For my active readers, FYI, I recently updated my 101 Startup Lessons Index. Although I did not change the name of the index, it now includes all 113 startup lessons and all other leadership lessons that I have written since publishing the original 101 lessons index back in September 2011. As I publish new content, I will continue to keep this index updated. So, use this list as the ever expanding Table of Contents for this blog. You can either bookmark the index, or simply access it from the list of featured posts in the upper left corner of this blog or from the home page of the Red Rocket website.
For future posts, please follow me at: www.twitter.com/georgedeeb
Tuesday, April 17, 2012
101 Startup Lessons--Index Updated
For my active readers, FYI, I recently updated my 101 Startup Lessons Index . Although I did not change the name of the index, it now inclu...
Monday, April 16, 2012
My Life's Annoyances That May Stimulate Startup Ideas
Following Lesson #112 on Startup Ideation , I started jotting down a few annoyances in my life that I wished were fixed. If still thinking...
Following Lesson #112 on Startup Ideation, I started jotting down a few annoyances in my life that I wished were fixed. If still thinking about what business to startup, I am hoping some of these ideas strike a similar chord for you. And, hopefully, your startups can help me resolve some of these issues.
POLITICS
A. Two Party System is Broken. I really hate the two party system we have in the U.S., with the liberal Democrats and conservative Republicans slugging it out on each topic, grinding our government to a halt. I feel most independents, like myself, are without a party that represents them, which I think would be "fiscally conservative, and socially liberal". I believe adding a third party would end the perpetual 50/50 log jam in Congress, and in theory, each issue would have two/thirds support, getting things done faster.
B. Campaign Finance Reform. President Obama is forecasted to raise $1BN for his re-election campaign. Really? Isn't there a better use of those campaign monies, like for education, infrastructure, jobs, etc.?? Especially since elected officials will become hostage to their contributors, to help them with their special interests. Campaigns should be capped, at a small reasonable level, and every aspiring voice should be put on an even playing field.
C. Attract the Smartest Candidates. Who wants to run their families through the public scrutiny of running for office? Who wants to work for a very nominal government salary? We need to figure out how to get our smartest people wanting to run our country, with the proper incentives in place. Each election should not come down to the lesser of two evils, but instead, to somebody that really understands the issues at hand and can drive real solutions on the global stage.
D. Too Much Time Spent Campaigning. In today's era of immediate information, do we really need candidates spending 1-2 years campaigning to get elected?? If you are in the House of Representatives, with two year terms, that means you are only getting real work done with 50% of your time in office, and trying to keep your job with the other 50% (suggesting longer terms, could get more work done). If American Idol can get 40MM votes in one night, can't we do something similar in politics?? Get our politicians more time focused on issues that matter.
EDUCATION
E. Stale K-12 Curriculum. As I watch my kids go through school, I am just dumbfounded that the subject matter has largely gone unchanged since I was a kid. Kids in elementary school are still spending a fair amount of time learning about rocks, Native Americans, state capitals, U.S. Presidents, etc., as if the curriculum is in auto-pilot. Nothing against these other subjects, but I think we need to reinvent our curriculum on things that really matter, to help prepare our kids for 21st century thinking and jobs. How about classes on how to use Microsoft Office, how to code HTML, how to build a social media following or how to start a business. Or, instead of having a U.S. centric mindset, incorporate how the U.S. fits within the global ecosystem of countries and cultures, given the global economy we are all now a part
F. Need Age 0-5 Curriculum. Over 80% of brain development is complete by the age of 5 years old. Yet we don't start our education system until then. I think we need to better emphasize pre-school development of our children, expanding curriculum starting with 2 and 3 year olds, if not sooner in some cases.
G. Teachers Underpaid. Our teachers are building the next generation of leaders for our country. That sounds like a pretty important job, that should attract the best talent possible. And, to attract the best talent, they need the proper financial incentives to take the job and make a good living. It is disgusting professional athletes and celebrities get paid up to $25MM per year, and teachers struggle to make $50K per year. What kind of message is that sending to our kids??
H. Stop Bullying. I just saw the documentary film Bully (good movie, by the way). I was more upset with the inept school administrators and clueless parents, then I was with the bullies themselves. Shouldn't there be a simple rule that says bullies will be put on probation for one offense, kicked out of class for two offenses and kicked out of school altogether for three offenses? Put cameras on each school bus, classroom and hallway and let the video speak for itself.
