Wednesday, February 29, 2012

Venture capital and Florida get reacquainted after dull patch,0,4884331.story

By Richard Burnett, Orlando Sentinel

In a boost to Florida's national ranking, companies here attracted nearly $300 million in venture capital last year, an indication that investment firms are taking notice of the Sunshine State during the nation's slow economic recovery, according to a new survey.

Florida companies received $299.8 million in 2011, or nearly 58 percent more than the state's 2010 total, according to the MoneyTree Report published by PricewaterhouseCoopers and National Venture Capital Association. They received $55 million in the fourth quarter alone — a fivefold increase from the same period a year earlier.

PricewaterhouseCoopers Florida's 2011 growth rate topped the national pace and moved the state up two spots to No. 13 on last year's venture-capital rankings. Nationwide, firms and wealthy individuals invested $28.4 billion in VC deals, a 30 percent increase from 2010.

Central Florida generated deals worth a combined $45.2 million last year, a 10-fold increase from 2010. With a fourth-quarter total of $9.35 million, the region has now posted five straight quarters of VC deals after being shut out in 2009 and landing only one deal in 2010 until late in the year.

Three local companies received venture financing during 2011's fourth quarter: software developer Pentaho Corp. ($5 million) and surgical-equipment maker LensAR Inc. ($4 million), both of Orlando; and XOS Digital Inc., a sports-data technology developer in Lake Mary ($350,000).

Pentaho's millions were the latest in a series of deals. The company, which produces business-intelligence software, has received more than $20 million from venture-capital firms based in Silicon Valley and London since its founding in 2004. It now has 58 local employees, a sales office in San Francisco, and a global clientele that includes browser-developer Mozilla.

"We have a group of strong investors that believe in the company and are willing to invest into the future," said Doug Johnson, its chief operating officer. "We sell all over the world and are ramping up to expand in several regions nationwide, including the Orlando area."

More venture capitalists are extending their radar to include Florida, said John Cambier, managing partner of IDEA Fund Partners, a Durham, N.C.-based venture firm that opened an Orlando office last year.

He cited, among other things, the state's new biotech initiatives, such as Orlando's Medical City at Lake Nona, which could eventually generate "a flurry of startups and venture-backable companies."

"We think there are good ideas, good people and good opportunities to invest in Florida," Cambier said. "We just need to work together to convince the rest of the venture-capital community to spend some time there so they can see it, too."

The nation's perennial venture-capital leaders continued to lead in 2011, starting with California ($14.7 billion), Massachusetts ($3 billion), New York ($2.3 billion) and Texas ($1.5 billion), according to the MoneyTree survey, which is based on Thomson Reuters data.

Local experts welcomed the latest figures but cautiously evaluated their significance.

"There's some economic recovery in those numbers, though ever so slight," said Michael Okaty, an Orlando corporate-finance lawyer. "The problem when we look at the economy is that we have some businesses doing badly or closing, while others are flourishing. In a way, we still have two different economies, two different Americas out there."

14 Ways To Be A Great Startup CEO

Everyone thinks that being a startup CEO is a glamorous job or one that has to be a ton of fun. That's what I now refer to as the "glamour brain" speaking aka the startup life you hear about from the press. You know the press articles I'm talking about... the ones that talk about how easy it is to raise money, how many users the company is getting, and how great it is to be CEO. Very rarely do you hear about what a bitch it is to be CEO and how it's not for every founder that wants to be an entrepreneur. I've spent a lot of time recently thinking about what it takes to be a great Startup CEO that is also a founder. Here are some of the traits I've found.

Be A Keeper Of The Company Vision
The CEO is the keeper of the company's overall vision. I'm not talking about the vision for the next few months, but the larger road ahead. The CEO needs to be able to keep things on course for the current quarter to make sure that the large overarching vision of the company can be achieved. The takeover the world vision of a startup usually can't be achieved in one year or even in some cases, like Google, in a decade. It takes a great startup CEO to keep the company on track to achieve that vision. A great startup CEO will often judge upcoming initiatives to see if they fit in as a piece of the large puzzle for the bigger vision.

Absorb The Pain For The Team
A startup CEO needs to be the personal voodoo doll for a startup. They need to be able to take on a strong burden of stress, pain, and torture all while making level headed decisions. You can't have the troops stressing and worrying about the difficult challenges at hand. A good startup CEO will absorb the stress, so the rest of the team can carry on. He also needs to be able to mask this pain and stress. Not that he should hide or lie to the team- I'm not encouraging that. Most of the day to day nuances+stresses of a startup aren't worth having the entire team worry about and the CEO needs to bear that pain.

Find The Smartest People And Defer On Domain Expertise
A startup CEO has a great knack for finding talent. The key is finding people that are smarter than you on specific topics. It might be technical team members/leaders or it might be a new VP of Biz Dev. A startup CEO has to have the ability to find these people and make relatively fast decisions to hire them. They also have to be able to show the fire and passion to convince them to leave what is most likely a better paying and more secure job to join the company. The real key to hiring as a startup CEO comes after the hire. A great startup CEO will be able to trust the hires that they make and defer to them on areas of domain expertise. It's hard to let go, but you have to learn to, especially when the company grows.

Be A Good Link Between The Company + Investors
Whether you want to believe it or not, you are not an investor's only portfolio company. Even if you are a superstar, they have a handful of other companies to help and a ton of incoming potential portfolio companies. A good investor will pick 2-3 new companies per year to work with. A good startup CEO will be a good link between progress, issues, and areas where they need help with investors. A good portion of early stage startups that raise money will have a board comprised of 3 people: the CEO founder, the investor, and an independent board member. You are the lone representative for your cofounder and other employees.

Be A Good Link Between The Company + Product
I have this unwavering belief that the best companies are those that keep a founder as CEO for the long haul. Not because the founders have the right to be CEO, but because the CEO needs to be close to the product vision of the company. Founding CEOs understand this the best and can carry out that same unified vision over time. To fill in the management gaps a great COO, other board members, and heads of divisions will come along. It's a strategy that Facebook has employed and why Apple has had a great resurgence with Steve Jobs at the helm. It's all about keeping the CEO as close as possibly linked to the product.

Be Able To Learn On The Job
Most startup CEOs didn't start out with an MBA or some background in growing a company from nothing to something. The best have an ability to learn along the way and embrace their failures to become a better leader. Zuck started when he was 19 and now 7 years later, runs the most powerful internet company. Don't worry about whether "you're qualified" as it's hard to put typical qualifications on the job. You'll learn the really core stuff along the way. The best startup CEOs will surround themselves with smart mentors to be a sounding board along the way.

No Experience Almost Preferred
It's almost better to have a blank slate of zero experience as a startup CEO. If you come in with preconceived notions and block out the scrappy methods of a startup founder, it actually hurts you. Traditional education often trains you to be CEO or manager for a much larger company, not for a startup of under 50 people. It's a different kind of leadership and company.

Have An Uncanny Ability To Say No
You will be inundated with a list of requests from potential partners, investors, employees, and more. They will all sound absolutely wonderful. As you grow, you will also have the resources to execute more of them. Don't. It's easy to say yes, but so very hard to say no. By having an uncanny ability to say no, you can keep your company on track with the large vision you maintain. It will also keep your team members (notice I don't like to use the word "employees") laser focused and feel more rewarded as they are able to focus on one thing for a good chunk of time. I've seen too many startups sink because the CEO keeps changing what the head of product and engineering should be doing.

Have Some Technical Knowledge And Skillset
A good startup CEO shouldn't be afraid of a little bit of code and a text editor. They don't need to be diving into the source code on a daily basis, but they need to understand the technical requirements. It's easy to say "go build this", but it's a whole other ball game to understand how to build it. What seems simple may be a huge mountain of a technical feat that just isn't feasible with the given resources and deadlines. It can also help lend some street cred with hiring early technical team members too.

Be Able To Break Things Down Into Sizable Chunks + Milestones
Remember that huge unwavering vision that you are the keeper of? Odds are it only makes sense to you and your cofounder. You will need to break it up into sizable chunks and milestones for the rest of the team to understand it. You also need to be able to pick when and where to conquer things strategically. What is the past of least resistance so you can gain traction? What can you do first with your given resources?

Have The Ability To Call An Audible
Nothing goes according to plan. Things fall through, people quit, shit happens, servers crash, and other random things go bump in the night. You're going to have to deal with it and fast. This is a football term:

"Seen when the quarterback goes up to the line of scrimmage, sees a defensive alignment he wasn't expecting, and adjusts by yelling out a new play."

You're going to come up against things that you didn't expect and just be able to call an audible. Launch faster, spend more money here, or even abandon a project.

Can Motivate The Team Through Despair
People love to talk in this business. People love to talk even more when you're company isn't fairing well. A great CEO will be able to take those moments of public despair and keep the company focused. They will be able to debunk the rumors or even approach them head on by keeping the members of the company focused on the bigger mission at hand. It can come in simple 5 minute talks or motivational emails. The worst thing you can do is avoid the situation and be passive aggressive. I repeat: DO NOT WUSS OUT.

