Female Tech Entrepreneurs – A Slow but Steady Evolution

Since beginning my career as a lawyer for entrepreneurs focusing on the high-tech sector, I have to admit that at many networking events I have been a minority being a woman in attendance. Perhaps it’s something about the mind-set of traditional entrepreneurs (studies show that women are typically more risk-averse than men), or the stereotypical affinity of men to tech-related activities (see this article on how video games stimulate men’s brains more than women’s).

Despite these conceivably ingrained barriers to women’s involvement in the tech-entrepreneurial sector, however, there seem to be a growing number of counterpoints. For example, The Huffington Post explains that a growing body of evidence is disproving the notion that “men are the tech industry’s most coveted market.” According to a cited study, women in Western countries use a significantly higher percentage of technology than men. This includes both mobile phone and internet use, especially social media. One rationale for this trend is that this type of technology speaks to women’s traditional inclination toward “talking to each other, cooperation and being part of a group.” The explosion of Pinterest is a perfect example.

Another recent article in USA Today notes that the growth of female tech entrepreneurs reflects larger change in the world of technology. For example, women purportedly control 70% of online purchases worldwide (If you had sat next to my law school classmate Katrina, whose favorite websites were dsw.com and macys.com/shoes, this would not surprise you –  I’m pretty sure she made some kind of shoe purchase every other day on her laptop during Federal Securities Regulation class). This statistic begs for the development of further applications and commercial sites tailored towards women.

Numbers support the emergence of women in the tech-entrepreneurial sector. The USA Today article states that the number of women founding tech companies in the U.S. doubled over the past three years. 89% of the high-tech IPOs in the U.S. in 2009 had at least one female officer. Last year’s grand prize winner of the Minnesota Cup was a company led by a woman. Finally, few months ago my fellow blogger Nevin Harwood posted about an Internet-based company founded by two women that was featured on ABC’s hit TV show Shark Tank.

There is definitely still progress to be made. The USA Today article cites the fact that still only 3% of tech start-ups today are led by women, and only 11.7% of computer-science bachelor degree graduates in 2010-2011 were female. It also notes that the recent economic downturn and drop in venture capital especially impacted women-led companies.

I remain an optimist, however, and truly believe that –  especially in Minnesota – the evolution of female tech entrepreneurs is just beginning.

A Post by Karen Wenzel, Guest Blogger

NANOTECHNOLOGY: Major market breakthroughs ahead?

I am writing this entry from COMS2012 in Tønsberg Norway, one of the leading nanotechnology conferences in the world being held in one of the oldest cities in Northern Europe.

COMS2012 is the 17th annual conference on commercializing micro- and nanotechnology. The conference brings “leaders from all over the world and every sector of industry, from high tech companies, national labs, regional development and government agencies, investment and consulting groups, market researchers, educators and students, all sharing, learning and creating partnerships in an open interactive setting.” A conference focusing on accelerating commercialization activity among established and emerging micro and nano-based businesses is an effort worth applauding and repeating—often.

Nanotechnology (the study, application and manipulation of atomic, molecular and macromolecular matter) is not new, but only since we’ve gained the ability to understand and apply knowledge about the molecular make-up of matter has anyone been able to appreciate the commercial value of nanotechnology. Primary industry sectors that utilize nanotechnology include food, medicine, pharma, cosmetics, energy, aquaculture, defense and metallurgy.

Nanotechnology hit the U.S. stage in a major way in July of 2000 when Congress authorized over $400 million into the National Nanotechnology Initiative to encourage R&D. The underlying premise was to advance billions of dollars of federally-funded research into commercially viable products and companies, initiating another “semi-conductor” like wave of innovation and advancements utilizing nano-particles and nano-engineering. What followed was a gradual increase in private sector participation in the development and production of nanotechnology products. This happened at the same time that market for public companies, including nanotechnology companies, was shrinking to its own “nano-like” stature.

