Code Section 1202: Let’s Hope It Doesn’t Expire | Startup Company Law Blog | Davis Wright Tremaine LLP

Code Section 1202: Let’s Hope It Doesn’t Expire | Startup Company Law Blog | Davis Wright Tremaine LLP (LINK)

'via Blog this'

Joe makes some great points, but another reason is that many investors are just beginning to learn about Section 1202 and make plans that allow them to take advantage of it.

Let's face it, people don't usually live and breathe the tax code and many people didn't immediately realize (and many probably still don't) that the 100% exclusion even existed, so it is necessary to leave it in place for a reasonable length of time in order for it to have the intended effect.

Gov. Haslam: TN to co-invest via INCITEinnovation and jobs-formation campaign on Venture Nashville

Although I'm thrilled to hear about these kind of initiatives in the Southeast, I would really love to see some in my home state for a change.

CAPCO all by itself, although great, is just not enough.

Gov. Haslam: TN to co-invest via INCITEinnovation and jobs-formation campaign on Venture Nashville

GOVERNOR Bill Haslam's new $50 million INCITE economic-innovation program will include co-investment for Tennessee ventures, new incubators, a push on both tech transfer and entrepreneurship, and a continuing role for Tennessee Technology Development Corporation (TTDC) and other allies, the governor said today.

Open Letter re: Supercharging Business Development in Alabama

I would humbly propose a vision. The vision is of a state in the heart of the Southeast that is an economic engine and a force in the global economy. That may sounds unachievable, but I firmly believe that it is within our grasp if Alabama can couple some measure of bold leadership with coordinated and efficient usage of current resources.

The strategic steps need to include solutions for two major bottlenecks in the high-growth company creation process by:

1. Increasing the number of investment ready high growth potential companies in Alabama; and
2. Encouraging investor participation in funding seed and growth stage high potential companies.

As a part of step one.

The state needs to use existing state resources to support the maturation process of quality high-growth potential companies.

Today, the Board of Alabama Launchpad is meeting to discuss the direction of that program and it is potentially a very important meeting in this business development process. Launchpad is a unique statewide organization that was established as a partnership among the state's research universities and the business community. The primary program run by Launchpad is an annual business plan competition that awards grants of $100,000; $50,000 and $25,000 for 1st through 3rd places respectively and it is a great starting point.

The reviewers and mentors already working with Launchpad are great entrepreneurial resources and their feedback is often worth significantly more than the prize money. However, Launchpad can be much more...

Ask almost any active angel investor or seed stage venture fund manager in any state and you will hear a lament about the typical sophistication and "readiness" of most startup businesses for outside capital. This is a huge bottleneck in the creation of high growth companies because regardless of the amount of capital available, it simply will not be effectively put to work if there are not proper risk/reward investment opportunities. Either the capital will under-perform or it will be put to work in other investments.

This is an opportunity Launchpad can grow to fill with a couple of steps:

1. Launchpad is expanded to include any innovative business, so that the entire state population can have the opportunity to participate.

2. A seed fund (or grant program) is associated to provide a stipend of $10,000-20,000 to the top 25 (approx. Phase 4) participants.

*this would be in addition to rather than replace the top 3 awards

3. Launchpad schedule is reworked to be a quarterly program rather than annual.

4. In exchange for receiving the seed funding, the top 25 participants agree to move company operations into the nearest business incubator for a three month program *(think TechStars on a state-wide basis).

Such program incubators could include:

5. During the three month program, mentors and advisors (many qualified candidates are already involved as judges) regularly meet with the participants in a combination of one-on-one company sessions, incubator-wide group sessions and program-wide webinars.

6. Following the end of the three month program all of the participants would come together for a graduation showcase of all the companies and the progress made by them during the term.


As a part of step two.

The state needs to implement a state tax credit that encourages increased investor participation with potential high-growth companies in Alabama at both the seed stage and growth stage.

Such a tax credit would be best if:

1. It is open to many industries and leaves the specific company and industry selection to the investing parties, so that profit motive may direct the investing activity without artificial manipulation.

