Urgent Speed

How Facebook, Twitter, Google+ and LinkedIn will change Finance

Western lenders have forgotten responsible lending, online social networks have the potential to bring them back to the basics.
 
In the Early 1900 Mr. J.P. Morgan was asked what is more important in lending, assets or income?  His response, “the character of the man”.  Mr Morgan knew a little about lending having financed much of the industrial revolution.  Morgan knew “Character” is the cornerstone of lending.  He knew, going back to biblical times, credit was based on the reputation in the community.  

 

Lenders lost their way in the 1950s as the very nature of community changed.  Harvard Professor Robert Putnam documents the change in his book Bowling Alone: The Collapse and Revival of American Community.  Putnam points out that suburbia, the automobile and television all converged to change how industrialized societies interact.   Western Societies became less connected with their neighbors.  One of the results is that banks turned to faceless ratios and FICO scores as the core of their underwriting process.   Furthermore, lending based on personal relationships did not scale well in the age of mega-corporations.   The result was bad lending and ultimately the recent sub-prime crisis (at least some of it).
 
Bankers have forgotten how to use character as the foundation for credit. 
 
The good news is the “lost art of character lending” is being rediscovered in the emerging markets where family and community bonds remain vibrant.  The strength of the community is reflected online where social network use often exceeds activity in the west.  Involving the community is the key to unlocking the riddle of character.
 
The rediscovery of character based lending all started with Professor Yunus desire to help the extreme poor in Bangalore.  Yunus hypothesized that if members of the community were willing to vouch for each other it would be an effective way to distribute credit.  He was right.  It turns out that people's willingness to vouch for each other is driven by character, and the result was the Microfinance Industry.   Yunus’ customers did not have access to electricity, let alone FICO scores, but thanks to Yunus they could access capital to improve their lives.   Today the Microfinance industry successfully lends over $50B a year, and Professor Muhammad Yunus won a Nobel Prize for his positive impact.
 
Globally, the default rate in the Microfinance industry is around 2%, outperforming most western consumer lenders.  Clearly, lending based on character, works.  Yet $50B a year is not much in a Multi-Trillion-Dollar debt market.  That’s because until recently, Microfinance lending was only used by the ultra poor, and had to be face-to-face.  Social networks like Facebook, Google+ and Linkedin can change all that.
 
Interested in empowering the emerging market middle class and building a new global financial infrastructure based on character?  Why not join our team at Lenddo.com?

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Prefer the Tedx video version

Startups Should Make a Dent in the Universe

Steve Jobs had it right: Startups should make a dent in the universe.    Big ideas attract the top teams. Big ideas keep the teams going through the inevitable hard times.  Big ideas with top teams change the world.   For decades, the life blood of Silicon Valley was great teams working on big ideas.

But recently, as Jon Evans at TechCrunch points out, the Valley is increasingly fascinated with “the big distraction of entertainment.”  I could not agree more.

Silicon Valley has lost its way.  Stop screwing around in the small pond of media and advertising and tackle big industries and real problems.   Heck, why not invent a new industry? Did you know in New York City there are at least a dozen companies that have sprung up around the “personal replicators industry” aka 3D printing ( MakerBot , Quirky, Shapeways etc.).

Did you know that all Media, (including NBC, CBS, Google, AOL, ESPN, every radio station, every magazine and every advertising agency) only represents about 2.5% of GDP?  The Valley has become obsessed with “selling sugar water.”   

The world needs Silicon Valley back.

Energy, Finance, Healthcare, Education… that is where the BIG problems are.  (BTW: Facebook already has $470M in financial service revenue from Facebook Credits).

How do you expect to attract great talent if you are not substantially improving the world?  Is it pay?  Has Silicon Valley become filled with “technology whores” like the East Coast hedge funds they like to make fun of?   As an entrepreneur, changing the world is what keeps me going.   Building a company is hard work. How can you work 80+hr weeks if the outcome is: it’s easier to buy crap you don’t need online (aka sugar water).    

Finance:

Credit, Savings, Insurance and Payments are Huge.  Sean Park has a great post on "digitally native finance.”  At my startup, Lenddo.com,  we are using the social graph to improve people’s lives and restructure finance.  Members are using their online reputation to prove identity and access credit in regions where there is little access to credit.   Every day members are able to get education for loved ones, medicine for family members, and shelter for relatives.  Tangible life improvements.  Our team sees how we will impact millions.  This is why you have a start-up!  This is the power of technology! 

