Yearly Archives: 2010

End-of-year Twitter Digest

Thank you to all our readers for joining us here for a bloggin’ 2010.  We wish you all a happy and prosperous 2011!

Enjoy this potpourri of our recent twitter activity to end the year, in case you missed any of them:

Tax credits for angels?

Xconomy reports that Michigan has decided to offer tax credits to angel investors. We’ve written on the topic here, and also recapped Rhys William’s testimony (before Florida Senator George LeMieux’s “Innovation in America: Opportunities and Obstacles” hearing) on the subject here. Scott Shane, Professor of Entrepreneurial Studies at Case Western Reserve University, argues in BusinessWeek that such tax credits are not the most ideal way to promote entrepreneurship because they redirect the same pool of available dollars to the same universe of start-ups, but in an inefficient manner – costing the state tax revenue while not maximizing job creation. Professor Shane prefers more broad-based tax relief:

Much as I would like to see policymakers encourage more high-growth entrepreneurial activity, I don’t believe that an angel tax credit for SBIR recipients is the way to do it. A capital gains tax cut for shareholders in startups (including angel investor holders of equity) would stimulate more high-growth entrepreneurship with fewer adverse effects than the proposed angel tax credit.

While we agree that broad-based tax relief (for any economic issue) tends to be a more efficient solution than targeted credits, it’s important to support any and all politically feasible means to make early stage investing more attractive.   Robert Ackerman, managing director of Allegis Capital, in a widely quoted interview, cites data from the National Science Foundation that illuminate why:

In 1981, 70.7% of industrial R&D took place at companies with 25,000 employees or more.  By 2005 that had fallen to 37.6%.  At the same time,  companies with fewer than 5,000 employees accounted for 39.6% of industrial R&D in 2005, up from 10.5% in the early 1980s.

From the same data we learn that companies with fewer than 500 employees account for just 11% of sales (of R&D-performing firms) while employing 25% of the scientists and engineers.  The large (>25,000) firms enjoy 43% of sales while employing only 29% of the scientists and engineers. Over the past three decades it has become more common for small companies to plant while large companies harvest – often by acquiring the same small companies in order to create economies of scale for the innovation.  This is a good change for the economy, and fueled in no small part by the growth and success of angel investors (and venture capital firms) who allocate capital more efficiently.  These activities should be encouraged with tax credits, rate reductions… or both.

It takes a network (in order to succeed)

LinkedIn co-founder Reid Hoffman offers short and sweet advice to entrepreneurs at the “Silicon Valley Comes to Oxford” forum:  “Build a network.”

Good advice – even if it does just so happen to coincide with his product offering.

A good CEO-VC partnership will expand – exponentially – the network that gets put to work on behalf of growing the business.

BPV completes successful exit from QOL Medical

Ballast Point Ventures is pleased to announce that it has sold its remaining interest in Fund I portfolio company, QOL Medical, LLC, in a minority recapitalization led by QOL’s largest shareholder, Cooper Capital.  Under the terms of the all cash transaction, Ballast Point Ventures and the Company’s founders, Trevor Blake and Edwin Hernandez, will sell all of their interests.  Edgemont Capital Partners served as the advisor to QOL on the transaction.

Additional detail can be found here.

Would it be a Bowie Knife?

Joel Kotkin – blogging at Forbes New Geographer – puts a humorous title to a theme that has been well covered here and elsewhere:California suggests suicide; Texas offers the knife.

CEO's 10 Best States for Business

Kotkin suggests 2010 will be used by future historians to mark the end of the California era and the beginning of the Texas one, citing as evidence this survey in Chief Executive magazine which ranks the states for their business environments.  CA not only ranks last, but is the only state to receive an ‘F’ in any category.

The Top 10 looks familiar to us, as it constitutes most of the geography in which we have focused our investment efforts for over twenty years now, and it’s not the first time Texas has led the pack.  Kotkin writes:

Even more revealing is California’s diminishing preeminence in high-tech and science-based (or STEM–Science, Technology, Engineering and Mathematics) jobs. Over the past decade California’s supposed bulwark grew a mere 2%–less than half the national rate. In contrast, Texas’ tech-related employment surged 14%. Since 2002 the Lone Star state added 80,000 STEM jobs; California, a mere 17,000.

Of course, California still possesses the nation’s largest concentrations of tech (Silicon Valley), entertainment (Hollywood) and trade (Port of Los Angeles-Long Beach). But these are all now declining. Silicon Valley’s Google era has produced lots of opportunities for investors and software mavens concentrated in affluent areas around Palo Alto, but virtually no new net jobs overall. Empty buildings and abandoned factories dot the Valley’s onetime industrial heartland around San Jose. Many of the Valley’s tech companies are expanding outside the state, largely to more business-friendly and affordable places like Salt Lake City, the Research Triangle region of North Carolina and Austin.

… Ultimately the “green jobs” strategy, effective as a campaign plank, represents a cruel delusion. …Without subsidies, federal loans or draconian national regulations, many green-related ventures will cut as oppose to add jobs, as is already beginning to occur. The survivors, increasingly forced to compete on a market basis, will likely move to China, Arizona or even Texas, already the nation’s leader in wind energy production.

