SEC nine months to complete the rulemaking process but there are no penalties if they do not complete the rulemaking within this time, so it is difficult to say how long it will take.
Launch America empowers men and women at the grass roots level and helps build cooperative teams to expand the individual’s creative potential. Launch America utilizes the expertise and experience of people of all ages to work with young people and the men and women who have a dream of creating their own successful startup. Launch America gives college graduates and young people the belief that they too have many opportunities to live the American Dream. This new way of forming and building businesses, with people helping each other, will give birth to an economic resurgence.
February 14th, 2012 :: Monika Jansen, posted on Network Solutions Small Business Series.
I’m a firm believer in benchmarking to learn new skills and to tweak my knowledge base. Studying what other successful marketers have done well, and avoiding others’ mistakes, is an efficient way to gain a competitive edge. Here are eight social media small business success stories, broken into two articles, to inspire and to teach:
Success Story 1: Take a quick visit to The Prospecting Expert’s social media sites, and you will find our first example of social media success. The Prospecting Expert, founded by Steve Kloyda, is a B2B consulting firm to help sales professionals refine their prospecting skills. Here are the tactics in Kloyda’s bag of social media marketing tricks:
Kloyda has made impressive use of video and podcasts to expand his social reach and convey information in an clear and interesting way. Does your content translate to these media?
His social media channels share consistent branding, though use of Kloyda’s photo and logo across all platforms. Clean up your own image by checking your platforms for consistency.
Kloyda’s content is mobile through the offering of an iPhone app directly on his site. While custom apps may be expensive, they offer considerable value for on-the-go customers.
Success Story 2: Click on over to Coconut Bliss, an organic dessert company whose products became well known through social media marketing. Here is what Coconut Bliss does to make everyone scream for their ice cream:
The company shares fun experiences of customers eating their ice cream to show the brand’s friendly personality and delicious products. Does anyone on your staff know how to take great photos? Invest in a camera, and share photos across all your social media platforms.
Coconut Bliss gets fans engaged by running promotions and contests exclusively on social media. Consider launching your own contest to grow and excite your fan base.
Success Story 3: JamaicansMusic is an online music channel and quite the social media success story. Using their social media savvy, the company grew their fans to 1.5 million in only four months! Here’s what they do best:
JamaicansMusic keeps fans coming back for more by offering contests, free music and games to encourage Facebook fans to revisit their page and share it with friends. What can you do to encourage repeat visits to your own page?
Visitors to JamaicansMusic’s website know instantly that the company is social because there are three opportunities – right on the home page – to connect socially. Are you sending enough social signals and providing plenty of opportunities to connect?
Success Story 4: You don’t have to be a large company, or even one with multiple employees, to be a social media success. Ana White, a self-described “homemaker” who is really a carpenter, runs a website that empowers women to take on carpentry projects. White has over 51,000 Facebook fans who enjoy her DIY furniture projects. Here are her smart and simple tactics:
White publishes free how-to guides for building furniture, and she asks fans to post pictures of their finished pieces. Fans enjoy sharing with each other, and White understands that this sharing provides great user-generated content. How can you get your own community involved in the content creation process?
White has created a community and tended to it without overshadowing it. She comments on roughly half of her fans’ posts, and she doesn’t post all that often. However, her fans constantly post and answer questions for each other because the community has been set up for real communication. What can you do to take your own Facebook communications from one-way to a place of real community?
Ian Schuster (rear) and Mike Johannsen work on a craft beer for their startup, Schubros Brewery, in their San Ramon test kitchen. Crowd funding would help it expand faster, Schuster says.
Ian Schuster and his business partners have raised almost a quarter of a million dollars to launch their craft beer brewery company, but if they had more money, they could grow the business much faster.
Bryan Brumfield has poured most of his life savings into the artisanal wine business he plans to start after he retires as an Oakland firefighter in March and needs additional capital to bring in outside expertise.
Daniel Hsu has networked up a storm on social media for his e-commerce clothing site and now needs $10,000 in startup capital.
All three entrepreneurs would love to tap the power of social media to find additional investors online who would each put up small amounts of money in exchange for equity stakes in their companies, a concept called “crowd funding.”
