Temporarily Grounded: No More Angel Tax Credits for 2011

With December right around the corner, Minnesota small businesses may not be too concerned with the recent news that the state’s angel tax credit program has no funds left for 2011. The program, which has been in operation since July of 2010, offers qualifying investors up to a 25% tax credit on eligible investments in Minnesota start-up businesses. It was allocated $16 million in tax credits for 2011, and as reported, ran out of this allotment in mid-November. The year’s $16 million is just a part of the total $23 million in credits that have been given out since the program’s inception, which has generated $92 million in investments in Minnesota companies. 

Fortunately, the popularity of the program (hence the empty bucket) is seen as a sign of success for the state, and will continue in 2012. More fortunate, still, the state’s Department of Employment and Economic Development (DEED) has already begun accepting applications for the $12 million in credits it has available for next year. 

It is still important to be aware of the ramifications for 2011. Businesses looking for—or planning on—capital from angel investors who desire the credit in the near term will now have to wait at least until January, if not later. And remember that money from investors looking for the credit cannot be received until after both the investor and the business have been qualified by the state AND allocated a portion of the funding. The 2012 credits will be doled out on a first-come, first-served basis. In the past, DEED has been quick to turn applications, but there could end up being a line (you thought that was over after Black Friday!) because of the exhaustion of the credits for 2011. 

Despite these hurdles, we are happy to see that, come New Year’s Day, the Minnesota angel program will be back.

A Post by Karen Wenzel, Guest Blogger

A Lesson to Entrepreneurs this Black Friday: Even the Big Guys Wait for Success

As Anne Bjerken noted in her blog post last week, we are rapidly approaching the holiday shopping season and, particularly, Black Friday. While I am, of course, looking forward to a reprieve from work as well as a big plate of stuffing for Thanksgiving, I am also reminded of my pre-lawyer days when I worked for a few years at the corporate headquarters of a large consumer electronics retailer. It was a Fortune 100 company, with thousands of locations and a decades-long history of perseverance and success. In the context of the current economic climate, however, particularly considering the difficulties facing small business and entrepreneurs, I can’t help but reflect on the irony of the fact that, for even big and long-standing businesses, profitability can truly come down to one day of the year. 

I’m certain most people reading this are aware of the explanation behind the name “Black Friday”: the day when retail businesses finally show a profit—and thus black ink, rather than red—on the company books. Despite the fact that this is a long-accepted rationale for the name, it is important to take a step back and think about the significance of this statistic: Most businesses’ fiscal years begin sometime between January and March. That means that even many very successful businesses wait up to 11 months of the year to break even. This thought alone is humbling. But by itself, this acknowledgement doesn’t do justice to a true understanding of how impactful this day is for retail businesses.

During my years in retail merchandising, the anticipation of a Thanksgiving-day meal paled in comparison to the fact that it was followed immediately by Black Friday. We at work had been planning for this day since June of the previous summer. We had held countless strategy meetings, board meetings, staff meetings—you name it—both internally and with vendors, and had prepared spreadsheet after spreadsheet of analytics.  Black Friday wasn’t just the day when we would find out if all of our analysis was correct and if any of our projections would come true.  It was a day that could solidify or take away our team’s ad space for the following year (making millions of dollars of difference), which could actually affect our corporate team’s composition and placement within the structure of the company.  Further, as consumer tastes and desires churn from year to year, Black Friday was a day that could impact the future of the placement of products in our stores across the country, literally making or breaking vendors—most of whom were large companies themselves.

Rather than taking the Friday after Thanksgiving off to travel for the holidays or actually go shopping, most of our team would be in the office, at our desks, watching real time numbers roll in from across the country.  We’d be receiving reports, and updating the executives, vendors, and other teams. After the first hour of the day, we already knew which ads succeeded and which were major failures. We would sheepishly try to explain the miscalculations, proudly applaud the unexpected successes, and frantically begin updating our advertising plans for the remainder of December, hoping to capitalize on our newfound knowledge. It was all sort of magical and mysterious, terrifying and exciting, overhyped and yet realistically important at the same time. While, of course, the entire company would not go down based on the day’s numbers, there was definitely more than just money on the line.