Be A Great Communicator
You need to be able to portray the energy and passion that you feel into others...over and over and over and over and over and over again on a daily basis. As a startup founder you need to communicate the vision and hope for the future of your startup to the rest of the world. You need to be able to break down the overall vision of the company into something that mere mortals can understand. You can't speak in crazy technical jargon or industry terms. It needs to be simple, clear, and compelling. You also need to be able to argue your point. Many will pick "fights" with you just to see how strong willed you are. Be respectful, but be very confident in your answer. Often wrong, but never in doubt my friend.

Don't Be A "Fake CEO"
Mark Pincus, CEO of Zynga, makes a strong case for not being a fake ceo. In short, worry about things that produce results, not fame. If it's between going to a conference/doing an interview or completing a deal, get the deal done. Don't "leave it to someone else". You need to get your hands dirty every single day.

By no means is this an exhaustive or definitive list. In some cases, the traits listed above might be counter-intuitive. What are some traits you've seen in great founding startup CEOs? Not the glamorous job you thought it was, eh?

You Should Follow me on Twitter:, Friend me on Facebook:, Email Me:, or even call: 201.305.0552

Tuesday, February 28, 2012

Would you invest some of your retirement savings in a VC fund?

The clock is ticking. Yesterday, and even today, people are waiting to begin investing for retirement until they are 50 years old. This delay brings about unneeded stress, financial complications, and worry for the years ahead. Couple that scenario with a stock market crash and Americans can easily lose 40% of their savings in the blink of an eye at one of the most inopportune times of their lives. The landscape for retirement savings in this country is muddy, unprotected and, in fact, systematically exposed to the downpours of market turmoil. But that was yesterday. Tomorrow we bring innovation to the market for retirement savings. We’re starting the movement with young professionals, and our clients will not make the mistake of waiting too long to begin saving. Our clients are getting ahead of the curve.

In a recent ING survey, nearly half of Americans wish they had started saving for retirement earlier. In fact, 89% of respondents agree that retirement savings process should begin with a person’s first job. However, the survey also found that nearly 70% of people in their 20s have no retirement savings accounts! Aside from societal opinion, the simple concept of an account’s worth compounding over such a long time horizon should be enough to persuade young people to begin investing, right? Yet the young professionals have remained stubborn and are caught in the quicksand of the status quo. With so much information available, how could this be? What is causing this pure neglect for future financial stability among young people? Our belief is that the problem does not lie in the young professionals themselves, yet it is due to the inability among today’s financial firms to draw in this demographic because of the pure mismatch of personalities between the target client base and the bureaucratic, gray-haired wealth management firms. No longer is this the case. Curve, Inc. is spearheading America’s retirement revolution, offering retirement solutions that are attractive, appropriate, and convenient for young professionals.

Curve is approaching the market with innovative retirement products that will provide young professionals access to many asset classes. We’re taking the traditional stock, bond, and cash allocation that current 401(k)s utilize in and adding private equity, hedge funds, and other alternative investments. This not only gives the retirement investment opportunity some sex-appeal, but more importantly it’s a smart option for young people given their long time horizon until withdrawal and limits their dependence on the stock markets. Therefore, next time the market crashes and our clients are in their 50s, their retirement savings will be protected. This is a wildly different concept from what we see today. Alternative investments are usually reserved for institutions and the mega-rich. Curve is bringing this possibility to young professionals by offering structured Roth 401(k) and Roth IRA products.

The market of Young Professionals in the United States, defined by Curve Financial Services as those with a college degree under the age of 36 making at least $40,000 per year, is approximately 12 million people. Only 32% of them have a retirement savings plan, which gives Curve 68% of this total market as year one non-competed for clients. That’s nearly 8.2 million people and $41 Billion worth of potential assets unclaimed by any other financial institution. Looking at the market as a whole, assuming a $5,000 annual contribution, the asset potential nears $60 Billion. Furthermore, that’s only the United States market, and market potential grows as the model is transferred to other countries.

Curve has a competitive advantage that stems from our ability to easily and effectively engage and interact with our target market. The founding team consists of young professionals with backgrounds in the financial services industry, which gives Curve the ability to communicate with prospective clients in a professional manner regarding the benefits of signing up with Curve. Finally, Curve is going to leverage its three-fold mission of educational, financial, and social aspects to relate with clients on an open and non-intimidating level. Young professionals will be inclined to open accounts with Curve since the company is positioning itself around the lifestyles our clients. We can do this better than today’s wealth managers because the leadership and employee base of Curve consists of young professionals.

Curve is introducing a highly scalable business model that allows for ultra-high revenue growth without a substantial increase in overhead costs. Our scalability is due to our operational plan in which we grow assets through employer-sponsored programs, thus lowering our cost of a sales force. We then bundle client accounts into one large account and pass through to our selected fund managers at one hedge fund, one private equity firm, and one financial adviser. Curve, as well as portfolio managers will earn a management fee off the total account. Therefore, we need not employ more portfolio managers as we take on more clients. Beginning in year three, Curve will begin franchising new locations, each of which will pay a 5% gross revenue royalty fee.

Our founding team’s skills have been honed over the years due to experiences at a global bank, UBS Financial Services, as well as hedge funds and regional commercial banks. One member brings previous entrepreneurial experience, and both members of the founding team possess the Masters in Business Administration (MBA) distinction.

By working with young professionals, we’re going to positively enhance the financial stability of our clients for years to come. In an industry recently dominated by profit-minded investment banks, Curve offers a breath of fresh air to an otherwise stale industry. Curve is going to draw in young professionals by leveraging our familiarity with their trends and lifestyles, and sell them on the aspirational notion of being able to allocate assets across many asset classes when they are newly college graduates. This is something they wouldn’t otherwise be able to attain unless they had a net worth in the tens of millions.

At the end of the day, Curve is a company that seeks to better the financial lives of today’s society. With social security issues looming ahead, and with the recession and market crash of the recent years still fresh on everyone’s mind, we’re creating a smart, desirable, and “cool” option that’s going to incline young professionals to begin saving for retirement at a younger age. It is our belief that America has been waiting too long to start saving for retirement. Today, we’re working on getting our young professionals ahead of the curve.

Wednesday, February 15, 2012

Private Equity: Fact, Fiction and What Lies in Between

What good is private equity, anyway?

As its critics see it, these investment pools make money the wrong way -- buying "target companies," slashing jobs, piling on debt and selling the prettied-up remnants, which by then are doomed to fail. To make matters worse, private equity firms get a stunning tax break, paying 15% on profits instead of 35%.

But the industry and its defenders, including presidential candidate Mitt Romney who made his fortune in PE, say it is a strong creator of jobs and value, and a vital source of outsized returns for pension funds, university endowments and other investment pools that serve ordinary people.

Which is true?

While there is fodder for both views, academic research finds that the truth for the industry as a whole is not so dramatic. If the entire PE industry were to disappear overnight, the economy probably would not feel much effect, positive or negative. "In the absence of private equity firms and funds, there are a lot of other types of capital that are trying to do very similar types of things," says Wharton accounting professor Wayne Guay.

Adds Wharton finance professor Richard J. Herring: "The question of whether they add value, in my mind, is really one of whether they only undertake financial restructuring ... or whether they replace management and the board, and undertake an operational restructuring that improves the efficiency of the enterprise."

Financial restructuring, he notes, "usually means withdrawing equity and leveraging the firm's balance sheet, and has very dubious social value." But operational restructuring "can really add value to the economy."

Executives both in and outside of the PE industry say that pure financial engineering is less common than in the past because lenders are pickier, and investors in PE funds are less eager to take the risk that comes with leverage. Adding borrowed funds to the investment pool can increase returns, but also amplifies losses when bets go wrong. While some leverage is still widely used to boost returns, most experts say the goal in most PE investments today is to grow the target firms.

"Private equity firms seek out companies in which they believe they can unlock significant value by changing the business strategy, investing new capital or injecting new managerial talent," says an industry trade group, the Private Equity Growth Capital Council, responding to the recent wave of criticism. "Private equity ownership fosters a climate in which companies can do what is necessary to achieve increased profitability over the long run."

Private Equity versus Hedge Funds

Private equity firms form investment pools with contributions from limited partners, largely pension funds, university endowments, wealthy families and the occasional sovereign wealth fund. The general partners, or owners and managers of the PE firm, typically contribute as well, and many funds, though not all, also borrow to increase their investment resources. A typical fund operates for 10 or 12 years and may or may not distribute some profits to investors along the way before a payday at the end. Limited partners -- LPs -- thus tie their money up for the duration, and they typically have little say in the general partners' investment decisions. Big PE firms run multiple funds at the same time, smaller firms only one.

Worldwide, the industry is estimated to have about $2.4 trillion under management, although minimal reporting requirements make assessments difficult. The Private Equity Growth Capital Council says about 2,300 PE firms are headquartered in the United States, and that they have stakes in 14,200 companies with 8.1 million employees.

