Tag: Entrepreneurship

Corporate Venture Capital: Boom, Bust, or Here to Stay?

Posted on by Christina Kim

Corporate Venture Capital has traditionally had a cyclical journey of ups and downs since the mid-1960s. Although its history has had three distinct boom and bust cycles, corporate venture investing has always presented significant advantages to both corporations and start-up companies. Entrepreneurs have often benefited from corporate venture capitalists’ expertise of bringing products to global markets, as well as from their additional funding and customer base.[1] Corporations have also been eager to invest in external start-up companies not only to generate financial returns, but also to develop new products and supplement its own activities.[2]

On October 31, 2012, Boston Consulting Group (“BCG”) released a report that makes a case for corporate venture capital’s permanent tenure in the corporate landscape. BCG points to data gathered by the Global Corporate Venturing, which lists 756 corporations that have corporate venture capital units.[3] The analysis separated the corporations by industry, and focused on the thirty largest corporations in seventeen industries.[4]

The first major trend garnered from the analysis shows a steady growth of CVC within the traditional industries of technology, pharmaceutical, telecommunications, and media and publishing.[5] Within the industries of technology, pharmaceutical, and telecommunications, over half of the thirty largest companies in each industry maintain CVC units.[6] This reflects the increasing corporate acknowledgement of the need to invest into start-ups to supplement their corporate development, research, and competitive advantage. Concurrent with this increase in CVC penetration, the numbers demonstrate a decrease in internal R&D.[7] These trends may indicate that companies are “transferring a share of the innovation investment from R&D into their venture units.”[8]

The second major trend demonstrates that there is a sharp increase in CVC investing within industries that have not traditionally engaged in CVC activity, such as machinery, power and gas production, consumer, and construction.[9] As a response to increasing pressure for “cleaner technology, more sustainable operations, and an improved user experience,” these industries are looking to CVC investing as a way to supplement their own internal R&D and find avenues for innovation.[10]

The third major trend demonstrates that investments are broadening beyond core business sectors towards adjacent sectors that have the potential to disrupt existing industries.[11] For example, the chemical industry diversified from its typical focuses and instead invested in clean technology.[12] This may lead to the discovery of innovative processes to supplant petrochemical processes with biochemical ones.[13] Such discoveries are essential not only to sustainable operations, but also to meet consumer demand and future efficiency.

The last major trend demonstrates that corporate venturing is occurring at earlier stages with many transactions occurring in the seed and Series A funding rounds.[14] Although investing in start-ups is inherently risky, industries such as the pharmaceutical industry rely on innovation in order to maintain a competitive advantage. Also, with the increase in CVC activity, investors are becoming more experienced, and thus, more comfortable with funding risky start-ups.[15]

These trends support the argument that corporate venture capital has changed from what it once was to an attractive and potentially permanent fixture in venture capital. With CVC emerging as an attractive avenue for supplementing R&D and discovering new innovative products and processes, CVC may indeed be able to avoid its typical decline. Thus, the mutually beneficial relationship between entrepreneurs and corporations may become a long-standing one for years to come.

___________________________

[1] Deborah Gage, Corporations Refocus on Venture Investing, Wall Street Journal (March 21, 2012), http://online.wsj.com/article/SB10001424052702304636404577291982192150956.html.

[2] Kent Bernhard, Jr., Why Corporate Venture Capital is a Good Thing for Startups, Upstart Business Journal (November 1, 2012), http://upstart.bizjournals.com/money/loot/2012/11/01/corporate-vc-is-here-to-stay.html.

[3] Falk Bielesch, Michael Brigl, Dinesh Khanna, Alexander Roos, & Florian Schmieg, Corporate Venture Capital: Avoid the Risk, Miss the Rewards, BCG Perspectives by the Boston Consulting Group (Oct. 31, 2012), https://www.bcgperspectives.com/content/articles/innovation_growth_mergers_acquisitions_corporate_venture_capital/.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

Decline in Venture Capital Investment in 2012

Posted on by Dilpreet Minhas

Many startups and young companies rely on venture capital investments to spur their growth and development, but such investment has decreased over the last fiscal year. With VC investment levels improving since the recession, but still well below what they were prior to it, 2012 reflects a declining trend in VC investment as compared to 2011. Some cite the presidential election as a contributing cause of this, suggesting investors were wary of potentially higher taxation rates on income and capital gains and that lower taxation rates on capital gains provide greater incentives to invest through venture capital firms.[1] Additionally, with the Bush tax cuts expiring in January 2013 if they are not renewed, investors may be more cautious given the uncertainty regarding potentially higher taxes that may be owed upon cashing out investments.[2] Only time will tell how President Obama’s reelection will influence investor behavior in the post-election period and through the next fiscal year.

According to a PricewaterhouseCoopers LLP and National Venture Capital Association (NVCA) report, investment for the first three quarters of 2012 totaled $20 billion in 2,661 deals, down from the results of the same period in 2011.[3] Further, in the third quarter of 2012, venture capital investment decreased in terms of both dollars and deals across all stages of development.[4] Additionally, venture capitalists invested a total of $6.5 billion in some 890 deals, representing an 11% VC investment dollar decline and a 5% deal decline from the second quarter of 2012.[5] First-time financing dollar investments also declined 8% to $1.0 billion in the third quarter, though the number of deals invested in increased 1% to a total of 297 deals.[6] Overall, it is predicted that the record of both dollar investment and deal volume will be appreciably lower at the end of 2012 than the previous year.[7]

Reflecting on this decline, NVCA President Mark Heesen commented, “Information technology investment continues to be very strong, particularly in the Internet arena while life sciences investment remains low, reflecting ongoing concerns regarding regulatory uncertainty, capital intensity and investment time horizons in the space. We also continue to see clean tech investment shifting concentration to smaller, more capital efficient deals. Opportunities continue to abound in each of these sectors, but lower venture fundraising levels will push investment dollars down as the industry recognizes it cannot put out more money than it takes in.”[8] As a result of the recession, the market has been less welcoming and favorable to companies’ initial public offerings, making it quite difficult for their investors to make a profit.[9] Further, poor responses to IPOs mean such investors are unable to recover as much of their investments to direct toward other startups, though this does not by any means leave all promising young companies without hope.