At its height, the nanotechnology field saw an estimated $1.8 billion of private sector investment (the entire value of nanotechnology investment cannot be fully known as large corporations and even the U.S. government do not necessarily track or report spending and investment on projects where nanotechnology may be only a part, even if a significant one, of expenditures). However, the number has been falling since, in part due to a dearth of funding for most sectors. Because of this, the ratio of government (federal and state) investment into nanotechnology compared to private investment is problematic. Public markets for nanotechnology companies, although commendable, remain small. Moreover, the dearth of any “traditionally understood” exit has the venture community concerned.

Also, the ability to utilize nanotechnology, particularly in the health and food sectors is not without controversy and regulatory uncertainty. In April 2012, the U.S. Food and Drug Administration issued draft guidance on nanotechnology. The draft guidance describes the factors that manufacturers should consider when determining whether changes in manufacturing processes, including those involving nanotechnology, create a significant change that may:

•   affect the identity of the food substance;

•   affect the safety of the use of the food substance;

•   affect the regulatory status of the use of the food substance; or

•   warrant a regulatory submission to FDA.

The cosmetic product draft guidance discusses the FDA’s current thinking on the safety assessment of nano-materials when used in cosmetic products. Key points include:

•   Legal requirements for cosmetics manufactured using nano-materials are the same as those for any other cosmetics. While cosmetics are not subject to premarket approval, companies and individuals who market cosmetics are legally responsible for the safety of their products and they must be properly labeled.

•   To conduct safety assessments for cosmetic products containing nano-materials, standard safety tests may need to be modified or new methods developed.

Both sets of guidance encourage manufacturers to consult with the agency before taking their products to market. Such consultation can help FDA experts address questions related to the safety or other attributes of nanotechnology products, or answer questions about whether their regulatory status warrants a regulatory submission to FDA. What this means is that the FDA is likely understaffed and underqualified to assess all of the potential uses of nanotechnology in optimizing the use of nano-particles to modify and enhance, food, drugs, devices and cosmetics. Ironically, the technology to do this exists now, but companies are reluctant to use the available tools because of concerns about potential legal liability, regardless of the utility, safety, and efficacy that may exist. This uncertainty puts a chill on investors and large companies that might otherwise fund potentially life-changing technologies.

Look for public sector centers with more market-friendly approaches to developing and commercializing innovation. If this occurs, we may see a floodgate of new investment into the nanotechnology sector. Also, public and private forces need to collaborate to promotion the adoption by regulatory bodies of more streamlined and predictable regulation. Conferences like COMS2012 are a welcome example showcasing how the private and public sector can work together to bring valuable science to the marketplace.

Of Donuts and Domain Names

Readers of entreVIEW may recall that I wasn’t very enthusiastic about the expansion of generic top level domain names (gTLDs) authorized by ICANN (Internet Corporation for Assigned Names and Numbers).  So when ICANN published the first list of applications on “Reveal Day,” last Wednesday (June 13, 2012), I didn’t drop everything to pore over the list.

Some did, and advised that there were 1930 total applications, but no real surprises, nor any particularly interesting applications. (Somewhere I seem to recall a prediction that there would be maybe 500 applications in the first round, so the sheer volume intrigued me).  These early commentators also pronounced Google and Amazon as two of the top applicants with approximately 100 and 75 applications, respectively, and indicated that about one-third of the applications were filed by organizations protecting one or more significant brands, while several common terms were the subject of multiple applications. No surprises.

When I finally took a few minutes to look at the list, I admit that I didn’t find anything that “surprised” me, but I did find a number of things that were nevertheless interesting.

While there were multiple applications for such gTLDs as APP, ART, HOME, SHOP, BLOG, and INC, there was only one each for marks such as ATTORNEY, BEER, and COMPANY. (I expected single applications for famous trademarks – NIKE, AOL, GOOGLE, DUPONT – but BEER?) Amazon filed its applications through its European corporation. United TLD Holdco Ltd. filed applications for both DEMOCRAT and REPUBLICAN; there were no competing applications. Google and Uniregistry Corp were the only applicants for LOL, and Google and Microsoft the only applicants for DOCS. Travelers filed applications for TRAVELERS, TRAVELERSINSURANCE, and REDUMBRELLA. The Gap filed an application for PIPERLIME. (How had I never heard of that?)  One company filed applications for ALLFINANZBERATER and ALLFINANZBERATUNG. Really?

