Tuesday, April 24, 2012

Update on Venture Capital Investing

Earlier this year, I wrote about the state of venture capital investing nationally and locally, based in part on data from the 2010 year-end MoneyTreeTM Report by PricewaterhouseCoopers and the National Venture Capital Association analyzing data from Thomson Reuters. Just this past week a new MoneyTree ReportTM , detailing venture capital investments during the first quarter of 2012, was released. This Report shows that venture capital investments were down in this most recent quarter relative to the fourth quarter of 2011, both in terms of the total amount invested and the number of deals completed.
On a national level, a total of $5.8 billion was invested in 758 deals during the first quarter of 2012, which represents a 19% decrease in the amount invested and a 15% decrease in the total number of deals from the fourth quarter of 2011. The decreased investment was felt broadly across most sectors, as 11 of the Report’s 17 industry classifications saw declining investment in the first quarter of 2012 from the fourth quarter of 2011. 
In contrast to the national numbers, the Report shows that venture capital investments in Minnesota-based companies were up for the first quarter of 2012 compared to the fourth quarter of 2011. Minnesota-based companies raised $70.5 million during the first quarter of 2012, compared with $42 million during the fourth quarter of 2011.
The largest of the six local deals involved software company Code 42 Software, Inc., which raised $52.5 million in a round led by Accel Partners. This continues a trend in favor of investments in software and Internet-based companies. On a national level, the software sector was the category receiving the largest amount of venture capital investment in the first quarter of 2012, both in terms of dollars invested ($1.6 billion) and the number of deals completed (231).
Interestingly, of the six reported Minnesota deals during the first quarter of 2012, only one was for a medical device company. Historically, medical device deals have accounted for a large percentage of venture capital investments in Minnesota. And, while most sectors experienced a decrease nationally, investments in medical device companies during the first quarter of 2012 were up 33% nationally from the fourth quarter of 2011.
The low number of medical device deals for local companies this past quarter is probably just an anomaly of quarter-to-quarter fluctuations. By the end of the year, the number of medical device deals will likely be closer to historical averages. However, as noted in this Star Tribune article, there is a lot of uncertainty in the medical device sector, fueled in part by regulatory concerns and a longer path to exit for medical device companies. Unless these concerns diminish (particularly on the regulatory front), in the long run we will likely see less investment in the medical device industry. This would not be good for Minnesota.

Friday, April 20, 2012

“Justice for...” Redux

Remember my earlier blog about the Florida grandparents who filed applications to register trademarks to “protect” the name of their murdered granddaughter? All of the media attention on the recent killing of Trayvon Martin in Florida made me think. I wonder…
Sure enough, the mother of Trayvon Martin has filed applications to register I AM TRAYVON and JUSTICE FOR TRAYVON. A separate application to register JUSTICE FOR TRAYVON MARTIN FOUNDATION was filed by the Justice for Trayvon Martin Foundation, Inc., which is a foundation established by the family of the deceased boy.
Unlike the “Caylee Anthony” marks (which were filed for use in connection with t-shirts, stickers, underwear, and buttons), the applications filed by Trayvon’s mother are for digital materials, and the Foundation’s application is for use in connection with charitable fundraising services and educational and entertainment services. From purely a trademark standpoint, these are much more appropriate uses, and the owners of these applications could actually achieve trademark “protection” for these uses of Trayvon Martin’s name and image. In addition, use of these marks on t-shirts, stickers, buttons, and other items is good trademark practice if such items advertise or promote the underlying trademarked services. 
Confused? Don’t be. Just remember that words or designs used strictly for decorative purposes do not meet the “branding” requirement for trademark protection. 
So what happened with the Caylee Martin marks? Both applications filed by the grandparents—actually, in the name of a law firm representing the grandparents—have been abandoned. The applications were reviewed and Office Actions were issued asking if the name in the marks represented a living or deceased individual, and requesting the consent of the named individual, if living. The grandparents/lawyers failed to respond, and so the applications were abandoned without ever getting to the really meaty issues—whether the law firm could actually prosecute the applications without being the owner of the marks, or whether the grandparents could ever establish appropriate use of the marks as trademarks. 
While it is possible that the grandparents could have worked out the technicalities and ultimately obtained registrations of the marks, I suspect that timing affected their ultimate decision not to proceed. While the applications were pending, the mother of the child, Casey Anthony, was acquitted of the murder charge. Caylee Anthony became yesterday’s news. There was no longer as much commercial value in the use of her name, and thus less concern for protection.
It may also have dawned on the grandparents that their acquitted daughter could actually challenge them for any trademark rights that they claimed—or at least prevent them from exercising any such rights. Under Florida’ s Commercial Discrimination laws (Chapter 540), no one is allowed to publish, print, display, or otherwise publicly use the name, portrait, photograph, or other likeness of any person for commercial or advertising purposes without that person’s express consent. For a deceased person, a license to use the name can only be given by a surviving spouse or surviving children. (Yes. That is what it says.) Elsewhere in the statute a parent or guardian is authorized to give consent for a minor, but that language is not expressly stated in the section applicable to deceased persons.  
Under the current circumstances, I suspect that this technicality will not become a factor in the Trayvon Martin case, unless raised by his father or someone else interested in commercial opportunities or trying to make mischief. About the same time that the Martin family applied for registration of its marks, an individual in California applied to register JUSTICE FOR TRAYVON for use on hooded sweatshirts, and an individual in Kansas applied to register IF I HAD A SON, HE’D LOOK LIKE TRAYVON for “licensing of advertising slogans and cartoon characters.” And while neither George Zimmerman—the man who shot Trayvon Martin—nor his family appear to have taken any similar actions to protect his name and story, an individual in San Francisco has applied to register I BELIEVE YOU ZIMMERMAN for use on all sorts of clothing, glasses/cups/mugs, and stickers.