While not all are unable to secure funding and not all venture capital funds are shrinking, there is a very real trend of limited partner financiers favoring less risky investments and investing exclusively in select venture capital firms, rather than investing more broadly.[10] With a new year approaching, it will be interesting to see whether the completion of the election and the tax decisions that follow will reverse the declining investment trend of 2012.

____________________________

[1] Steven Overly, U.S. Companies Find Venture Capital Harder to Find, Wash. Post, Oct. 24, 2012, available at http://www.washingtonpost.com/business/capitalbusiness/us-companies-find-venture-capital-harder-to-find/2012/10/24/0f429b48-1d24-11e2-b647-bb1668e64058_story.html.

[2] Id.

[3] Caroline Traylor and Emily Mendell, Venture Capital Investments Decline in Dollars and Deal Volume in Q3 2012, PwC, Oct. 19, 2012, available at http://www.pwc.com/us/en/press-releases/2012/venture-capital-investments-q3-2012-press-release.jhtml.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Steven Overly, supra note 1.

[10] Id.

Convertible Equity

Posted on by Loretta Tracy

Innovative. In the world of private equity and venture capital this term is usually reserved to describe the entrepreneur. These days however, its not just the entrepreneurs developing new ideas. The Founder Institute and law firm Wilson Sonsini have created a new “startup-friendly seed-financing” tool – convertible equity. [1]

Traditionally, convertible debt has been the chosen vehicle to fund startup businesses.[2] The pervasive use of convertible debt has uncovered its shortcomings. First, some states’ laws create unique liabilities for the directors of startups if creditors, who hold convertible debt, are not paid upon its maturity.[3] Also, accounting principles dictate that convertible debt must be recorded on the books as a liability.[4] This may result in some startups being technically deemed insolvent.[5] Also, debt on the books is a road-block if the startup seeks a line of credit from a supplier or to close a deal with a large corporation.[6]

The risk that investors may demand repayment is also now a greater concern than it was in the past. When the conversion period occurs, which may be in as little as a year after issuance, an investor has the right to call the debt. This may result in the startup filing for bankruptcy or putting the startup in a weak position to renegotiate financing terms.[7] Adeo Ressi, creator of the Founder Institute, notes that while this “isn’t traditionally a problem in tight-knit Silicon Valley circles, first-time investors may be more prone to go against tradition and enforce their legal rights.”[8] Further aggravating the situation is the fact that “the percentage of companies with convertible debt that successfully raise Series A funding is shrinking, due to an explosion in new angel financings and just moderate growth in venture funding.”[9]

How does convertible equity solve these problems? It solves, because convertible equity is basically “convertible debt without the debt.”[10] Investors still get a discount for purchased shares that are realized upon conversion.[11] However, startups do not carry the corresponding debt on their books.[12] An example of the documents used to draft a convertible equity agreement can be found at TechCrunch.

The Startup Company Lawyer blog outlines the four following advantages of using convertible equity as opposed to using convertible debt:

1. Convertible debt may need to be repaid. The risk that an investor might demand repayment of a convertible note is eliminated with convertible equity.

2. Convertible debt holders must be paid interest. Convertible debt must have interest at the applicable federal rate (AFR) published by the IRS or higher, or the IRS will deem that the lender should have received imputed interest at AFR. If convertible debt with a price cap is supposed to mimic the economics of equity, then removing interest seems logical. (Of course, one may argue that some preferred stock financings contain a feature called cumulative dividends that is similar to interest on debt, but I find the provision to be fairly unusual in typical West Coast venture financings.) In addition, when a financing occurs and the convertible debt converts, creating the spreadsheet to track interest on the notes to the penny, especially when notes have been issued on different days, ends up being a painful task — especially as the closing date of a financing may be delayed and the amount of interest increases, resulting in more shares being issued to note holders.

3. Convertible equity is “equity” and probably can be characterized as qualified small business stock, which may have a tax benefit for investors.

4. Convertible debt with a maturity date longer than one year creates problems for California-based investors due to licensing requirements under the California Finance Lenders Law. Making it equity removes this issue. [13]

However, convertible equity is not without its critics. Some concerns raised by skeptics are that investors may be reluctant to give up their position as a creditor of the company.[14] Investors would also lose a return on their investment in the form of paid principle and interest.[15] Will the loss of these benefits undermine convertible equity’s chance of being the financing vehicle of the future? Or will it go away as quickly as it came? Creators are optimistic believing “all it takes is one major player to adopt it.”[16] Deals made in the upcoming year should determine whether or not they are right.

_________________________________

[1] Convertible Equity, a New Early-Stage Funding Concept, First Venture Legal (Oct. 2, 2012), http://www.firstventurelegal.com/convertible-equity-a-new-early-stage-funding-concept/.

[2] Id.

[3] What is Convertible Equity (or a Convertible Security)?, Startup Company Lawyer (Aug. 31, 2012) http://www.startupcompanylawyer.com/2012/08/31/what-is-convertible-equity-or-a-convertible-security/.

[4] Adeo Ressi Introduces ‘Convertible Equity’, Convertible Debt Without Debt, Forbes (Aug. 31, 2012) http://www.forbes.com/sites/jjcolao/2012/08/31/adeo-ressi-introduces-convertible-equity-convertible-debt-without-debt/ .

[5] Startup Company Lawyer, supra note 3.

[6] Forbes, supra note 4.

[7] Id.

[8] Id.

[9] Leena Rao, Convertible Equity, A Better Alternative To Convertible Debt?, Tech Crunch (Aug. 31, 2012) http://techcrunch.com/2012/08/31/thefunded-founder-institute-and-wilson-sonsini-debut-startup-friendly-seed-financing-vehicle-convertible-equity/ .

[10] Forbes, supra note 4.

[11] Id.

[12] Id.

[13] Startup Company Lawyer, supra note 3.

[14] First Venture Legal, supra note 1.

[15] Id.

[16] Startup Company Lawyer, supra note 3.

The Acqui-Hire: Success, Failure, or Just Plain Acquisition?