But they can’t do so under current law. Companies can sell shares to what the SEC calls “accredited investors” – seasoned, high-net-worth people who understand the risks. But financial stakes for small-time investors are limited to 35 people (fewer in some states), just enough to enable some friends-and-family funding, but not enough to harness the Internet’s reach to attract a larger number of equity investors.
Popular websites like Kickstarter and IndieGoGo show the power of crowd funding by letting people request funds online from strangers to back specific projects – a theatre performance, for instance. But the people who pledge money can only receive perks like T-shirts, not equity shares, in exchange.
Then there are lending websites like Prosper.com that facilitate person-to-person loans. People ask to borrow money for anything from plastic surgery to starting a company and offer a fixed interest rate in return. But again, equity stakes are not allowed.
Now, legislation pending in Congress that enjoys strong bipartisan support and Obama administration backing may make crowd funding possible for entrepreneurs.
Crowd funding “has the potential to be a powerful new venture capital model for the Facebook and Twitter age and its potential to create jobs is enormous,” said Sen. Scott Brown, R-Mass., in congressional testimony last month. “But crowd funding is currently illegal because of obsolete regulations, some dating back to the 1930s. Imagine that – the next Steve Jobs is being held back by rules written during the age of the typewriter.”
Brown is sponsoring the Democratization of Capital Bill, which would let small companies sell up to $1 million in equity online in chunks of $1,000 or less. It is under review by the Senate Committee on Banking, Housing and Urban Affairs.
A similar bill, the Entrepreneur Access to Capital Act, passed the House in November by a wide margin. It would allow up to $2 million in crowd funded investments in $10,000 increments.
But some industry experts worry that crowd funding would entice online hucksters to set up shop.
“A lot of people believe everything they see on the Internet, so we are concerned about fraud,” said Jack Herstein, president of the North American Securities Administrators Association. “Scam artists follow the hottest trends. They could make up fraudulent websites (pretending to be legitimate businesses seeking crowd funding). The mom-and-pop retail investors won’t know who’s on the other side of those websites. Once you push the button and send your credit card number, your money is gone.”
Still, he said, he is not opposed to crowd funding – he just wants to make sure there are built-in safeguards to protect investors. “Everybody should be behind anything that helps the economy,” he said.
That’s exactly the argument made by proponents of crowd funding. The role of small business in job creation is well documented. At a time when banks are reluctant to make loans, allowing small enterprises to solicit funds online so they can start up and grow makes sense, supporters say.
It’s not clear yet whether Connecticut’s 18-month-old angel investor tax credit will be the job creator its authors envisioned, but loosening the eligibility two months ago has surely been popular.
The Connecticut legislature’s jobs package bill passed in May 2010 allowed angel investors who put at least $100,000 into a young, small Connecticut company in certain technology and science fields to deduct a quarter of that investment from their state income taxes. If their income tax liability isn’t large enough to use up $25,000 — you’d need to earn nearly $400,000 a year to owe that much — they can carry the balance forward for several years.
Connecticut Innovations, a quasi-public agency that helps administer the investment program, has certified 37 companies that may receive the investments, from software firms to drug companies to companies that have designed consumer products, such as a hospital bed that can transfer its occupant to a chair, or an automatic shutoff for a boat if its driver goes overboard.
Thirty companies have gotten investments since the law first took effect, with about one-third of the companies only closing a round of investments once the threshold for the tax credit was lowered to $25,000. That change took effect two months ago.
“There is an explosion in entrepreneurship and people want to get in on it,” said Matthew Nemerson, president of the Connecticut Technology Council, which started lobbying for a tax credit for angel investors more than five years ago. “The legislation came at the right time to throw fuel on the fire. Because of the $100,000 limit, the fuel [was] a little bit watered down.”
In the two months since the credit was expanded, 21 Connecticut taxpayers have applied for the program, and together invested $2.1 million in nine companies, a much faster pace than during the first 16 months. Some doubt that pace will continue, however.
In all, 66 angel investors have qualified for the credit since it began. Investors must have at least $200,000 in income and $1 million in net worth to qualify for the credit.