PE investments are long-term bets on illiquid assets. Hedge funds, in contrast, tend to make comparatively short-term bets on liquid assets such as stocks, bonds, commodities and derivatives. Venture capital firms, a subset of the PE industry, invest in young companies, while PE firms specializing in leveraged buyouts generally look for businesses that have been around for some time. This may include privately held companies with founders ready to retire, or firms that need growth capital but -- because of poor credit ratings, jittery lenders, low cash flow or other impediments --cannot get it from traditional sources like bank loans or bond issues.

Because investors tie their money up for so long, they expect returns to exceed what they could earn with liquid investments like stocks. Whether the average PE fund achieves this is debatable.

The industry claims enviable returns. "As of September 2010, private equity outperformed the S&P 500 by 11.4 percentage points, 7.3 percentage points and 19.4 percentage points for one-, three- and five-year periods," according to the Private Equity Growth Capital Council. But those figures cannot be verified because the industry is secretive, and findings of academic studies vary.

An oft-cited study by Steve Kaplan of the University of Chicago and Antoinette Schoar of MIT found that PE funds did not produce outstanding results during the 1980 to 2001 period. According to Herring, "it showed that the returns earned by limited partners were more or less equivalent to what they could have obtained by investing in the [Standard & Poor's 500] index once you netted out the substantial fees that were paid to the general partners."

A study by David Robinson of Duke and Berk Sensoy of Ohio State covered more recent performance, from 1984 through 2010, finding that PE investors earned 18% more over the life of the fund than in the S&P 500. While that is a good margin, an 18% edge over 10 or 12 years is not jaw-dropping rewardfor tying money up for so long.

Other research shows that, in contrast to the mutual fund industry, past performance in PE is an indicator of future results, as PE firms that are successful with one fund tend to be successful with the next. If so, investors who stick with the top funds can indeed get outsized returns.

The future, of course, is cloudy. Many PE executives and outside experts warn that while returns may beat the public markets, they are likely to come down as competition in a growing PE industry makes it harder to find good target companies. Reduced leverage may also take a toll. And although PE may be profitable for its investors, critics say the cost in lost jobs and destroyed target companies is too high. This issue flared up in the presidential campaign, with Republican candidate Newt Gingrich describing PE as "exploitative" and job-destroying, and attacking Romney -- a founder of private equity giant Bain Capital who is now worth in excess of $200 million -- for his role in it. Some top PE executives have become billionaires.

Wealth Creation versus Wealth Transfer

The issue is whether PE firms create wealth or merely transfer it from target companies to themselves. One of the most recent studies, by Jarrad Harford and Adam Kolasinski at the University of Washington, looked at 788 large U.S. PE buyouts from 1993 through 2009 and found plundering was not the rule. "All of our evidence is consistent with value creation," the study reported.

"We test and reject the hypothesis that on average private equity sponsors transfer wealth or damage the portfolio company's long-term value," the authors write. "We also test the hypothesis that private equity sponsors extract capital through special dividends and leave the target firm in distress," they add, referring to payments from portfolio firms to the PE fund that are often derived from having the target firm take on new debt. "First, despite the impression given by the public press, we find that special dividends are rare. Second, those that occur are uncorrelated with future portfolio company financial distress."

A look at portfolio firms with publicly traded debt found only 42 special dividends issued in 2,435 firm years, with the issuers and non-issuers showing the same return on assets.

One way for PE firms to extract value is by skimping on research and development and other needed investment at portfolio companies, and then using the savings to pay down debt to improve short-term results. The fund can then sell the firm before the underinvestment comes back to haunt it. But again, Harford and Kolasinski found no evidence that PE firms are damaging their portfolio firms in this way, while they did find evidence that PE ownership tends to reduce damaging over-investment. The results, the authors said, suggest PE ownership mitigates destructive "agency problems," where a portfolio firm's executives put their own interests ahead of the firm's.

PE funds make the bulk of their returns by selling portfolio firms at a profit. The Harford/Kolasinski study noted that only about 10% of these "exits" involved sales to the public through stock offerings. The most common exit was to a "strategic buyer," such as a corporation wanting to add a new unit, and about a third of exits were sales from one PE fund to another. This means most portfolio firms are sold to sophisticated buyers, who could be expected to shun the market if the typical target firm was a gutted shell destined to fail.

But are PE funds and their portfolio companies profiting at employees' expense? Is the industry creating jobs or destroying them? In what they say is the most comprehensive study of the question to date, researchers from the University of Chicago, Harvard, the University of Maryland and the U.S. Census Bureau found that private equity "catalyzes the creative destruction process in the labor market, with only a modest net impact on employment." In other words, change took place faster at portfolio firms than among companies in a control group, but the net job loss among PE firms was only slightly higher -- about 1%.

The study, titled Private Equity and Employment, looked at 3,200 target firms in PE transactions from 1980 to 2005. "Relative to controls, employment at target establishments declines 3% over two years post buyout and 6% over five years," the study reports. "The job losses are concentrated among public-to-private buyouts, and transactions involving firms in the service and retail sectors. But target firms also create more new jobs at new establishments, and they acquire and divest establishments more rapidly. When we consider these additional adjustment margins, net relative job losses at target firms are less than 1% of initial employment."

Control firms were selected for factors like size, age and industry, but the study did not consider whether controls and target firms were in the same financial condition. Because PE firms scour the market for targets with unrealized value, it is possible some of the targets were overstaffed relative to the controls. If so, greater job losses would be expected, but there is no way to know for sure. Of course, many jobs are shed at firms that are not owned by PE funds, some by necessity and some through mismanagement. Most of the millions of jobs lost in the U.S. since the financial crisis were at firms that were not owned by PE funds.

The study is a strong challenge to critics' claim that PE is a massive job destroyer, and it does not support the industry's claim to be a large job creator.

Tax Incentives

The second issue concerns the tax treatment of private equity earnings known as "carried interest," the general partner's share of the fund's profits. Carried interest is taxed at the 15% long-term capital gains rate rather than as ordinary income, at rates as high as 35%.

While terms are subject to negotiation with the fund's limited partners, PE firms typically receive an annual fee equal to 2% of the capital the LPs have committed to the fund, plus carried interest equal to 20% of the fund's profits. Often, the carried interest applies only to profits exceeding a given annual "hurdle rate," or rate of return on the fund, such as 7% or 8%.

The PE industry argues that the 15% tax on carried interest is consistent with the rate all investors get on long-term capital gains, or profits on investments owned longer than a year. But critics focus on a key difference: Carried interest is profit paid to general partners on money put at risk by the limited partners; with ordinary investments, people get the capital gains rate only for risking their own money. For the general partners, carried interest is a gain without an offsetting risk.

"It's a fee for service," says Wharton accounting professor Jennifer Blouin, rejecting the argument that carried interest is an investment return. "How can you make the argument that that's [the GP's] capital at risk?" Carried interest, she notes, is income the GPs receive for running the fund -- for research, analysis, management and all the other work it takes to find target firms and improve them. "It doesn't look like an investment," she notes. "Those are attributes for which you generate ordinary income" that is taxed as income, not capital gains. When people are compensated for know-how, the compensation is income, she adds.

Critics say carried interest is like other compensation linked to performance and taxed as income, although some of them concede that the general partners are entitled to the low long-term tax on any of their own money put into the fund. Limited partners enjoy the long-term rate and have not been targets of criticism, because they clearly put their own money at risk.

Democratic Congressman Sander Levin of Michigan has been trying since 2007 to get carried interest taxed as income. His measure has passed the House four times but has stalled in the Senate. He has said he will try again this year and may perhaps get a boost from the issue's higher profile.

Legal definitions of income and capital gains aside, the tax break on carried interest can be seen as an incentive, like a tax break to spur oil exploration, to find new medications or to encourage people to save for retirement or to buy homes. "Having lower taxation on long-term capital gains, on long-term investments, is probably a good thing," says Wharton accounting professor Gavin Cassar, arguing it encourages investors to tie their money up. "You make these longer-term projects that require more capital investment more attractive."

But it is difficult, he adds, to disentangle the costs and benefits of applying lower rates to specific types of investments. And even economists, he says, tend to have dogmatic positions on how tax rates affect the incentive to work. In private equity, it is the limited partners who contribute the bulk of the fund, and no one is suggesting they lose the incentive to invest provided by the long-term rate.

Do talented people need a tax incentive to work at private equity firms? Clearly, a higher after-tax income would make any job more appealing. On the other hand, many of the top people in PE are so wealthy that it is likely they have non-monetary reasons for continuing to work, such as satisfaction, prestige and excitement.

To say that tax rates are key to job selection is "a false argument," Blouin states. "The story is that you are there because profits are high, not because tax rates are low." Guay sees carried interest as a type of bonus, because it is paid only after the fund exceeds set performance levels. Bonuses are taxed as ordinary income, he notes.