I. Losing Our PHD Edge. Countries like India and China are pumping out PHDs at multiples of those earned by Americans, many of which are schooled right here in our U.S. universities. But, due to U.S. immigration rules and otherwise, many of these students go back to their home countries to build their careers and end up competing against us. That doesn't make any sense to me. We have the best universities in the world and we should keep that talent all here in the U.S., regardless of their country of origin. We have to start thinking like a scrappy underdog here, and not rest on our laurels.
GOVERNMENT
J. Way Too Bloated, In All the Wrong Places. Our country is straddled with tons of debt and huge budget deficits. But, it is very difficult to cut government jobs, since they comprise 10% of the U.S. workforce. And, if you cut half of these jobs to rightsize government, it would take U.S. unemployment rates back up to over 13%, which would send the economy back into a tailspin. But, at the same time, tech companies are struggling to find good tech talent. Seems like we can retrain government workers with the much needed tech skills, and knock off two birds with one stone.
K. Paying for Services We Will Never Benefit From. I have been contributing to government services like Social Security and Medicare my entire adult life, and both programs are near bankrupt, making it very unlikely I will ever benefit from such programs by the time I get to the age of needing them. And, if we stop paying into the system, the current beneficiaries will suffer. We have to figure out affordable plans that actually work.
L. Crumbling Infrastructure. Largely built decades ago, we simply do not have the budgets to replace all the roads, bridges, electrical grids, communications systems, etc. that need to be upgraded to modern standards. If we don't make this a priority, we will all be scratching our heads asking how we let their demise happen (as compared to spending billions on wars in Iraq and Afghanistan).
M. Major Tax Reform Needed. The tax code is simply too complicated for the average American. I shouldn't have to hire an expensive accountant each year to help me navigate the current tax laws, pages of tax filings and all the supporting documents needed. Not to mention all the IRS jobs that are required to fulfill this broken system. I waste almost a week of my life each year, dealing with my taxes. Somebody figure this out . . . please!!
EVERYDAY LIFE
N. Birth Lottery is Not Fair. A person's financial and social fate is largely set from the day they are born. Were you born to an affluent family with loving parents and access to great schools? Or, were you born to a poor family with a single mom on drugs dependent on inferior schools? I think everyone deserves a fair chance regardless of their personal circumstances. America was built on the shoulders of a strong middle class, which is quickly evaporating. I think we need to figure out how to bridge that gap.
O. Job Search is Broken. Where do I even start here!!?? Why are we still using paper resumes, instead of online videos. Why don't technologies automatically sort applications and prioritize candidates, with no human intervention until much later in the process? Why do we all submit oodles of online resumes, to never get any responses, given the tons of clutter in the marketplace? Why are we told to leverage our networks to find new jobs, but other than LinkedIn, there aren't many useful tools that help you learn how best to build and leverage your network? Why do recruiters like to label people in very narrow buckets, making it more difficult for jacks-of-all-trade to compete on an equal footing? Why does it feel like it is an "out of sight, out of mind" mentality with the recruiters? And, so on!! Lots of great startups in development here. Let's hope they figure this out.
P. Healthcare is Broken. There are so many inefficiencies in the healthcare system it makes my stomach turn. Major reforms are needed in malpractice claim caps, to lower malpractice insurance premiums, to lower fees charged by doctors. Major integration of disparate patient data systems are needed to avoid duplicative medical testing costs (although some progress is being made to this regard, but not fast enough). Power needs to shift from the health insurance companies, back to the patients and their doctors, to keep costs down, get the best service and attract the next generation of doctors where they can actually make a good living again. Obamacare and a bankrupt Medicare will continue to put additional strains on an already broken system.
Q. Traffic. Our roads were built to support a population half of the size our cities are housing today. It shouldn't take 60 minutes to drive 15 miles on the highway, during rush hour. That is lost productivity time, better spent elsewhere. Add roads, new lanes, second levels, whatever. Just give us back our 90 minutes a day of lost time.
I may add more to this list over time, but this is a good place to start. Understanding a lot of this can be fixed by public policy, let's see what interesting startups out there can tackle some of this.
For future posts, please follow me at: www.twitter.com/georgedeeb
POLITICS
A. Two Party System is Broken. I really hate the two party system we have in the U.S., with the liberal Democrats and conservative Republicans slugging it out on each topic, grinding our government to a halt. I feel most independents, like myself, are without a party that represents them, which I think would be "fiscally conservative, and socially liberal". I believe adding a third party would end the perpetual 50/50 log jam in Congress, and in theory, each issue would have two/thirds support, getting things done faster.