Though I am now much farther removed and less personally involved in Black Friday, I believe there is a lesson in this perspective for small businesses—those that may feel like any day of the year could result in failure. Even big businesses, those that have achieved a level of success most entrepreneurs would dream of, sit on pins and needles on Black Friday. Their success and profitability can truly come down to one day of the year, after millions of dollars in time and resources spent, and 11 months of waiting “in the red.” 

So, whether it’s after 11 months, or 11 years, my message to entrepreneurs is to take heart in the similarities you have with even the biggest companies this Black Friday. The waiting, the work, and the perseverance will never be over, but eventually for many of you (whether it’s with or without the crazy shoppers), those black numbers will materialize too.

A Post by Karen Wenzel, Guest Blogger

Online Sample Sales—Creating Consumer Frenzy for Absolutely No Reason

I have an addiction, I will admit it. I am addicted to online sample sale sites.

Sample sale sites are websites that usually sell designer brand items that you would purchase in department stores for (what appears at least to be) a discounted price. Sites such as RueLaLa, Gilt Group, Ideeli, Hautelook, the Outnet, and Beyond the Rack require you to be invited by someone, or join as a member for a fee, and then they advertise a select number of designer offerings each day with the sales typically open for only 48 hours. For example, these websites might offer anything from luxury vacations and diamond jewelry, to Hermes Birkin bags, at a discount. The “retail price” is often listed, without any source for where that comes from, and then the site offers their exclusive discounted price from that. Often, if I do a quick Google search for the same item, I can find it at the same or lower price at other non-sale retail sites. The trick is to make the consumer (namely, me) feel as if they have been invited to this exclusive sale, which is only available for a very limited time, and they have to make a Target-check-out-line-type of impulse decision. Most of the sales sell out within the first couple hours of being open, adding to the feeling that you HAVE to buy it now. Oh yeah, and most of the time you can’t return anything.

As we approach the holiday shopping season, this model is very much like creating Black Friday frenzy every single day of the week. Genius, really. With the world captivated by extreme-couponing and getting a good deal in general, the mass market of sample sale sites, monthly subscription memberships for everything from plants to shoes, and the coupon giants like Groupon and Crowd Cut, have become retail gold mines.

How can business owners in general jump on this bandwagon, or create this same feeling for their consumers? Even though not every business owner targets shopping-crazed women in their thirties with constant access to a computer (not to name names), all kinds of businesses can use this same concept to create a feeling of exclusivity, a need to purchase the product right now, and that feeling that you are getting tremendous value for the price. Age old sales concepts, really, but in the new context of a bargain obsessed population that is always looking to feel as if they paid far less for something than it was worth.

House Passes “Crowdfunding bill”… the fine print

As I mentioned in my last post, Crowdfunding is the latest trend for raising capital. The U.S. House of Representatives has noticed and, on November 3, passed legislation intended to help foster the ability of early-stage companies to use Crowdfunding to raise capital. It also passed other legislation that may, as a practical matter, be more significant…but more on that below.

My last post detailed some of the potential pitfalls of Crowdfunding under the current regulatory scheme. The new legislation was proposed to eliminate some of these hurdles.

It’s great that Congress is recognizing the need to update (to quote the House bill’s sponsor, Representative Kevin McCarthy) “Depression-era regulations that are outdated because they not only predate Twitter and Facebook but cell phones and color television.” However, before you all run off and start contacting the masses for capital through a "general solicitation" (without advice from your lawyer), you need to look at the “fine print” in the details that were added to the legislation and companion legislation that have been passed by the House.

First, the good news: the legislation has recently been placed on the Senate calendar and has President Obama’s support, so it appears that something will ultimately pass. It does address some of the key issues we’ve been wondering about (like interaction with state law and integration with other federally exempt offerings). A quick summary of the key provisions:

• An issuer can raise up to $1,000,000 in a 12-month period ($2,000,000 if it has audited financials)
• Investors can invest the lesser of $10,000 or 10% of their annual income in such an offering
• Issuers aren’t precluded from raising capital under other exempt offerings as a result of their offerings under the crowdfunding legislation
• Shareholders who invest under the crowdfunding exemption are not counted toward the maximum number of shareholders that a private company can have (currently 500, but there’s proposed legislation to raise that to 1,000) before it must become a reporting company
• State regulators are preempted from regulating these offerings (although they retain their enforcement rights against unlawful conduct)