A study by Andrew Metrick, a former Wharton finance professor now at Yale, found that carried interest makes up only about 30% of PE profits. The rest comes from the 2% annual fee on committed funds. Because the fee income is already taxed as ordinary income, raising the rate on carried interest would affect less than one-third of annual pay.

The broader question is whether there is any need to use tax policy to encourage the private equity industry. Would society suffer if PE were smaller or did not exist at all?

PE firms do make it easier for pension funds, endowments and wealthy individuals to invest in collections of privately held companies, just as mutual funds allow small investors to hold diversified baskets of stocks. But there are many other ways for investors to acquire privately held companies. Wealthy individuals and groups can buy firms, corporations can acquire them, and small companies can merge on their own.

Whatever contribution PE is making, it is not irreplaceable, Guay concludes: "If there are inefficient businesses out there, capital will be drawn to them, whether it's in the form of private equity or in the form of something else."

Tuesday, February 14, 2012

Venture capitalists favor Silicon Valley, but Silicon Alley is rising fast

February 7, 2012
by Grace Nasri

Despite a still sluggish economy, venture capital firms poured a total of $28.4 billion into 3,673 deals last year—one of the highest levels of dollar investments of the decade—with the majority of deals going into the software and biotechnology industries.

The annual figures represent an increase of 22 percent in dollar terms and a 4 percent increase in the number of deals compared with the 2010 figures, according to The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.

This year’s VC funding figures represent the third highest annual investment (in dollar terms) of the past decade.

While the overall annual figures were positive, there was a year-end dip: The fourth quarter numbers saw a 10 percent decrease in dollars and an 11 percent decrease in deals when compared to the previous quarter—with $6.6 billion invested into 844 companies last quarter.

Comparing last year’s quarters, the third quarter saw the strongest numbers of the year both in terms of dollar investments and number of deals, with $7.3 billion invested into 953 deals.

Most-funded industries

The industries that experienced some of the largest dollar increases in 2011, according to data from Thomson Reuters, included
•Consumer Products and Services (103 percent increase);
•Media/Entertainment (53 percent increase);
•Electronics/Instrumentation (52 percent increase); and
•IT Services (39 percent increase)

But despite these high increases, the software and biotechnology industries continued to dominate, receiving the largest overall investments of the year according to The MoneyTree™ Report.

The software industry saw the largest investments with $6.7 billion invested into 1,004 deals. The 2011 figures for software represent a 38 percent dollar increase and a 7 percent increase in deals when compared to 2010 numbers. The year didn’t end as high for the software industry, as investments fell in the fourth quarter, with $1.8 billion going into 238 deals. But despite a dip in investment in the fourth quarter, the software industry retained its hold as the number one sector in terms of dollars invested and number of deals in the fourth quarter.

The biotechnology industry was the second largest sector of last year, increasing 22 percent in dollar terms but dropping 9 percent in deals, with $4.7 billion going into 446 deals. The industry also saw gains in the fourth quarter, with an increase of 10 percent in dollar terms and an increase of 6 percent in the number of deals, as compared to the third quarter.

The medical device and clean technology sectors also saw large investments; the medical device sector increased 20 percent in dollars to $2.8 billion and decreased 2 percent to 339 in terms of deals, while the clean technology sector increased 12 percent in dollars to $4.3 billion and 12 percent to 323 in terms of deals, when compared to 2010. Last year was the highest level ever recorded for the clean tech sector.

Investments by stage of development

Last year, early stage investments saw the highest increases in terms of both dollars invested and deals—increasing 47 percent in dollar terms and 16 percent in number of deals as compared to 2010. Early stage investments also saw the highest number of deals last year, but it was the expansion-stage investments that brought in the most dollar investments.
•Expansion: $9.7B (+9%) in 999 deals (-8%)
•Later stage: $9.5B (+37%) in 864 deals (-5%)
•Early stage: $8.3B (+47%) in 1,414 deals (+16%)
•Startup/Seed: $919M (-48%) in 396 deals (no change)

California leads but New York rising faster

Comparing California and New York VC investments and deals, Silicon Valley continues to overshadow Silicon Alley, with California-based investing almost 6.5 times that of New York-based investing in terms of dollars, and almost 5 times in terms of deals. (See first graph below.)

But when comparing 2011 numbers to 2010 numbers, VC investments in New York are rising 64.3 percent in terms of dollars and 10.2 percent in terms of deals, while investment in California is only rising 24.4 percent in terms of dollars and 5.0 percent in terms of deals.

Predictions for 2012: Which industries to watch

According to predictions by the NVCA and Dow Jones VentureSource, the IT sector is the one to watch this year. Venture capitalists and VC-backed CEOs predict this year will see investment increases in consumer IT, healthcare IT and business IT. On the other hand, VCs predict investment decreases in the biopharmaceutical, medical device sectors and clean technology companies.

Kevin O’Connor, founder of FindTheBest, O’Connor Ventures and DoubleClick, predicted increased investments in the consumer web, energy-efficient devices and the 3D industry. (Disclosure: FindTheBest contributed this article to VentureBeat, and also provides the product comparisons that appear on our site.)

“The consumer Web will see huge increases this year, as well low-energy components and devices,” O’Connor said. “The crossover hasn’t happened yet, but in the near future our mobile devices are going to become our primary device. Another industry that will see big gains is the 3D industry, especially in the adult and gaming areas. On the flip side, I think investing in social companies will be more discerning.”

While California’s Silicon Valley still trumps all other regions in terms of VC funding and the start-up ecosystem, VCs predict New York will provide a more fertile ground than even Silicon Valley this year. Thirty-four percent of VCs and 42 percent of CEOs see the start-up ecosystem in Silicon Valley improving, while 46 percent of VCs and 41 percent of venture-backed CEOs predict the start-up ecosystem in New York will improve this year.

VC predictions on the presidential elections

Interestingly, when VCs were asked about the upcoming presidential elections, 79 percent predict Mitt Romney would be the Republican presidential nominee with Gingrich coming in a very distant second, according to the NVCA. But despite strong predictions that Romney will win his party’s vote, 56 percent of VCs predict President Obama will be elected to a second term.

Monday, February 13, 2012

Clara Shih's Hearsay Social

Her startup helps large companies control how workers interact with customers on Facebook and other social media outlets

By Douglas MacMillan

Since 2009, Clara Shih has published a bestseller, co-founded a fast-growing startup, and joined Starbucks’ (SBUX) board of directors. None of it would have happened if she’d followed some lame advice when she was writing her book, The Facebook Era, a how-to guide for using social media in business. “My editor wanted me to rename it The MySpace Era,” says Shih, 30. “I guarantee you I wouldn’t be sitting here if I called it that.”

In a short time, Shih has become one of the world’s top experts on how companies can navigate the new world of tweets, profiles, and pokes. She saw the opportunity while working at (CRM) in 2007. That year, Facebook started letting outside developers build apps for its site. Shih noticed that no one was making business apps. Using her spare time and programming chops—she graduated at the top of her class in computer science and economics at Stanford—Shih built Faceconnector. The app pulled personal details from Facebook profiles into Salesforce software, so sales reps could learn the favorite music and other interests of potential customers. Faceconnector helped inspire a dialogue about social media in the hallways of Salesforce, which went on to create the Chatter messaging service for businesses. And it transformed Shih into a social media expert, delivering keynotes at tech and marketing conferences and winning a book deal.

While researching the book, Shih came up with the idea for Hearsay Social, which she co-founded in September 2009. The startup helps large companies control how workers interact with customers on Facebook fan pages and other social media outlets. For over $100,000 a year, customers such as 24 Hour Fitness get a dashboard to monitor the activities of their workers on Facebook, Twitter, Google+ (GOOG), and LinkedIn (LNKD). Hearsay’s software looks out for compliance violations (such as bankers discussing a deal) and keeps tabs on which branches and employees are best at bringing corporate messaging to the Facebook-friend level. The almost-70-person company has raised a total of $21 million and became cash-flow positive in 2010, Shih says.

Farmers Insurance (ZURN:VX) signed up for the service in 2010. “Having thousands of agents on Facebook posting things we have no insight into can be a challenge to the legal team,” says Ryon Harms, director of social media at the insurer. Hearsay alerts management if agents ask customers for Social Security numbers over the Web—a potential regulatory violation—and helps pinpoint which are best at using Facebook to get new business.

Shih continues to play public evangelist for social networking in business, and dedicates a quarter of her time to doing press and speaking. Her latest fan is Starbucks Chairman and CEO Howard Schultz, who named her to the board as part of an effort “to amplify the online experience” at the coffee chain, according to a press release. Executives “are looking for more than technology,” Shih says. “They are looking for answers.”

Graduated at the top of her class in computer science at Stanford

A Facebook app won her invites to speak at tech conferences

Hearsay Social has raised $21 million from VCs

Friday, February 10, 2012

Start-up guru aims to build investment fund

By J.D. Harrison

After more than a decade working for a number of start-ups, Charlie Kiser decided to finally pursue a venture of his own a couple years ago. He had an idea for a company that would fill a gap in automobile maintenance, and before long, he started pitching his idea to venture capitalists and angel investors.