Education:

At Aristotle Circle, where I am an Angel, they are using technology to build a network of peers and experts to radically improve educational outcomes.  Other companies are using algorithms for adaptive/dynamic course material to tailor online material to the specific pace, medium and style of each individual learner.  Today about 5.5% of GDP goes to public education which does not include private universities and corporate training.  What happens when education cost half as much, or is twice as good?  Technology combined with entrepreneurship will show us.

Health Care:

We waste more in healthcare then we spend in media..come on.  We spend around 16% of GDP on healthcare in the US, and baby boomers are not getting younger.  Did you know computational linguistics combined with analysis of social media is being used to guide drug discovery?   If you are great at math or engineering, why would you be optimizing online photos, when you could be extending human lifespan?  Why not ask a health care entrepreneur?

Energy:

Don’t worry about Energy; why would we want to have more of that?  

Don’t get me wrong.  I love Silicon Valley. The Valley had a great run with semiconductors, PCs and the Internet.  They did a fine job “taking on” media.  The Media Industry is Powerful, but they are pussycats (or leave off the cats) when compared to Wall Street, The Teachers Union, Health Insurance Companies, Big Pharma, and Energy.   

My friend in Silicon Valley once gave me sound advice: “Jeff, as a tech-entrepreneur you need to be back here in Silicon Valley at least every 30 days”  He was absolutely correct.  There is nothing like the innovative energy and echo chamber of northern California.  I go often, and every trip is time well spent. 

Now my advice for Silicon Valley: Get out of the echo chamber at least once a month.  See what is going on in Finance, Education, Health Care, Energy and “personal replicators.” 

It’s time to think big again.

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Photo: from Bob Cringely's awesome 165 minute history of the PC industry "Triumph of the Nerds"

NYC’s Shawn Parker Density

Monday,  Paul Graham gave a speech at General Catalyst.   Paul has great insights into what makes a great tech hub and zeroed in on the final piece of NYC’s start-up ecosystem. The piece just now cementing into place: Entrepreneurs' ability to run into high quality mentors.  Paul used Shawn Parker’s mentoring of Mark Zuckerberg as the classic example.  Facebook would not be what it is today had Shawn not run into Mark.  HP, Apple, Intel and Google all have similar serendipity. The founders all received critical help from the ecosystem. 
 
Paul is right to highlight the importance of running into smart, driven people who are experienced in entrepreneurship and technology.  This continuous cross-pollination of experience, vision and innovation is paramount.
 
Over the last 15 years, the NY tech scene has really evolved.   Although it takes 20 years  to build a robust start-up ecosystem, NYC has made great strides since 1995 when we started SquareEarth our first internet technology company.  Back then, similar to today, there were great reserves of engineers inside wall street, but pulling them out was almost impossible.   I got lucky. Marc Andreessen came to visit Solomon Brothers to spread the gospel of the browser, and I was able to pull from the pool of engineers whose lives were changed by his visit.  Back in the mid 90s,  Solomon Brothers was pioneering the use of the browsers as part of their $400,000,000 annual technology investment.   Banks and hedge funds are still huge pools of technical talent, but today, technical talent is more willing to transition to a tech startup.  Companies like Aristotle Circle, Delicious, Gerson Lehrman,  TheLadders and Secondmarket were all founded by former Wall Streeters.
 
Back in 1995 people in NYC interested in tech-startups were few and far between.   Guys like Peter Bloom, Michael Bloomberg and Bernard Weinstein were important tech mentors, but your chance of running into them on the street was three in a million.  Today, we have a vastly different story.  Now there are hundreds of veteran tech start-up professionals in NYC playing that “Sean Parker” role.  
 
Outsiders think access to technical talent is the gating factor for faster start-up growth on NYC. It is not. (like Silicon Valley, our demand for exceptional technical talent is limitless).  Others think the constraining factor is Seed Capital. Untrue.  NYC is full of dozens of seed-stage funds, hundreds of Angels, and thousands of qualified investors, all looking for investments.   You could argue that the lack of a MIT or Stanford will mean NYC will always be a tier 2 tech hub, but neither does this tell the whole story.  NYC is currently pursuing Stanford and 14 other top engineering schools to set up a multibillion dollar campus in NYC.  Plus, NYC is already a college town, There are about 594,000 university students in New York City attending around 110 universities and colleges.   Low rent space, easy transportation, access to media, and a huge creative class all help, but it is the high density of people passionate about startup tech that makes all the difference.  
 