Anthony Viggiano, who founded Autotether in 2007 and began contracting with Connecticut manufacturers to build the automatic boat-engine shutoff device two years ago, said he had been traveling around the East Coast pitching his company as a good investment to angels for more than a year with only three bites.
“You get like $50,000, $25,000 there, it’s a tough road, it’s a lot of work,” Viggiano said.
But once the threshold for the tax credit dropped, he found another seven investors in the state. Between the two groups, they invested $550,000 in Autotether, with a round that closed just before Christmas.
Viggiano will use the money for marketing. He and four others work for Autotether. “Within three or four months we’re hoping to have enough cash flow to pay ourselves a reasonable salary,” he said. Autotether hopes to break even by the end of the year.
When six Connecticut angel investors put $600,000 into Farmington‘s Innovatient Solutions, immediately after the tax credit began, that money and a match of $500,000 from Connecticut Innovations allowed CEO Jolinda Lambert to hire two people, for a total of six. Innovatient’s software sends information to hospital patients about their treatment through the TVs in their rooms.
The company expects to sell more than $1 million in software this year, making it too large to qualify for tax credits in its next $2 million round of angel and venture capital.
“It made all the difference; without the funding and the contribution of individuals like CI and the angel investors, we would not be in existence,” Lambert said. “We wouldn’t have had the runway necessary to build the company.”
Advocates for startups say that creating an incentive for more angel investing is important because venture capital firms have become less likely to nurture brand-new, unproven firms. Angel investors in Connecticut, by contrast, have put money into companies that are less than 6 months old — Lambert’s company was 5 months old when it was funded, and didn’t have a product yet.
“Venture capital keeps moving up and doing bigger deals and later deals,” Nemerson said.
Peter Longo, president of Connecticut Innovations, said his organization has been moving toward new companies for four years. It started a pre-seed fund for micro investments in brand new companies in 2010. Of 37 CI investments in the fiscal year that ended in 2011, 15 were pre-seed.
Spurring more angel investing helps CI, because the state is sending it $25 million more a year for the next five years. Not all of that will be poured directly into companies, but given that CI only invested $9 million last fiscal year, it needs to find more companies deserving of its capital. “We think this [fiscal] year we’ll close on $20 million,” Longo said.
But, Longo said, the pace of investing by smaller angel investors is unlikely to continue in 2012. “A lot of it was pent-up demand,” he said.
Mary Anne Rooke, president and managing director of Connecticut’s Angel Investor Forum, said the legislation is too new to say what its effect will be. Even before the limit was lowered, some $25,000 and $50,000 investors got the credit by setting up corporate structures that combined their investments with others; and even now, some who don’t want to put in $25,000 do the same.
But the credit does convince others to put in more, she said, including one man in December who was planning to invest $10,000 or $15,000, “and this pushed him up to $25,000,” she said.
But will those decisions make up for those who might have put in $100,000 when the floor was higher, and now will put in $75,000 or $50,000?
David Cohen, co-owner of Standard Oil of Connecticut, stumbled into angel investing by accident with the son of a friend of a friend who was a founder of Higher One, Connecticut’s poster-child for dorm-room startups. Cohen invested $25,000 at first, and kept putting money in each time the company asked again. When Higher One went public, he cashed out half his stake, and made roughly 60 times what he put in.
That’s not typical, he’s quick to say, but he’s used the proceeds to keep investing — he’s now put money in seven Connecticut startups and five outside the state.
Angel Investor Forum puts about 70 percent of its money into companies outside the state, mostly in the Boston to New Jersey corridor. In seven years, only one company has provided an investment exit for the group, at a six-fold return.
Cohen always puts in at least $100,000, so the lower floor doesn’t matter for him, but he said being able to save on his state income taxes does put a thumb on the scale for Connecticut firms.
Viggiano, the Autotether founder, says the credit makes him think that Connecticut’s business climate is changing. In decades as a manufacturing executive, he thought it was a difficult state to do business in.
“I think that lower amount is going to open up a huge opportunity for a lot of people,” he said. “It’ll make a big difference for my company, and it will make a big difference for a lot of companies. No matter how good your idea is, you can’t do it without capital.”