What the first reports missed were the 307 applications filed by Donuts, Inc.  This is understandable as each application was filed in the name of a separate holding company, but it is quickly apparent that there is some connection because of the shared contact person, Daniel Schindler.

A simple Google® search of that name and “TLD” discloses Donuts, Inc. as the source of the numerous applications, and identifies Donuts, Inc. as a start-up that raised over $100 million from venture capital firms and private equity institutional investors (reported to have access to billions) for the purpose of acquiring and operating numerous gTLDs. With over $56 million invested on the applications alone ($185,000 filing fee per application), Donuts, Inc. will be looking at further significant costs in completing the review process, which will involve at least some competition with others filing for some of the same gTLDs (e.g.,  APP, BLOG, BOOK, CARS, etc.), as well as fending off challenges under prescribed opposition procedures.

Since an applicant is evaluated on its financial and technical capability to operate a registry, and is expected to be in operation within a year after final approval, Donuts has to have spent some serious cash developing a plan for each application, and must be committed to spending further funds to pursue the registrations, negotiate conflicts, defend oppositions, and implement a registry for each application that is ultimately approved. I sure would like to see the business plan that shows when Donuts, Inc. first expects to make a profit.

Pre-Transaction Estate Planning Part 1: A Simple Gift Illustration

Especially in a time of very favorable interest rate environments, depressed asset values, a large estate/gift tax exemption, and capital gains rates that are probably as low as we will ever see them, pre-transaction planning is not an overly exciting blog topic, but it is an important thing for business owners to be aware of.  So here’s the first of a series of posts about some of the estate planning options you have as you prepare for a sale, liquidity event, retirement, or any kind of appreciation event this year.

By pre-transaction estate planning, I mean the estate planning opportunities that can capture the up-side of any appreciation or liquidity event and spread it among family at a low or zero transfer tax cost.  Transfer taxes are taxes levied on the transfer of assets to others, either during life or at death.  Currently we have a $5,120,000 exemption to use during life or at death before the person transferring the assets pays any tax.  Any gifts or transfers over that amount pay a 35% tax (substantially lower than the 45% or 55% tax in prior years). In Minnesota there is a $1,000,000 exemption at death, and no limit during life.  Combined with the low interest rates, low capital gains rates, lower business asset values, and exemption amounts that are set to expire at the end of 2012, this is a prime time to do any pre-transaction planning.

I will start with the most straightforward example: gifts to family members of business interests.  If you currently own 100% of a business entity, and are looking towards a sale in the next 2-5 years, you can use gifts of business interests to spread out the upside of that future sale.  For illustrative purposes, pretend you own 100 shares of the entity, currently appraised at $10,000 per share, or a total entity value of $1,000,000.  You consider this to be a very low valuation, and expect you could sell the entity for a higher price in a couple years.  You could transfer 1, 2, or even 5 shares to each of your grandchildren, in trust or outright.  If 4 grandchildren each own 5 shares, you still own 80% of the company, clearly retaining control.  The 5 shares are valued at $50,000, and because they are minority interests in the company and so are non-marketable business interests, could even be discounted further to $40,000 or $45,000 gifts.  The total gift is $160,000 to $180,000, barely using any of your allotted $5,120,000.  There is no tax due as a result of these gifts.  Fast forward 3 years, and you sell the company for $3,000,000 or $30,000 per share.  Now the grandchildren each have $150,000 and there is no additional gift implication.  The appreciation of $110,000 belongs completely to the grandchildren transfer tax-free. 

There are any number of variations to this example. You could create and gift non-voting shares, gift to dynasty trusts to last generations, or gift to a holding entity like a family limited partnership.  As this series progresses, I will discuss more leveraged gifts and how to use estate planning to make the sale of your business more appealing.

Who Did More to Revolutionize the PC Industry? Bill Gates or Daniel Bricklin?

I grew up in a suburb of Philadelphia known as West Mt. Airy. I still have fond memories of Saturday afternoon neighborhood touch football games.  Everyone would try to catch the ridiculously fast Stevie Lerner. One of those neighborhood friends was Daniel Bricklin.