B. Campaign Finance Reform. President Obama is forecasted to raise $1BN for his re-election campaign. Really? Isn't there a better use of those campaign monies, like for education, infrastructure, jobs, etc.?? Especially since elected officials will become hostage to their contributors, to help them with their special interests. Campaigns should be capped, at a small reasonable level, and every aspiring voice should be put on an even playing field.
C. Attract the Smartest Candidates. Who wants to run their families through the public scrutiny of running for office? Who wants to work for a very nominal government salary? We need to figure out how to get our smartest people wanting to run our country, with the proper incentives in place. Each election should not come down to the lesser of two evils, but instead, to somebody that really understands the issues at hand and can drive real solutions on the global stage.
D. Too Much Time Spent Campaigning. In today's era of immediate information, do we really need candidates spending 1-2 years campaigning to get elected?? If you are in the House of Representatives, with two year terms, that means you are only getting real work done with 50% of your time in office, and trying to keep your job with the other 50% (suggesting longer terms, could get more work done). If American Idol can get 40MM votes in one night, can't we do something similar in politics?? Get our politicians more time focused on issues that matter.
EDUCATION
E. Stale K-12 Curriculum. As I watch my kids go through school, I am just dumbfounded that the subject matter has largely gone unchanged since I was a kid. Kids in elementary school are still spending a fair amount of time learning about rocks, Native Americans, state capitals, U.S. Presidents, etc., as if the curriculum is in auto-pilot. Nothing against these other subjects, but I think we need to reinvent our curriculum on things that really matter, to help prepare our kids for 21st century thinking and jobs. How about classes on how to use Microsoft Office, how to code HTML, how to build a social media following or how to start a business. Or, instead of having a U.S. centric mindset, incorporate how the U.S. fits within the global ecosystem of countries and cultures, given the global economy we are all now a part
F. Need Age 0-5 Curriculum. Over 80% of brain development is complete by the age of 5 years old. Yet we don't start our education system until then. I think we need to better emphasize pre-school development of our children, expanding curriculum starting with 2 and 3 year olds, if not sooner in some cases.
G. Teachers Underpaid. Our teachers are building the next generation of leaders for our country. That sounds like a pretty important job, that should attract the best talent possible. And, to attract the best talent, they need the proper financial incentives to take the job and make a good living. It is disgusting professional athletes and celebrities get paid up to $25MM per year, and teachers struggle to make $50K per year. What kind of message is that sending to our kids??
H. Stop Bullying. I just saw the documentary film Bully (good movie, by the way). I was more upset with the inept school administrators and clueless parents, then I was with the bullies themselves. Shouldn't there be a simple rule that says bullies will be put on probation for one offense, kicked out of class for two offenses and kicked out of school altogether for three offenses? Put cameras on each school bus, classroom and hallway and let the video speak for itself.
I. Losing Our PHD Edge. Countries like India and China are pumping out PHDs at multiples of those earned by Americans, many of which are schooled right here in our U.S. universities. But, due to U.S. immigration rules and otherwise, many of these students go back to their home countries to build their careers and end up competing against us. That doesn't make any sense to me. We have the best universities in the world and we should keep that talent all here in the U.S., regardless of their country of origin. We have to start thinking like a scrappy underdog here, and not rest on our laurels.
GOVERNMENT
J. Way Too Bloated, In All the Wrong Places. Our country is straddled with tons of debt and huge budget deficits. But, it is very difficult to cut government jobs, since they comprise 10% of the U.S. workforce. And, if you cut half of these jobs to rightsize government, it would take U.S. unemployment rates back up to over 13%, which would send the economy back into a tailspin. But, at the same time, tech companies are struggling to find good tech talent. Seems like we can retrain government workers with the much needed tech skills, and knock off two birds with one stone.
K. Paying for Services We Will Never Benefit From. I have been contributing to government services like Social Security and Medicare my entire adult life, and both programs are near bankrupt, making it very unlikely I will ever benefit from such programs by the time I get to the age of needing them. And, if we stop paying into the system, the current beneficiaries will suffer. We have to figure out affordable plans that actually work.
