LegalZoom.com Accused of Unauthorized Practice of Law and Privacy Violations

Legal Zoom (legalzoom.com) is accused of the unauthorized practice of law, as well as disclosing to third parties customers' private information:

LegalZoom and Washington State Reach Agreement Over Unauthorized Practice of Law, IP Watchdog

[T]he most egregious charge leveled against LegalZoom is that they sold, transfered or otherwise disclosed consumer information to third parties. So not only was LegalZoom offering to provide legal services to individuals without a legal license but they seem to have been collecting private information and giving away sensitive, personally identifying information such as financial information, information relating to real or personal property and information relating to family relationships. This screams for further investigation by other State Attorneys General and the United States Patent and Trademark Office. Not only does LegalZoom’s advertising lull unsuspecting consumers to believe they are being represented, but what LegalZoom learns during such representation is given away to third parties? If an attorney did that they would lose their license.

Entrepreneurship and Taxes (link)

Scott does a good job of not just stating his opinion, but also attempting to make sure that his opinion has a basis in verifiable fact and he has some great points about our current Congressional decisions on the Bush era tax cuts.

Entrepreneurship and Taxes by Scott Shane

"The United States has an enormous budget deficit, which may require tax increases to close the gap. But we need to carefully consider the law of unintended consequences when raising taxes. Much evidence shows that higher taxes discourage entrepreneurial activity, including investment and hiring by small business owners. If we let the Bush tax cuts expire, we risk shutting off already weak small business hiring and investment. Is that possibility really worth the relatively small reduction to the deficit that we might derive from a tax increase?"

As an aside, Scott also has a good book out on angel investing too...think Freakonomics for angel investors. Of course, my favorite quote being:

"Particularly promising are angel groups, which pool knowledge and money for wiser and more productive investments. In groups, angels can rely on each other's expertise, share the labor of performing due diligence, and generally insure that their money is being placed--and used--wisely. Fostering the formation of such groups may be the single most important thing that government can do to boost angel investing."

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.

BAN Meeting - Update

Just a quick update.

We (BAN) met last Thursday at Innovation Depot and had a packed house.  TransactionTree (www.transactiontree.com) presented for us and even gave a live demo of their e-receipt product using attendee information.

The portfolio company update was very upbeat since all the BAN companies are currently tracking well.  We even had a prior portfolio zombie that sprung back to life in a big way on Friday and that means we are back to batting 1000.

All in all, I couldn't be any prouder of the group and it's leaders for sticking it out through a tough economy and the results seems to be REALLY paying off.

Congrats to everyone and if you haven't made it to a meeting yet, check out the schedule (www.birminghamangels.com) and come visit!

Communication and Planning in a High Growth Company

Ralph Waldo Emerson once said, "Speech is power: speech is to persuade, to convert, to compel. It is to bring another out of his bad sense into your good sense."

For quite some time I have suggested a plan (see below) of communication to clients and BAN participants.  It's not anything ground breaking, but it is a programmatic way for a company to facilitate orderly communication.  Nonetheless, it is amazing how few of them really follow it (or any other) systematic plan of communication and I think it ends up hurting them...potentially a lot.

Effective internal communication among stakeholders (Management, Employees, Board, Shareholders, JV partners, etc.) is critical to coordinating efforts and maximizing the opportunities for success, but it doesn't just apply to startups...most companies would do well to try and systematize some regular forms of communication.

Suggested Plan:

1.  Quarterly (maybe monthly early on) board/advisors meeting
-- Progress
-- Plan
-- Challenges

2.  Weekly recap email of progress and "to do" items

3. Monthly Financial Statements *(email updated statements even if no revenue)
-- Income Statement  (aka P&L)
-- Balance Sheet

4. Annual letter (recap and vision)

If you are looking to make a change for the better in your business, give it a try or work out your own plan and let us know how it goes.  I bet you will be surprised at the energy and progress it will create.

Niche, Dominate and Repeat

I was having a conversation with Jonathan Sides, Daxko VP of Finance, the other day about startups in Birmingham and he told me a bit about their story.  He summarized their business strategy as "niche, dominate and repeat."

I have seen a lot of strategic theories and there are plenty of books that talk about niching, but I had not heard that phrase used as a complete strategy before...I loved it.

"Niche, dominate and repeat" encapsulates a lot of good strategic thinking because "niching" forces a company to define exactly what they want to be and who they want to serve while "dominating" reinforces that niching process and encapsulates most of the strategic tools such as:

• product/service differentiation
• value proposition planning
• creating a minimum functional unit
• customer experience focus
• adoption planning
• etc.

"Repeat" is also a critically powerful tool because it implies both continued process improvement and new market growth.  

A lot of business planning and strategy is cumbersome and somewhat clunky to use, with graphs and graduate level books to understand and it can be difficult for many entrepreneurs to actualize the theory.  On the other hand "niche, dominate and repeat" is just four words and it doesn't take a rocket scientist to figure out what it means.  With that kind of simple strategy, everyone on the team ought to easily be on the same page and what a powerful place to start.  I don't think it is a surprise that the guys at Daxko are getting it done.

If you are in an existing business or starting a new one..."niche, dominate and repeat" is not a bad place to start.