It didn’t take long for them to pitch him.

“Some of the local investors asked me whether I had considered taking my skills to the seed and angel investor side of the business instead,” he said. “Basically, they told me there was a demand here for people to educate start-ups and investors and help them interact more effectively.”

Kiser took heed of the advice, and has tabled his original business plan in favor of another: a consulting and investment venture that would connect local, early-stage technology firms to investors. He has not settled on a name for his venture.

The West Virginia native first entered the world of technology start-ups in 1999, working in sales for life sciences bioinformatics firm InforMax based in Bethesda. Later, after brief stints with young companies in New Jersey, Boston and Ohio, Kiser returned to the area to take over executive-level sales positions at the mapping firm FortiusOne (now GeoIQ) and open-source management firm Bluenog, both in Arlington.

There, he took part regularly in boardroom dealings between founders, board members, investors and clients, and he said he began to fully understand the nuances of the entrepreneurship ecosystem and how strategic business relationships were formed. Most importantly, though, he said, he made invaluable connections with the important players in the D.C. area and started gaining their trust and respect.

“A lot of the deals and new companies I know about now, ones I can then present exclusively to my investors, many of them are thanks to the connections I made during those years, interacting with their boards and investors and pitching them to venture capitalists around town,” Kiser said.

Kiser is busy expanding that network now as part of his new enterprise. He is taking on temporary or on-call consulting assignments, allowing him to work with a large number of firms, and he’s come up with an unusual title: chief reality officer.

“A lot of times, these early management teams just need a truth-teller, someone to tell them straight up that they need to change their product or pivot to appeal to investors, or that they need to take something off the pipeline or get rid of their CTO. That’s the role I try to fill,” he said.

Now, with enough connections under his belt, Kiser has started building the funding side of his business. He plans to pursue a slightly different model than the structure of traditional angel investment groups, which rely on a select few investors with tons of wealth at their disposal.

“My plan is to reach out to a larger number of potential investors, and include those who are new to the game and maybe have smaller amounts of capital to play with,” he said

Kiser has begun contacting doctors, lawyers and family office managers – individuals, he said, who are often intrigued by the possibility of backing young technology firms but often don’t know how to enter that world or how the ecosystem functions.

For now, Kiser is working with investors on a one-on-one basis, helping broker individual deals between them and the start-ups with which he is currently consulting. But already, a few have expressed interest in putting resources into an eventual seed fund.

Kiser has also recruited a 10-person advisory team, which includes Joshua Konowe, chief executive of Uppidy, a message sharing service in Reston, and Navroop Mitter, head of Gryphn Corp. in Washington, which is developing ways to secure text messages. That team will help him determine the potential of future investment opportunities, and Kiser said he expects they will add a degree of credibility to his eventual fund.

“We have a lot of wealth and resources here, and there are a lot of great ideas worthy of investments,” Kiser said. “I’m trying to introduce them and help them understand how to work together, and that’s where we are going with the seed fund.”

Why Women Want to be Entrepreneurs

Like Facebook's Sheryl Sandberg, women are driven to do business better and more flexibly, and make work better for everyone.

By Margaret Heffernan

Every businesswoman who acquires any public profile has her family life raked over: How does she do it? What are the trade offs? What are the social and personal costs of her success? Facebook's Sheryl Sandberg is just the latest victim of this too-familiar trope, with other women and entrepreneurs prying into her childcare arrangements and wringing their hands with self-righteous disapproval. Some of this is good old- fashioned misogyny; after all, men don't get such scrutiny and few people have asked how much time Bill Gates spends with his kids. But female leaders get a lot of attention too because there is a real hunger—felt by men and women—to understand how to combine business and family successfully. We all face this challenge and we're eager for inspiration.

Let's get a few facts straight first.

1. Most women work. Most mothers work. Most parents work. How families balance the needs of work, children and, often, their own parents, is not a female issue: it's a human issue. Even singletons have parents who, as they age, will need care. As everyone lives longer and as kids stay home longer, integrating family and work becomes a permanent, not temporary, challenge.

2. Family demands don't make it less likely that women will become entrepreneurs; it may make it more likely. The fact that more than 10 million private companies are owned or controlled by women shows that we aren't rarities. Why do women start their own businesses? Because they hope that they will find in their own companies the kind of flexibility so often denied them by more conventional corporations. Or as the fabulous Doreen Marks of Otis Technology once said to me: "When you own the company, it doesn't matter which 80 hours a week you work." Parents don't mind working hard. They do mind working in rigid environments that won't accept that there is a life beyond the job.

3. Everyone needs support. Sheryl Sandberg has nannies. I had a nanny. I now have family and friends. No parent thrives without a network of supporters and backup. My own experience is that often it is those without the money for paid help who have the most reliable, emotionally-rich relationships. What parents do not need is the intrusive criticism of others who claim to know best. Every family is different and creates its own solutions.

In my study of female entrepreneurs, I never encountered a lack of ambition or any kind of trade-off that implied that driven businesswomen loved their children less. What I did find was an energetic determination to prove that business could be done better, that companies could be more flexible, and that the resulting engagement and commitment made life and work better for everyone: both men and women.

So I don't buy a lot of the you-can't-have-it-all criticism and envy that surrounds Sandberg. Having it all is hard, sure. All entrepreneurship is hard; that is why so many of us love it: because when we succeed, we know we've achieved something meaningful. If it were easy, it wouldn't be nearly so much fun and everyone would be doing it.

Venture Capital Comes of Age in Europe

After a rocky start three decades ago, early-stage funding in the U.K. and Continental Europe is starting to resemble the industry in the U.S.

By Alliott Cole

Unlike in the U.S., venture capital on the other side of the Atlantic is a relatively young industry. It had an inglorious and stuttering start in the 1980s, often as an extension of the activities of conventional banks or as a limited part of fund managers’ remits. The first Gulf War and 1990 recession were among several setbacks, even before the promise of the first Internet boom culminated in the dot-com bust. This left many investors bruised—and venture capital out of favor in Europe.

As we approach the end of 2011, it’s clear that European venture capital has finally come into its own. There are now a number of well-established firms based in London and elsewhere that invest across the region and have helped entrepreneurs build significant businesses during the past 15 years. The early big wins of ARM (ARMH), Cambridge Silicon Radio (CSR), and Autonomy (AUTNY) have been followed by ASOS, Betfair, Lovefilm, Playfish, Skype, Spotify, Wonga, and Vente-Privé in recent times, to name just a few.

The culture of early-stage investment also has shifted. Most investors now understand that forensic examination of business forecasts isn’t very productive or predictive: Thorough assessment of the management team, the product, and the relevant market are better indicators of a business’s likelihood of success.

New Breed

More critically, a new breed of smaller funds mixed with high-caliber angel investors is emerging in Europe. Angels are people whose understanding of the needs of early-stage businesses is borne from firsthand experience as entrepreneurs. In the U.K., for instance, firms such as Atomico, Eden, Notion, Passion, PRO Founders, and Octopus (where I work) are combining with seasoned businesspeople such as Sherry Coutu, Alex Hoye, Simon Murdoch, Jon Moulton, Robin Klein, and Hermann Hauser to foster a new wave of fast-growing young companies. Empathy, resilience, and network are brought to bear alongside financial investment.

A culture of partnership between entrepreneur and investment partner is taking hold, borne of better communication between stakeholders and more transparency around investment terms. The view that building significant businesses takes patience and flexibility—as well as fortitude and ambition—is well-established. There is also more willingness to learn best practices from the West Coast, such as inward migration of skills and a greater risk appetite. Technology and expertise is now accessible online and only a tweet away from those wishing to improve.

Significant challenges remain, nonetheless. Clusters and density of domain expertise take decades to build, and the venture capital community is no different. The U.K. lacks the depth of capital to support startups through the cycle from seed through growth to exit. The U.K. also struggles in the absence of established technology companies that could provide sources of both liquidity and highly skilled human capital. Finally, we also see the hallmarks of brain drain: All too often successful entrepreneurs, having honed their skills in the U.K., choose to build their second business in the U.S., having tasted the raw energy and ambition on those shores.

These are not challenges that can be met overnight. But the trend is favorable. Entrepreneurs and venture capitalists are working together more productively and efficiently than ever before, increasing numbers of startup businesses are succeeding, and the foundations for a promising future have now been laid.

Thursday, February 9, 2012

DIY Apps Save Small Businesses Time, Money

A study estimates that small companies have cut 725.3 million annual employee hours by using mobile apps, equaling $17.6 billion in savings

By Rachael King

Realtor Nick Galiano wanted to create a downloadable application that would let clients browse his firm’s home listings from mobile phones. Professional software developers wanted him to cough up $30,000 for a trio of apps for Apple’s (AAPL) iPhone, Research In Motion’s (RIMM) BlackBerry, and devices using Google’s (GOOG) Android operating system. Then he found Appsbar, a Deerfield Beach (Fla.)-based company that builds apps at no charge, seeking instead to make money from advertising placed inside the apps.