2. It is targeted at seed stage investments (i.e. no previous 3rd party capital, less than 20 or so employees, less than $1 million investment, etc.)* because that is where the largest gap is located.

*the criteria need to be fully vetted to avoid unintended consequences

3. It is in the 20-40% range, so that the investor incentive is significant while not eliminating the need to properly evaluate prospective investments.

4. It is available for both direct investments into a target company as well as for investment into a qualified venture fund, so that those investors interested in participating, but without sufficient time, skill or interest may act through a qualified professional.

Conclusion

If both of these projects (Part 1 and 2) can be implemented, then Alabama could see the annual creation of 100 new investment ready high growth potential companies. If only 5% of those companies are able to achieve a successful exit, then Alabama could still be creating an annual addition of approx. $225 million* in new enterprise value to the state's economic base. Furthermore, those number would not include the economic effect of the other 95 companies and the "exiting" companies that choose to stay in Alabama and continue to grow, so the total economic effect could be many times the simple exit value.

*(5 companies annually multiplied by the $46 million median exit value in 2010 of venture backed companies...according to DJ VentureSource)

P.S. As always, take what you like and leave the rest.

Apply to Birmingham Angel Network, LLC - Create Application

It's a new year and time to kick off a great new class of companies for 2011.

Birmingham Angel Network ("BAN") will be looking for a new high growth companies to work with at our next meeting on Thursday night (Jan. 27th).

If you or someone you know would be a great fit, please tell them to submit an application before Thursday or it will be another 3 months before there is another opening. General criteria may be found at: BirminghAmangels.com/entrepreneurs.php

Submissions may be made online through AngelSoft at: Apply to Birmingham Angel Network, LLC - Create Application.







If you are a potential investor, Thursday is a great time to visit and check things out as well. RSVP at: http://ban012711.eventbrite.com/

Median exit price was up 70% to $46 million in 2010, but either way the math still works.

"The $46 million median amount paid for a venture-backed company in 2010 was 70% more than the $27 million median in 2009."Exits and amount up in 2010 by Dow Jones Venture Source

Thankfully those numbers are still in line with the the $30 million average successful exit planning assumption we have been using in our portfolio pro formas. (See the Nov. 22 blog post for more detail)

Of course, we would all be even happier if a non-typical paypal/google type 1000x slipped in there too.

Angel Investing: Do good by doing well (WTN News)

An article worth reading:

Angel Investing: Do good by doing well (WTN News): "But the giving back is not about lowering investment standards, it’s about providing more active assistance than most VCs can provide in terms of helping entrepreneurs meet those standards. It’s about working with entrepreneurs that combine world-class ideas with the rough edges typical of high impact entrepreneurs that are new to the game and/or otherwise do not have the polish and experience – yet – to pass muster with more seasoned professional investors."

And I would go one step farther...good angel investing is not just about overlooking rough edges, but instead it is about taking well thought out and calculated risks at a very early stage in the life cycle of a high growth business, thus there are apt to be more rough edges in a typical deal than in deals done by later stage investors.

The simple economics look like this:

1. "Successful" deal(s) return 30x or more of investment (e.g. $100k investment equals $3mm or more on exit);

2. Approx 1 in 10 deals are successful *;

3. Approx. 50% return less than the investment*;

4. Average hold period for a successful exit is approx. 6 years*; thus

5. Average IRR of angel deals is approx. 27%*.

Nonetheless, despite the lofty economic motives there is significant "goodwill" (founders, community, employees, etc.) because many of those companies simply would not exist without the investment and support of early stage angel investors.

*(Numbers based on national averages included in a number of different studies. See Marion Kaufman Foundation for just a few.)

Don't mind the media, southern angel investors still wanted!!! *a southern view of a west coast commentary

Mark Suster (generally, one of my favorite writers about angel/VC investing) wrote an article yesterday called "Here's What Angel Investing And Florida Condos Have in Common" and made several points that I think are worth considering in a southeaster context.

