JOBS Critics

As the JOBS Act awaited President Obama’s signature this week, critics, emboldened by accounting issues at the recently public Groupon, continued to take aim at provisions alleged to roll back crucial investor protections. Passed by strong majorities in both the House and Senate, the principle purpose of the JOBS Act is to promote capital raising among startups by easing their paths toward an IPO. Opponents of the Act, however, claim that its relaxed financial disclosure standards invite a reemergence of Enron-era accounting fraud.

Recent news on internet startup Groupon has stoked much of that criticism. Last Friday, in response to an auditor’s determination of a “material weakness in internal controls over financial reporting,” the company revised fourth-quarter earnings down by $14.3 million.1 Had the Act been in place, Groupon’s revisions would not have been a product of adjusted reporting requirements; the relevant JOBS provisions apply only to companies with less than $1 billion in annual revenue and $700 million in market cap, while Groupon earned 1.6 billion in 2011.2 Nonetheless, critics contend that events at Groupon highlight the risks associated with easing financial disclosure requirements, generally. Had the Act been law before Groupon went public last year, some point out, its annual revenue of less than $1 billion would have made it eligible for relaxed reporting requirements and the company’s questionable accounting methods may not have drawn the attention that they are getting now.3

Among the specific provisions targeted by the Act’s opponents is that which allows emerging companies on the verge of an IPO to have “private conversations with the S.E.C. about planned disclosures,” not to be made public until 21 days prior to an offering.4 Andrew Ross Sorkin of NYTimes Dealbook wrote recently that the provision, which allows companies to avoid “embarrassing public gaffes,” may benefit those seeking to go public who would otherwise be discouraged by accounting scrutiny, but is “awful for the investors, who rely on the transparency of the process.”5 Had the Act applied to Groupon’s public offering, Sorkin explained, “it is unlikely the public would have found out in time about a series of questionable accounting gimmicks and metrics that the company had hoped to employ to bolster its numbers investors.”6

The same day that Sorkin’s comments were published, The Wall Street Journal’s Michael Rapoport weighed in on the 21-day provision, characterizing it as permitting companies to “iron out disagreements with regulators behind closed doors before they go public.”7 This practice, Rapoport agreed, “might have prevented investors from finding out about Groupon’s early accounting questions until after they had been resolved.”8

Others, however, are less concerned. Joel Trotter, a Latham & Watkins attorney on the task force responsible for devising ways to make it easier for companies to file publicly, was quoted by Rapoport claiming that “three weeks is an extremely long time in assessing information relevant to an investment decision.”9 AOL Founder Steve Case has similarly responded that, while the bill is “not perfect,” it will ultimately “strike the right balance” between encouraging IPOs and maintaining appropriate disclosure standards.10

Opinions are clearly divided and the debate surrounding a 21-day notice provision barely scratches the surface of that division. If the last major adjustment to financial disclosure standards (See SOX 2002) provides any indication, it does not appear that the debate will be ending anytime soon.

3. Id.
5. Id.
6. Id.
8. Id.
9. Id.

Ann Arbor has the Right Stuff

Jason Mendelson (@jasonmendelson) and his partner, Brad Feld (@bfeld), visited Ann Arbor and UofM back in the fall. They made the rounds of TechArb, the University Office of Tech Transfer, and even stopped by a Ross School of Business Class taught by Dr. David Brophy that pairs students with budding companies trying to land Angel or VC funding. I was enrolled in the class and I got to pitch Jason on my company… WHAT a great experience! I was REALLY impressed with both of them and I love their dedication to cultivating a culture of entrepreneurship in Boulder, Ann Arbor, and throughout the US more generally. It is definitely something that helped stoke my entrepreneurial fire. However, the best thing I heard was at a lunch talk at the Law School. Both gentlemen raved about Ann Arbor and, while I am way overdue in sharing, this recent post encouraged me to mention their trip.

I thought I would share this blog entry, written by Brad, since it has a number of good thoughts and links to some of the other posts from their visit. Enjoy!