Posted on by Matthew Bahleda

It’s got to be great news when Facebook, Google, or any of the other Silicon Valley giants is buying up one of the smaller companies or startups, right? What many are surprised to learn, however, is that these giants aren’t always looking to capitalize on an opportunity to control the product produced by these startups. But if they don’t want the product, what is it that these Silicon Valley giants are after?

The real end game of many startup purchases is to bring the engineering talent from that startup to the purchasing company; the so called “aqui-hire.” While it may cost millions of dollars to purchase the small startup whose product may be simply mothballed by the purchaser, the return on investment can still be astronomical. Even if Facebook gets only one high-quality engineer from each startup purchase, then it possibly sets itself up to continue on the path toward millions of dollars of reported profits each year. [1]

It’s simple economics and a little bit of sociology. Silicon Valley is arguably a seller’s market: there is high demand for highly-skilled engineers and there are very few of them to go around. That being the case, a well-established engineer, being courted by the wooing ways of Silicon Valley giants, can demand a pretty penny in exchange for leaving his current startup and working with the others at, say, Google(as if the free haircuts, ping pong tournaments, and snack times were not enough to convince you to head over to the Googleplex). [2] By purchasing a startup and thus acquiring its engineers, the giants don’t have to be on the weak side of the negotiation table. Instead, they use their money and reputation to buy the company, thereby bypassing the individual negotiations with the engineers—the real item of value.

The real genius of the acqui-hire is the feelings of success that all involved parties tend to get out of the sale and purchase of the startup. The giants get their engineer, the engineer gets to work for an exceptional company alongside other equally-talented engineers, and the CEOs get to tell all their friends at the bar that their company was bought out by Google. Everyone’s a winner!

Not everyone’s a winner, says Fred Wilson, the oft-quoted voice of the venture capital finance community. In fact, Wilson is cited in an article of The Observer saying that the CEOs of the companies that Google and Facebook-types buy for the sake of their engineers are “essentially failed entrepreneurs.“ [3] To be sure, not everyone sees these sales as failures. Matt Langer, a former lead web engineer for a company recently purchased by Facebook in an acqui-hire, responded to Wilson’s claim: “[W]hen the single most important company on the Web considers it worth their while to acquire the product you’re building and the people you’re working alongside, the absolute last word that comes to mind is ‘failure’.” [4]

[1] Facebook Inc, Google:Finance, http://www.google.com/finance?q=NASDAQ:FB&fstype=ii.

[2] Jonathan Strickland, How the Googleplex Works, How Stuff Works, http://computer.howstuffworks.com/googleplex3.htm.

[3] Leyon Neyfakh, Don’t Blow It! New York Tech’s Top Investors Have Bubble Trouble on the Brain, The New York Observer, http://observer.com/2010/11/dont-blow-it-new-york-techs-top-investors-have-bubble-trouble-on-the-brain/.

[4] Id.

Impact Investing

Posted on by Perry Teicher

Impact investing has become the new hot topic in the social impact world. Similar to social entrepreneurship and social enterprise, impact investing attempts to amalgamate social good and more traditional models of finance arrangements. Rather than dividing the world into the classic for-profit/non-profit dichotomy, impact investing is another example of the trend that attempts to build a new path.

Impact funds span a range of investment philosophies. Lok Capital, for example, puts a high value on base of the pyramid companies that “have clear alignment with [investors] in terms of profitability and growth.” [1] Acumen Fund, one of the earliest impact investing funds, puts a higher value on portfolio companies’ social impact, viewing their financing as supporting growth in a market that takes longer to show impact and return.[2]

Closer to home, the University of Michigan Ross School of Business Social Venture Fund approaches investments based on a nuanced balance of social and financial returns, with the exact details largely dependent on the focus of the investment. [3] These three funds represent only a small fraction of the variety in this sector. Additionally, the space consists of numerous organizations that help seed organizations, but view themselves more as incubators than as any type of investment vehicle.

Traditional private equity and venture capital funds have a relatively clear principle mission – provide support for and help create more value in companies in which the fund invests. This takes the form of financial investment and control through different ownership tools. Impact investment, however, is based on the thesis that the social impact of a company is as important to foster as the financial returns. While this is a wonderful vision, the reality of balancing financial and social returns can get very messy.

Just as traditional investment vehicles put a high value on thorough due diligence, impact funds attempt to apply tried metrics to understand the impact and potential return of a social company – one that is likely to move more slowly in terms of financial returns, but with potentially life-changing impact for customers and clients.

Many of these funds focus on base of the pyramid customers due to the sheer number of these customers and the clear lack of service that has been provided to this market segment in the past. Rather than viewing individuals making less than two dollars a day as customers, many governments and companies see this group as a massive charity case – give them more and their lives will be better.

Impact investors, and a multitude of international conglomerates and new start-ups, see these billion-plus individuals as potential consumers who can contribute to the local and the international economy and through this process, can be pulled out of the most extreme poverty. This thesis, that poverty can be eliminated and social problems can be solved through the market, is not new but it remains somewhat radical. The challenge many impact funds encounter is how to balance the breadth and depth of impact with the opportunity cost of not applying a good business model to new customers, who may not be quite as needy as those who were originally the target market.

Impact investing is continuing to evolve and have a range of success. As companies, governments, and non-profits see alternative forms of activities, this space will grow and the potential value of the base of the pyramid market, and viewing opportunities in a combination of social and financial returns will become increasingly important.

[1] Lok Capital Investment Thesis, http://www.lokcapital.com/investment_approach.html (last visited Oct. 13, 2012).

[2] See David Bank, Acumen Fund’s Transparent Experiment, Impact (Oct. 13, 2012), http://impactiq.org/acumen-funds-transparent-experiment/.

[3] See Social Venture Fund, http://www.umsocialventure.com/philosophy (last visited Oct. 13, 2012); University of Michigan Social Venture Fund, YouTube (Oct. 13, 2012), http://www.youtube.com/watch?feature=player_embedded&v=1oNdU9mJ8L0 (describing the Social Venture Fund’s investment philosophy).

