Good Riddance 2009…Hello to a Better 2010 in the VC Market

23 12 2009

As most know, throughout 2009, I’ve posted about the dismal VC market in ConnTIP.  The drying up of exit opportunities, with fewer M&A’s and even fewer IPOs, didn’t help matters much.   Here’s a chart posted by the WSJ which is a pretty way of showing the awful 2009 VC market:

[VCYEAR]

 Still, an article posted today on WSJ suggests that 2010 may be a pretty good year in the VC market (After Dry Year, Start-Ups Are Poised to Get Cash).  Some encouraging observations made by VCs in the post:

  • Geoff Yang, a general partner at venture firm Redpoint Ventures, is quoted:  “When the year started it couldn’t possibly have been worse…Now there’s a significantly more optimistic view” .
  • Tom Baruch, of CMEA Capital, says that with the IPO window now appears to be opening, and expects up to half a dozen of his firm’s start-ups to file to go public in the foreseeable future.

Bottom line is for everyone in the field to chalk up 2009 as a learning experience, and, hopefully, start ramping things up to 2010!

-Gregg J. Lallier


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Some States Doing Their Part: Tax Credits for Venture Investments

10 12 2009

Wall Street Journal has a blog entry from last week about a recently passed law in North Dakota that extends a 45% tax credit to angel investors who back homegrown businesses (North Dakota: More Than A Flyover State).  Two new angel funds, the Grow Dakota fund (estimated $2 million) and Aurora Angel Fund ($5 million) are being created as vehicles for the program, where investors can invest in these funds, and receive the tax credits, and the funds would invest in target companies in the state.  This is a great example of states doing their part to help solve the Need for Seed problem that exists throughout the country.  Some other states have similar tax credit incentives for local venture investment:

  •  Maine Seed Capital Tax Credit Program offers state income tax credits to investors for up to 60% of the cash equity provided to eligible Maine businesses, which may be used for fixed assets, research or working capital.
  • Iowa Venture Capital Credit is allowed for investments made into the Iowa fund of funds.  The Iowa fund of funds makes investments in venture capital funds who make a commitment to consider investments in Iowa businesses (capped at $100 million in the aggregate, and $20 million of credits in one year).
  • Wisconsin has two tax credit programs:  Angel Investment and Venture Capital. Under the Angel Investor Tax Credit Program, angel investors and angel investor networks that invest in qualified new business in Wisconsin can claim an income tax credit on that investment, equal to 12.5% in each of two years. Under the Venture Capital Tax Credit Program, venture capital funds that are certified by the WI Department of Commerce and that invest in qualified new businesses may be eligible to claim a 25% income tax credit on that investment. 

These are great ways for states to help incentive intrastate venture/angel investments, and a direction that Connecticut and other states hopefully will soon follow.

- Gregg J. Lallier


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University Spin-Offs

10 12 2009

David B. Lerner has a nice summary on his blog (Heard it from the Horses’ Mouth: What Venture Capitalists Like and Don’t Like to See when Doing University Spinoffs) of the annual University Startups Conference arranged by NCET that took place last week in Washington DC .  I especially liked his summary of what VCs don’t like about dealing with university spin-offs.

- Gregg J. Lallier


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Golden Rule Is Still the Rule

10 12 2009

He Who Has the Gold Makes the Rules

The Golden Rule, as the above is known, is something that I use often when counseling start-ups going through their first round of venture capital/seed money.  It comes into play not only at the term sheet stage of negotiating the preferential privileges of the venture capitalist’s investment (e.g. liquidation preferences, anti-dilution rights, veto rights, board seats, etc.), but also after the investment as the venture capitalist tries to ensure the maximum value of its investment through macro (and sometimes micro) management.   A recent Wall Street Journal article highlights this give-and-take with VCs in Who Has The Gold To Make The Rule – VC Or Entrepreneur?.

The current market environment, where venture (and early stage/seed) money is hard to come by, only helps to reinforce the Golden Rule (which exists also in a good market environment…although, maybe, in a less stringent form).  I recently attended the New England Venture Summit in MA, and the panels of VCs continually brought up the fact that tight venture market is going to continue for some time.  Given that, entrepreneurs need to recognize that, in order to get the money needed, they will need to cede some power and control to their investors.  Still, my advice to these start-ups is to (1) still try to get the best deal that they can get and (2) more importantly, try to look at the increased VC presence as a good thing for their business.   The right VC can add more than just their money:  experience, connections and advice all should come along.  Thus, it’s important to do one’s due diligence of prospective VCs to find one that will fit with the culture and plans of the company.  Jeff Glass, a managing director with Bain Capital Ventures, brings up this point in the WSJ article:

A huge part on both ends is just personal chemistry between management and board; board and CEO; investor and management…I would advise to spend more time diligencing the VC or PE firm. Everyone’s cash is green until you have a problem.