Interview with Angel Investor Esther Dyson

Last semester, Esther Dyson, an angel investor focused on health, biotechnology, and space flight innovation, was featured as a keynote discussion sponsored by the Telluride Association. After Ms. Dyson shared snapshots of her experiences, including her work as a journalist on Wall Street and her completion of cosmonaut training for a future space flight, I invited her to share some of her perspectives on investment with our readers. The following is an edited version of our conversation.

When did you start investing in startup companies?

To give you some background first, I started working as a fact-checker for Forbes. That provided tremendous training for all my work – perhaps the best training you could have – in asking the right questions, and being properly skeptical of the answers. I worked for Forbes for three years and then worked as an analyst on Wall Street for five years. Next, I worked for Rosen Research and bought the company, renamed to EDventure. I wrote its monthly newsletter about the computer industry, and ran its annual conference (PC Forum) from 1982 until 2006. That’s where I learned the most about computers and the internet.

Then, in the early ‘90s, I started spending a lot of time in Eastern Europe. An investor said to me, “Considering the amount of time you spend in Eastern Europe, why don’t you invest?” I had never thought of that; I was a journalist. But, when he offered me $1 million to invest, I closed down my Eastern European newsletter and started investing instead. I learned a lot from these early investments, including how much fun it could be. I started investing in United States startups as well.

You mentioned in our correspondence not having an MBA. Was it difficult breaking into the financial industry without this degree?

An MBA makes it easier to find a job, yes. But once you get the job, it all depends on how well you do it and whether you can learn.

When someone on Wall Street looked at your resume and asked, “Why no MBA?” what did you say?

I told them I worked as a fact-checker and reporter for Forbes for three years, and that I understood business from the players’ rather than from the professors’ side.

What other characteristics do you believe make you a good investor?

Curiosity and enthusiasm. I love what I do! I would love to make money with my work, and I am glad when I do – and of course I need money to keep investing. But for the most part, I don’t do anything I wouldn’t do for free. Fortunately most of it pays off anyway!

How important is it for investors to share ideology with the company receiving their investment?

Oh, very important. When you need to make a tough decision for the company, it is important to have your interests aligned. Startups should be selective when it comes to picking their investors because their investors end up having a big say in the company’s direction.

Do you use investment to promote or change public policy?

No. It’s hard to change public policy. In fact, I am very frustrated with Congress and both political parties. I use investment to do what I can to help companies, ideas, and people fulfill their potential. I do get involved in policy, but not usually through my investments. Unfortunately for most companies, the less they have to do with policy the better – at least until they grow quite large.

What role should public policy play in investment?

It depends on what the policy is. Generally, the best policy for free markets is antitrust enforcement. Competition and transparency are crucial for building companies and fostering success of the best players. Maintaining consumer choice is also important.

Most markets work well. If you introduce public policy in the market, such as subsidies for health care, you should make sure the policy has no adverse side-effects. Moreover, these policies should be clear, transparent, and have discrete objectives. For example, it’s usually better to subsidize people rather than specific products. You can help the poor or the ill without interfering with their ability to choose. Though I would support policies such as prohibiting the purchase of cigarette or soda pop with food stamps.

For me, areas in need of public spending are health incentives – not just health care – education, and our country’s infrastructure, such as roads and bridges and mass transit.

Thinking about your involvement as a board member for 23andme, what role should public policy play to protect privacy? For example, should public policy protect privacy over consumer health information?

The government should foster clarity and informed consent, and leave privacy choices to individuals. People should have access to their own data and retain control over whom to share it with. However, if individuals want subsidized health care, they have certain obligations to provide accurate data to be used in the context of that care – but mostly not in the context of an employer making job-related decisions.

The problem, however, is not privacy. The problem is how the data may be used and society’s overall economic and health-related policies. I would hate to see people with diabetes being charged an extra tax on junk food, for example.