A New Model for Female-Driven Start-ups

Posted on by Anne Shaughnessy

A recent study has shown successful start-ups with female officers have a greater likelihood of success. [1] However, this same study found that only 1.3% of privately held companies have a female founder, only 6.5% have a female CEO, and only 20% have one or more female C-level executives. [2] Furthermore, in 2011, fewer companies at the point of equity financing had female executives than in 2006. [3]

The study confirms that women in leadership roles at start-ups can have a material impact, yet that they are often underutilized. [4] While these numbers portray the current macro-level reality, there is a certain subset of products that have been conceived, produced, and brought to market by female entrepreneurs, all with resounding success. The early success of these companies founded by women are changing the market, providing return for their investors, and opening the door for more female entrepreneurs to seek financing for their projects.

Rent the Runway and Birchbox, both internet-based companies, were conceived when their founders recognized solutions for universal problems facing the modern woman. For Rent the Runway founders Jennifer Hyman and Jennifer Fleiss, it was how to solve the “closet full of clothes but nothing to wear” phenomenon. [5] Hyman and Fleiss developed a dress rental service best described as “Netflix” for dresses. [6] Renting a dress for a four-day period costs about 10 percent of the full retail price of the garment. [7] Their first funding was a $16 million investment by Bain Capital Ventures and Highland Capital in 2009. [8] In 2011, they received an addition $15 million from venture capital firm Kleiner Perkins Caufield & Byers. [9] By October 2012, Rent the Runway has close to 3 million members, the majority of whom are between 15 and 45 years old, and continue to grow. [10]

Birchbox was founded by Hayley Barna and Kaita Beauchamp in 2011. [11] They had observed a problem in brick and mortar beauty retail caused by a combination of a high volume of merchandise and limited customer guidance. For many, shopping for new products was overwhelming and inefficient. Further, when shopping online, it was even more difficult to experiment with new products because of the limitations product testing. [12] For a $10 per month subscription, Birchbox sends customers a curated mix of trial-size items to sample. Birchbox created a one-stop shop for subscribers: they can test, learn about, and ultimately purchase, products featured in the Birchbox through the online store and community. [13] This solution for consumers also manifested itself as a solution for beauty companies struggling to maximize the benefits of e-commerce. [14] Since their launch in 2011, Birchbox has been a darling for big beauty business and venture capitalists alike. [15] They were named a “Start-up to watch in 2012” by Inc.com and so far have received financing from investors First Round and Accel Partners. [16] By October 2012, the subscriber list has reached almost 100,000 and they have launched a Birchbox Man subscription service. [17]

Birchbox and Rent the Runway are examples of start-ups that have created a unique service that solved a problem faced by many individuals. However, they were not the first companies with female founders to disrupt the market. The success of these companies can be attributed to the success of another female-founded company: Spanx.

Over the past ten years, Spanx has helped open the door for female entrepreneurs like Hyman, Fleiss, Barna, and Beauchamp. Sara Blakely created an entire new sector of women’s retail, shapewear, when she founded Spanx out of her apartment. The slimming undergarment was conceived in 1998 after Blakely struggled to find an undergarment that flattered white pants. Since its founding in 2000, Spanx has had an estimated 20% net on revenue (approximately $250 million), an international product reach, and enviable brand recognition (Spanx is to shapewear as Kleenex is to tissues). [18]

The company began with $5,000 of Blakely’s own money and no outside investment. [19] Spanx is now sold through 11,500 retailers and in 40 countries. [20] The company – and its sole owner – are now valued at $1 billion. [21]

Spanx demonstrated the immense buying power of women and their appetite for game-changing lifestyle products. Rent the Runway and Birchbox built on this model by tailoring their business to the Internet-centric lifestyle. This is accomplished by maximizing their social networking footprint to continue to engage with customers outside of the traditional consumer environment. This month, Rent the Runway launched “Our Runway”, a user-generated database of photos and reviews for all rental merchandise. [22] Customers can seek out similar styles or well-reviewed items from women with similar body types. [23] At Birchbox, as the company learns more about the customers’ tastes, future boxes are curated to fit these preferences. [24] Each company also writes a blog [25] and maintains active accounts on social networking sites like Facebook and Pinterest. [26] By expanding into online communities, the companies have created a dialogue between consumers and the company, increasing product exposure and strengthening brand loyalty.

Spanx’s runaway success has enabled other start-ups offering solutions to the modern lifestyle problems to be taken seriously in the predominantly male world of venture capital and financing. Companies like Rent the Runway and Birchbox capitalized on this opportunity and reaffirmed the bankability of this series of products. Venture capitalists should continue to take female entrepreneurs with an innovative product and strong business acumen seriously when deciding whether to invest in a seemingly frivolous lifestyle product.

It is estimated that women make approximately 85% of purchasing decisions in their households. [27] This number is growing as more women become primary wage earners in their households. [28] Furthermore, the median income of women without children, in their 20s, living in metropolitan areas, is greater than that of their male counterparts. In Atlanta, women make 121% of mens pay; in New York City, women earn 117% a man’s wages. [29]

These women are prime customers for women-focused startups. In the future, there will certainly be more female entrepreneurs creating novel yet game-changing products and services similar to Spanx, Rent the Runway, and Birchbox. As these types of companies grow in size and strength, hopefully it will help to balance the disparity between men and women in the executive halls in start-ups across industries.

[1] Michael Yglesias, Successful Startups Have More Women in Senior Positions, Moneybox, Slate (October 9, 2012, 10:45 AM), http://www.slate.com/blogs/moneybox/2012/10/09/successful_startups_have_more_women_in_senior_positions.html (defining the benchmark for a successful company as one that has held a public offering, has been acquired, or has begun to generate profit).

[2] Jessica Canning, Maryam Haque, Yimeng Wang, Women at the Wheel: Do Female Executives Drive Start-Up Success? 10 (2012).

[3] Id at 9.

[4] Yglesias, supra note 1.

[5] The Backstory , Rent the Runway http://www.renttherunway.com/story (last visited Oct. 25, 2012).

[6] Jenna Wortham, A Netflix Model for Haute Couture, N.Y. Times, Nov. 9, 2009 at B1, http://www.nytimes.com/2009/11/09/technology/09runway.html?_r=0.

[7] Stephanie Clifford, High Fashion, No Airbrushing, N.Y. Times, Oct. 19, 2012 at B1, http://www.nytimes.com/2012/10/20/business/rent-the-runway-uses-real-women-to-market-high-fashion.html?ref=style .