His points were primarily:

• angel investing is currently a hot fad;
• there are too many startups being formed for the historical ratio to be successful;
• the VC market is overheated, so it is masking the problem of too many startups;
• we won't fully realize the bubble for another 5-6 years;
• angel investors, like other investors tend to pick poorly and buy high then sell low; and 
• if investors pick the right sectors there are still good startups available.

These are interesting for a number of reason, but mainly because of how west coast influenced they seem to be.

"Hot Fad" - Angel investing may be a hot fad in LA or Boston, but in the southeast angel investors are still few and far between and the resulting investment gap is large.  If you question that statement, then I would encourage you to ask your local VC groups because I bet they will tell you they are still searching hard for qualified deals and that they really don't have a good place to refer companies that are too early stage for their investment criteria.

"VC market overheated" - just a couple of weeks ago at the southeastern ACA meeting we heard over and over  again how difficult the current market is for raising a new venture fund.  Without new funds it is hard for a market to get overheated.  Also, the hot VC markets don't reach well into other geographies, so even if certain pockets are hot it still doesn't reach.  Brad Feld ( I think it was Brad) explained it well a month or so ago when he pointed out that because of limited time, he really had to spend his time looking at deals in his core travel routes.

"Bubble" - this point I agree with...at least to the extent that I agree that angel deals are no different than other businesses and need to be supported by solid economic fundamentals.  Thankfully, we are able to wait and pick through deals that don't seem to have solid fundamentals (i.e. actual sales and even profits...jaw dropping for west coast angels I know).

"Investors buy high and sell low" - this is a trait where I think southerners can claim some superiority in angel investing because southerners by nature are less prone to jump onto the bandwagon of the last hot trend.  Southerners are used to being considered uncool on a national basis and some even revel in it, so pragmatism is a bit more apt to rule the day.   **I realize the real estate boom hurt southerners too, but the desire to own land is a particularly southern weakness that I think overruled our otherwise general pragmatism.

"Certain sectors are still good" - I want to agree with this point, but I don't because it just sounds too much like the same fad based investing Mark was railing against in the article.  Instead, I will say that good businesses and good business opportunities can make for successful investments in any market. 

Overall, I will say that the southeast is still an undiscovered gem for many investors and that it is good business to be a part of companies that are growing and successful, which is exactly what our southern angels are seeking to do.

**If you want to see what I mean come check out a local ACA group meeting (BirminghamAngels.com) and I think you will find there is still plenty of room for good business people that have vision and practicality, both as entrepreneurs and investors.

The company financing life cycle...

I ran across this diagram of the financing cycle of startup companies on eandua.com and thought it was an elegant expression of where true seed stage capital fits in the overall scheme of our economy and the critical role it plays despite it's relatively small dollar amounts.

I also think this points out a somewhat obvious, but often overlooked, concept...things can really start to take off once a company gets to Break-Even and is cash flow positive.  


That is why I believe the goal of most seed stage investments should be to get companies to a positive cash flow.  When a company gets sustainable positive cash flow all kinds of good things are possible because the home runs have a chance to happen, but solid returns can be achieved over time even without them.

Is a Company ready to think about outside investment....?

"Sequence of Blue Ocean Strategy" is pretty much a summary of the initial evaluation of an angel deal... www.blueoceanstrategy.com/abo/sequence.html

1. Product/Service has Significant Value/Utility to the User
2. Compelling Price
3. Appropriate Cost of Production (i.e. good margins at the compelling price)
4. Reasonable Adoption Plan

At least self certifying (if not certification by a relevant 3rd party) that a deal passes well through this evaluation should probably be a requirement for beginning any fundraising effort.

Baseball and Investing

Growing up with a dad that played a lot of baseball, many of the advice I heard around the dinner table related to the strategy of the diamond.

Particularly, I think about frequent advice to focus on the fundamentals while hitting singles and letting the home runs happen. Great advice for a young man that had (maybe, "has") a talent for sometimes biting of more than he could chew.

But the thing I was thinking about this weekend was the mystery of a streak. You know, "don't mess with a man on a streak" and all of the hocus pocus that makes for so much fun on the outside looking in.