L. Crumbling Infrastructure. Largely built decades ago, we simply do not have the budgets to replace all the roads, bridges, electrical grids, communications systems, etc. that need to be upgraded to modern standards. If we don't make this a priority, we will all be scratching our heads asking how we let their demise happen (as compared to spending billions on wars in Iraq and Afghanistan).
M. Major Tax Reform Needed. The tax code is simply too complicated for the average American. I shouldn't have to hire an expensive accountant each year to help me navigate the current tax laws, pages of tax filings and all the supporting documents needed. Not to mention all the IRS jobs that are required to fulfill this broken system. I waste almost a week of my life each year, dealing with my taxes. Somebody figure this out . . . please!!
EVERYDAY LIFE
N. Birth Lottery is Not Fair. A person's financial and social fate is largely set from the day they are born. Were you born to an affluent family with loving parents and access to great schools? Or, were you born to a poor family with a single mom on drugs dependent on inferior schools? I think everyone deserves a fair chance regardless of their personal circumstances. America was built on the shoulders of a strong middle class, which is quickly evaporating. I think we need to figure out how to bridge that gap.
O. Job Search is Broken. Where do I even start here!!?? Why are we still using paper resumes, instead of online videos. Why don't technologies automatically sort applications and prioritize candidates, with no human intervention until much later in the process? Why do we all submit oodles of online resumes, to never get any responses, given the tons of clutter in the marketplace? Why are we told to leverage our networks to find new jobs, but other than LinkedIn, there aren't many useful tools that help you learn how best to build and leverage your network? Why do recruiters like to label people in very narrow buckets, making it more difficult for jacks-of-all-trade to compete on an equal footing? Why does it feel like it is an "out of sight, out of mind" mentality with the recruiters? And, so on!! Lots of great startups in development here. Let's hope they figure this out.
P. Healthcare is Broken. There are so many inefficiencies in the healthcare system it makes my stomach turn. Major reforms are needed in malpractice claim caps, to lower malpractice insurance premiums, to lower fees charged by doctors. Major integration of disparate patient data systems are needed to avoid duplicative medical testing costs (although some progress is being made to this regard, but not fast enough). Power needs to shift from the health insurance companies, back to the patients and their doctors, to keep costs down, get the best service and attract the next generation of doctors where they can actually make a good living again. Obamacare and a bankrupt Medicare will continue to put additional strains on an already broken system.
Q. Traffic. Our roads were built to support a population half of the size our cities are housing today. It shouldn't take 60 minutes to drive 15 miles on the highway, during rush hour. That is lost productivity time, better spent elsewhere. Add roads, new lanes, second levels, whatever. Just give us back our 90 minutes a day of lost time.
I may add more to this list over time, but this is a good place to start. Understanding a lot of this can be fixed by public policy, let's see what interesting startups out there can tackle some of this.
For future posts, please follow me at: www.twitter.com/georgedeeb
Tuesday, April 10, 2012
Lesson #113: State Tax Credits & Programs for Startups
Most states have long sought to foster job creation and retention by providing tax credits and other forms of assistance to startups. ...
Most states have long sought to foster job creation and retention by providing tax credits and other forms of assistance to startups. You should research what credits may be available in your state. Since most of my readership is in Illinois, I will dig in deeper on the relevant tax credits and other programs that are available in our state. In Illinois, there are several incentives and programs for startups that are worth considering: (1) the EDGE Tax Credit; (2) the Small Business Creation Job Tax Credit; (3) the Invest Illinois Venture Fund; and (4) the Angel Investment Tax Credit.
The EDGE Tax Credit
The EDGE Tax Credit is one of the most important tools that Illinois has in its economic development tool kit. EDGE is an acronym for “Economic Development for a Growing Economy.” It is a negotiated state income tax credit designed to offer a special tax incentive to encourage companies to locate, expand and retain jobs in Illinois, when there is active consideration of locating such jobs in competing states or countries. Alternatively, some businesses want to create jobs in Illinois because of the deep talent pool or access to transportation, but need an incentive to help bridge the gap between Illinois’s cost structure and those of other locations.
The credit is calculated based on the amount of state income taxes withheld from the wages or salaries of employees in newly created or retained jobs. To quantify the amount of the credit, as an example, let's say a business is considering hiring 10 new full time employees at its Illinois office, instead of an office in another state or country. If each employee will be paid $50,000 in salary per year, at the current rates, the amount of the credit could be as much as $25,000 per year, in the aggregate, recurring for a total of 10 years. So, once you hit profitability, these tax credits can result in meaningful cash savings that can be accumulated over time (e.g., up to $250,000 in this example), which will be attractive to the company's cash flow and its value to investors. Each situation is different and the amount of the credit is determined on a case-by-case basis. Although the credits are non-refundable, unused credits can be carried-forward for five years, which is a good benefit for startups that are incurring losses in their early years (creating future value down the road).