In the spring of 1978, Daniel, then a Harvard Business School student, came up with the idea for VisiCalc, which was to become the very first spreadsheet program for personal computers.  Before VisiCalc, doing financial projections involved manually collected spreadsheets, every single cell of which would need to be recalculated if anything changed.  VisiCalc would automatically recalculate the entire spreadsheet to reflect any changes. What normally took 20 hours to complete with a spreadsheet could now be done in 15 minutes. Finally there was good reason to purchase personal computers for the office.

In 1979, VisiCalc retailed for $100 and became a big hit. Many observers credit the early success of Apple to the popularity of the 32 KB Apple II among businesses that wanted to use VisiCalc. In 1983, Lotus 1-2-3 was released for use on the IBM PC and other MS-DOS computers.  More powerful clones of VisiCalc thereafter continued to be introduced.

So what did Daniel do to protect the intellectual property associated with VisiCalc?

In 1979, when VisiCalc was first demonstrated to the public, patents for computer programs were possible but rarely obtained. Daniel’s lawyer at the time explained how difficult it would be to obtain patent protection and what the costs might be to  pursue a potential patent. Daniel made the decision to forego patent protection and instead rely upon copyright and trademark protection. It was not until two years later that the importance of this computer program was demonstrated in the marketplace and, in retrospect, it became clear that the decision to not file a patent application was a bad one. Unfortunately, the statutory bar—a patent application must be filed within one year the invention is used publicly or offered for sale to the public—now foreclosed patent protection for VisiCalc.

Nevertheless, Daniel has still done very well for himself and continues to develop new and innovative computer programs. 

As an intellectual property lawyer, I have learned some important lessons from Daniel. I do not want to be the lawyer who suggests to the next Daniel Bricklin that patent protection may not be a wise investment. I also wish that I had the speed to catch that pesky Stevie Lerner on the football field behind Hillel Goelman’s house.

Small Reflections on the Big Apple

I was thinking about my recent trip to NYC and all the fodder for a post relating to entrepreneurship. Should I write about the demise of H&H Bagels  (a NY institution started by Hector Toro and Helmer Hernandez on $5,000 of seed capital), which was recently shuttered because Helmer (now the full owner) was indicted for stealing employment-related taxes (a reminder to never use the IRS as a source of capital)? What about Doughnut Plant (started by an entrepreneur using his grandfather’s doughnut recipe and now a highly successful business that sells the best doughnuts I’ve ever eaten for (only in NYC) about $3.00 a pop)?

Ultimately—and not surprisingly for those who know my passions (I did see the usual 6 shows in 4 days)—I decided to forego baked goods with holes in them and comment on the journey of Newsies The Musical to the Great White Way. First, a little background:

·   The original live-action Disney movie musical “Newsies,” which was loosely based on the New York Newsboys Strike of 1899, opened in 1992. It was filmed on a budget of $15 million and earned under $3,000,000 at the box office; it was also widely panned by critics and earned seven Razzie Award nominations.

·   However, after release on VHS and DVD, the movie developed a cult following among teens, many of whom memorized every lyric (check out this YouTube video as an example) and held sleepover parties to watch the film. Amateur theatre companies made Newsies the most requested theatrical version of a Disney property that hadn’t been adapted for the stage.

·   Disney assembled a high caliber creative team, including the original composer and lyricist (Alan Menken and Jack Feldman, respectively) along with book writer Harvey Fierstein, to create the stage version. Their hope was to mount a successful professional production that they could subsequently license for regional and amateur productions. That original version opened in September 2011 to strong critical acclaim and huge response from the film’s fans.

·   Disney decided to transfer to production to the Nederlander Theatre on Broadway for a limited three-month run in early 2012, which was extended for another two months and, finally, to an open-ended run.

·   Although the show didn’t win the Tony Award for Best Musical on Sunday (that distinction went to Once, which I also really enjoyed when I saw it off Broadway last fall), it’s tough to find a ticket for the Broadway production.

What could be more entrepreneurial than a show about enterprising newspaper boys banding together to take on big corporate honchos? After-all, many well-known entrepreneurs (including Warren Buffett and Walt Disney) got their starts delivering papers.

