William Carleton, Counselor @ Law

WSJ Live Chat Today: What Will the JOBS Act Mean for US Startups?

Every law firm seems to be putting on a webinar about the recently passed JOBS Act.

But how many organizations are having live chat sessions where people can type in questions to be answered online in real time?

The Wall Street Journal is doing such a live chat. Today at 11 am Pacific, 2 pm Eastern. WSJ reporter Angus Loten will moderate, and I will be answering the questions. Please join in if you can!

Future programming note: Denise Howell, Joe Wallin, Doug Cornelius and I plan to have a Google+ hangout about the JOBS Act on April 25. Stay tuned for more details about that.

The Three Audiences of the JOBS Act

Today the House is expected to "concur in the Senate Amendment to H.R. 3606." After that happens, the Jumpstart Our Business Startups (JOBS) Act will go to President Obama, who is expected to sign it.

As you know, the JOBS Act has been the focus of this blog this month. The JOBS Act is a big deal for entrepreneurs, startups, angel investors, venture capitalists, and would-be equity crowdfunders. Joe Bartlett, who chairs the advisory council to the public policy committee of the Angel Capital Association, said at the ACA Summit in Austin earlier this month that the Act represents the biggest set of changes to securities laws in over twenty years.

Debriefing will continue for some time. The SEC will have to engage in rulemaking that for some provisions will, and for other provisions may, make or break the intended reform.

You might note how different audiences are receiving and talking about the JOBS Act. There are three discernable audiences:

• Angels and angel groups are focused on the lifting of the prohibition on general solicitation in Reg D Rule 506 offerings that are limited to accredited investors. Complementing this reform is a new safe harbor to federal broker-dealer registration requirements, which will let angels socialize deals online, and make it easier for startups to pitch at angel and incubator events.
• VCs and serial entrepreneurs who can project taking their companies public are focused on the IPO on-ramp provisions, reforms that will delay some of the requirements imposed on companies after they go public. This initiative was lobbied for by the National Venture Capital Association. In GeekWire, John Cook wrote about how the VC lobying effort had the support of many prominent startup entrepreneurs.
• Crowdfunding advocates, most of them, are ecstatic that a law has been made which would allow equity to be crowdfunded, with participation in such deals being open to everyone. I feel bad that I have been so negative about what the Senate did to the McHenry crowdfunding bill. Paul Spinrad, a huge leader in the equity crowdfunding movement and, in my opinion, the one who best articulates the rationale for equity crowdfunding, posted a remarkably objective assessment yesterday. 

At the beginning of this month, I posed questions in this GeekWire guest post about how angel financing and equity crowdfunding might co-exist: would deals overlap; would one kind of deal naturally follow the other; would crowdfunded deals and angel financed deals be mutually exclusive? No one can really know for sure, of course, but I would say that the changes made in the Senate to crowdfunding will make crowdfunding and angel financing mutually exclusive. It's a bit ironic, but Title II of HR 3606 in many ways puts true crowdfunding behind the accredited investor gate, while giving non-accrediteds a new kind of limited offering registration as an alternative to the others (little used) already out there.

As always, the best discussion of the implications of the JOBS Act is on Fred Wilson's blog. With regard to crowdfunding, Fred says to remember that a step in the right direction has been taken. I'm going to keep reminding myself to stay positive.

Photo: Three Ring Circus by scilina georgia / Flickr.

The Billion Dollar Emerging Company

What's your definition of an "emerging company?"

In my world, that phrase might fairly describe any growing company anywhere between Series B (possibly Series A) and Series D or later-lettered financings.

But in Chuck Schumer's bill, the "Reopening American Capital Markets to Emerging Growth Companies Act of 2011," S. 1933:

"The term 'emerging growth company' means an issuer that had total annual gross revenues of less than $1,000,000,000 during its most recently completed fiscal year."

A billion dollars!

Schumer is the fellow who decided to address the problem of software patents by exempting the banking industry from them. (Not on Wall Street but have software patents that persecute you? Go fuck yourself.)

Well it's nice to see Schumer can sponsor legislation that has even handed applicability to everyone. You know, like, a law.

You'll hear some people grouping Schumer's bill, and a companion House bill, H.R. 360, with the cluster of exemption and private offering reform bills covered fairly faithfully on this blog, to wit:

• a crowdfunding exemption, expressed differently in separate bills, one that passed the House already, another introduced in the Senate by Scott Brown;
• House and Senate bills to repeal the prohibition on general solicitation in all-accredited offerings under Rule 506 of Reg D (this is the exemption relied upon in most angel financings today);
• a bill to increase the 500 shareholder limitation; and
• a bill expanding Regulation A (which no one uses today but might if you can raise $50 million with it?).