In order for a typical small business to qualify, it must meet certain capital investment and job creation requirements. Typically, for a company with 100 or fewer employees, the company must: (i) agree to make a capital investment of $1 million (e.g., for IT or other assets); and (ii) create at least five new full-time jobs. But, the state can approve projects that do not meet the minimum investment and job creation thresholds on a negotiated case-by-base basis, depending on the situation and at the discretion of the state.
The Small Business Job Creation Tax Credit
The Small Business Job Creation Tax Credit was created in 2010 for businesses with no more than 50 full-time employees. Originally, the credit only applied to newly created Illinois jobs for the “incentive period” beginning on July 1, 2010 and ending on June 30, 2011. But, the Illinois General Assembly recently extended the incentive period to June 30, 2016, to stimulate more job growth. The amount of the credit is $2,500 per new employee hired and the credit is applied towards any owed payment of Illinois payroll withholding taxes. The state is currently updating its rules for obtaining the credit in light of the extension and the website will be updated accordingly. The web-site is http://jobstaxcredit.illinois.gov.
The Illinois Invest Venture Fund
The Invest Illinois Venture Fund is a new $78MM venture capital program that is part of the Advantage Illinois program. The fund describes itself as “a venture capital program seeking to support young, innovative companies, and start-ups that show a high potential for future growth resulting in the creation of high-paying professional Illinois jobs.” It is part of Advantage Illinois, which consists of three programs to spur institutional lending to small businesses and one program to leverage private venture capital in start-ups and high-growth businesses. An on-line application can be submitted directly to the Illinois Department of Commerce & Economic Opportunity (DCEO) at www.ildceo.net. Before applying, make sure you also have an actual or conditional, market-based third-party lead investor commitment, as this fund follows the lead of other professional investors and doesn't typically invest more than 20% of the monies raised in any financing. Two Illinois start-up businesses, Buzz Referrals. and AuraSense Therapeutics, were the first to receive investments from the Invest Illinois Venture Fund in January 2012.
The Angel Investment Tax Credit
Illinois offers angel investors a tax credit in an amount equal to 25% of an investment made directly into a qualified new business venture, as defined below. The credit is designed to encourage investment in innovative businesses, but there are several conditions and restrictions that must be met: (i) the business must be registered with the state as a qualified new business; (ii) it must be headquartered in Illinois; (iii) at least 51% of the employees must be employed in Illinois; (iv) the business must have the potential for increasing jobs and capital investment in Illinois; (v) the business must be principally engaged in innovation; (vi) the business must have fewer than 100 employees at the initial time of registration; (vii) the business has been in operation in Illinois for not more than 10 consecutive years prior to the year of certification; and (viii) the business has not received more than $10,000,000 in aggregate private equity investment in cash or $4,000,000 in investments that qualified for tax credits. Businesses desiring to be registered as a qualified new business venture must submit a registration form in each taxable year for which the business desires registration, attesting to the fact the business still qualifies to being a new business venture as defined above.
From the investor's perspective, the maximum amount of an investment that may be used as the basis for a credit is $2,000,000 for each direct investment in a qualified new business venture. Interested investors desiring a tax credit must submit an application to the Illinois DCEO which attests to the fact that an investment has been made and remains in the qualified new business venture for no less than 3 years. The credit is available for taxable years beginning after December 31, 2010, and ending on or before December 31, 2016. There are other considerations related to the credit as well, so make sure your investors seek proper counsel from their tax adviser. For more information about the Angel Investment Credit, including the current list of qualified new business ventures registered, can be found on the Illinois DCEO website.
In summary, the government may create new credits over time, and existing credits may be limited or expire over time. So, make sure you stay on top of the then-current programs available in Illinois, or your state.
If you need futher guidance from here, I suggest reaching out to an experienced startup lawyer with expertise in securing these tax credits from the state, including close working relationships with the state agencies that administer these credits. One such lawyer, who assisted me in preparing this post, is Kevin Spiegel, a colleague of mine. So, if you have any additional questions, please reach out to Kevin directly at 312-870-0829 or kevin @ spiegelesq .com. And, keep in mind, fees for Kevin's legal services are more than paid back by the tax credits that he is assisting you in securing, and can be structured in a way that are "startup friendly" (e.g,, contigent based on the success that the tax credits are realized).