Launch America Editor’s Note:
With a lower investment threshold and a broader spectrum of companies that could be invested in, as proposed by the Launch America Initiative, a big wave of investments could go into startups and small businesses creating new jobs and an economic resurgence.
President Obama has brought forward the idea of Fairness. Being fair to all, giving all a fair shot, playing fair, fighting fair – but what is fairness? How is is applied across such a wide spectrum of people and business. What makes it meaningful and what will make it work?
FAIR to me means: For All Individuals Respect. Giving Respect to another at work, on the street, or at home. Respecting the individual and his right to different views, respecting the dignity of the ‘humanness’ of us all. It is easy to see what is Fair, just ask: “Does this respect All Individuals? As the administration moves forward and proposes what it considers Fair policies, and as all other parties ring in with their independent views, let us ask: does this respect the individual? When we interact, communicate or have dealings with another, are we showing respect? Is this Fair?
I was inspired to write Launch America! Reviving the American Dream, when I watched the unfolding of the tragic economic downturn and the great number of Americans losing their jobs and then their homes. This was at the same time that a massive stimulus package was approved by the government. This was top-down spending with the intent of keeping the economy from turning much worse. The government gave out the money to states and then the states gave out contracts and then someone got hired and was paid a wage. How much of it went into the worker’s pockets? How much was taken as overhead, profit, equipment or “other” expenses that did not turn into wages? Through these times, unemployment continued to get worse. The high unemployment was then followed by record high foreclosures. I felt deeply for the losses Americans were suffering.
During this time, I also had the opportunity to talk with many of my friends around the country. They were discouraged. With both husbands and wives working they could still barely make ends meet. They discussed with me my how their children had finished college, and now cannot find work. My youngest son, now finishing his third year in high school, questions why he should work hard and go to college? He is watching his brother’s and sister’s friends working through college, ending up with mountains of debt and no job.
In addition talented, experienced executives, highly skilled workers, machinists, teachers, educators and professionals are finding it difficult to find work or advance in their careers. Many companies have cut and outsourced to overseas thousands and thousands of jobs for American workers and executives to save costs. Many of these employees were highly skilled and experienced. Now where can they find work? When you are over 50 years old, its pretty tough. So where is your opportunity? How can you create wealth and financial freedom?
What has happened to the American Dream, The Land of Opportunity, and the affluent middle class? More importantly, I asked, what can we do to revitalize this country? What makes it great and how can it be great again? I was really disturbed and thought there must be a way to reverse this, quickly and effectively. What created this economic nightmare and how could we get out of it?
I realized that it was the pioneer spirit, the entrepreneur, the “I Can” attitude and the innovative spark that in the past has propelled this country ahead. New companies were formed with innovative ideas and services that produced products that the rest of the world desired. These American companies turned into industries that created assets, growth and opportunities for millions of Americans who, in turn, invested in savings, stock portfolios and other assets to create wealth. Many of the innovative startups have grown into worldwide giants such as Amazon, Microsoft, Google, Facebook, Yahoo, DELL and many others, leading America to its greatness. Many other startups were acquired by large businesses to fuel their growth. My question was: how do we incentivize that innovative gift, that productive spirit, of the American people and give all Americans again the chance for financial freedom? How do we Launch America into the prosperity that enriches all Americans.
What came forward is the book, Launch America! Reviving the American Dream and the Launch America Initiative: An initiative to revive the American Dream at the grass roots level and create a prosperous America. People Helping People, being of service, mentoring and assisting others to manifest their dreams. The foundation of the Launch America Initiative is creating the financial opportunities for men and women across America through the formation of more successful startups and proving more funding to launch these new businesses. We believe that together we can achieve these goals. Together, We Can, I Can, You CanTM.
The National Sponsor’s Pledge to Launch America is to help Americans help themselves through forming startups and pursuing their American Dream. This is a way for people and businesses throughout America to give back and contribute to creating opportunities for the men and women of America. Through the donations and special services offered by the Pledging Members, Launch America is able to offer education, grants and prizes for the innovative entrepreneurs across America as they work to form and fund their startups. We will offer regular updates of the new sponsors and pledges received.