123 posts categorized "Startups"

A Simple Act of Congress to Make Things Better for Startups

My friend Joe Wallin had an idea earlier today, which was, “how can Congress pass a single, simple law, to tell federal agencies to back off the rulemaking?”

His idea is borne of the frustration we all feel when Congress passes a reform intended to make life easier for startups, entrepreneurs, and the angel investors and VCs who support them, only to see that new law languish – or, worse yet, backfire – through rulemaking to implement the Congressional reform.

Here’s a simple bill we’ve come up with. With respect, we believe this bill, by itself, might help curtail the problem we’ve seen with rulemaking under the JOBS Act.

“In implementing any Act of Congress through rulemaking, or in construing the meaning of any Act of Congress through ruling or interpretation, the various administrative bureaus and agencies of the United States shall not make it harder or more difficult for entrepreneurs or emerging companies to raise money privately from accredited investors, and may expand, but shall not diminish, the pool of persons who qualify as accredited investors.”

What do you think? If it were to pass, and you were a clever person in a federal agency bent on drafting rules to frustrate this Act of Congress, how would you undermine it? 

Fossils, science and commerce

Really good article in the Herald Business Journal of Everett this week about my friend Matt Heaton's passion for fossils and his business selling fossils through an online store.

CaptureThe article is by Jim Davis and gets into the tension that can exist between the scientific community and commercial fossil dealers.

Disclosure: I am in investor in FossilEra and a huge fan of Matt. Matt is not only a fossil hunter but he knows how to build online communities.

Cracking open the SAFE

I see Antone Johnson and Joe Wallin are tweeting about the "SAFE," or "simple agreement for future equity") being promoted by Y Combinator as a seed-financing alternative to convertible notes.

6901756969_dcb05eac80_zThe animating idea appears to be to take the pressure off a startup to close on a priced equity round before a slew of seed fin ancing convertible notes mature.

What does a purchaser of a SAFE get? A promise that future shares will be issued on triggering events that the SAFE agreement defines.

There are four varieties of the instrument indexed on the Y Combinator site. I've had a quick look at this one, a version that imposes a valuation cap and gives the SAFE purchaser a conversion discount. A few things stand out:

  • The size of the SAFE round is not scoped; I suppose this simply reflects a Y Combinator and perhaps Silicon Valley philosophy of open ended rounds, with notes (or SAFEs) being issued with different discounts at different times. (A byproduct of this approach is that you have to get each investor to individually agree to any change in terms; maybe this is not so bad here, as the investor really has no downside protection to give up.)
  • Unless I missed it, I don't think the SAFEs convert into convertible note rounds, if the company later determines to issue convertible notes before a conversion-triggering equity round. Nor is there a covenant restricting the company from issuing convertible notes without consent.
  • Investors do get the benefit of a few key company reps, but there is no capitalization rep, no rep as to founder reverse vesting, and no rep that everyone has signed an inventions agreement (though there is a rep that the company has the IP it needs).
  • There seems to be an appetite to put off corporate approvals to authorize offerings, make reservations of shares, and make appropriate Reg D filings; I think a sophisticated investor is not going to be comfortable with that (even assuming she is willing to get past the threshold problem of not having any priority over the common stock).

The above from a quick read just after seeing Joe's and Antone's tweets. LMK if you see anything I missed.

Photo: Dennis van Zuijlekom / Flickr.

Trick question: can a shark a million years extinct be an endangered species?

Fun post for Friday: an interview with serial entrepreneur Matt Heaton, who has just launched FossilEra, a site at which you can buy cool fossils to impress friends and yourself. And to ponder on just how late we human beings are to the terrestrial party. 

As you read this interview, keep in mind that Matt is a passionate fossil hunter himself. I believe a species of trilobite has been named after him, such is his affection for that creature noted in paleontological circles. Disclosure: I am an investor in Matt's company.

CaptureSpecimen

Q: Matt, if I go to Fossil Era to buy something cool for myself, or a gift for a friend, what should I expect to spend?