Wednesday, April 18, 2012

A Look at the Startup Genome

I have been following the “Startup Genome,” a developing benchmarking tool for (and blog relating to) start-ups. The tool allows a start-up to measure its progress—or lack thereof—compared to other similar companies against a database developed and standardized by Startup Genome.
The initial results are fascinating. Over 16,000 companies signed up for Startup Compass and have been feeding valuable data to Startup Genome. Startup Genome has used this data to identify not only key ecosystems for successful entrepreneurial activity, but factors which make entrepreneurial efforts either more successful or more likely to fail.  
The initial report, the “Startup Genome Report,” takes data from over 650 web startups, and provides initial findings that, if developed as anticipated, will be an extremely valuable tool for entrepreneurs. 
What may be ultimately less valuable than the underlying tool is the analysis of certain geographic areas where start-ups develop and how they succeed and fail in those environments. In the references to “ecosystems,” a key input for companies submitting data is “where are they,” and clearly some ecosystems come out on top compared to others in the world. Among the top are Silicon Valley (no surprise), London, and New York City (which is experiencing a “Renaissance-like” resurgence as an “entrepreneurial ecosystem.”)
Ecosystems that support entrepreneurial activity are extremely important, but the companies are important to the Ecosystems as well. Case in point: as pointed out here, according to the White House, “companies less than five years old created 44 million jobs over the last three decades and accounted for all net new jobs created in the U.S. over that period.”  
One can only imagine how economic development departments from cities in the heart of these ecosystems will latch on to where their cities rank among the other ecosystems to promote what they are doing right. And, if you live in one of the lucky “top three” or find comparative analysis among the three interesting, there are some great comparisons here. 
The fact that there are geographic areas that have developed into entrepreneur-friendly environments is not the news. On the contrary, the study gives credence to the argument that you can seek out or even make your own ecosystem just about anywhere, a point made in Bryan Keplesy’s article entitled, “Your Community as a Start-up Ecosystem.” Because so much of communication and collaboration is done virtually, having access to a particular ecosystem is far more valuable than being in the ecosystem itself. Is residing in Silicon Valley an advantage if you’re a start-up? Sure. Is it necessary? Maybe. Is access to Silicon Valley and its ecosystem critical? Absolutely.  
The Genome Report takes basic steps to categorize start-ups for better identification and study. This is not an easy task. Companies are divided into type and stage of success. What is valuable about even the more intuitive observations (for example, a start-up in one industry will behave and need to take different steps than its counterpart in a different industry) is that the Genome Report provides data that shows tangible reasons why basic observations have clear distinctions that can provide start-ups with useful benchmarks. Firms can now more properly align their actions according to their type, and not act on general advice that does not pertain to them.  
The Genome Report also goes to great lengths to categorize the stages of a Start-up listed as follows:
  1. Discovery
  2. Validation
  3. Efficiency
  4. Scale
  5. Profit maximization
  6. Renewal
The Genome Report does not report on #5 and #6. The overview of the results showed very consistent data from successful and unsuccessful companies by industry. To view the complete report, which requires a sign-in process, click here.
The goal of the project is to develop a tool where start-ups can measure whether they are making progress, and how they should allocate their time and energy to increase their chances of success. The report suggests that successful VCs identify firms that have well-developed processes for identifying market fits that are scalable and are not fixated on traditional criteria of the team, the market, traction, etc. 
Keep an eye on the Startup Genome. Using it could be the next big part of your business strategy. 