“It’s amazing how you can create something in a couple of hours that would have taken a company $10,000 and six to eight weeks to develop,” says Galiano, who built the app for his Metairie (La.)-based company using the Appsbar website.

Small business owners eager to create mobile apps—whether to market services to customers or improve internal productivity—are finding a growing array of alternatives to hiring professional programmers. Aside from Appsbar, the list also features such companies as MyAppBuilder, AppBreeder, AppsGeyser, Mobile Roadie, and Socialize, which makes the AppMakr tool.

Appsbar Founder Scott Hirsch says he got the idea to start his company while running another business, when he was shocked to discover how expensive apps were and how long they took to develop. “I thought, ‘this is ridiculous,’” he says. To have a custom app developed could cost anywhere from $10,000 to $100,000 and take six weeks to 12 weeks, he says.

Appsbar mainly caters to small and midsized businesses such as bars, gyms, banks, event planners, and accounting firms. The service has amassed 60,000 users since it began in April 2011. While Appsbar doesn’t charge fees, clients must agree to let the company place ads inside apps available through online bazaars, such as Apple’s App Store. “Apps are the fastest growing thing in the history of consumer products,” Hirsch says. “Everyone is impressed by how fast it’s growing and I think it’s just starting.”

Apps Become Indispensable

Small business owners are becoming increasingly dependent on mobile apps. In 2011, about 70 percent of small businesses used mobile apps for operations and almost 40 percent said it would be difficult to survive without them, according to a survey that AT&T (T) released in March.

Mobile apps can help small business owners save time—about 5.6 hours a week, according to a report published by the Small Business & Entrepreneurship Council in June. The study estimated that small business owners are annually saving 373.8 million hours of their own time and 725.3 million employee hours by using mobile apps. The employee hours alone translate to about $17.6 billion a year, according to study co-author and SBE Council Chief Economist Raymond Keating.

Lauren Kay says her New York child-care business SmartSitting saved itself about 30 hours of work monthly when she discovered she could create her own app, using tools made by Zoho to automatically convert the time sheets submitted by her 215 sitters into invoices. These time savings roughly translate to from $500 to $600 a month, she says. “The day we discovered we could create that app was one of our best business days,” says Kay. Zoho Web apps can be viewed from a mobile phone’s browser.

Do-it-yourself apps can also be used to create more complex applications for businesses. Greg Taylor, who runs an investment advisory firm called Powerline Advisors, has created an app that brings together a wide range of data from five different online sources that couldn’t be found in a single location. These include easily accessible sources such as Yahoo! Finance (YHOO), as well as harder-to-find information that includes company balance sheets and cash flow statements. He paid programmers about $700 to help him get the app up and running and put in about 100 to 200 hours of his own “sweat equity” into it. Taylor updates the data in his app every night and pays a provider called Xignite about $300 quarterly for corporate financial data. “I’m able to do things I wouldn’t have been able to do five years ago cost-effectively,” he says.

Monday, February 6, 2012

The creators of no-longer-with-us products explain what went wrong

Verifiable (shut down August 1, 2010)
Stuart Roseman shut down Verifiable, a crowdsourced charting and data analysis site, to start SaneBox, a product that automatically identifies important email and separates them in a user’s inbox. Below, he explains how he knew when it was time to pull the plug on Verifiable.

“We couldn’t charge for it. It was pretty clear. I’ve done this for a long time. I said, ‘This is a bad idea. I need a new idea.’

“The Verifiable problem still exists. It hasn’t been solved. There’s still chart junk. It’s got to be easier. But Verifiable was something I thought the world needed. SaneBox was something the world was asking for.

“My new mantra is: ‘I will make a product that people want to pay for and that they will be happy to pay for.’ I wake up in the morning and I say that. And I go to sleep at night and say that. It really changes everything.”

Related: “Out with the old business, in with the new”

Wesabe (shut down June 30, 2010)
Wesabe launched as a site to help people manage their personal finances. While competitor Mint was acquired by Intuit, Wesabe eventually shut down. In “Why Wesabe Lost to Mint,” Marc Hedlund dissects what happened.

“Mint focused on making the user do almost no work at all, by automatically editing and categorizing their data, reducing the number of fields in their signup form, and giving them immediate gratification as soon as they possibly could; we completely sucked at all of that…I was focused on trying to make the usability of editing data as easy and functional as it could be; Mint was focused on making it so you never had to do that at all. Their approach completely kicked our approach’s ass.

“You’ll hear a lot about why company A won and company B lost in any market, and in my experience, a lot of the theories thrown about — even or especially by the participants — are utter crap. A domain name doesn’t win you a market; launching second or fifth or tenth doesn’t lose you a market. You can’t blame your competitors or your board or the lack of or excess of investment. Focus on what really matters: making users happy with your product as quickly as you can, and helping them as much as you can after that. If you do those better than anyone else out there you’ll win.”

Storytlr (shut down February 24, 2009)
Storytlr let members create their own lifestreaming service (i.e. connecting Twitter, Flickr,, and other accounts) at their own URL. Founder Laurent Eschenauer on what happened:

“Storytlr started as a personal project to power my own site. People liked it, so we decided to build a nice UI and start hosting it for others. We were developing and operating the service next to our day job and families. We were quickly successfull, reaching beyond 10,000 users quickly and this meant a lot of strains on our lives (maintenance, support, etc.) and budget (~500$ monthly hosting bill) without any revenues.

“At that point, we started researching potential revenue models and investors, but quickly realized that the service was not well suited for a strong revenue stream. It was a tough choice, but, for the security of our families, we decided to pull the plug.”

TwitApps (shut down September 13, 2009)
Stuart Dallas created TwitApps as a technical exercise for himself. But after some early blog coverage, it attracted 4000 active users (and that number was growing). Despite that base, he couldn’t turn it into a product that was worth the effort.

“I considered the whole thing to be a toy project for a long time and it took me a while to realize that people were starting to rely on the service.

“Once you’ve established a free service and that service has other free competition, it’s very difficult to monetize it. It’s also very hard to change people’s impression of what something is once they’ve decided for themselves.”

“It became difficult to juggle the time demands of supporting TwitApps with the requirements of a full time job, several contracts and the need for downtime. In the end something had to go and it was clearly going to be the bit that wasn’t earning any money.”

Vox (shut down September 20, 2010)
Vox was Six Apart’s friends and family blogging service. According to Michael Sippey, the company felt emphasizing TypePad was a smarter business move.

“It’s a question of focus. We’re focused on TypePad and supporting bloggers and publishers with advertising products. And that is a much more scalable proposition.

“It’s a different type of business than the friends and family blogging service that Vox provided. And it’s not that Vox wasn’t a great service or didn’t provide great utility to people. It’s that for us, from a strategy perspective, we needed to focus.”

Swivel (shut down summer of 2010)
Brian Mulloy was CEO of Swivel, a site where people shared reports of charts and numbers. The site had thousands of registered users, but less than ten paying customers. In “The Rise and Fall of,” he discusses how hard it is to make a truly functional product.

“This is the reality between a prototype and a working product: there are so many details that go into turning an original idea into a product, most people don’t realize that. You can spend a lot of time on that. In fact, to the point where a year goes by and all you’ve done is that you’ve fixed a bunch of bugs. So you can either scale back the features and only support a limited set of functionality, or scale up your team to support all of those things.

“I’m certainly wiser now, to know how easy it is to build a nice façade, and how much more work it is to really develop these features and make them truly functional.”

Swivel’s Product Chief Dmitry Dimov adds:

“We weren’t able to describe what the actual uses were: this is what you can do, this is why it’s useful, so people would use it. We also weren’t able to prioritize our features, and we had very limited resources in terms of how many developers we had, etc.

“There was such a huge variety of things to do, that as fresh entrepreneurs, we had difficulty saying: here’s the one thing we’re going to do.”

EventVue (shut down February 5, 2010)
Josh Fraser thought it was crazy that people would spend thousands of dollars and fly across the country to attend a conference without actually knowing who else was attending. So he created EventVue to create private social networks for events. The product evolved from there but never took off the way he hoped. He discusses the journey in “A few words about EventVue.”

“EventVue was always a vitamin instead of a pain killer. Conference organizers typically liked our product but none of them said they needed it. It didn’t make their lives easier, make them more money or cut any of their expenses — it was just ‘nice to have.’

“We wrongly assumed that since we were obviously improving the conference experience, organizers would want to pay for it. One of our customers memorably said ‘If I wanted to improve the conference experience I would buy everyone steak dinners. I don’t care about the conference experience. I care about selling tickets. What can you do to help me do that?’”

Greenhorn Connect Helps Startups Get On Their Feet, If They're Good Enough

By Curt Nickisch

A pair of twentysomethings in Boston had a startup idea, so they did what just about everyone in their shoes does: They asked Jason Evanish for introductions to angel investors and VCs. But after a few tough questions, Evanish declined. "They're not even remotely ready to raise money," he says later, shaking his head.