A fossil can make a very interesting gift. There is something unique and appealing about being able to hold something in your hand that was alive tens of hundreds of millions of years before humans. They can be appealing to people for a large variety of reasons, the natural history aspect, the aesthetic/art aspect, or a big fossil Megalodon tooth can just look downright impressive.

We have specimens across a large variety of price ranges from $10 through several thousand. There is a pretty good selection of quality fossils under $50 for sale.

Q: How old are these fossils, and where do you get the inventory?

The fossils range from trilobites which are as old as 540 million years to things like Megalodon teeth that can be as recent as 3 million years.  To put this time range in perspective, modern humans have been on earth for only about 200,000 years.  

Inventory comes from a variety of sources.  Most of it comes from wholesale suppliers who I personally know and have collected with in the past.  Some material comes from old collections being liquidated which I either buy in mass or sell on a consignment basis.   There is also some fossils on the site which I've collected and prepared myself.  All of the material has been legally collected mostly from private leases.  You won't see material offered from BLM lands which is illegal to sell, or China where it can't be legally exported.

Q: How much time does it take to prepare each fossil? What is the process?

The preparation time is an under-appreciated aspect of fossil collecting and in many fossils preparation time represents the majority of the cost.  Many fossils when collected are still partially or even fully covered in matrix (rock) which has to be removed.  In many cases such as with most trilobites this requires tedious work under microscope using air abrasives (think miniature sand blaster) and air scribes.  Here are some examples for the site.

437-137The trilobite of the species Walliserops trifurcatus with free standing spines [pictured at top] would have been found in cross section completely encased in hard limestone.  Removing all of the rock surrounding it would have taken on the order of 40 hours of highly-skilled preparation work under microscope.  And yes, all of those spines and the trident shaped appendage on it's nose is real.

Here's another example of a trilobite from New York which I collected and prepared myself.  It includes a before and after photo of the preparation and probably took me about an hour of work under microscope.

Q: Fossil Era started as a game company, Bad Pug Games. Is this the mother of all pivots, totally random, or is there any link between the old business and the new venture?

Yes, this is a pretty interesting story.  About two years ago I developed a massively multiplayer, strategy game called Starpires purely as a hobby project.  It ended up gaining a passionate following with some very impressive player acquisition and monetization numbers.  Based off of these numbers I raised a small round of funding from local angel investors (yourself included), so that I could scale the game.

Things went great for about 6 months, with Starpires garnering some impressive player growth and revenue numbers.  Then early in the summer it hit one wall after another, primarily due to platform changes with Facebook, my primary avenue of player acquisition.  They shut off nearly all of my sources of organic players and my advertising cost per signup quadrupled in two months.  With the spike in player acquisition costs the game went from have great profit margins to being unprofitable.

I explored many other avenues for player acquisition without much success.  There was still some investor capital in the company and a revenue (quickly dwindling) stream so I decided to look for an alternative course forward.  Given the state of the free-to-play gaming industry I felt building another game was unlikely to yield a positive outcome.  I decided to do a 180 degree change in direction and pursue a business I'd been looking at for years. Fossils and paleontology has always been my passion but I was very wary of corrupting my hobby by making it a business.

After discussions with many people in the industry I got over my fears and began work on building FossilEra. I built FossilEra under the Bad Pug Games corporate structure in order to bring along the current investors and use the existing capital/revenue as seed funding.  I felt this was much more preferential outcome than simply wiping out investors, or being stuck stubbornly pursuing a line a business to the bitter end with little chance of success.

Q: Show us your favorite, moderately priced item on the site right now.

Well that depends on your definition of moderately prices.  I'm really like the cut and polished ammonite fossils we are selling from Madagascar in price ranges to $10-159  They not only are very interesting from the natural history perspective but are absolutely gorgous and display well.  

Test2

Q: So I hear you’ve been banned by Google for trading in “endangered species.” How in the world did your pre-historic fossils get on an endangered species list?

This one really wants to make me bang my head against the desk.  Google decided to ban one of our advertising accounts because in their opinion selling Megalodon teeth violated their policy against selling endangered species.  Nevermind they've been extinct for several million years, long before the appearance of modern man on this planet.  I think someone has been watching too many fake Shark Week "documentaries"  After about a dozen  emails back and forth they still continue to stick to their claim that Megalodon is an endangered species.