Maybe my view is skewed by having offices on either side of Union Square, with my main office sharing an elevator with Foursquare, resulting in a regular flow of random reconnections.   
 
That said,  like a diamond dealer making regular trips to Antwerp, or a movie star visiting Hollywood, as a tech entrepreneur, I still need to make regular trips to Silicon Valley.   It’s Tech Start-Up Mecca, but after 15 years,  it’s good to see NYC has achieved its “Sean Parker” density. 

Information wants to be Free, Money wants to flow Freely

In the mid 1980s, technologist Stewart Brand observed “Information wants to be free”, in one simple statement Brand predicated the fall of governments and the restructuring of industries. There were powerful interests, aligned against the idea of information flow, but in the end Middle East dictators, and media executives all had to adapt to the tide of new technology.

Brand was the Founder of the Whole Earth Catalog, and his full quote is:

“On the one hand information wants to be expensive, because it's so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other.”

I think CraigsList, BitTorrent and Google are the embodiment of the idea of free flowing information.  Google, along with other search tools, empower individuals to connect directly with information, disintermediating any friction that does not add value to the flow of information. Not good for record labels, great for consumers.

But just as Google empowers information flow, Facebook and Google+ empower Money.

Money and information are in many ways interchangeable. Money represents a special type of information, an informational unit called trust.  In barter, one trusts that 8 chickens will be worth something in the future, either to yourself or to others. In Roman times one trusted that metal coins could be exchanged for goods, in the 50s it was trusted that paper money could be exchanged for gold or silver, and today one trusts that your government issued paper will buy goods in the future.

Information = Trust

Trust = Money

Information = wants to be free

Therefore

Money = wants to be free

Or said another way

Money wants to flow freely

Historically only big institutions had the gravitas to be the trusted intermediary for industrial scale commerce, and for this role they extracted a hefty fee. Wire fees, transaction fees, merchant interchange fees, credit card fees, regulations, bank fees and currency depreciation all represent friction to the free flow of capital.

What happens when trust can be calculated by careful analysis of your endorsements and social network?

What happens when communities can easily form groups (AKA "circles"  ) to cross collateralize, insure, or drive better terms?

The result will be hundreds of new companies, maybe even new industries. Companies like AirBnB, Groupon, Lenddo and Square are just the tip of a “socially empowered” commerce renaissance.  

Stewart Brand was right, and we see information flow in the form of media has been radically changed over the last 10 years. But consumer media represents only about 2% of GDP,  finance is closer to 8% of GDP.

Let me say that again for emphasis.  TV, Radio, Advertising and Social Media represent about 2% of GDP, and they have been transformed by technology. The finance Industry is 4 times bigger!

Media is a precursor of the change to come, Mark Zuckerberg says "every industry will be changed by social". Tom Anderson, co-founder of MySpace says "everything got better when it was social".

What happens when finance becomes socially empowered?  

I guess the best way to predict the future is to create it.   

 

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It takes 20 years

Marc Andreessen was interviewed about Bubbles in today’s New York times.  It got me thinking about a core lesson from history: breakthrough technologies impact society in unexpected ways, and generally take 20 years before their true potential is realized.  

In late 1994 I had to make the biggest decision in my life: Should I quit my career as a management consultant to start my first internet business? I was learning tons as a consultant, had great mentors, and had a hard time imagining having more fun.

However, since my first lemonade stand, I always felt destined to start companies. In following the growth of the World Wide Web, I felt the time was right to try my hand as a full time entrepreneur. My gut said the magnitude of the web opportunity would more than offset my relative lack of business experience.

My holistic, big picture right brain was ready to make the move, but my analytical left brain still wanted more data. I needed data to squash my hesitation. The problem was little data existed about the World Wide Web. I charted mentions in the press; I charted user growth; I extrapolated future data. But none of them gave insights into the impact of the internet on society. For that I would have to look back into history.

Edmund Burke said, “Those Who Don't Know History, Are Destined To Repeat It.”

I say “Those Who Don't Know History, Are Destined to Not Profit From The Future.”