But really Schumer's bill is different. It's about reviving the IPO market. That's something important to Wall Street and VCs, no doubt. But on Main Street I gotta think expansion of exemptions and modernizing of Reg D are much more important.

Photo by Third Way.

Sramana Mitra on Indian Product Entrepreneurs

An opportunity to "interview" (by email exchange) Sramana Mitra fell into my lap this week. Mitra is an entrepreneur, consultant, and the founder of the "One Million by One Million" initiative. Among many other things, she is knowledgeable about Indian tech companies. Her recent post, "Indian Product Entrepreneurs: Your Time Has Come," is the backdrop for this Q&A.

Q: I've read your post about "product" companies in India, with interest. I don't know as much as I should about startups and emerging companies in India. Would you mind briefly putting India's venture and emerging company scene in a global context? Are the paradigms for starting, financing and exiting similar to those in the US, or like Europe, or unique to India?

Mitra: India now has a good sized venture industry with many global players operating in India. The seed capital / angel investment eco-system is quite immature. Cost-structures being low, and because of a legacy outsourcing industry, Indian entrepreneurs bootstrap more, which is a good thing.Exits are a more recent phenomenon, but not very different from the US, except, the Indian public markets tolerate much smaller deal sizes.

Q: You use the term "product companies" very deliberately, I think to distinguish them from businesses that provide staffing on an "outsourced" (a pejorative word for you, I take it) basis for others. Is there more to the term "product company" than that? Is there a US-equivalent to the term "product company?"

Mitra: Product company is a term applied to businesses that build one product and sell it to many people, as opposed to services which have to be repeated for every customer over and over again. The notion is the same in the US.

Q: Would the new class of product companies in India ever "outsource"anything to companies based in the US, Europe, or elsewhere?

Mitra: I doubt it. They may outsource to lower cost destinations within or outside India. They will sell to US, Europe.

Q: Your post suggests SaaS businesses based in India have a competitive advantage over American counterparts, in that Indian companies don't incur the same sales and marketing expenses. Why is that? Is it that customers in a given market, once established by venture backed US companies, will go looking for the lower cost provider? Is it because wages for sales and marketing talent in India are that much lower than in the US? Or is there something else unique about SaaS companies in India that make sales and marketing less relevant?

Mitra: I don't think I ever said that Indian companies don't incur the same sales and marketing expenses. But your second comment is true ... customers who have been sold higher priced solutions will be coming looking for lower cost providers, and this is a dynamic that is already playing out.

Q: You describe the current moment of opportunity for Indian entrepreneurs as one of arbitrage, of taking already successful SaaS concepts and executing them in lower-cost realizations. Longer term, do you envision Indian innovation to be more IP based? Or is IP not the future of innovation, broadly speaking?

Mitra: There is no lack of IP based innovation even if you execute on an existing idea. Technology is moving so fast, there is always opportunity for enhancing products. That applies for the Indian SaaS and other product companies as well.

Q: I know you are based in Silicon Valley. Do you think that geographic region's leadership, in terms of innovation and the ecosystem of education, talent and financing to nurture innovation, is sustainable long term, or will other regions supplant California? Put another way, will it remain Silicon Valley's birthright to generate IP and new and innovative business models for the rest of the world?

Mitra: Silicon Valley remains a unique place, the biggest cultural asset being that it is a culture that doesn't penalize failure, which is essential to encourage experimentation. I have never seen any other place like this.In theory, it can be supplanted. In practice, we are yet to see anything comparable.

Q: What kinds of investment opportunities are there for US based angels, in Indian SaaS companies?

Mitra: Huge opportunities. Investors interested can contact me, and I would be happy to plug them into such opportunities in our portfolio.

Bootstrapping to Success

Awesome to see John Cook's Q&A with Chad Brown of IdentityMine in TechFlash on Friday. 

This is the second time in a month that an IdentityMine founder has been featured in a PSBJ publication. A few weeks back, the focus was on Mark Brown, IdentityMine's CEO, in a piece about mobile apps. (Full article is behind a paywall, unfortunately.)

As is evident in both articles, IdentityMine (a client) is probably best known these days for their UX design and software on Windows Phone. I bought a Winphone last week just to enjoy IdentityMine's work on the Twitter app.