[8] Phil Wahba, Rent the Runway gets $15 million from KPCB, Reuters (May 23, 2011, 1:59 PM), http://www.reuters.com/article/2011/05/23/us-luxury-summit-renttherunway-idUSTRE74M3OS20110523 .

[9] Id.

[10] Squawk on the Verge: How to Rent the Runway (CNBC television broadcast Oct. 22 2012).

[11] Start-ups to Watch in 2012 , Inc., http://www.inc.com/ss/nicole-carter/startups-to-watch-2012#7 (last visited Oct. 25, 2012).

[12] Allen Adamson, Birchbox, Like Apple and Amazon and Google, Is a Hit Because Its Founders Hit on the Right Question, Forbes (Sept. 12, 2012, 4:01 PM), http://www.forbes.com/sites/allenadamson/2012/09/12/birchbox-like-apple-and-amazon-and-google-is-a-hit-because-its-founders-hit-on-the-right-question/ .

[13] Id.

[14] Id.

[15] Olga Kharif, A Surprise in Every Birchbox, E-commerce, Bloomberg Business Week (Feb. 16, 2012), http://www.businessweek.com/articles/2012-02-16/a-surprise-in-every-birchbox .

[16] Star-ups to Watch in 2012 , supra note 11.

[17] Caroline Waxer, Digital Style Start-ups Get Nimble at New York Fashion Week, On the Runway, N.Y. Times, (Sept. 4 2012, 7:17 PM), http://runway.blogs.nytimes.com/2012/09/04/digital-style-start-ups-get-nimble-at-new-york-fashion-week/ .

[18] Clare O’Connor, Undercover Billionaire: Sara Blakely Joins the Rich List Thanks to Spanx, Forbes, March 26, 2012, http://www.forbes.com/sites/clareoconnor/2012/03/07/undercover-billionaire-sara-blakely-joins-the-rich-list-thanks-to-spanx/ .

[19] Id.

[20] Id.

[21] Id.

[22] Clifford, supra note 7.

[23] Id.

[24] Kharif, supra note 14.

[25] RTR Insider, http://blog.renttherunway.com/.; Birchbox Blog, http://blog.birchbox.com/.

[26] Rent the Runway , Facebook, https://www.facebook.com/RentTheRunway?fref=ts; Birchbox, Pinterest, http://pinterest.com/birchbox/.

[27] Belinda Luscombe, Woman Power: The Rise of the Sheconomy, Time Magazine, Nov. 22, 2010, http://www.time.com/time/magazine/article/0,9171,2030913-1,00.html .

[28] Id . (citing a Bureau of Labor statistics study).

[29] Id. (citing research firm Reach Advisors analysis of the Census Bureau’s 2008 American Community Survey).

Growing Singapore’s Venture Capital Industry

Posted on by Aaron Berman

What is the state of venture capital and entrepreneurship in Singapore? For six years in a row, the World Bank has named Singapore the friendliest country in which to conduct business.[1] Its business friendly laws, well educated population, and easy to absorb culture have combined to make Singapore one of Asia’s financial and commercial centers. [2] The amount of venture capital funding for small medium sized enterprises, however, lags behind that of other countries. Recently, Singapore has attempted to rectify the situation by encouraging technology startups and venture capital.

Is the problem the people, or a lack of financing? According to one survey, conducted by the Zoltan Acs of George Mason University and Erkko Autio of the Imperial College Business School, it is not necessarily the people; Singapore has a population with entrepreneurial spirit and aspirations, but lacks access to venture capital finance.[3] In 2011, there were less than twenty venture capital funds focused on investing in Singapore based businesses. [4]

Over the past year, the Singaporean government has attempted to bolster venture capital investment in Singapore. One way in which it is doing this is to increase the amount of funding available from the government itself. In 2011, the government had around $300 million of funding available to startups. Recently this year, Singapore’s National Research Foundation, a governmental department, announced that it would make approximately S$4 billion in additional funding available for startups.[5] It is, however, currently unclear exactly how, when and to whom the funds will be dispersed.

The Singapore government has also increased other resources available to startups. For example, the Singaporean government is providing startups with office facilities, training, and mentoring.[6] Additionally, the government has a tech incubator, and various incentive programs such as a three-year tax exemption and joint funding options. [7] Finally, the number of contracts between government research departments and entrepreneurs has tripled over the past year. [8]

There is one catch with these programs; in order to gain access to many of these government programs, a startup company must be at least partially owned by a Singaporean person or business entity.[9] Thus, foreigners looking to start companies in Singapore must either find a Singaporean cofounder, or give equity to Singaporean VCs or government funds. [10] Very new startups will also struggle to bring foreigners to Singapore, as the government’s visa program imposes minimum paid-in-capital and local hiring requirements. [11]

Investment activity is not entirely government driven, however. [12] Singapore is a large financial center and, in 2011, its private equity and venture capital sector has an estimated $26.5 billion in total assets under management. [13] Of that total, a 2011 PriceWaterhouseCoopers survey found that $500 million was invested in venture capital deals with startups inside Singapore. [14]

The private venture capital industry appears to be growing since that survey. The Singapore Venture Capital and Private Equity Association’s membership is increasing every year.[15] Recently, Facebook co-founder Eduardo Saverin gave up his American citizenship, and moved to Singapore to invest in startups. [16]

Singapore makes for an attractive destination for investors due to low corporate and personal tax rates, highly educated population, its business friendly government, and position as a regional hub for conducting business in other Southeast Asian countries. [17]

Despite these advantages, however, Singapore remains a small country of only five million people, limiting the growth opportunities for domestic companies, and making its domestic market unique in ways that may not translate easily to other places. [18] Overcoming the limitations of the domestic market for goods and services is one of the key challenges for startups seeking to attract capital; startups must be able to show how they will reach markets outside of Singapore.[19]

[1] Anthony Kuhn, Singapore’s Rising Tech Industry Draws Expat Innovators and Investors National Public Radio, (Sept. 17, 2012), http://www.capradio.org/news/npr/story?storyid=161267393.