So I hit the books to study the biggest technological changes of the last 1000 years with an emphasis on the societal impact. My targets: Gutenberg Printing Press, Steam Engine, Electricity, Railroad, Broadcasting, Telegraph, Movies, Telephone, Automobile and the Personal Computer. Research took several weeks, but my view was unobstructed as I was able to stand on the shoulders of giants. Much had been written about the impact of technology on society. Eventually a pattern emerged:

Phase I: People at first underestimated the technology’s potential
Phase II: People then got excited about the potential, but then underestimated how long it would take (The bubble)
Phase III: Technology eventually reached its potential, but only years after the bubble popped
Phase IV: Eventually Society was impacted in even more than expected, and in unexpected ways, usually about one generation later (20 years)

Printing Press, Steam Engine, Electricity, Railroad, Broadcasting, Telegraph, Movies, Telephone, Automobile and the Personal Computer all conform to this pattern. This is not an asset bubble pattern (think Tulips, Silver or Mortgage Backed Securities).  It’s a technology bubble pattern. Around 2015 we should expect to enter Phase IV for the internet.

Get Ready! Phase IV is where the second order and unexpected societal impacts occur.  The automobile led to suburbization, highways, the drive-in movies, fast food and a change in how you interacted with your community.   Electricity lead to the light bulb, reading at night, home appliances, and the change in the role of women in the household.   

Reshaping the media industry is entertaining, but the “World Wide Web” is just getting started.   The “big” industries are Energy, Finance and Health Care.  When the internet, combined with social and mobile, hits those industries look out! Those changes will make CraigsLists, Yahoo and Netscape look like my first lemonade stand.

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Startups and Whiteboards: Like chocolate and peanut butter

Really the title should be a phrase: we need more whiteboards!  The number of startups here and New York are growing like brushfires.  If you visit a few startups one thing you see is lots of Whiteboards. Seems like startups and dry erase boards are like chocolate and peanut butter, or like Red Bull and, well startups. They go great together.
 
Whiteboards are one of the most important business tools a startup could have… entrepreneurship and software development are inherently creative, collaborative, information intensive processes. The startup blogosphere has lots of posts on hiring, marketing, software development and fundraising.  But what about whiteboards?  The “experts” are missing this critical tool in the entrepreneur toolkit. Sure you may learn something from Lee Hower that will help you close $5,000,000 in funding, but what good is that money if can’t collaboratively design your next pivot? That requires a great collaboration and brainstorming tool, the best I've ever seen at least.   
 
Successful project management systems revolve around people.  And as you probably know, no matter how many new “innovative” project management tools you try, there is always a role for the age-old, reliable whiteboard.  It is the ultimate collaborative tool. 
 
As a startup Founder and Investor, I found the whiteboard to be central to any good business.  It encourages focus, communications and effectiveness. Sadly, today, whiteboards are not getting the critical attention they deserve, an online-startup-knowledge void I hope to fill. 
 
So at first glance, it seems easy. Walk over to Staples and pick a size and order.  But wait, you’re embarking on building a world changing company, the next Facebook, and the whiteboard is a critical tool of your craft.  It would be like Lady GaGa buying her outfits at Lane Bryant, or Michael Jordan buying his sneakers at Payless.  They're more creative than that, and you can be too.
 
True, every penny counts in a startup, but you shouldn't cut corners on your most critical tools. Would you swap your new 27’ Mac for a 5 year old Gateway to save a few bucks, no way!  Maybe your whiteboard is just as key?
 
So what are your other choices?
 
Whiteboard Wallpaper – I have had good experiences with wallpaper. Several of the conference rooms at Mimeo.com have floor to ceiling whiteboard walls, and the ideas just keep coming when the space allows.  One consideration, the wallpaper comes in both mat and glossy finish.  I recommend gloss, unless you are also using the wall for projecting in which case I would recommend a mat finish.  
 
Whiteboard paint –  I have not had as much success with paint, but I think this is a good option for irregular surfaces where you anticipate light use (i.e list that change only monthly). The other advantage is the paint can be applied it to any shape or place in your office, but it’s definitely a light duty option.
 
Write-on poly sheets - are basically glorified white vinyl sheets (just a small step up from thick trash bags) but they are great when you need something right this instant, right now, today.  Poly sheets are also temporary, so you can take them with you when you take over your investor’s summer house for your corporate offsite.   The con, they’re tricky to handle, and like plastic wrap they cling to themselves ferociously.  The other con is any office that has plastic cling whiteboards definitely gives of the image that you will be packed up and gone tomorrow.  Not exactly reassuring to potential hires. (BTW, its also easy to get overly enthusiastic and accidentally write over the edge, onto the wall).
 