But the part I liked best about Friday's TechFlash Q&A is what Chad had to say about bootstrapping the company's growth:

"How did you finance the business in the early days? 'It was out of pocket. Thankfully, Mark and I were pretty successful -- not only in our (prior) businesses -- but also in saving money. And so we were able to go about eight months without any income, and that's what we did. We brought David Meunier on board, and we consider him one of the founders as well. And all three of us dipped into our finances to make it happen, and put our houses on the line and signed personal guarantees against credit and we made it happen. It was not easy.'

"So, did you ever consider taking outside funding? 'We really didn't want that. It would have been tough timing as well since there was a pull back around the same time. We didn't go out and pursue it. We felt optimistic.'"

Moral of the story for tech startupers: you can skip angel and VC financing and make it!

Startups & Job Creation

Last week in Bloomberg Businessweek, former Intel CEO Andy Grove wrote that NY Times columnist Thomas Friedman is wrong about startups being the key to U.S. job growth. Grove counter-argued:

"Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

"The scaling process is no longer happening in the U.S. And as long as that's the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs."

There's a tinge of xenophobia in Grove's article, and a disquieting admiration for the way other nations set economic policy by government. But the article is a damning indictment of the de facto U.S. industrial policy being set by private markets.

Particularly worrying is his point about breaking "the chain of experience that is so important in technological evolution." Grove attributes America's lack of leadership today in batteries for electric cars to the fact that manufacturing of all consumer electronics was sent offshore 30 years ago.

Reading Grove's article, I found myself wanting to square it with a fascinating column by Scott Shane from a month or two back, also published in Bloomberg Businessweek. Shane's piece draws together two research findings to reach a somewhat counter-intuitive, synthetic conclusion. But let me start with his first point:

"Recent statistics gathered by the U.S. Census Bureau show that almost all net job creation comes from the formation of new businesses, not from the growth of existing businesses. In fact . . . except for the job creation by businesses more than 26 years old, the act of formation accounts for all of the net job creation in the economy."

Shane's second point is this: census data shows that startup failures produce more of the new jobs created by startups, than do successful startups.

Shane's argument is nuanced but well built. His bottom line:

"If most of the net new jobs in the economy are created by entrepreneurs forming new businesses and the majority of those jobs are produced by entrepreneurs whose businesses don't survive five years, then the act of business creation by unsuccessful entrepreneurs is a key part of how our economy creates new jobs. To have the kind of net job creation that would bring down our currently high unemployment rate, many soon-to-be-unsuccessful entrepreneurs need to start businesses."

How square what Shane prescribes with Grove's thesis? You might say Grove is lamenting missed opportunity, the possibility of putting an exponential factor on the job creation that is, in actual fact, driven by startups.

This July 4th coincides with World Cup time, so I'll try my hand at a soccer metaphor: think of startups being the aggressive midfielders that keep sending cross after cross into the penalty box, with later stage companies the high priced strikers who choke and fail to finish near the goal.

Thanks to my friend from grad school, Bill Fleischmann, for tweeting me a link to Andy Grove's article, along with a question that prompted this post.

The Emerging Company CEO and Decisive Terminations

"I welcome debate among my team, but I won’t tolerate division." -- President Obama yesterday, on firing General McChrystal

The line between "startup" and "emerging company" is not always bright, but when a company is generating revenue or certainly once it's profitable on a monthly basis, the CEO's burden changes.

Be she a founder or someone brought in by the board from the outside, the emerging company CEO has to think about the momentum of the company, about its customers, about identifying processes that will make initial success sustainable, about turning that success into exponential successes.

At some point in the new company's life, there is a "program," recognized and endorsed by a board, and the CEO takes on responsibility to nurture it.

When I think about CEOs who've flailed in the midst of this transition, many of whom had the passion and the maturity and the ethics to make a good leader for an emerging company, I find an uncannily common denominator: an unwillingness to confront internal insurrection and terminate the instigator.

Unlike civilian primacy over the military, the emerging company's need to stamp out insurrection has nothing to do with hierarchy or obsequious respect for a chain of command. "Insubordination" as such is not even that common a "for cause" termination factor in executive employment contracts, and that's as it should be in the 21st Century.

No, the problem is the toxicity that will poison employee moral, and will leach out of the company to customers through email and face to face conversations. It's the inability to hire top flight talent or win customers who will pick up on the scuttlebutt and judge management to be in over their heads.

I can think of zero companies that have gone down because a CEO has fired a high-profile troublemaker and closed ranks around those genuinely with the program. I'll withhold numbering those with promise that I know to have failed by shirking from such a fight.