Thursday, April 12, 2012

The Pitch Doctor: How to Effectively Communicate Your Business Pitch—and Other Messages

Last month I attended a Minnesota entrepreneurs event hosted by the Minnesota chapter of EO. It was an evening-long affair, with entrepreneurs from all levels and at all stages in attendance to discuss their businesses, ideas, goals, and challenges. While the majority of the evening consisted of roundtable discussions with experienced “mentors,” there was also an optional workshop by Chris Carlson, a designated “Pitch Doctor” for Project Skyway.
Being an attorney at the event, I planned to spend my night meeting, socializing with, and learning from the other attendees; the pitching workshop didn’t seem very relevant for my purposes. But after hearing more than a few people commenting on how great the session was, I decided to make it my last stop of the night.
I’m very glad I did. Not only did I learn valuable information about how entrepreneurs attempt to pitch their businesses and common missteps, I also learned more broadly about the importance of listening, speaking honestly, and being yourself when attempting to convey a message of any kind. Chris Carlson, attorney, actor, and founder of NarrativePros, LLC, led the dynamic session and was inspiring. Again, his key message for effective communication revolves around focusing on one’s audience (listening), and being your authentic self.
In one exercise, Chris had us pair up with a partner for a two-minute-long conversation. During this conversation, each partner was told to repeat the last three words spoken by the other person before continuing with their own response. For example, here’s a snippet from my conversation: “Hi, my name is Karen Wenzel and I’m from St. Cloud.” Response: “I’m from St. Cloud. Hi my name is Joe Nelson. I went to Carlson School of Business.” Response: “Carlson School of Business. I went to St. Olaf College and majored in English.” Response: “Majored in English. . . .” And so on.
While it felt silly and awkward, to say the least, once the exercise was over, participants agreed that it was more difficult than it had sounded. Not because it was hard to think of something to say yourself, but because it took an extra amount of concentration to really listen to each word your partner was saying—since you knew you’d have to repeat it back. The message was clear: listening to your audience cannot be a passive activity. Rather, listening to what someone is trying to tell you may often take more energy and concentration than communicating your own message. In the challenging and competitive world of entrepreneurship, listening to what customers/clients/investors want from your business is not only significant—it is vital.
Chris also brought to our attention the way we spoke about ourselves during these types of casual conversations. For example, he’d note the way a person looked, sounded, and acted while discussing his/her background, where he/she grew up, went to school, etc. This was contrasted with the way that same person looked when giving his/her business pitch. During the casual conversation, most people appeared laid back and comfortable. They might have leaned back in their chairs, smiled, paused appropriately, or used hand gestures. When asked to deliver their business pitches, these same people would appear rigid, speak robotically, with perhaps less emotion or ease. They may have sounded “fake” or appeared to be in “sales mode.”
Of course, part of this effect comes from the fact that many business pitches consist of memorized, rote phrases that are the same each time they are conveyed. But again, the point was clear: it is not only easier for speakers, but more comfortable and therefore more meaningful to audiences, when messengers speak honestly and freely—when they are being themselves. Business pitches or slogans certainly have their purpose, but I found that when Chris would ask people to actually explain their businesses after giving their pitches, I more thoroughly understood and connected with not only the business ideas, but the people behind the ideas and their motivations.
These concepts may seem elementary, but I, for one, sincerely appreciated my “appointment” with the Pitch Doctor last month. His messages and techniques can truly help budding entrepreneurs make the most of those critical communications with business partners, customers, and investors.

A Post by Karen Wenzel, Guest Blogger

Tuesday, April 10, 2012

From Failing the LSAT to the Youngest Woman Self-Made Billionaire: Working to “Make the World Better One Butt at a Time”