Evanish is not wealthy, he hasn't started a big company, and until recently, he wasn't especially well connected. He's just a green-eyed, crew-cutted 26-year-old. But he's also a vital stop on any young entrepreneur's startup tour. That's because, in the town that fostered the likes of Facebook and Scvngr, he figured out something nobody thought of before: He who controls networking also controls the network.

The revelation grew out of frustration. After completing a tech-entrepreneurship grad program in 2009, Evanish and a college buddy found Boston's multiplicity of techie meet-and-greets too confusing. So they started, a clearinghouse for networking events and startup resources. Soon, entrepreneurs and VCs were contacting him directly, looking for info and introductions no one else was giving. And the site's $35-a-listing fees were making it worth his while.

"That's where it's, like, Sweet!" he remembers thinking. "This is doing what it's supposed to." But he noticed a cast of wannabe entrepreneurs--"stale muffins," he calls them--always hogging the Q&A mic at events but never starting their own companies. He felt obliged not to waste anyone's time, so he turned himself into a gatekeeper, arranging strategic meetings to filter out the groupies. "Everyone thinks entrepreneurs are short on money," Evanish says, "when in fact their most scarce resource is time."

Evanish insists this gives him no power. He prefers the word value--he just knows who to connect and who not to. But his super-node status helps young techies find the best jobs and helps companies launch faster--like when he brought a reluctant Vermont angel investor, Ty Danco, down to Boston, leading to deals for a couple of startups. He also connected a new social-metrics company, SocMetrics, with one of its first clients.

Boston has never been able to replicate the efficient network of Silicon Valley, so these kinds of successes got noticed fast.

"If you're a twentysomething starting a company, he's the guy to know," says Mark Bao, who recently sold his hit site,, to dotcom mogul Kevin Ham. "You almost can't not know him." What do you do with all that, ahem, value? Use the connections, of course. Evanish plans to join the ranks of those he helps, launching his own B2B software company. He's feeling prepared.

A version of this article appears in the November 2011 issue of Fast Company.

Sunday, February 5, 2012

A Startup Weighs In on Politics

By Miguel Helft, senior writerJanuary 26, 2012: 5:00 AM ET

A tiny polling site hopes to get a lift from presidential campaigns - and its tech-star co-founder.

FORTUNE -- Scott McNealy can barely conceal his enthusiasm as he sits down in the media room of his Silicon Valley mansion to watch the New Hampshire Republican presidential debate. But it is not the debate itself that has Sun Microsystems' longtime CEO literally on the edge of his seat -- in fact, his enormous television is actually on "mute."

No, he is pumped because two of the six candidates on the screen are using Wayin, an online polling startup that McNealy co-founded with a financier friend, to measure their supporters' opinions and to gauge their performances in the early January debate. Mitt Romney and Newt Gingrich both use Wayin, as does the Republican National Committee and Frank Luntz, the Republican strategist and pollster. "I'm flat-out excited," McNealy says. "I'm investing an enormous amount of my waking hours in this."

Nearly 30 years after he co-founded Sun, and two years after the company sold to Oracle (ORCL), one of the tech industry's most outspoken and colorful executives is back. Only instead of selling servers and software to businesses, he's trying to get consumers, sports teams, and corporations -- and politicians -- to embrace a social media tool that's a little hard to define: It is part polling app, part interactive media tool (think Twitter), and part enterprise service.

The polling software at the heart of Wayin is super easy to use. It allows you to create basic questionnaires, on the web or using a mobile app, by selecting an image and asking a question. Pick a photo of the Fab Four, ask Who is your favorite Beatle?, and bingo, the answers from your followers will start trickling in immediately.

Launched in October, the service has gotten early traction in politics. Romney -- the candidate McNealy favors, by the way -- has used Wayin to ask his supporters on Facebook what the most important issue in the election is. (Some 42% say the economy.) Pollster Luntz, who is a Wayin investor, went on The Sean Hannity Show after the Fox News debate in December and asked viewers to vote on who had won. Within 10 minutes he had 5,000 responses (early on, viewers had Gingrich winning, but sentiment gradually shifted to Ron Paul). "There are times when polling overnight isn't fast enough," Luntz says.

The campaigns' use of Wayin underscores the rising importance of social media in politics. "We are trying to reach across as many platforms as possible," says Kathryn Wheeler, the national Facebook director for the Gingrich campaign. "The younger generation likes this newer, faster, more visual platform," she says about Wayin. (While Wayin's major political users are all Republicans, as is McNealy, the company says it has pitched itself to the Obama camp -- which wholeheartedly embraced social media in 2008 -- but has not heard back.)

McNealy, who serves as executive chairman, foresees many other uses. Online fashion magazines could use Wayin to poll readers on a new purse, and consumer goods companies could use it to test new packaging ideas. A retailer like Wal-Mart (WMT) could poll employees on how their week went to determine which stores have morale problems, he says. And Wayin could also play a role in interactive television: AT&T (T) has built Wayin into its U-verse broadband television service, so if you are watching the NFL playoffs, for example, the Wayin app on your phone will automatically suggest related polls. (Will the Bulls win in overtime? Will they make the playoffs this year?)

Wayin has raised $6.5 million from McNealy and other investors, and McNealy is furiously working his Rolodex to get his former big-iron customers to give it a go. Revenue will come from advertising and sales to companies who may want to use the service to measure customer satisfaction or employee sentiment.

The biggest challenge for Wayin may be getting heard above the noise. Facebook already has a built-in questions app, and upstarts like Qriously and PollDaddy offer ways to gauge opinions in real time. Services like Yahoo's IntoNow (YHOO) and GetGlue allow users to interact alongside television programs. During the New Hampshire debate, ABC News was encouraging its viewers to weigh in -- not with Wayin, but with Twitter by using the hashtag #nhdebate. Twitter may not have the tools to classify the answers as neatly as Wayin, but it does have more than 100 million users.

Las Vegas: Startup City

Zappos CEO Tony Hsieh is spending $350 million of his own to make Sin City a startup hub

By Brad Stone

The history of Las Vegas is full of determined men with outsize egos and grand plans. There was Bugsy Siegel in the 1940s, envisioning a gambling mecca in the desert, away from the reach of law enforcement. A half century later, developers like Steve Wynn and Sheldon Adelson added pomp, glitz, and more than a touch of excess to the area that has become known as the Strip.

Now there’s another resolute businessman who wants to bend Sin City to his vision. Tony Hsieh, the soft-spoken chief executive officer of shoe and apparel site (a division of (AMZN)) wants to turn the often overlooked and economically depressed downtown area into a dense urban neighborhood teeming with artists, entrepreneurs, and Internet workers. It’s one of the most unconventional redevelopment efforts in any American city, ever. Instead of soliciting public funds, Hsieh is spending $350 million of his own money to buy empty lots, seed new businesses, and subsidize schools. Next year he’ll move his company’s 1,400 local employees from suburban offices into the 11-story former City Hall (complete with jail cells on the second floor that may become meeting rooms). “What started out as a campus relocation project has evolved into a project to revitalize downtown Vegas,” Hsieh says.

Hsieh and the 10 Zappos employees he’s tapped to help have their work cut out for them. Downtown Las Vegas has resisted rehabilitation attempts for decades. The area was developed at the start of the 20th century as a railroad stop between Salt Lake City and San Diego. Almost immediately the focal point of the region shifted six miles to the southwest, to the area that’s now the Strip, when casino operators started building on unincorporated land to avoid paying city taxes. While historic districts like Baltimore’s Inner Harbor have been successfully redeveloped, plans to put a domed stadium in Las Vegas’s downtown and build row houses along its tightly gridded streets have gone nowhere. A small colony of artists, restaurants, and bars have moved in, but the neighborhood is still seedy. The empty lots, abandoned buildings, dollar stores, and pawnshops are punctuated by retro signs, including a 30-foot-tall neon blue martini glass.

Now it’s Hsieh’s turn. As anyone who read his bestselling 2010 memoir, Delivering Happiness, knows, the Zappos CEO is willing to make big personal bets. Bucking investor skepticism and economic turmoil after the first dot-com bust, he invested his fortune from the sale of a previous Internet company and built a successful online shoe retailer. In 2009 he sold Zappos to Amazon for $850 million. Last year, Hsieh started thinking about where to move his company, which is straining the capacity of the three nondescript office buildings it occupies in nearby Henderson, Nev. (Hsieh moved Zappos from San Francisco in 2004, in part to take advantage of the relatively inexpensive labor market for call-center employees.) At first he considered building an enclosed corporate campus like Apple’s digs in Cupertino, Calif., or the Googleplex in Mountain View, Calif.—“our own little paradise,” he says.