For future posts, please follow me at: www.twitter.com/georgedeeb
If you need futher guidance from here, I suggest reaching out to an experienced startup lawyer with expertise in securing these tax credits from the state, including close working relationships with the state agencies that administer these credits. One such lawyer, who assisted me in preparing this post, is Kevin Spiegel, a colleague of mine. So, if you have any additional questions, please reach out to Kevin directly at 312-870-0829 or kevin @ spiegelesq .com. And, keep in mind, fees for Kevin's legal services are more than paid back by the tax credits that he is assisting you in securing, and can be structured in a way that are "startup friendly" (e.g,, contigent based on the success that the tax credits are realized).
For future posts, please follow me at: www.twitter.com/georgedeeb
Tuesday, April 3, 2012
Lesson #112: Startup Ideation
Back in Lesson #1 , we talked about determining whether or not you had a good business idea for your startup. I just assumed everyone ...
Back in Lesson #1, we talked about determining whether or not you had a good business idea for your startup. I just assumed everyone reading already had a startup idea in mind. But, what if you don't? What if you know you want to startup a business, but aren't really clear on what business to start. Then, this lesson on startup ideation is for you.
To me, startup ideation is centered around solving real life problems, with a solution you are passionate about. Notice I intentionally did not lead with: can you make a lot of money with this idea. Although that is an equally important concept, that analysis will come later, as we learned in Lesson #1. But, as we discussed in Lesson #50, unless you are passionate about what you are building, your startup will most likely not survive all the potential pitfalls that come along the way. It is much easier to get frustrated and walk away from a business you are not passionate about. It is much harder to walk away from a startup that hits you in your softspot. And, it is that drive that every good entrepreneur needs, to get through the good times and the bad times.
Launching iExplore was like that for me. I was passionate about adventure travel, as a traveler who had been to 50 countries looking for an easier way to plan trips to remote destinations, based on the pain points I had identified in the process of booking my own trips. And, that passion fueled the business through both the good times (e.g., the dot com boom) and the bad times (e.g., after the impacts of 9/11/01). When you are passionate about something, you want it to succeed that much more, regardless what hurdles get thrown your way.
So, what is the best way to identify real world problems that need solving? Simply living your day-to-day life will identify plenty of opportunities. Every time you get frustrated about an inconvenience you experience, write it down in a notebook. Before you know it, you will have pages of inconveniences, that most-likely, millions of other people are frustrated by the same things. Then, prioritize that list of inconveniences around the products or services that are most meaningful to you. Perhaps these are your hobbies, or certain interests that really get you excited. And, worth mentioning, the more first hand experience you have around a topic, the better you will be in building a business around that topic.
So, an an example, in my life, I am passionate about many things. I love movies, music, collecting books, traveling, college football, history and spending time with my family, to name few. We already learned iExplore was born out of my love of travel. So, what other pain points exist across these topics, that a startup may solve real world problems? As one example, I hate movie reviews from professional film critics, as I usually never agree with them. I would rather rely on the movie critiques of friends and family that I trust, who best understand my interests and would recommend movies that I would most likely enjoy. Voila! There is a startup idea of turning my Facebook friends into movie reviewers, in an industry I am passionate about, and with a solution that will improve my life. Whether or not it is good idea, or a investor backable idea, would be the next question solved by Lesson #1.
So, keep your notebooks handy and you will find startup ideas will be aplenty!!
For future posts, please follow me at: www.twitter.com/georgedeeb
Tuesday, March 27, 2012
Lesson #111: Crowdfunding Startups
Last week, the Senate passed the Crowdfund Act by a vote of 73-26, the sister act to the Jobs Act (or Entrepreneurs Access to Capital Ac...
Last week, the Senate passed the Crowdfund Act by a vote of 73-26, the sister act to the Jobs Act (or Entrepreneurs Access to Capital Act) passed by the House back in November by a vote of 407-17. The two acts still need to be reconciled and enacted into law, but it is clear that both Democrats and Republications are in agreement on at least one thing: startups need easier access to capital, to help create jobs and stimulate the economy. And, a solution is nearly here. That is very good news to the entrepreneurial community.