I didn't mention blackboards and blackboard paint, mainly because from time to time I wear a suit, and chalk and suits don’t mix.  Betaworks seems to have success with blackboards, and I have seen them in the quantitative trading conference room at Morgan Stanley.  The math PHDs love them, they give off a real academic vibe, but I don’t like the fact that the black surface can’t double as a projector screen (and like I said, chalk is messy).  So until I get my own “minority report” super screen, I am counting whiteboards as a core startup tool.

The Entrepreneurial Singularity - or - Moore's Law for Start-ups

Steve Blank has an excellent article “When It’s Darkest Men See the Stars”  which is the talk-of-the-town in the serial entrepreneur community. A brief excerpt:

“Entrepreneurial Singularity - The barriers to entrepreneurship are not just being removed. In each case they’re being replaced by innovations that are speeding up each step, some by a factor of ten. For example, Internet commerce startups the time needed to get the first product to market has been cut by a factor of ten, the dollars needed to get the first product to market cut by a factor of ten, the number of sources of initial capital for entrepreneurs has increased by a factor of ten, etc.”

Sounds a lot like CPU’s and Moore’s Law, eh?

If you follow Steve’s writing you find his basic premise is that a start-up is a project to find a business model, and that most startups will need to “pivot” before finding a model that works. 

Iterate to Success – Start-up Clock Speed

I look at each pivot as a special type of iteration.  An iteration is a change in product, packaging or business model.  Not all iterations are pivots, but all pivots are iterations.  The pace of iterations is an organization’s clock speed.  The faster you iterate, the more likely you are to strike success with the market. Usually the faster your clock speed the less cash you consume between iterations.  A start-up that has a clock speed of 6 months will have two chance to get it right on I year of cash, a startup with a clock speed of 30 days will have 12 chances.   In large organizations, an iteration is merely a product enhancement, or market expansion, but in a start-up one iteration can be the difference between riches and bankruptcy.   Urgency is critical.  

At the core of Ray Kurzweil’s Singularly is CPU clock speed.   In 1981, my first computer, had a clock speed of 4.77 MHzs, but computer speeds have steadily marched forward. The time and cost of a cycle was roughly cut in half every two years.  Will the same thing happen with start-ups?  Could faster iterations result in a startup singularity?    I don’t know.  It seems that the maximum start-up iteration speed is constrained by how fast customers will provide feedback.  But people have said Moore’s law would meet its constraint for over 15 years, yet every time the chip engineers think its over someone finds another way to speed up the chips.  

I wonder if entrepreneurs will have similar success in increasing the start-up cycle time.  Certainly in the next few years there will be massive improvements.  The time it takes to build teams, release software, attract investors, and close customers is still measured in months.   We (entrepreneurs and investors) can do better, and we will.    Recruiting, Agile Development, Seed Investing and Marketing are all fertile ground where innovation is flourishing, and increased innovation will increase speed.  

Innovation will stay, but Silicon Valley IPOs will go to Hong Kong, Singapore, Shanghai or Bombay

Last weekend I got to meet several start-ups from Yale and learned more about the Yale Entrepreneurial Institute (YEI).  Although Yale's start-up ecosystem is decades behind those of  Stanford and MIT, I'm sure Yale will graduate several entrepreneurs of note.

Columbia and NYU also have major efforts underway to foster entrepreneurship as a respectable and obtainable profession.  Last year more Columbia MBAs said they wanted to peruse a career in entrepreneurship than wanted to pursue a career on Wall Street!

The Yale event was a microcosm of why Americans should continue to be optimistic about entrepreneurship.  Our risk-taking culture, critical mass of self-made-entrepreneurs, and acceptance of failure virtually guarantee a steady stream of innovation.  Although many young companies will fail, others will go on to improve the world while simultaneously creating thousands of new jobs.

Unfortunately, the innovation coming out of Yale and all other universities is threatened by the current state of the American IPO.  Mid-stage funding is critical to both timely returns for early stage risk capital and, more importantly, scaling innovative businesses.  As I have said before, we are seriously lacking  “Ten Million Dollar IPOs.”  Tech IPO's will move offshore if America does not remedy its mid-stage capital markets. 