[2] http://www.ivcpost.com/articles/5939/20120928/economist-reviews-asias-tech-start-up-environments.htm; http://news.asiaone.com/print/A1Business/General%2BNews/Story/A1Story20120928-374378.html

[3] Jo-Ann Huang, Venture Capital Industry Needs More Support, Channel News Asia (Mar. 23, 2011), http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1118413/1/.html

[4] Id.

[5] Singapore Offers $4bn Funding to Startups , PRWeb (Sept. 10, 2012), http://www.prweb.com/releases/SingaporeStartup/4bnFunding/prweb9884734.htm

[6] Eileen Elliott, Economist Reviews Asia’s Tech Start-Up Environments, International Venture Capital and Private Equity News (Sept. 28, 2012), http://www.ivcpost.com/articles/5939/20120928/economist-reviews-asias-tech-start-up-environments.htm.

[7] Jacky Yap, A Taiwanese Opinion on Singapore for Foreign Startups, E27 (Oct. 3, 2012), http://e27.sg/2012/10/03/a-taiwanese-opinion-on-singapore-for-foreign-startups/

[8] Singapore Offers $4bn Funding to Startups , PRWeb (Sept. 10, 2012), http://www.prweb.com/releases/SingaporeStartup/4bnFunding/prweb9884734.htm

[9] Jacky Yap, A Taiwanese Opinion on Singapore for Foreign Startups, E27 (Oct. 3, 2012), http://e27.sg/2012/10/03/a-taiwanese-opinion-on-singapore-for-foreign-startups/

[10] Id.

[11] Id.

[12] Bernard Leong, A Map on Venture Capital in Singapore, SGE (Mar. 5, 2009), http://sgentrepreneurs.com/2009/03/05/a-map-on-venture-capital-in-singapore/

[13] Nisha Ramchandani, S’Pore a Magnet for PE and VC Firms, AsiaOne (Oct. 1, 2012), http://news.asiaone.com/print/A1Business/General%2BNews/Story/A1Story20120928-374378.html

[14] Id.

[15] Singapore Offers $4bn Funding to Startups , PRWeb (Sept. 10, 2012), http://www.prweb.com/releases/SingaporeStartup/4bnFunding/prweb9884734.htm

[16] Anthony Kuhn, Singapore’s Rising Tech Industry Draws Expat Innovators and Investors National Public Radio, (Sept. 17, 2012), http://www.capradio.org/news/npr/story?storyid=161267393.

[17] Id .

[18] Id., Jo-Ann Huang, Venture Capital Industry Needs More Support, Channel News Asia (Mar. 23, 2011), http://www.channelnewsasia.com/stories/singaporebusinessnews/view/1118413/1/.html

[19] Id.

Cyber Security Start-Ups

Posted on by Rachel Shapiro

Enterprises and consumers alike have experienced two recent and rapid technological innovations that will continue to alter the tech landscape: the rise of cloud computing and a mass move to mobile devices and applications. “‘We are on a shift that is as momentous and as fundamental as the shift to the electrical grid,’ said Andrew R. Jassy, the head of [Amazon Web Services]. ‘It’s happening a lot faster than any of us thought.’” [1] Indeed, recent research concludes that paid cloud services are expected to double among small and midsize businesses in five years. [2] Computing giants Microsoft, Google, and Amazon, each with its own set of cloud offerings, will compete to meet this growing demand.

Cloud computing, which promises substantial cost-savings for businesses via “pay-as-you-go access to sophisticated software and powerful hardware,” [3] also poses certain security risks that derive primarily from the security, or lack thereof, of the channel by which information travels to the cloud and that of the data itself while on the server and in use by the cloud service. [4] When it comes to mobile devices, the risks are no less. In fact, the frequency of mobile threats doubled between 2010 and 2011 and the volume of malware targeting smartphones increased 155 percent in 2011 alone. [5] The rash of hacks on mobile devices and public and private networks by “pranksters, criminal syndicates or foreign governments” [6] illuminates the disconcerting reality that “[n]o one is immune to the threat posed by cyber criminals.” [7]

From an economic standpoint, the risks posed by potential security breaches are great: a typical breach might cost a business more than a half million dollars to rectify.[8] Likewise, such an occurrence might have a detrimental psychological effect, reducing the confidence of customers in a particular company or, worse, chilling the transition to cloud and mobile services overall, since no sector is impervious to the security threats.

It is perhaps of little surprise that, against this backdrop, “big companies are expected to spend $32.8 billion on computer security this year, up 9 percent from last year. Small and medium-size businesses will spend more on security than on other information technology purchases in the next three years.”[9] The “white hat” cyber security professionals, whose challenge is to “foster a faster and more open exchange of valuable information [while striving to] stay a step ahead of technically advanced, well-financed cyber criminals,” [10] are not only security powerhouses like McAfee, but also obscure security start-up companies, such as Imperva, Splunk, and Palo Alto Networks. [11] The remarkably strong stock performances that these companies have enjoyed since going public, with shares ranging from 26 to 65 percent above their offering price, has piqued the interest of the venture capital world. Not to be understated, venture capital contributions to these tech security start-ups reached $935 million in 2011, nearly doubling 2010 venture capital investments in the same genre. [12]

Most security start-ups seeking venture financing are focused on one of the following areas of weakness: mobile devices, authentication, intrusion detection, or “big data.” [13] For example, Bit9 is a start-up that blocks malware, Zenprise brings enterprise-level security to consumer mobile devices, and Solera Network tracks breaches in real time. Each of these companies has recently raised tens of millions of dollars in investment rounds led by top-tier venture capital firms, including Sequoia Capital and Intel Capital.[14]

Though this infusion of capital into the cyber security realm is likely spurred on by the potential for big monetary gains for venture capital firms and not altruistic motives, the ultimate security outcome, if the start-ups are successful, will be highly beneficial for many, if not all. Given the positive externality that seems to ensue from this particular type of investment in this age of increasing cyber crime, I can only hope that the unusual risks borne by investors of security companies, such as death threats and aggressive cyber counterattacks by criminals, [15] will not dampen its popularity going forward.
__________________________________________________

[1] Quentin Hardy, Active in Cloud, Amazon Reshapes Computing, The New York Times (Aug. 27, 2012), http://www.nytimes.com/2012/08/28/technology/active-in-cloud-amazon-reshapes-computing.html?ref=technology .