Everyone’s cash is green until you have a problem….maybe that should be called The Green Rule.

- Gregg J. Lallier


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Investment Considerations for Start-Ups

4 12 2009

Just as start-ups are creatively developing ways in which to do more with less money in today’s environment, start-ups and VCs are developing creative plans and alternatives for investment.  Two recent Mass High Tech articles highlight this trend:

  • Three alternate routes to financing a startup, as the title implies, describes three alternative ways that VCs and angels are structuring early stage investment in this tight VC/angel market: 
    • “Pay for Play” is an alternative used by Revolutionary Angels.  Start-ups looking for capital pays the organization $4,995 to present its business plan to the Revolutionary Angels’ board of entrepreneurs and executives as part of a business plan competition (current competition submission period of 10/1 – 12/31 described here).  Revolutionary Angels will accept 100 business plans, and invest up to $300,000 in two winning companies (up to $250,000 for the leading plan and up to $50,000 for the runner-up).   In exchange, Revolutionary Angels takes up to 10% in common equity in the companies.
    • Debt Funding is an alternative used by LaunchCapital Small Business (see previous ConnTIP post LaunchCapital Small Business Product).
    • Customer Financing is where the a potential customer of the start-up’s product pays for the product in advance (i.e. prior to be ready for market) in exchange for an equity position.
  • Four values in family financing of startups, as the name also implies, describes four things to consider when a start-up takes early money from friends/family.   A great alternative to traditional equity investment by friends/family is presented in the first value:  debt which is convertible into equity upon the closing of professional investment.  A hard thing to know, or even estimate, is the price per share/unit of equity that a friend or family member (or, really, any early-stage, non-sophisticated investor) would be charged.  As the post says:

Taking equity investment is complicated and expensive.   At the early stages of launch, a startup can ill afford the legal fees required to generate an equity term sheet.  Dealing with inexperienced friends-and-family investors, it may be nearly impossible to set a reasonable valuation.

By using a convertible debt instrument, you’re basically leaving the valuation process to the professional investors (or, as the post describes, “punting” it).  This is a great consideration that more start-ups should consider.

- Gregg J. Lallier


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Start-Ups Learning (or Need to Learn) to Do More With Less

3 12 2009

As most start-ups looking for capital knows, the availability of such start-up capital has been decreasing over the past 10 years, and has accelerated with the recent economic downturn.  Jill Gambon writes about this on Mass High Tech (Startups learn to stretch their finances).   Any start-up looking for a “reality check” should recognize the following points made in the article:

Gone are the days when ideas sketched on the back of a Starbuck’s napkin or a business existing only as a PowerPoint presentation could woo investors. Venture capital investors now expect thorough business plans, revenue forecasts and even an early version of the product or service with paying customers before they’ll write a check.

“We are expecting firms to go much farther on a short dollar,” said Elon Boms, managing director of LaunchCapital LLC, a Boston-based investment firm that provides early-stage capital to startups and small businesses.

Given this environment, it is now more important than ever for start-ups to efficiently use the dollars that they have, including things like founders deferring salaries, outsourcing developmental work, home offices, and other virtual type business models.

- Gregg J. Lallier


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Summits, Conferences and Competitions

25 11 2009
A few upcoming events that entrepreneurs, start-ups and other people in the VC/start-up area may want to keep on their radar:
  • Early Stage Venture Fair hosted by Connecticut Venture Group will be held on December 9, 2009 at the New Haven Lawn Club in New Haven, CT (registration info here).
  • 2010 Alumni New Venture Contest was announced by the Harvard Business School’s Arthur Rock Center for Entrepreneurship and Alumni.  It is a business plan competition for Harvard Business School alumni with a $25,000 cash prize to the winning team.
  • 2009 New England Venture Summit will be held on December 8, 2009 at the Hilton Boston Dedham in Dedham, MA.  The conference is presented by youngStartUp Ventures, which is a company that assists companies in finding/accessing angel and venture capital investments.  According to the Summit’s website, it “is the premier industry gathering connecting senior executives of early stage and emerging growth companies, venture capitalists, angel investors, technology transfer professionals, university researchers, incubators, successful entrepreneurs and premier service providers”.  Registration info can be found here, and an agenda for the event can be found here. 

