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

Category : Entrepreneurship
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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

Do You Value Experiences Or Things?

Category : Personal Thoughts, Travel
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I just booked my flight to South Africa for World Cup 2010.  I’m going with my friends Andy and Katie and we have tickets for all three USA group stage games, plus a the Spain vs. Switzerland group stage match.  Everyone I talk to says something along the lines of “oh wow, you must be rich to be able to go to the World Cup.”  When I talk about some of the other places I’ve been, people are even more shocked.

Although I am very lucky that I do not have any student loan debt and had a business where I made some money, I am not rich.  The reason I can afford to travel is that I value experiences over physical things.  Let me explain.

I value experiences like traveling, going to sporting events, eating good food and learning new skills.  I don’t value physical things like the latest tech gadgets, new cars, expensive houses, fashion and other material things.  That’s why I’ve traveled to Europe multiple times and am going to South Africa this summer.

I’m able to travel because I drive a scratched and dented ’95 Toyota Carolla (link isn’t my car, its too clean).  It is one of the cheapest cars to drive and maintain and my insurance is cheap because I don’t have comprehensive insurance, just collision.  I get 30 MPG and live close to my office, so I rarely drive.

I could afford to upgrade to a “better” car, but what’s the use?  I view a car as a way to get from point A to point B.  As long as the car is safe and reliable, why change?  I look at it this way:  I could have a new car or a trip to Europe each year.  The average US car payment is $400, or $4800 per year.  I’ll choose driving a “crappy” car every single day of the week if it means I can go to Europe once per year.

I also don’t need luxury living.  I pay $400/month to rent a room in a house that I share with 4 friends.  We have an entire house here in Madison and have plenty of space.  We have a great location, close to the Capitol, restaurants and bars.  I could live on my own for $700 or live with a roommate in a nicer apartment for anywhere between 600-1200/month.  That $200/month minimum difference in rent, or $2400, will more than pay for my flight to South Africa this summer.  It could also pay for my groceries, since I cook most days of the week.

I also have had the same cell phone for the past 6 years.  It’s functional, makes calls and I’ve had fewer than 10 dropped calls in that time period, unless I’m in an elevator.  Since I’ve had the phone for so long, I don’t have a long term contract and my rates are low.  I recently got an iPhone for business and the price difference is stunning.  My old phone costs about $40/month.  If this weren’t for business, a new iPhone can cost up to $100/month.

I don’t care about fashion.  Obviously, I want to look good, just like everyone else, but I don’t need to be on the cutting edge.  If I find something that fits and looks decent, I’ll wear it until its worn out.  I own (and wear) shoes from 2004, 2008 and 2009 that still are comfortable and look decent.  If you see me around Madison, you’ll probably see me in one of 5-6 different clothing combos.  I spent under $200 on new clothes in 2009.  I have friends who spend $200 on a single pair of jeans.  That savings will pay for my match tickets to 4 world cup games and my food while I’m there.

I also try to pack a lunch instead of going out to lunch.  A nice sandwich, salad and piece of fruit costs about $2 at most.  The average lunch at a sandwich shop costs $7.  That $5 per day difference goes toward eating dinners at interesting restaurants and trying new cuisines.

I don’t impulse buy.  I never buy cheap, plastic things that will only be used once.  I was talking with my friend Andy about buying things when we were on our way back from visiting our friends Mike and Pat in Chicago.

Andy said he remembered sitting in an intro Finance class sophomore year of college where the professor said “we all buy things everyday.”  She was trying to give an introduction to finance, but Andy couldn’t stop thinking to himself “No, I don’t buy things everyday.  Sometimes i even go 3-4 days without buying anything.”  I’m in the same boat.

In the US, you can say “we buy things everyday” and for most people, it is true.  I know when my parents were growing up, their families did not buy things everyday.  They bought a weeks worth of groceries at the store and cooked meals at home.  Eating at restaurants was rare and fast food places like Qdoba, Potbelly, Subway and others were nonexistent.  Going out was considered a special treat.  They wouldn’t buy candy from vending machines, cheap plastic junk from stores or close to 75% of the inventory in your typical Walmart.  It’s amazing that there can be stores in the US that only sell cheap plastic junk that will only be used once.  At least Walmart sells groceries and other necessities.  People buy all sorts of things without even thinking about them and many times, rarely use them more than once, if at all.

I think there are three subsets of people.  People who value experiences over things, people who value experiences over things, but get sucked into buying lots of material things and people who value things over experiences.   I don’t think there is a “right” way to live, although I personally can’t imagine being happy based on purchasing electronics, cars and clothes; everyone can be happy in any of the three categories.  The point of this post is not to chastise people who value things over experiences, but to point out that people in the middle group can get out of the “things” trap.  Instead of spending money on things to “keep up with the Joneses” they could save the money and actually do the things they’ve always wanted to.

What do you think?  Which category to you fit into?  What experiences would you like to be able to do in your life?

March Books

Category : 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.

Mad Fiber Ice Cream and Why Google Should Pick Madison for Google Fiber

Category : Personal Thoughts
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In February, Google announced plans to build “ultra high speed” Internet connections for 50,000 to 500,000 people in one or more cities around the country.  To help Google decide which city to choose, they asked cities around the country to fill out an extensive request for information and get the community behind the effort.

Ever since I heard about Google’s plans, I thought Madison would be a great fit.  Madison is a pioneer in fiber technology, has a huge, highly rated public university and has been at the forefront of biotechnology innovation.  Lately, more technology companies are getting their start in Madison, including a few that have been extremely successful.  Entrepreneurship is alive and well in Madison and these new companies will have a huge leg up if Google were to build its network in town.

The Google Fiber effort has really brought the community together.  For the last month, I’ve been working with a group in Madison to help bring Google Fiber to town.  We’ve created a website, madfiber.net, which includes a Google map where anyone in Madison can show their support and have a point plotted on the map.  We’ve created a YouTube channel and gotten community support by creating a place where people can upload posts, videos and pictures of why they support google fiber in Madison.  We’ve also gotten great support on Facebook and Twitter.

I was also able to continue helping the effort, and at the same time check something off my bucket list, when Jesse Davis and I came up with idea to create an ice cream flavor to support Google Fiber.   We pitched vanilla ice cream, google colored m&ms and sweet granola for the fiber. The amazing people at Babcock made it happen and the flavor is delicious.  It was even mentioned in today’s New York Times in an article about fun things cities around the country are doing to bring google fiber to town.  As a native Wisconsinite, this is truely one of my favorite achievements.

I know that Google Fiber will help everyone in Madison, but it will benefit me as a startup founder even more than most.  If we had Google Fiber in Madison, I believe I would be able to get more done with my startup, Entrustet.  We would be able to do multiple video conferences with all of our contractors and board of advisors on a super fast internet connection, instead of having to turn off the video on skype because our connection cannot keep up.  We’d be able to hire more amazing developers because Madison would be a new, high tech city.  I’m excited by everything that Google Fiber can bring to Madison.

Whether Madison gets Google Fiber or not, I can say that it has been a great experience, both for me and for the City of Madison.  The effort has brought together people from government, schools, the university, startups, community organizers, big companies and everyone in between.  Madison’s effort shows what we can do.  Even if Google does not choose Madison, we should make sure to keep the effort going so that we do not lose these new connenctions and opprtunies to make Madison stronger.

Show your support by going to Madfiber.net and filling out a nomination form!