[2] 2012 Microsoft/Edge Strategies Cloud Adoption Study, http://www.edgestrategies.com/component/k2/item/117-just-released-2012-microsoft-edge-technologies-smb-cloud-adoption-study.html (last visited Oct. 13, 2012).

[3] Jeff Beckham, The Top 5 Security Risks of Cloud Computing, Cisco Blog (May 3, 2011, 8:36 AM), http://blogs.cisco.com/smallbusiness/the-top-5-security-risks-of-cloud-computing/ .

[4] Id.

[5] Ian Paul, Mobile Security Threats Rise, PCWorld (Sep. 7, 2012, 9:36 AM), http://www.pcworld.com/article/262017/mobile_security_threats_rise.html .

[6] Nicole Perlroth & Evelyn M. Rusli, Security Start-Ups Catch Fancy of Investors, The New York Times (Aug. 5, 2012), http://www.nytimes.com/2012/08/06/technology/computer-security-start-ups-catch-venture-capitalists-eyes.html .

[7] Kevin Johnson, CIOs Must Address the Growing Mobile Device Security Threat, Forbes (Aug. 16, 2012; 7:55 PM), http://www.forbes.com/sites/ciocentral/2012/08/16/cios-must-address-the-growing-mobile-device-security-threat/ .

[8] Id. (citing cash outlays, business disruptions, and revenue losses as elements of the cost of a security breach).

[9] Perlroth & Rusli, supra note 6.

[10] Johnson, supra note 7.

[11] Nicole Perlroth & Evelyn M. Rusli, Security Start-Ups Catch Fancy of Investors, The New York Times (Aug. 5, 2012), http://www.nytimes.com/2012/08/06/technology/computer-security-start-ups-catch-venture-capitalists-eyes.html .

[12] Id.

[13] Id.

[14] Id.

[15] Id.

Health Care and Venture Capital: An Uncertain Outlook

Posted on by Sumit Gupta

When most people hear “health care” today, their minds automatically pivot to the national health care debate dominating the election season. Many venture capitalists, however, are thinking about their next target in the broad health care and biotechnology industry. Investment in the sector, which includes companies developing “medical devices, diagnostic [platforms], technology based healthcare services, life science tools,”1 and pharmaceuticals, has been on the rise. In 2011, venture capital investment in biotechnology reached $4.82 billion, with medical devices and healthcare services financings realizing gains of 17% and 41%, respectively, year-over-year. 2

What’s behind the uptick in a sector “long shunned by venture-capital investors?”3 Two key explanations are optimism over “new U.S. laws that could speed up drug approval in key areas”4 and the increasing role of software in health care. The current regulatory climate makes it a difficult and lengthy process to receive FDA approval for pharmaceuticals and medical devices.5 As the founder of a short-lived medical device startup, I can attest to the difficulties that FDA approval can bring a similarly-based business – our startup’s projections, for example, indicated that simply becoming eligible for 510(k) clearance (which is necessary to market certain categories of medical devices in the United States) would cost $20 million and take at least 5 years. The FDA has since established the Center Science Council to improve the predictability of its decision-making on new innovations,6 and the response from venture capitalists has been cautiously positive.7

Entrepreneurs remain hopeful, as increased software penetration, beyond electronic medical records, exposes new opportunities in the field. Venture firms have begun “broadening the types of businesses they consider part of the life-sciences field”8 to include those creating software solutions to many of healthcare’s most pressing problems. These firms aren’t comparable to those such as Google or Facebook when they were still startups, but that’s a good thing – venture capitalists such as Kevin Kinsella of Avalon Ventures recognize that “every therapeutic idea or product is a big idea”9 and has a better chance of disrupting a field still relatively foreign to the Internet. Cyrus Massoumi, founder of ZocDoc, a startup which allows users to find and book appointments online, finds the current financing landscape superior to that of years prior. In 2007, the reaction to ZocDoc’s pitch was “less, ‘Good idea,’ and more, ‘Good god, you’re crazy.’”10 In the five years since, Massoumi and his team have raised $95 million, culminating in a $75 million Series C last year with DST Global and Goldman Sachs.11

While some parties are optimistic for biotech’s resurgence, “[p]ricing pressures, slower economic growth and greater regulatory scrutiny”12 continue to make investment difficult to come by. Ernst & Young’s global life sciences practice released a report two weeks ago finding capital harder to come by for younger companies in the sector.13 According to their numbers, venture capital investment in biotechnology remains substantially lower than the $5.40 billion peak reached in 2006-2007,14 and the situation may not be improving to the degree that 2011’s numbers suggest. The data available so far for 2012 support their pessimistic stance. In Q2 2012, biotech companies received $697 million, or 42% less money in deals than the same quarter a year prior, the lowest amount seen by the National Venture Capital Association “since the first quarter of 2003.”15 Most affected by these trends are the small, young startups hurting for cash, especially those on the software-side of things. While more established companies, such as Merck, who launched its own $250 million venture fund in 2011, “invest in [early-stage] innovation with a portion of the dollars they would have invested in their own R&D,”16 these dollars end up at companies immersed in the pharmaceutical sector – the bread and butter of companies like Merck. Nevertheless, the experience of ZocDoc and others in the field show that substantial venture money is still out there – only now it’s being packaged in smaller, but smarter, deals.17