Now, the not so good news—many additional requirements on issuers were added to the original proposed legislation. These include:

• Requiring an issuer to post a warning on its web site regarding the speculative nature of the investment
• Taking “reasonable measures to reduce fraud” (whatever that means)
• Providing the SEC with notice (prior to any offering) and a bunch of other information (including addresses, principals, employees, use of proceeds, and targeted offering amount), which the SEC is required to share with state regulators
• Requiring investors to answer questions demonstrating their suitability to invest in areas “as the [SEC] may determine” (more about that in a minute)
• Having a web capability for the issuer and investors (and the SEC) to communicate with each other
• Outsourcing “cash management” in the deal to a qualified third-party custodian (broker-dealer or insured depository institution)
• Requiring that proceeds be withheld from the issuer by such custodian until at least 60% of the targeted offering amount has been raised
• Maintaining books and records as the SEC determines appropriate

As you can see from the above, there are a host of issues for the SEC to address. In fact, the legislation requires the SEC to adopt rules within 180 days to “carry out” the law. Six months doesn’t sound long, right? Well, if you’ve been following the Dodd-Frank financial reform legislation at all you probably know that regulators have missed 77% of all deadlines under that law, including 53 deadlines missed by the SEC alone. Anyone want to bet how successful the overburdened regulatory agency will be in enacting rules within the deadline that is in the final legislation? 

The Silver Lining: Notwithstanding its shortfalls, the legislation is a step in the right direction.

Maybe MORE importantly, at least when I think of things that get in the way for my clients (many of whom seem like they spend a majority of their time and energy raising capital), the House also passed the Access to Capital for Job Creators Act. This legislation removes the prohibition from general solicitation for offerings to accredited investors made under Rule 506 of Regulation D. The majority of equity financings I’ve worked on in the last decade fall into this category. As a result, with the right structure, companies will be able to use general solicitation (e.g., web sites, advertisements, PR) to publicize their offerings and they won’t have to hear me explain why they need a pre-existing relationship with investors in order to take their money.

Because the impact on many of my clients is potentially so significant, I’ll be monitoring both bills as they (I hope) make their way through the Senate and to the president’s desk. Somehow, I can’t think about it without humming the "I'm Just a Bill" song from my childhood spent watching Schoolhouse Rock.

Why VCs Are Attracted To Online Wine Retailer Lot18

I was happy to receive an email this week from Lot18, my favorite online wine marketplace, announcing that the company had raised an additional $30 million in Series C venture capital financing led by Accel Partners.

For those who aren’t familiar with it, Lot18 runs “flash” short-term (sometimes lasting only a couple of hours) sales on premium wine and wine-related products, and recently added travel, food and wine experiences, and gourmet foods to its offerings. Since I’m a big fan of the site from the consumer perspective, the news of investors wanting to put their money at risk to grow this business was good news to me. Lot18.com has only been around since last November and has reportedly raised a total of nearly $50 million in investments, has 500,000 members, and did $1 million of sales in one month earlier this year.

With new flash sale sites popping up all over the place in a number of categories (clothing, accessories, food, wine, travel), this category already seems saturated with a lot of sites that will eventually be faced with an inventory scarcity or less price advantages as the economy recovers and wineries (and other sellers of products and services) no longer need to liquidate inventory at below-retail prices.

With this in mind, I looked at this most recent substantial investment as an opportunity for me to research the short history of Lot18 to examine some of the factors that might make this an attractive investment for the VCs. When I really started looking, I realized this company is getting a lot of attention from bloggers, as well as VCs, and I think these are some of the reasons why:

(1) Founders with a Track Record.

Co-founder of Lot18, Philip James, was previously the founding CEO of snooth.com, a wine-focused web site with over 805,000 members that offers extensive wine reviews, online price comparisons between wine merchants, and many other wine-related products and services. Kevin Fortuna, Lot18’s other founder, was formerly the CEO of Quigo, an advertising technology company that was sold to AOL Time Warner for $360 million in 2007. Combined, those two look to possess a very relevant set of skills and experience for this type of venture, and they are a good reminder that, when looking for investment in a yet-unproven company, proven people are very compelling. 