As a quick history lesson, prior to crowdfunding being enacted, SEC laws limit private company investments to accredited investors with over $1MM in net worth or $200K of annual income. That limited startup investing to largely the wealthy. The logic of the law was that most startups fail, and the SEC assumed wealthier people made smarter investments and could more easily digest losses, and the masses wouldn't flush their life savings down the toilet on a bad idea. But, the counter argument was "how is startup investing different than making donations or gambling", which is accessible to everyone. So, with proper controls and the convenience of web enabled tools, crowdfunding could become a great resource to stimulate the economy.
The two acts are not in agreement on the exact details yet. The House's act allows up to $10K investments or up to 10% of your income, to be invested into startups. The Senate act, allows up to 5% of your income if under $100K per year (e.g., $2K), and up to 10% of your income if over $100K per year. Another difference is the Senate requires the investment be made via an accredited crowdfunding marketplace, that is government screened, in an effort to control fraud. Both laws require a verification process that the investors meet the stated investor thresholds. It will be interesting to see what details finally get agreed upon in the final law, once enacted.
Price Waterhouse Coopers estimated that seed stage investments for startups totaled $920MM in 2011. And, as evidenced by crowdfunding pioneer, Kickstarter, generating $100MM of funds pledged in 2011 by themselves, and the scores of additional crowdfunding platforms beginning to take off, access to seed stage investment capital will explode in the coming years, helping to launch the next generation of great startup businesses.
That said, entrepreneurs should be cautious about these new channels for capital. Coordinating and communicating with hundreds of investors, can become much more cumbersome than dealing with one or two large angel investors or VC firms. And, these "mom and pop" investors typically do not come with the networking benefits or strategic advice provided by professional investors. At the end of the day, it is simply money. And, some entrepreneurs need much more than money to make their businesses a success (e.g., Rolodex of connections, mentorship from people that have done it before). So, buyer beware!
Most crowdfunding sources take a cut of the monies raised (e.g., Kickstarter keeps 5%, and their payment processor Amazon.com keeps 3%-5%). So, make sure you read the fine print, and make sure you are asking for enough funds, once you net out these fees. And, be sure to research the various nuances of these funds. Things like: (i) where are they based; (ii) how many investors do they have in their network; (iii) how many successful fundings to date; (iv) what is the average size of their fundings to date; (v) the industry/product focus of these networks (e.g., music, design, CPG, green, startups); and (vi) whether they raise funds via "donations" that do not need to be repaid, or whether they are actually taking equity in your business.
As best as I have been able to research the crowdfunding market to date, I feel they fall into three camps. First, you have micro-donations websites for various projects, like Kickstarter, IndieGoGo, Fundly, Microgiving, Helpers Unite, Pozzible (based in Australia) and Give A Little (based in NZ). Most of these have a creative design project focus, cut could be accessed for good startup ideas. Second, you have U.S. based micro-investment websites specifically focused on startup companies, like WeFunder, FundRazr, Microventures, Bank to the Future, Crowdfunding Bank, Early Shares, PathfinderBCM, RocketHub and Crowdfunding Offerings. These are probably the best place to start for U.S. based startups. Third, you have foreign based micro-investment websites specifically focused on startup companies, like Seedrs (UK), Crowdcube (UK), Crowdfunder (UK), CoFundos (Germany), Grow VC (Hong Kong), and Symbid (Netherlands). They may do equally well, but not sure how foreign investor demand will be for U.S. based startups? As a subset of these startup focused crowdfunding resources, there are ones specifically focused on certain industries, like Quirky for consumer products and Green Unite for ecofriendly projects. And, I am sure there a many more in the works, that I haven't stumbled upon yet. Time will only tell which ones of these will grow into dominant market leaders, given the infancy of this space. So, do your homework on which one is best for your needs, location and industry.
For future reading on the matter, be sure to check out the crowdfunding section of Crowdsourcing.org, the leading research group in this space. Or, check out this blog on crowdsourcing trends, called Daily Crowdsource.
Here are some other useful articles I used to research this topic:
Senate Passes Crowdfunding Bill (from Techcrunch)
Senate Approves Crowdfunding (from Forbes)
Comparison of Crowdfunding Websites (from Inc.)
9 Crowdfunding Websites to Help You (from Web Distortion)
Crowdfunding is Great, But is it Right for Startups (from BostInno)
And, be sure to read my follow-up blog post from October 2012 with an update on key crowdfunding details that were beginning to emerge as of such date.