Unfortunately, we are conflating economic issues, such as who should pay for health care and what they should pay for, with privacy issues, such as what health information individuals should be required to reveal and to whom these disclosures should be directed.

How should companies properly use the data they receive from consumers?

They should use it only in the way they have contracted with the user to use it.

Switching gears a little, and in closing, what are your most memorable accomplishments?

First of all, I like to say that I’m not done yet. I don’t sit around and think about everything I have done. I am proud of having trained as a cosmonaut and I am proud of being one of the first ten to publish my DNA with the human genome project. I am also proud of 23andme. But there are so many things I still need to learn and to do.

For more information about Esther Dyson please visit EDventure Holdings or check out her contributions on Project Syndicate.

Bad Apples Spoiling the Crate?

The New York Times “Bits Blog” had an article this past Sunday titled “Disruptions: Tech Valuations Defy the Restraints of Reality.” Unfortunately, this short read paints a broad brush of the Venture Capital industry and plays to a few of the oft-discussed and unflattering stereotypes about venture capitalists (…as if there was any need for fuel to be added to the raging fire stoked by Republican presidential candidates.)

The article lays out a number of problematic investment rationales pursued by some within the VC industry. Among the rationales listed are:

• Investing only based on a “herd mentality and a yearning to be a part of a potential next big thing”
• Investing in a company “so they can stick the logo on their Web site”
• So-called “spite investing” when you invest in a company “simply because they were not given the opportunity to invest in the competitor”

Do these practices go on? Clearly they do, which is why the failure rate of venture capital firms can exceed 50% during some periods (per the Harvard Business Review) and so few earn solid returns on investment. However, it would be unfortunate to paint the industry with such a broad brush. The few bad apples with money to spend, but not the sense to invest it wisely, should not pollute the image of an entire industry.

A number of successful (and tenured) VCs have spoken in classes at Michigan, and they have consistently preached the polar opposite of the approaches noted above. Their principles are simple: don’t follow the crowd, be true to your investment analysis methodology, and be steady in how you invest your money. Quite apart from the investing process described in this article, these VCs described the process as akin to “courting a significant other” in order to become personally close with the founders. They also spoke of the industry’s increasing talent. Many VCs have built their own companies or have been executives at Fortune 100 companies.

Will that approach counter the ills described in the Bits blog? It will not. If it did, everyone would be taking the same approach in an industry notorious for breaking the mold. However, those principles will help you avoid turning a venture capital portfolio into a junkyard of failed investments and, apparently, it will also prevent you from running with the rest of the herd (50% of which won’t see its next meal).

In the post dot-com crash and Sarbanes-Oxley world, companies are staying private longer. This allows companies to develop into real revenue-generating businesses without being scrutinized by public markets. The days of “” are history and also the irrational exuberance that came along with them. VCs that succumb to irrational investments fail, as they should. So, while the article seems to paint the whole lot as a bunch of crack pots, the truth is that the industry is full of extremely successful investors. Otherwise, why would there be so much money entering the market in first place? Success breeds copycats.

NYT article:

HBR article:

University of Michigan Adds Venture Capital Fund within Endowment

The University of Michigan Board of Regents has approved a University-housed and managed venture capital fund.

The permanent allocation, part of the $7.8 billion endowment, will be called Michigan Investment in New Technology Startups (MINTS). The $25 million fund will be invested over 10 years and be co-managed by the University’s Office of Tech Transfer, a department that manages and funds technology spin-offs, and the Investment Office, which manages the University’s long-term endowment fund.

The Office of Tech Transfer has spun off a number of prominent venture capital-ready investments, as is recognized by Dr. David Brophy’s “Financing Research Commercialization” course at the Ross School of Business. The creation of this fund is further acknowledgement that the Office of Tech Transfer is going to be a growth engine for the University and that this technology center will be profitable enough to be worthy of the University’s investment attention.

The initial investment may seem small, but this fund will allow the University to make several small-to-mid-sized investments per year, a number that would be about average for a new fund in this area.