Below is a video highlight of the 2008 New England Summit:

 

more about “Summits, Conferences and Competitions“, posted with vodpod

   - Gregg J. Lallier 

 


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Global Entrepreneurship Week (November 16 – 22, 2009)

13 11 2009
Monday, November 16 marks the beginning of Global Entrepreneurship Week.  The annual event was founded by is the Kauffman Foundation, a leading foundation for entrepreneurship, and Make Your Mark, the UK’s campaign to “give young people the confidence, skills and ambition to make their ideas happen”.

For one week, millions of young people around the world will join a growing movement of entrepreneurial people, to generate new ideas and to seek better ways of doing things. Countries across six continents are coming together to celebrate Global Entrepreneurship Week, an initiative to inspire young people to embrace innovation, imagination and creativity. To think big. To turn their ideas into reality. To make their mark.

From 16 – 22 November 2009, Global Entrepreneurship Week will connect young people everywhere through local, national and global activities designed to help them explore their potential as self-starters and innovators. Students, educators, entrepreneurs, business leaders, employees, non-profit leaders, government officials and many others will participate in a range of activities, from online to face-to-face, and from large-scale competitions and events to intimate networking gatherings.

As part of Global Entrepreneurship Week, the Collaborative for Entrepreneurship & Innovation at Worcester Polytechnic Institute will host many events.

Below is a video highlighting the 2008 Global Entrepreneurship Week, and promoting this year’s event.

 

- Gregg J. Lallier

 


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Web Resources for Start-Ups

12 11 2009

One of the advantages of starting companies in this day and age is the plethora of resources out there on the web.  Blogs (like ConnTIP, LaunchCapital blog, CT Innovations blog), as well as publications (like Xconomy), can help “lift the curtain” on the complex world of start-ups, and venture investment.  A few interesting recent articles/blog entries to check out:

  • David B. Lerner blog:  David is a self-described “Serial Entrepreneur, Angel Investor” and is Director of Columbia University Venture Lab/Spin-Off program.  He has some great info and tips.  His continuing series of entries entitled Getting from Zero to One in Your Startup is a must-read for anybody thinking of starting up (or, for that matter, who have already started up).  I especially liked his mapped out org chart in his second entry (Getting from Zero to One in Your Startup (2) Map it Out!) detailing the important players that a start-up has to begin assembling:

- Gregg J. Lallier


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Tax Implications When Taking Venture Money

11 11 2009

Any start-up/high growth companies that have taken, or are in the process of taking, venture debt or equity investment are familiar with the following customary forms of investment:  debt that is convertible into common stock; preferred stock that is convertible into common stock; and warrants to purchase common stock.  Depending on certain features of these types of investment, the value of these types of investment may need to be separated and classified in both the equityand liability sections of a company’s balance sheet, under Financial Accounting Standards Board’s consensus paper EITF 07-05, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to a Company’s Own Stock,” which applies to financial statements issued for fiscal years beginning after 12/15/08.

Frank Milone, a partner at the accounting firm of Fiondella, Milone & LaSaracina LLP, has a nice summary of this issue on the Connecticut Innovations blog (Presenting Financing Instruments in Financial Statements – a New Twist).  According to Frank, the particular terms within these investments that will likely preclude equity treatment, or will require a portion to be classified as a liability, include:  conditional exercise provisions where the conditions are not based upon the performance of the company’s stock or operations, and price protection provisions (i.e. anti-dilution or full-ratchet provisions) that adjusts the exercise price or conversion price after subsequent at-market issuance of equity below the investment’s original exercise/purchase price.

The bottom line is that equity classification for many of these instruments will be harder to conclude going forward, and derivatives liabilities, and their requirements to mark-to-market, will become more frequent in company financial statements. And remember, as the requirement for fair-value accounting increasingly impacts your financial statements, you will need to ensure that the valuation of such derivatives and the inputs and assumptions into valuation models like Black-Scholes (i.e., common stock valuation) are being properly supported.

Important considerations for companies with existing venture investment and who may be seeking venture investment.  And, another reason why having tax counsel who has some experience in the venture-backed company world is important.

-Gregg J. Lallier


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