If any of you have had any good or bad experiences from working with the various crowdsourcing websites, or if there are others we should add to the list, please tell us in the comments field.
For future posts, please follow me at: www.twitter.com/georgedeeb
Tuesday, March 20, 2012
Lesson #110: When to Drive Growth vs. Profits
Last week, Lisa Leiter at Crains Chicago wrote a great article "When Should a Startup Worry About Making Money?" It raised g...
Last week, Lisa Leiter at Crains Chicago wrote a great article "When Should a Startup Worry About Making Money?" It raised good questions on when a startup should focus on driving growth vs. driving profits. It is an important topic for startup executives to understand the underlying issues, and I am going to drill down deeper with more thoughts on this topic.
This really is not a simple question to answer. There are so many nuances that go into assessing the right answer. What is going on with the economy? How liquid is the fundraising climate? Are you B2B or B2C? Are you the first mover? How defensible is your business, with patents, product complexity or otherwise? What are your competitors doing? How big is the market opportunity? How quickly is it emerging? Are you trying to dominate the world, or build a nice lifestyle business? Are you venture backed, or privately owned? So, in light of all these moving pieces, I will do my best to layout some high level guidance.
Based on the above questions: (i) the softer the economy, the more you should protect your cash reserves to weather the storm; (ii) the better the financing climate, the more comfortable you should feel in accelerating growth with access to investors; (iii) I think B2C businesses need to think "faster" than B2B businesses, given the nuances of consumer behavior vs. corporate behavior; (iv) it is always best to be the first mover, and accelerate your lead when you can (or catch up if you are not first); (v) the more complex or defensible your business, the less speed becomes an issue; (vi) the larger the market, the more room there is for multiple companies to thrive, and hence speed becomes less an issue; (vii) brand new markets or business concepts are typically dominated by the first mover, so move quickly at the expense of profits; and (viii) venture backed businesses trying to dominate the world, need to move quickly to ensure growth and liquidity value for your investors.
Let's use Groupon as a case study. They are the fastest growing company in the history of business. They went from zero revenues in 2008 to a forecasted $3BN of revenues forecasted for 2013. And, they spent hundreds of millions of dollars in capital and startup losses, to acheive a dominant market position in the revolutionary B2C "daily deals" space. Why was that the right answer and strategy for Groupon? First of all, their product was not all that hard to build, and their early success spawned hundreds of competitors. Secondly, they were the first mover with a highly-lucrative new business model, and they wanted to dominate the global markets before anyone else did. And thirdly, their biggest competitor Living Social was also investing hundreds of millions of dollars in trying to catch up and take the lead in the daily deals space. What was the outcome: a publicly traded Groupon valued at $10BN and forecasted to drive $400MM in net profit in 2013 (its fifth year of business).
Facebook was an equally successful, but different story. There wasn't a clear e-commerce model to drive revenues with. And, their executives and investors decided the idea was so revolutionary, as a communication platform, that it was critical to get all consumers locked up, even without a clear revenue model. And, that they did, amassing hundreds of millions of users worldwide, on the shoulders of hundreds of millions of dollars of startup capital. And, similar to the premise of the Field of Dreams movie, if you build it, the revenues will come, soon thereafter. Sure enough, Facebook does about $4BN in advertising-based revenues today, and is estimated to go public in 2012 at a valuation of around $100BN. Not a shabby return on their investment!!
Now let's look at a third example, this time for a slow mover. Streampix is the new online streaming movie service by Comcast, launched to go head-to-head with Netflix. This was already a very crowded space with YouTube, Hulu, Redbox, Blockbuster, Amazon, iTunes and others trying to dominate online movie streaming. But, why was that a good launch for Comcast? They already had all the studio and network relationships? They already had the cable box hardware in everyone's homes, so an easy upsell? It was a simple message to consumers to simply stream online movies from Comcast, instead of Netflix, for a lower price already bundled into your cable service. And, Comcast is much better funded, to afford the high content licensing costs with the film studios. Time will tell if Streampix succeeds or not. But, this slow mover has as good a chance as anybody, given the nature of this industry and its current market dynamics.
As I said before, each business has its own considerations. Study your options, and plan accordingly. And, where you can, I am always a fan of moving faster before your competitors do. If you have specific questions about what is the right path for your business, simply let us know.
For future posts, please follow me at: www.twitter.com/georgedeeb.
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