One can only hope that the creation of this fund will attract other venture capital firms to increase their focus on Michigan. Additionally, this new fund will provide students in the Zell Lurie program and the Ross School of Business a vehicle through which they can receive early exposure to venture capital investing. What a great development for the University and southeastern Michigan.

Venture Capital as Targeted Self-Help?

Many believe there are serious issues with the economy and the trajectory of our two concurrent wars. Unfortunately, these two headline concerns come together to affect veterans more profoundly than the average American; the unemployment rate among young veterans (30%) is just short of double that of comparable non-veterans ages 18-24. How do you counteract this phenomenon and harness the power of disciplined young people who have served their country? Venture Capital seems to be part of the answer.

National Public Radio (NPR) had a story on Morning Edition about a Milwaukee, WI based group called VETransfer that is focused on helping veterans start their own businesses. The VETransfer program utilizes a huge (13,000+) network of volunteer experts to help its start-ups with a variety of services including connecting owners with financing and management assistance. The stated goal is “to teach veterans how to become entrepreneurs and assisting them to accelerate veteran owned innovations.” The group has 15,000 sq ft of space for collaboration, meetings, and organization, and a few small businesses that have been incubated by the program have plans to hire other veterans as part of their company expansion plans. One of the initial grants ($3 million) came from the Department of Veterans Affairs, but there are a number of other private sector supporters as well.

This isn’t “venture capital” solving the problem, but it is the ideas behind venture capital that are helping to attack the root of a problem. The military prepares young men and women for productive lives, but right now they seem stranded once they get home. Now, with some assistance from the government in the form of what looks like a block grant, there is some hope for these veterans and the power of the private sector is taking over. The venture model is serving as the self-help mechanism that the nation needs to attack the problem of veteran unemployment, and it is truly a great thing to see. Hopefully we will see more of it.

The website for the article is:
The website for the group is:

Michigan & the Smart Money: What the State Needs Today to Build Tomorrow

The smart money has not been flowing into Michigan in a long time. However, that money is starting to come back to Michigan again. This smart money—investments coming from well-informed and experienced financiers —is the key to a recovery for Michigan, and the state government needs to work hard to accelerate that trend. As Michigan shifts away from the auto-dependent economy that has forced the state into a multi-decade decline, the state government needs to focus its effort on attracting the smart money, and it needs to ramp that effort up now.

In order for the state to diversify away from the auto industry, Michigan should make a concerted effort to attract smart money with as much effort as it expends trying to attract tourists. Central to a recovery will be the smart money that helps grow new businesses. Venture capital companies can provide the money and expertise to help young companies get off the ground at a time when traditional funding routes are not open to start-up businesses. Michigan is ripe for continued growth if it focuses on showcasing what it has in spades: a strong university system that spins off opportunities and talent, an abundance of skilled labor, and low barriers to investment. Not only is there room for more money in Michigan but also the demonstrated venture capital returns are impressive enough that the state should be able to sell itself as an attractive investment locale if it makes the effort.3

Michigan’s CEO, Governor Rick Snyder, and its Board, Michigan’s legislature, need to coalesce around this reality; the path to recovery will come if Michigan focuses on attracting the smart money. Quick hits and fun headlines will not help, but venture capital firms like Detroit Venture Partners will. The venture capital investments can help build a solid foundation for a diverse economy, and they can leverage the work already done, such as Governor Granholm’s focus on attracting new industries by encouraging investment in battery and alternative fuel manufacturers. The blitz should ensure that local companies know where to seek the funds. Michigan should also showcase what the state offers to large venture firms around the country. This won’t be a sexy, short-term investment like film tax credits, but it will help create jobs, and it will build a strong foundation for growth and diversification.

Right after Governor Snyder gets home from his trip to Asia, where he will try to drum up trade deals, he needs to have his Chief of Staff put together a domestic itinerary. If Gov. Snyder puts in some hours promoting Michigan in Silicon Valley and New York City, those cities will be promoting Michigan in the not-too-distant future as the next great American turnaround story