There may be another lesson here about taking measured steps. Most people wouldn’t guess that Disney (the same Company that brought the gigantic spectacle of “The Lion King” to Broadway—it’s still running after almost 15 years and has grossed more than any Broadway show in history!) would have set its sights so low with “Newsies.” By setting appropriate expectations and decreasing the stakes—mounting the show (which could have flopped) on Broadway would undoubtedly have cost millions more than mounting it first at the Paper Mill Playhouse—Disney found a way to build the right show for the right audience. The payoff will likely come with a long-running Broadway production and successful foreign and touring productions to follow.

Often I see entrepreneurs who set their sights on the BHAG without focusing on the small opportunities right in front of them. While it’s important to have big aspirations, particularly when you want to use other people’s money to reach them, sometimes it’s OK to think small.

Networking Opportunities Through BizLounge

If you are an aspiring or early-stage entrepreneur, or want to expand your network to include such people, consider attending a BizLounge networking event. BizLounge is an organization that is committed to supporting entrepreneurism by inspiring, educating, and connecting people in our start-up community. Gray Plant Mooty has been a proud sponsor of BizLounge for several years.

BizLounge hosts monthly networking get-togethers throughout the year. The events are usually held on the third Monday of each month, with the next such gathering taking place on June 18th. The events are usually held at a local restaurant or bar, although they have also hosted events at interesting office locations. Last month, the meeting was held at CoCo, which is a co-working and collaborative work space. 

From September through May, the events include both time for networking and a presentation from a speaker. The speakers are usually successful entrepreneurs who can share their experiences (both successes and failures) to inspire and educate the attendees about starting and growing a business. Past speakers have included Larry Abdo (current owner of Nicollet Island Inn and My Burger, among many other ventures), Phil Roberts (founder of Parasole Restaurant Holdings, which has owned and operated several successful restaurants in the Twin Cities, including Manny’s, Salute, Figlio, and Chino Latino), and Robert Stephens (founder of Geek Squad).

Just last month, Daryoush Allaei, founder and CEO of Sheer Wind, Inc., spoke about his new company and his many past ventures. While his presentation was scheduled to last about 30-45 minutes, it went well over an hour because of questions from the audience. In addition to events involving entrepreneur-speakers, there are usually a few events during the year where subject matter experts are brought in to educate attendees on their field of expertise. For example, this past year, Mike Cohen, an intellectual property lawyer at our firm, spoke about IP-related concerns for start-up businesses.

During the summer months, BizLounge takes a little more relaxed approach. Typically the events are held at a restaurant/bar with a good outdoor meeting space, usually near water. The next meeting on June 18th will be held at Tuggs, on the riverfront just across from downtown Minneapolis. The summer events do not include a presenter, and are intended to provide an informal opportunity for entrepreneurs to network.

The events are free to newcomers, but they do ask you to become a member if you plan to continue attending. Annual membership dues are $75, or $25 if you are a student. All membership dues are used to pay for the meeting spaces, food, and drinks. The organization has no other real expenses, and the board that operates BizLounge does so on a volunteer basis.

So, if you are looking to connect with some other aspiring and early-stage entrepreneurial types in a relaxed setting, consider attending a BizLounge networking event this summer. At worst, you’ll spend an hour or two meeting and talking with others interested in entrepreneurism, all while enjoying free food and drink. And, you might even meet someone who is able to create some real value for your business, or help you to start that business that you’ve been planning to launch.

Advisory Boards: An Underutilized Entrepreneurial Weapon

Not to generalize (okay maybe just a little bit), but the entrepreneurs I know can be a pretty headstrong and opinionated bunch. Maybe this is part of the reason I don’t know many who have engaged an advisory board to help them develop and grow their businesses. While I’m not an entrepreneur myself (still waiting for that million dollar idea), advisory boards can add a lot of potential value for a new company.

An advisory board is similar in some ways to a corporate board of directors, but without the legal risks; there is also often less formality around them, too. The role of a corporate board of directors is to act as a fiduciary for the corporation’s shareholders and to oversee the executive officers of the corporation. An advisory board typically does not hold any official corporate power (or liability) and literally functions only in an advisory capacity. To be clear, an advisory board does not replace a board of directors, it’s just another tool in an entrepreneur’s arsenal of expertise.