Sara Blakely, the founder and creator of Spanx, a popular shape wear brand, at the age of 41 is the youngest woman to make the Forbes billionaire list without the assistance of a husband or an inheritance. Spanx is a product that emerged in 2000 when Blakely grew tired of wearing bulky body shapers and turned the control top portion of pantyhose into something she could wear comfortably under sheer clothes. Today, the company doesn’t even need to advertise, as every A-list celebrity swears Spanx is a must-have accessory on the red carpet.
Sara’s story is a true American entrepreneurial fairytale. A young woman, tired of the corporate rat race, after failing the law school entrance exam, invents a product that takes off and makes her a billionaire. Sara decided she needed something to wear under clothes that otherwise didn’t exist in the marketplace. She cut the feet off some pantyhose, invested an initial $5,000, and took her product around to manufacturers until she found one that would make the product the way she wanted. After self-financing for years, and shipping samples to Oprah’s stylist, she now sells in 11,500 stores worldwide. When Harpo Productions called to tell her that Oprah was going to tell her audience about Spanx, Sara didn’t even have a website up yet.
Today Blakely owns 100% of the company she founded, and it is worth an estimated $1,000,000,000. For the first time in 12 years, Sarah is considering taking the company public in order to secure capital for international growth. She, like many company founders, was initially against the idea of bringing in outside investors. Of course, very few can get to $1 billion without outside capital. Wonder what would have happened if I had failed the LSAT?

Thursday, April 5, 2012

Random Thoughts on Privacy and Test Taking

·       On February 22, the White House issued a Consumer Privacy Bill of Rights.
·       On March 26, the Federal Trade Commission called for greater regulation of online consumer privacy.
·       On March 9, I took two examinations to become a Certified Information Privacy Professional.
The certification exams followed my attendance at the Global Privacy Summit in Washington, DC, sponsored by the International Association of Privacy Professionals (IAPP). The first exam covered privacy and data protection from a global perspective, including privacy principles and definitions, information security controls, and online privacy protection. These general principles are essential to all privacy professionals regardless of industry, practice, or jurisdiction. The second exam was specific to United States privacy laws and regulations as well as the transfer of personal data to and from the United States, European Union, and other jurisdictions.
There was one prerequisite for this certification exambring a sharpened #2 pencil. The invitation clearly stated that no extra pencils would be available at the test. Our law firm supply room had mechanical pencils and some thin black #10 graphite pencils. Cool looking pencils, but I was looking for the old-fashioned maize-colored Ticonderoga brand. Thanks to a fellow test-taker who apparently had a zest for the use of the eraser, I was able to borrow one of the pink “Dora the Explorer” pencils that he had been given by his young daughter.
The last test I took was the Minnesota bar exam in 1985 and the outcome was positive. I expect to get the results of these certification exams within a few weeks. If I pass, I will certainly make the results public. If not, I may assert my right to keep private such personally identifiable information (otherwise known as “PII”).
Yes, the privacy professional lives in a world of acronyms and technical jargon. Consider the following:
Right now, my knowledge of privacy law and related issues is at its zenith. If you ask me questions about any of the above privacy-related laws and terminology, I will likely answer quickly and with confidence. How long can I keep so much information stored in my brain for such instant recall?
How do I sum up the most important lesson learned from my recent studies? Say what you do and do what you say.
If you have a privacy notice and policy posted on your website, make sure that it is consistent with how you actually use the PII. If you say you will not share the PII with third parties, make sure that you do not share information with third parties. Even if the sharing is otherwise legal, your inaccurate privacy policy may subject you to a claim of deceptive trade practices.
Cory Doctorow, a keynote speaker at the Summit and co-editor of the weblog boing boing.net, suggested that people undervalue their privacy and that data-driven companies exploit this. He asserted that the privacy bargain made with Facebook to give up personal data in exchange for a free service is not a fair exchange.
At the other end of the spectrum was the perspective shared by Summit speaker Jeff Jarvis. Author of Public PartsHow Sharing in the Digital Age Improves the Way We Work and Live, Jarvis professes that “public is better than private” and that the sharing of PII can be beneficial. When Jeff decided to tell the world about his prostate cancer he happily blogged about his malfunctioning penis and the adult diapers he had to wear. He views technology as enabling the sharing of information and that the digital conversations we are having are like nothing we have ever experienced in our history.
Should the collection, processing, and use of PII follow the European model and require more informed consent by individuals? Are new federal laws and regulations necessary? How many more acronyms will I have to learn to give sage counsel in the privacy arena? How different will the certification exams look next year from the ones I just took?
Note to self: when you take a multiple choice test with a pencil and eraser, try not to sit next to the heavy set guy who makes the entire table shake each and every time he makes use of his eraser. You just might find that your attempt to fill in “A” ends up in the “B” box.


Monday, April 2, 2012

The JOBS Act—is it all about the acronyms?