__________________________________________
1ARBORETUM VENTURES, http://www.arboretumvc.com/about.php.
2 Sarah McBride, Venture firms see signs of rebirth in life sciences, REUTERS (Sep. 24, 2012, 2:42 PM), http://www.reuters.com/article/2012/09/24/us-venture-capital-life-sciences-idUSBRE88N0UG20120924.
3Id.
4 Id.
5 Kate Greenwood, Venture Capitalists Complain of ‘Regulatory Challenges,’ FDA Responds, HEALTH REFORM WATCH (Dec. 20, 2011), http://www.healthreformwatch.com/2011/12/20/venture-capitalists-complain-of-regulatory-challenges-fda-responds/ (“The venture capitalists blame ‘regulatory challenges,’ primarily ‘the hostile FDA.’”).
6 See CDRH Center Science Council FAQs, U.S. FOOD AND DRUG ADMINISTRATION (Mar. 31, 2011), http://www.fda.gov/AboutFDA/CentersOffices/OfficeofMedicalProductsandTobacco/CDRH/CDRHReports/ucm249249.htm.
7 See Greenwood, supra note 5.
8 McBride, supra note 2.
9 McBride, supra note 2.
10 Cyrus Massoumi, Healthcare Momentum: Our Shared Responsibility, THE HUFFINGTON POST (Oct. 4, 2012), http://www.huffingtonpost.com/cyrus-massoumi/appointment-booking-tech-startup_b_1939854.html.
11 ZocDoc, TECHCRUNCH, http://www.crunchbase.com/company/zocdoc.
12 Susan Kelly, Venture capital for medical technology harder to come by: report, REUTERS (Oct. 2, 2012, 1:23 AM), http://www.reuters.com/article/2012/10/02/us-medtech-investing-idUSBRE89104D20121002.
13 Id.
14 Id.
15 John Carroll, New biotech deals scrape record low as VC groups lose steam, FIERCEBIOTECH (July 19, 2012), http://www.fiercebiotech.com/story/new-biotech-deals-scrape-record-low-vc-groups-lose-steam/2012-07-19.
16 McBride, supra note 2.
17 See McBride, supra note 2.

The Legitimacy of the Entrepreneur

Posted on by DJ Hill

It certainly seems like a special thing that our modern world has reached a turning point in which all stereotypes (regardless of their occasional accuracy) are generally considered offensive and are a simple indication of poor social posture. For the most part, this is good news. Be that as it may, obviously this was not always a familiar attitude. There is no question that prejudice and unjust group classifications used to be entirely acceptable modes of thought, even in our own recent past. In spite of this new war on labels, however, there is still one group upon whom an unofficial “open season” has been declared: the entrepreneur. Specifically the private equity community, who not long ago was likened to a “swarm of locusts.”1 This seems to be a shared sentiment among many.

Private equity firms are simply not seen as innovators. They are not seen as providers of capital. They are “greedy” because they own or control a disproportionate share of “society’s” wealth. There are dozens of obvious examples of this lazy characterization.2 The common joke, of course, is that “business ethics” is an oxymoron and the two concepts – business and ethics – are at a fundamental tension with one another. This confusion in moral and economic thinking can be seen by the fact that little moral sanction is granted to private equity firms, and many of the individuals are often accused of carrying around “more guilt” than the average person.

In fact, the two concepts are not mutually exclusive, but rather they have a very special ability to go hand in hand. The quest for success and knowledge is a simple, ontological desire, and an undeniable part of our human constitution. Regardless of a person’s skills, interests, or occupation, the pursuit of excellence is always a motivating force. While private equity firms don’t deserve unfair criticism, it’s important to note that they also don’t deserve to be treated like victims of unfair discrimination. That being said, their chosen profession certainly deserves to be legitimized by the people. The only way this can be accomplished is by acknowledging the value of private equity firms, the talent it takes to be a part of one, and the tangible benefits that are conferred onto society by them.

If private equity firms are indeed valuable, why the powerful divide? How is it that well meaning, generally “moral” people have difficulty grasping the moral fortitude or basic principles of a free economy? Most likely it is due to an alarming lack of economics training. Private equity is about producing wealth, not redistributing it. There is no zero-sum game. Entrepreneurs make money – they don’t simply collect it. The only way this can happen, though, is for them to offer something of value in exchange for payment. In other words, some party upstream has to actually pay them. “Greed” alone is nothing more than an attitude and can’t add even one cent to a person’s income. And even though it’s probably more accurate to characterize private equity investment as wealth creation rather than job creation, the obvious reason for this is that no business could survive with the chief goal of creating jobs. For example, Mitt Romney was recently criticized for only seeking net profits rather than job creation, and that “any job creation [at Bain Capital] was accidental.”3 Indeed, he amassed great wealth for Bain Capital, but isn’t it the goal of every single commercial enterprise to be profitable?

Another likely reason for the vitriol toward wealth is the unavoidable mass-media exposure to the terrible poverty that exists here and around the world. Strong emotional reactions to poverty are entirely proper, and morally incumbent on those who have the ability to assist. A problem develops, however, when this good sentiment is combined with the economic ignorance explained above to fabricate a sort of cause and effect relationship between the wealthy class and existing poverty. This reaction is understandable but mistaken. People who react this way fail to recognize that the most successful method for bringing people out of poverty is through a free market and wealth production.4

Moreover, private equity deals are never a guaranteed success. These firms put their money, time, and property on the line to ensure security for their investors and the companies they are creating efficiency for. These benefits necessarily run through to the entire market they are being supplied to, which includes individual consumers and employees. Only people with the competence, creativity, and guts to undertake such massive risks succeed.

As a free people, we have a moral obligation to attack uncertainty in an enterprising way. The private equity entrepreneur is a shining example. They look courageously into the future with a great sense of opportunity. They create newer, more efficient enterprises which allow more people to choose the way the earn income and develop their skills. Immoral behavior is at least as prevalent, if not more so, in any other industry. What’s important, though, is that categories of immoral behavior aren’t applied to the private equity community with more fervor than any other industry or trade. Particularly, the assertion that private equity firms are motivated by nothing more than “greed.”

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1 Op-Ed, Marx or Markets: German Politicians Debate the Dangers of Capitalism, SEIGEL ONLINE, May 5, 2005, http://www.spiegel.de/international/anti-capitalism-debate-marx-or-markets-german-politicians-debate-the-dangers-of-capitalism-a-354733-druck.html.
2 See, e.g., WALL STREET (Twentieth Century Fox 1987), AMERICAN PSYCHO (Lions Gate Films 2000), Dallas (Warner Horizon Television 2012).
3 Steven Rattner, Tall Tales About Private Equity, N.Y. TIMES, May 22, 2012, at A23.
4 Mary Tupy, Capitalism Will Eliminate Poverty In Africa, CATO INSTITUTE, Apr. 20, 2012 http://www.cato.org/publications/commentary/capitalism-will-eliminate-poverty-africa