Der Spiegel agrees, and further argues about the risk and expense of listing in the United States:

With expensive accounting rules, an increased threat of litigation and hundreds of millions of dollars in fines for some firms, the once prestigious New York Stock Exchange and other American markets have become unattractive to companies. Daimler and Deutsche Telekom have fled this year and the few remaining are likely to follow. 

It looks as if American Entrepreneurs, Angels and VCs need to start familiarizing themselves with the “non-NASDAQ” IPO process in order to scales and remain competitive.   Some already have.  This week Sequoia-backed SKS Microfinance will raise over $350,000,000 in an IPO on the National Stock Exchange of India and the Bombay Stock Exchange. 

A changing of the Guard - This is not the 80s or 90s

Recently, New York has passed Boston as the number two city on the planet for creating and launching technology start-ups (both take a back seat to Silicon Valley).   But New York could be losing its dominance in facilitating mid-stage capital.In the 80s and 90s, technology companies from all over the world turned to New York and US investors to fund their mid stage growth.  Wouldn't  it  be ironic if future US entrepreneurs turned their back on Wall Street to fund their mid-stage capital needs?  

Tech IPO's: What TechCrunch & Fred Wilson Are Leaving Out

Erick Shonfeld has a great post up on Techcrunch called "The Poor Pilloried Tech IPO" that's worth a read, following on Fred Wilson's  recent post on the same subject.  Says Erick:

A decade ago, tech IPOs ruled the stock markets and Silicon Valley. They were the end-all and be-all for ambitious entrepreneurs and venture capitalists looking to become instant billionaires, or at least millionaires. That was many booms and busts ago. The IPO market never came back, and the multiple financial meltdowns which brought on Sarbanes-Oxley and other regulations made going public even less appealing to shoot-from-the-hip entrepreneurs. The founders of the most successful tech companies today—Facebook, Skype, LinkedIn—are pushing off the inevitable IPO for as long as possible. And for smaller tech companies, IPOs seem hardly worth the bother.

As I said in my April post on "Why Ten Million Dollar IPO's Matter", the U.S. IPO torrent has turned into to a trickle:

My concern is that we are not graduating the “Intels” of tomorrow.
 
AT&T, Disney, General Electric, Genentech, Cisco, Intel, Microsoft, Google and E-bay all had a public offering.  Since going public, they have all benefited from the credibility, profile and prestige associated with being publicly traded companies.  And of course the access to capital, both as IPOs, and perhaps even more importantly, with secondary offerings. The ability to do a short lead time secondary offering gives a company enormous flexibility.

But that flexibility is unavailable to most growth companies today.
 
Would the phone, talking movie, television, personal computer, and internet industry have been as innovative if these leading companies were instead acquired as a division of Western Union?   I think not, but that is the future of most venture-backed companies today. M&A has become the only available exit for growth investors and Founders. 

But why? Erick, as well as some of the people he quotes like Fred Wilson and Frank Quattrone, point to one or two barriers to going public - mostly the lack of "category-defining, earthshaking" precedents, and regulatory hurdles (such as Sarbanes-Oxley). But I think that's just the tip of the iceberg.

As I posted before, there are at least nine major impediments preventing tech IPO's:

1. Death of the mid-market investment firms
2. Decimalization. 
3. Rise of the Internet Brokerages
4. Growth of Prop Trading.
5. End of Equity Research.
6. Increased Litigation Risk
7. The Internationalization of Wealth.
8. Larger Global Funds.
9. Increased Regulatory Expense including Sarbanes-Oxley.

Quattrone's conclusion is right -  VC's need an IPO market. But I think he's wrong if he thinks the problem will be solved just by a few high profile IPO's from some current web standard bearers. 

Our community needs to address ALL the key impediments for tech IPOs. Something must change, even if it means moving the IPO market off-shore and and excluding U.S. participation to under 500 U.S. “Qualified” Investors.
 
There are smart people in Silicon Valley, London, New York and Hong Kong working on ways to overhaul the IPO process.  As tech innovation moves millions more into the middle class, people need a better place to invest their new wealth. And by 2035 the majority of the world’s wealth is expected to be outside the G20. It's inevitable that markets will connect these investors with start-ups and innovation will continue, that's a given.

But the big question -- how long it will take U.S. entrepreneurs and investors to figure this out?