(2) Gradual Loosening of Regulations in a High Value Industry

Gomberg, Fredrikson & Associates, a wine industry consulting firm, reported earlier this year that the United States has just eclipsed France as the largest wine-consuming nation, and that the retail value of United States wine sales in 2010 topped $30 billion. This was a luxury industry that actually grew in the United States even during a recession, which, for a non-investing expert like me, seems like as good a place to put money to work as any.  Further brightening the future for online wine sales, states are continuing to loosen their regulations regarding interstate shipments of wine. Most recently, Maryland passed legislation allowing residents to have wine shipped directly from wineries to their homes. As these shipping regulations continue to change, investors can see an obvious path towards future growth without having to be too imaginative. As we often tell our clients who are looking for outside investment, a simpler story about the path to success is usually a better story.

(3) Differentiation from Competitors

Despite flash sales being a fairly young category of sales vehicle, there already seems to be more flash sale sites than even I can keep track of (and let’s face it, I love wine). In the wine category alone, Wines ‘Til Sold Out, wineaccess, wine.woot, and Gilt Taste are obvious competitors. I admittedly know more about Lot18 than I do about any of these competitors, but from a purely consumer perspective, I prefer Lot18 because of the excellent customer service I have received there and because it offers what appears to be a small and carefully chosen selection. Thus, the appeal of Lot18 specifically lies well beyond just discounts on the wine, which means I am likely to continue shopping there even if the discounts dwindle as the economy recovers in future years. When there are reasons a company should succeed in a bad economy as well as a good economy, any time seems like the right time to invest.

A Post by Alyssa Hirschfeld, Guest Blogger

Fast Food Nation: The Dark Side of the All-American Meal,

The Book: Fast Food Nation: The Dark Side of the All-American Meal, by Eric Schlosser (Perennial, 2002).

Why You Should Care: Before the high tech revolution, there was fast food. Both are a testament to the power of entrepreneurship.

Let me confess something at the outset: I have a weakness for McDonald’s french fries. Faced with a supersized serving, my head tells me to turn away, but my heart—or, to be much more accurate, my stomach—compels me otherwise.

I know I am not alone. You’d be hard pressed to find anyone who does not have an opinion on who—or rather, which, fast food franchise—offers the best fry. For a large number of aficionados, the golden, hot crispiness of the McDonald’s fry, with its hint of beef flavor, wins hands down.

For me, McDonald’s has always been around—I never knew a time when there wasn’t one nearby. And now fast food is everywhere. Where did it come from? I wanted to know more, and so it was with some anticipation that I approached Eric Schlosser’s Fast Food Nation, a fascinating and detailed review of what has become, like jazz music, one of America’s principal contributions to global culture—the fast food franchise.

I was not disappointed. Here I learned that the subtle beef flavor of those McDonald’s fries originally came from deep frying in beef tallow. I shudder to think how much of that, consumed in my youth, now coats the walls of my arteries, but was relieved to learn that since 1993 the fries have been prepared in pure vegetable oil (the subtle beef flavor now coming from a secret “natural flavoring” additive). I also learned that those perfectly shaped fries are the product of a contraption consisting of a giant high pressure hose that shoots potatoes at high speed into a group of sharp steel blades. Pretty cool.

The big picture is even more interesting. “A Nation’s diet,” Schlosser tells us, “can be more revealing than its art or literature.” That’s some claim, but consider that on any given day, about a quarter of the adult population in the United States eats at a fast food restaurant. And about half of the money spent on food in this country is spent in restaurants, mostly of the fast-food variety.

It was not always thus. Here again we have a story of the marriage of opportunity and American ingenuity giving birth to a hitherto unknown industry that has changed life in the United States and, by export, abroad. Before the high tech revolution came fast food. And, as has been the case with high tech, “One of the ironies of America’s fast food industry is that a business so dedicated to conformity was founded by iconoclasts and self-made men, by entrepreneurs willing to defy conventional opinion.”

For better or worse, the industry has changed America, and again the massive shift in the way we live our lives started with just a few entrepreneurs and an idea.