As many of you may have heard, the U.S. Senate and House of Representatives each passed the Jumpstart Our Business Startups (or JOBS) Act in the last several days and sent it to President Obama for his signature, which is expected later this week (likely Thursday).
As I described in a prior post, the JOBS Act is actually a “roll up” of several pieces of legislation relating to early stage capital raising and opening the U.S. IPO market. The legislation that passed in both the House and Senate has been amended from the original pieces of legislation passed by the House that I described in another earlier post last November.
You may be wondering how this significant legislation (more on that in a moment) made its way through Congress and passed with strong bipartisan support, especially when there is so much gridlock in Washington. It certainly has something to do with people realizing that many emerging companies, the lifeblood of our economy, are starving for early stage capital and that the IPO market has been stagnant.
Could it also be related to the clever “JOBS” acronym?
Of course jobs will be created by improving access to capital for emerging enterprises. However, unlike some legislation aimed directly at job creation and “shovel-ready” projects, the JOBS Act is really about access to capital markets for emerging enterprises (an indirect approach). But calling it the JOBS Act must have made it easier to garner votes…after all, who would want to be standing for re-election saying that they voted against the “JOBS Act,” especially in the current economy?
As for the legislation, I think it is pretty clear that there is a lot of SEC rulemaking and guidance to come before we know what it really means and what the impact will be. Assuming the president signs it, here are a few things I’ve learned that should be most interesting to entrepreneurs:
  • Title II, which I still think has the biggest potential to be a game changer for my typical entrepreneurial clients who are raising capital, eliminates the prohibition on general solicitation (Internet, radio, advertisements, etc.) in a Rule 506 offering (ask your lawyer if you don’t know what that means), as long as you ONLY allow “accredited” investors to invest.  You also need to take reasonable steps to verify (whatever that means) accredited status; I guess we’ll learn when the SEC adopts rules telling us. Hopefully, this will enable entrepreneurs who aren’t well connected to find legal means to reach new potential investors. I wouldn’t rush out and purchase air time on local late night cable TV to advertise your offering just yet because these provisions won’t take effect immediately—they require SEC rulemaking (within 90 days).
  • There are also some provisions in Title II that, on their face, seem interesting (especially in light of the recent focus on finders detailed by my colleague, Frank Vargas, in his recent post) because they exempt certain individuals who assist in offerings from broker-dealer regulation. Before all the “finders” out there get too excited, the language is pretty narrowly tailored to codify previous SEC guidance regarding matching services.  You still can’t legally get paid transaction-based compensation or be actively involved in documenting and/or negotiating the terms of an investment.
  • Believe it or not, someone in Washington was clever enough to come up with the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act,” or CROWDFUND Act. Another creative acronym, huh? While much focus has been placed on this legislation because of the desire to permit early stage companies to access small amounts of capital from large groups of investors using the Internet, there are many hoops to jump through (and at least 270 days worth of rulemaking by the SEC) before it might make sense for a company to give it a try. Maybe all you need to know is this: you won’t be able to do it without the assistance of a skilled securities lawyer (and, depending on the amount you’re raising, an independent CPA). Certainly more to follow on this subject in future posts as the rules are adopted.
There’s a lot more in the JOBS Act (too much to detail in a single post). Much of what remains has to do with access and reporting to the public capital markets.
Here’s a brief summary of some of what remains:
  • Title I is designed to make it easier for companies to test the waters (and confidentially get feedback from the SEC) prior to actually launching an IPO. It also lowers the reporting obligations for “emerging growth companies” (which, believe it or not, means those who have revenue of less than one billion in annual gross revenues) for a period of time after public offering. Bad news for companies that are “emerging” and already public—the Act only helps if you became public after December 8, 2011.
  • There are provisions that increase the amount that can be raised under “Regulation A” (again, ask your lawyer) in an attempt to increase its utility. This should be easy to accomplish because there have been so few. Other provisions deal with the interaction between the new law and state regulation of (and enforcement relating to) offerings.There are provisions that increase the amount that can be raised under “Regulation A” (again, ask your lawyer) in an attempt to increase its utility. This should be easy to accomplish because there have been so few. Other provisions deal with the interaction between the new law and state regulation of (and enforcement relating to) offerings.
  • Finally, the law increases the number of shareholders a private company can have before being required to become a “reporting company” under SEC rules. The new number is 2,000 total or 500 non-accredited (not sure about the logistics of confirming accredited status but maybe a year-end questionnaire when the question is relevant); you also get to exclude from counting any shareholders who bought under the CROWDFUND Act or under an employee plan.
The Heartfelt Expiration of my Editorial News Discourse…