Then he started to spend time downtown with the residents and local business owners who had rejected Las Vegas’s addiction to McMansions and ritzy shopping destinations. Hsieh started to think about Zappos’s geographical decision differently. According to Triumph of the City, a 2011 book by Harvard professor Edward Glaeser, when cities grow, productivity increases because of the serendipitous connections between people. When companies grow, they tend to become stodgy and bureaucratic. “We decided on an approach that was more like NYU [New York University], where the campus blends into the city and you don’t know where one begins and the other ends,” Hsieh says.

Hsieh tells this story from his apartment on the 23rd floor of the Ogden, once a 275-unit condo building painted nausea-inducing pink. It opened right into the teeth of the housing bust and was subsequently repainted white and rented out as apartments. Last year, Hsieh abandoned his Vegas mansion and moved into one of the downtown building’s top floors, turning part of it into a command center for his revitalization efforts. A wall of yellow Post-its specifies the kinds of businesses his team wants to draw to their new mecca, including a doggie day care and a barbecue joint.

Zappos expects to move next year into the refurbished city hall, where there will be less space per employee than with the current setup. That’s by design. Hsieh envisions that instead of holing up in conference rooms, employees will stream outside, into coffee shops and restaurants, to interact with their environment. On top of the undisclosed amount that Zappos is spending for a 15-year lease on its new digs, Hsieh is personally spending $100 million to buy land, $100 million to develop high-density apartment buildings, and $50 million backing tech startups that open in the area. Over the next few years an additional $100 million will be parceled out, in chunks of around $200,000, to schools and small businesses that lay down roots in the neighborhood. City officials are thrilled, though Hsieh adds that he didn’t solicit government funds because he doesn’t want to deal with the bureaucracy.

Hsieh and his novice city planners cheerfully concede they have no experience doing what they’re doing. They’re simply mapping what they do know—how to build technology companies—onto urban development. Hsieh’s motives are not selfless: His for-profit company, The Downtown Project, will take a large piece of equity in each business it funds, but he says entrepreneurs have no obligation to pay him back until they turn a profit. “We are not doing it to make money,” he says. “We want owner-operators who care about this community.” Although the initiative could swallow a large chunk of his wealth, he isn’t worried. “No matter what happens, I don’t see my lifestyle changing,” says Hsieh, inviting an interviewer to look at his rather modest collection of possessions. “In some ways, you could argue I’m not actually risking anything.”

Veteran Vegas watchers have seen many ambitious plans for downtown come and go, but Hsieh seems to have won them over. Robert E. Lang, an urban sociologist at the University of Nevada at Las Vegas, says Zappos could be a big enough anchor to spark a revival, and that if the area can craft a unique identity as a hip hangout, it could be a huge draw. “If you create a successful space in Las Vegas, you don’t just work off the 2 million residents in the region. You can count on 40 million visitors who come to Las Vegas every year,” he says. Stephen Brown, director of the UNLV Center for Business & Economic Research, says Hsieh’s approach is unconventional but notes that in Las Vegas, iconoclasm is completely normal. “Nevada is still a place where individual audacity can be really successful.”

The bottom line: To revitalize the area around Zappos’s new headquarters, Hsieh is funding restaurants, schools, and startups that open nearby.

Founders: Are You Forgetting Something?

Don't be too focused on your product--because if you're not building a community for it, it may never get off the ground.

By Matthew Shampine

When you are first starting your business, it can seem as if there are an infinite number of items on your to-do list and not enough hours in the day. While it's important to put in the necessary time to build out your product or service, there is a danger in being overly focused.

As an entrepreneur you have to immerse yourself in the communities that revolve around your business. I've met a number of entrepreneurs who built their vision, but were confused why users did not come flocking once their site was live.

Case Studies: Building Community

For instance, if you're a tech startup building a fitness web application, then you should work on becoming major contributors in both the tech and fitness communities. Fitocracy—which makes fitness more engaging and addictive through game mechanics and social reinforcement—is a perfect example. In less than 16 months, co-founders Brian Wang and Dick Talens were able to create a community of more than 200,000 members—without spending any money on marketing. They openly told their own fitness stories to existing online fitness communities; they also contribute regularly on blogs and forums with fitness tips and other thoughts. The two of them were able to create a loyal following quickly by relating to others, offering solid advice and creating friendships with in the community.

Another great example is founder Kellee Khalil, of wedding inspiration site Prior to moving to New York, Kellee worked to help build her sister's wedding-focused public relations company. The two of them spent years in the trenches together, learning about the industry from top to bottom. This enabled them to form close relationships with an incredible number of people in the wedding space; when Kellee started her own company, the community was more than happy to help.

Networking Goes Both Ways

It's important to realize that being part of the community is not just networking. You need to focus on building real relationships: Be authentic in your desire to contribute. Remember it's a two-way street and you should always offer to help out the others in the community.

You'll see that:
•You will get a more honest and realistic view of the industry that you're working in when you spend time with others in the community.
•Members in the community will gladly provide you with feedback and help you continually improve your product or service.
•When you launch your site, make changes to your product, or offer a new service, you will have a base set of supporters that will want—and be able—to help you.
•As you continue contributing to the growth of the community, you will start to establish credibility. It will be easier for you to start conversations with others you may need in the future.

Now of course, being a contributor to your industry's community will not make up for an inferior product or service. But it's a key step that you shouldn't procrastinate on. Relationship building can be exhausting, especially in the beginning—but you will find that the payoff for your business and personal growth will be invaluable down the road.

Can Smaller Companies Score With Super Bowl Ads?

Is $3.5 million for 30 seconds of fame worth it? These businesses are putting it all on the line during Super Bowl XLVI.

By Eric Markowitz and Nicole Carter

Some make you laugh, others (attempt to) make you cry. Others, well, they're forgettable.

It's all part of the fun at the Super Bowl, where brands spend upwards of $3 million for 30 seconds to capture the world's attention. "More than a game, the Super Bowl is a cultural event, a truly American spectacle, and the ads are very much a part of the experience," notes Advertising Age's digital editor, Michael Learmonth. To be sure, airtime in between downs will be dominated by the big players: Coca-Cola, Pepsi, and GM are steadfast Super Bowl advertisers. But the little guys are taking a shot, too. Here's a look at ads from seven (smaller) brands taking a run at prime time.

Click here to watch the videos.

Wednesday, February 1, 2012

Just How Risky Is Entrepreneurship, Really?

by Bruce Gibney and Ken Howery

There are two views on entrepreneurship in America: the first (largely feigned), that it is a pure virtue like freedom of speech or religion, and the second (real) attitude that it is largely a game for the naïve. Steve Jobs, Mark Zuckerberg, and Michael Dell make fine fodder for commencement speeches, but when parents and career counselors thrust graduates into the job market, the default isn't entrepreneurship, it's corporate serfdom. Entrepreneurship is a deviation, an occupation for heroes, heroic for the reasons it can't be recommended: it's just too unsafe. But the conventional position is nonsense; building new companies is far more sensible than the practical will admit.

First, entrepreneurship is not riskier than working at a big bank or law firm, a fact vividly underscored by the de facto nationalization of the banking sector and mass layoffs of the last few years. An especially pungent comparison exists between the classically "safe" job of lawyering versus starting a new enterprise. What could be safer than a career at a century-old white shoe firm (aside from the fact that less than a third make partner)? Lots of things, actually. Few law students even get the chance to buy the losing lottery ticket: the government estimates that 215,417 jobs for attorneys will open between 2008 and 2018 and in the same decade, there will be over 430,000 new legal graduates so only half will get to practice in their chosen field (at substantial opportunity and tuition costs). By contrast, of 5,000 businesses started in 2004, almost 56% were still in business in 2010, despite suffering through a brutal economic downturn. Even as venture capitalists predisposed to have faith in new ventures, we were somewhat surprised that entrepreneurship has such favorable odds (the traditional rule of thumb in venture is that 4 out of 5 companies will flounder, although VC-backed tech companies may be somewhat riskier than the entire universe of new companies).

Another consideration: you can actually make real money with new companies. The actual money entailed in entrepreneurship can dwarf the outcomes from legitimate toil at established businesses. A quarter of first-time venture-backed firms are acquired for at least $50 million or file for an IPO. That's not a guarantee that every early worker makes a fortune, but it suggests the odds are better than we would intuit. And in a world that has structurally shifted to bimodal outcomes, why not shoot for the mode that allows you to build wealth? Facebook, like Google and others before it, will make an army of millionaires. They won't be the last to do so.

Maybe the most important point about entrepreneurship is that people who start or join new companies tend to actually like what they are doing. ("Outcome-independent decision making", in consulting parlance). In addition to the psychic merits of working on the personally meaningful, in an economy where low-wage, high-skill overseas workers and no-wage machines encroach ever more rapidly, it is essential to compete both in input and output. Workers motivated by financial incentives alone struggle to perform at the level of the true believer. Caring about one's job isn't a hippie luxury; it is a necessity in a ruthlessly competitive world.

Not everyone is suited to join a new company. But as a society we can't discourage those who are so inclined from joining, especially in a persistently stalled economy. We need to reconcile the realities and the rhetoric: entrepreneurship is everything we hope it to be.