Entrepreneurs, like everyone else, can use an occasional reminder of their own strengths and weaknesses. None of us are experts in everything. I have often observed that some of the most successful people are those who are not afraid to admit this and to ask for help in areas in which they may not excel.

You should consider an advisory board as an opportunity to augment the skills, networks, and relationships that you already have and seek advisory board members who have specific skills (e.g., finance, marketing, operations, or human resources) that are otherwise lacking in your business. Also, consider the professional connections that advisory board members may be able to bring to your businesses.

Creating a formal advisory board, rather than a loose set of advisors, can have other benefits. Being part of an advisory board tends to help an individual feel more invested in the success of the business. This could lead to additional sources of financing, contacts for potential customers or suppliers, or simply the benefit of lessons learned by another business owner.

It may be easier to attract quality people to serve on your advisory board than on a board of directors, because they do not have the same fiduciary obligations (and liability exposure) as members of a board of directors. Using an advisory board, you can tap into complementary skills and experience of members, without subjecting the individuals to the same level of risk or the same expected time commitment. Also, never underestimate the appeal to a person’s ego when they are asked to serve as an “expert.”

You’ll need to decide whether and what to compensate members of your advisory board. Many entrepreneurs do not provide more than a lively conversation with some adult beverages and food. Others do provide some sort of compensation, although usually stock options (rather than cash) to align interests in creating value. If a potential advisory board member is more concerned about the compensatory arrangement than how he or she can add value, you may be talking with the wrong person.

There is no one-size-fits-all recipe for an ideal advisory board. Still, an advisory board that has clear expectations as to its role and operating procedures is likely to provide more value to the business owner. When forming an advisory board, an entrepreneur should consider other issues such as: (1) whether the advisory board should have regularly scheduled meetings, or just be convened as particular questions arise; (2) what would be a reasonable time commitment to expect from advisory board members; and (3) whether there are current specific challenges in the business that the advisory board is expected to help solve. Communicating these expectations to your prospective advisory board members will help them take their role seriously and help you get the most value out of their generous support.

A Post by Alyssa Hirschfeld, Guest Blogger

Replay

The Book: Replay, by Ken Grimwood (Arbor House, 1987).

Why You Should Care: A wonderful summertime beach-read, this novel is a page-turner that will have any person with an entrepreneurial mindset wondering what he or she would do under similar circumstances.

So last time I wrote that I rarely read fiction, which prompted a fellow entreVIEW blogger (who’s something of an entrepreneurial guru) to tell me I just had to read this book, which had been recommended to him by a client who is also an entrepreneur. Turns out, this is a pretty good read for anyone, especially those with an entrepreneurial mindset.

The main character is a middle-aged journalist who, in the first pages of the book, dies of a heart attack, only to find himself returned to the point in his life when he was a freshman in college. The twist is that he can still remember everything from his prior lifetime, so he knows all the major events that have yet to occur. Following a classic entrepreneur’s fantasy, he makes bets and investments that seem extremely risky to those who know him, but are sure things to him (so, really, if there’s no risk involved, is this actually entrepreneurialism?). He makes a huge fortune, which he continues to build until he dies again, same time as in his previous life. The scenario plays over and over (just as in the 1993 film Goundhog Day, which some suggest may have been inspired by this 1987 book), except that each “replay” starts at a later point in the character’s life.            

Not a bad story (Okay, yes, it’s a page-turner), but I liked it for two particular reasons not directly linked to its story arc.

First, it really captures the feel of the time period, which covers the early 1960s through the 1980s, a period during which I went from childhood to lawyerdom. Time after time, the story will touch on some little detail, something I haven’t thought about in 40 years but which evokes the essence of life in the earlier era.

More important, though, is that the story really inspires thought about how you would act if you found yourself in the same circumstances. Chances are, most of us immediately would think of doing what the character first does—he makes a lot of money so that he can live his life without having to worry about how to generate cash flow. But, as the unfolding story makes clear, this presents its own challenges. Money proves necessary but, in the end, not sufficient. I suspect that a number of entrepreneurial readers would, after envisioning their own fantasy world along these lines, reach the same conclusion.