Photos are copyright FossiEra.com, used here with permission.

Weekend Read: WSJ Accelerators Post on Pitch Events and General Solicitation

This weekend please read an article I wrote for The Accelerators blog of the Wall Street Journal, The Trojan Horse of Accredited-Investor Verification.

6960882500_cc7fccd4d4_oThe piece gets into how some angel groups, pitch event promoters, and demo day organizers are dealing with new Rule 506(c). Basically, the days of a de facto industry practice of ignoring the Rule 506 prohibition on general solicitation and general advertising are over.

Now that it is okay to generally solicit, it's also time to come to terms with what came part-and-parcel with such over permission: the need to take reasonable steps to verify the accredited status of all purchasers.

It's going to take some time for the ecosystem to sort things out.

Check out this Pando Daily post that Doug Cornelius quoted from in his weekly roundup post. Do you think the newly conservative steps demo days promoters are taking, as recounted by the Pando Daily reporter, Erin Griffith, cut the mustard?

Please do read the piece for the WSJ Accelerators!

Photo: D Services / Flickr.

The mission of startupequality.org

"StartupEquality.org has a simple mission," writes Dan Shapiro in an important guest post on TechCrunch. That mission "is to get same-sex couples the same rights to invest in startup companies as heterosexual couples."

CaptureOur "ask" of the SEC is to expressly acknowledge that persons in civil unions, domestic partnerships, or similar state law relationships, should have the same ability to pool resources, for purposes of satisfying accredited investor thresholds, as persons who are married.

Here's the rule Startupequality.org is proposing that the SEC adopt:

A spouse of a natural person shall mean another person, regardless of gender or sexual orientation, whose relationship with the person specified: (1) may be characterized as such person's (i) husband, (ii) wife, (iii) spouse, (iv) domestic partner, or (v) designated beneficiary under any applicable state law for the purpose of ensuring that each person in a two-person relationship has certain rights or financial protections based upon such designation; or (2) is that of the other party to a civil union with such person.

I encourage every member of the wac6.com community to read Dan's post and also consider weighing in on the comment thread developing there.

We didn't used to talk about discrimination against sexual orientation in the startup community. But now that we see how embedded it is in the enabling rule set, we have to confront it.

And the way to start is to acknowledge the inequity and to talk about it.

Snobby MOOCs

My friend the history professor Mark Byrnes, who has strong feelings about MOOCs, was telling me last night about a recent article in the Chronicle of Higher Education, by Jeffrey Young. Seems that the publication, through a freedom of information act request, obtained a copy of a contract between the University of Michigan and the MOOC startup and venture-financed Coursera.

6a01156e3d83cb970c01901eb4f39f970b-580wiYoung's article parses the contract for clues on how the university and the for-profit venture mean to make money together.

Mark tees off on how various monetization models - including Corsair's right to seek sponsors for classes ("Today's seminar on the Peloponnesian War brought to you by Raytheon") - are not compatabile with the mission of education.

I myself am more interested in the snob factor Young uncovers:

'When I showed the Coursera contract to Trace A. Urdan, an analyst at Wells Fargo Securities who focuses on education-related companies, he found it "ironic" that major universities are embracing online education when they have been dismissive of earlier efforts by for-profit companies like the University of Phoenix.

'"These are two of the most arrogant types of institutions—Silicon Valley companies intersecting with these elite academic programs," he says. "Neither of them considers that anyone else has come to this place before they've arrived. They say, We're here now, so now it's sort of legitimate and for real."'

Reassurance of the privileged nature of associating with Coursera is not just subtext; it is important enough to be recited in the contract.

Exhibit G, pictured above, has more contractual "teeth" than the revenue sharing provisions. The limitation to host within North America only content from universities that are members of the Association of American Universities is the key. According to the AAU site, the association as only 62 members (here is a list of them).

But the contract otherwise looks flimsy. Because a university can walk away on 90 days notice, love, presumably, will have to keep the parties together.

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