I think deals may be somewhat like baseball streaks (and maybe home runs too). I never really know what trigger gets a deal on a hot streak, but I sure don't want to touch them too much when they are on one.

I wonder if it would help to suggest wearing lucky socks too.

What do Angels want to see?

Angel investors should want to work with entrepreneurs that (1) value their investment even more than they do and (2) are fanatical about the product or service...but social intelligence is huge too.

Social intelligence makes almost all of the many tough things about starting a new business easier...marketing, sales, HR, customer complaints, negotiations, investor relations and the list goes on.

Unfortunately, it is the lack of social intelligence that makes many brilliant and creative people a terrible fit to lead a new venture. That doesn't mean those people can't be involved at all, but the overall leadership needs to be good with people.

So if you are an odd duck, be honest with yourself about it and try to partner with someone that can be a great face of the company or you may be fighting a long battle.

Time to look outside of Wallstreet. Local startup capital wanted...and needed.

According to MoneyTree (report link) we only had three Alabama companies participate in venture capital rounds during the 4th quarter of 2009.

• Atherotech, Inc. Southeast AL
• Halo Monitoring, Inc. Southeast AL
• Silver Leaf Capital LLC Southeast AL

Of course, the MoneyTree report is widely known to be under reported in Alabama, but that is still an absurdly low number.  If Alabama is going to pull it self up by it's bootstraps and "refuse to participate in the recession" then we are going to need a much higher VC and similar participation than 12 companies a year.

Let's do the math for a minute.  According to the 2007 Kauffman Foundation study on returns (study link), "angel investors participating in organized angel groups achieved an average 27 percent internal rate of return on their investments" however the study also confirmed the conventional wisdom that the majority of those returns were produced by a small percentage of the portfolio.  In the study, "the top 10 percent of exits account for 75 percent of the total cash returns in the sample."  That means that at the MoneyTree reported rate, Alabama is barely investing in enough companies to consistently produce one significant success a year...for the whole state.  No wonder supporting and using venture backed startups to impact the local economy isn't really viewed as a viable economic growth strategy.

But it is...

There are numerous examples of other regions that actively use high growth startups to energize the local economy and are all the better for it...Silicon Valley, NY, Austin, NC Research Triangle and even Nashville.

The strangest thing to me is that I get the feeling that many of our potential local investors think that startup investing is something that is done by "those other people, over there" or that establishing success startups can't be done here or is something akin to gambling.  Of course, many of those same people have no problem at all putting money into a fund managed a thousand miles away, by a person they will never meet, to invest in companies they personally may know little or nothing about.  And those returns have been dismal for a decade.

Now, I'm not advocating taking all your money out of the NYSE and putting it into some random local startup all by yourself, but for those that have the ability to diversify into some non-traditional investments...why not participate in a local invesment club (see: ACA or Birmingham Angel Network) and use some of that capital to do some good in your local economy, you just may end up finding some higher returns?

Bold Smurf...and other interesting investments.

I read an article today in the Financial Times (Article Link) that reminded me of something that I think can be forgotten about angel investing...it can and should be fun!

And over the course of my (relatively young) life, some of my favorite family stories revolve around investments. There was the plucky race horse "Bold Smurf" (a purported descendant of Secretariat), the short lived Nascar race team that came along with another deal (it had a pink car and at about 10 or 12 years old, I was embarrassed to tell anyone about it) and this list goes on.

Of course we have now entered the age of the nerd (a term I may resemble), the internet and Web 2.0 etc., but just because some of the investments may have changed, they should still be fun. After all, if you can't smile about it, then it probably isn't worth doing.

So...what is on tap for 2010?

Almost every project I had (or heard about), across multiple industries, had to trudge for most of 2009. Amazingly, a few of our portfolio companies that boot strapped like crazy are poised for launch in the first quarter of 2010, including:

a Premium Tequila Importer,
a Wide Area Wifi company, and
a Web Asset Integration Interface service.

There are a few more that are hanging around and could get into the starting gate if a few things break the right way.

Of course, I know that eventually some are going to have to raise some capital, but it has been impressive to see how far creativity and determination can take a company.