Tomorrows Green Jobs are in Jeopardy

For 30 years, the process of job creation in the U.S. was the envy of the world.  Start-up entrepreneurs backed by private investors, followed by public investors, created and expanded companies that generated millions of jobs, all while growing the U.S tax base.  These new companies became the backbone of our modern economy.
 
While Ford, International Harvester, Chrysler, PanAm and RCA shrank or declared bankruptcy, Adobe, Dell, Microsoft, Cisco, Intuit, Yahoo, and hundreds of others were created jobs, increased our standard of living, and made America a better place.
 
Today that process is under siege: .not only from abroad where nations are duplicating our process, but also domestically, as well-meaning legislators are undermining the process.  We can handle the international competition, but these internal assaults could be the death of America’s standard of living.
 
The majority of U.S job creation follows a simple 3 step process:
 
Step 1 – Entrepreneurs have ideas and start companies, kicking-off the hiring process.
 
Step 2 – Angel investors, and eventually early stage investors, provide capital to fund further employment growth.
 
Step 3 – The company moves into the public market, where it has even greater credibility and access to capital, enabling it to continue to create jobs.
 

This whole process costs the government nothing, while it simultaneously increases the U.S. tax base. But it’s about to come to an end if elements of Senator Dodd’s new Banking Bill are passed into law.  Specifically, the Dodd Bill makes it much harder for individuals to qualify as angel investors. It’s already competitive enough for startups to attract early investment. 

If these changes are implemented, the definition of “accredited investor” will be individuals with a net worth of over 2.3 million. Currently that minimum is 1 million. As a serial entrepreneur and early stage investor, I know firsthand what this means to the future of startups. If these changes are implemented there will be significant reduction in the number of startups that are able to attract funding. 

Other countries have no such artificial barriers.  In China, where for the first time, in 2009, more money was raised in IPOs than in the U.S, anyone can have a chance of getting rich and investing in risky startups.  I guess our government thinks you can’t handle the risk associated with early stage companies, unless you are already rich.  Why is it only the rich should have access to this exceptional asset class?  True 60% of startups will produce no economic return for investors, but in aggregate the asset class is outstanding.
 

• Section 412 of the draft bill recommends adjusting the accredited investor to for an individual to $2.3 million in net worth or $450,000 plus in annual income.  At a time when many accredited investors have lost approximately 20% of their net worth and innovative startups are having an increasingly difficult time raising equity capital, decreasing the potential pool of angel investors is counterproductive to supporting the very companies that will create new high paying jobs.

• Section 926 of the bill would require, for the first time, companies seeking angel investment to make a filing with the Securities and Exchange Commission, which would have 120 days to review it. This would both raise the cost of seeking angels and delay the ability of companies to benefit from their funding. 120 days is an eternity for a fast growing start-up.  Kauffman Foundation Vice President, Robert Litan notes:  “that 'protections' for angel investors in Section 926 of the comprehensive financial reform bill outlined by Senate Banking Committee Chairman Senator Dodd are unnecessary and will hurt America's job creators.”

• Section 928 of the legislation would repeal the existing federal preemption of state regulation over “accredited investor” securities offerings. This would end the uniform, national set of rules for financing startups. By eliminating regulation that is working well, the draft bill would expose technology startups to a potentially complicated system of patchwork, state by state regulation, resulting in higher costs, more legal risks, and the potential of not being able to raise capital because of different rules in different states. Nothing would be gained from this change: no additional protections would be provided to the accredited angel investors and there would be no benefits to the national financial system or to the economy.

These three Sections of the bill will kill the creation of jobs, especially green jobs.

Right now the CleanTech industry in the U.S is in its infancy. Many of the companies of the future are currently angel backed and all rely on investment for their early stages of growth. 

These companies produce no drain on the U.S. treasury, and in fact increase the tax base by growing the economy.   

A good example is Locus Energy, With Angle backing; Locus is developing the hardware and software to manage alternate energy sources like solar panels. 

Another good example is high quality carbon offset provider, Belgrave Trust.  With Angel backing, Belgrave Trust helps high-net-worth individuals (and some corporations) use market based solutions to completely offset their carbon footprint. 

Both companies are growing their revenue, delighting their customers, and both companies are creating an ongoing stream of high quality green jobs. 

Our future is dependent on entrepreneurs and angel investors, for they will create the jobs of the future.  I just hope well intentioned legislators destroy the process.