By the way, we have nothing against California.  It’s a beautiful state and a great place to visit.  We just wouldn’t choose to try and build a business there.

No start-ups, no jobs, no money

According to Dow Jones VentureSource, venture financing is up 10% in the past year – which is encouraging news for job creation.  Less encouraging however (also from DJ Venture Source) is that it’s still down 27% compared to two years ago.

We’ve written previously about the slight misconception concerning job growth in the economy:  jobs are created mostly by new businesses, which start out small, as opposed to the more common short-hand of “small businesses.”  The Wall Street Journal reported on the subject a few days ago, with a sobering graph, in Few Businesses Sprout, With Even Fewer Jobs.

The entrepreneurs interviewed for the piece claim they’ve “never seen seed capital so low” and are “alarmed” by what is actually a one-two combination of unavailable capital and deep uncertainty about the overall business environment:

Some entrepreneurs say it’s not all about financing, though. They express concern about taxes, health-care costs and the impact that wrangling in Washington over the federal budget deficit will have on them. “I can’t determine what the cost of providing health care for employees would be,” says Kevin Berman, 47, who is starting a local-produce company in Orion Township, Mich., called Harvest Michigan. Starting a company “is harder than it was at any time I can remember.”

We are hopeful that in the months and years ahead our economy will improve at a more rapid rate.  But we also know that for even an improving economy to produce high quality jobs in substantial numbers, our government will need to focus on restoring a favorable and predictable business environment that provides the right incentives for new business formation.  That is the only approach that will allow for the unleashing of the entrepreneurial “animal spirits” that fuel robust periods of economic growth and impressive job creation.

Trust Me

This article from the Wall Street Journal’s Business Insight report offers advice to entrepreneurs on how to establish trust and credibility.

The authors (Quy Huy and Christoph Zott) suggest that oftentimes an entrepreneur becomes so focused on getting his product or business ready that he neglects the little things that can exert out-sized influence on the “selective recall” of customers, vendors, and potential investors.  (E.g., a polished website, personalized thank-you notes, small gifts, nice office space.)

It’s a fair point, and true as far as it goes.  However, we also see no shortage of products and businesses that could be greatly improved with tighter focus.  One particular conclusion resonated strongly with us and is applicable for the duration of any successful Long Term Relationship, whether referencing the product, business, or the little things:

To be effective, each of these actions must be underpinned by authenticity.

In other words, only promise what you can deliver.

We’d offer one final caveat on the advice offered by Huy and Zott:  an entrepreneur might impress some unsophisticated investors with a “tony” office location, but institutional venture firms get worried when they see expensive office space and upscale surroundings.  The best entrepreneurs watch every penny, and your venture partner, if you go that route, won’t care where your office is or what it looks like as long as it is tidy and has what you need to run the business.  We know of more than a few examples where venture capital firms passed on opportunities where the “surroundings” were top shelf but the company was still losing money.  You can be sure that when the venture capitalists perform their due diligence, they won’t be focused on your office space.

Appreciating the rich for how they got there

One of the great satisfactions found in our line of work is the close long term relationships we forge with many entrepreneurs, angel investors, and limited partners who have enjoyed their own hard-earned business success.  Their prior success creates in them both the tendency and the wherewithal to help support the next generation of high-growth companies that improve all our lives.  This recent article in Forbes magazine discusses the critical role these successful business people (and their savings) play in fostering economic growth:

Saving is not the practice of the wealthy stashing money under plump mattresses. Rather, [those] savings are the funds [that allow] businesses access to the capital they need to grow. Firms use these funds to start or expand businesses and to buy machinery and other physical capital…

Because much of the savings that can drive investment and economic growth over time comes from the relatively small fraction of individuals in the top income tax bracket, permitting a tax increase on high-income earners would be a significant disincentive for savings…  This decision [to raise taxes on interest, dividends, and capital gains] will affect not only the near-term outlook for the economy but savings and investment decisions for the long-run as well. Consumer spending has its place, but it is not the answer to every economic question. By disparaging investment and in particular the taxpayers who account for most of that investment, Congress is biting the hand that feeds long-run economic growth.

Ziad K. Abdelnour, President & CEO of Blackhawk Partners, blogs that the nation’s successful entrepreneurs deserve gratitude instead of increased taxes:

The entrepreneurial knowledge that is the crux of wealth creation has little to do with glamorous work, or with the certified expertise of advanced degrees. Great wealth usually comes from doing what other people consider insufferably boring.

The treacherous intricacies of building codes or garbage routes or software languages or groceries, the mechanics of butchering sheep and pigs or frying and freezing potatoes, the murky lore of petroleum leases or housing deeds, the ways and means of pushing pizzas or insurance policies or hawking hosiery or pet supplies or scrounging for pennies in fast-food unit sales, all of those tasks are deemed tedious and trivial.

In short, our rich – America’s best entrepreneurs – perform work that most others spurn. (more…)

Sleep Apnea: The New Cholesterol

The October issue of Start-Up magazine includes an article on growth opportunities in the 25-year old field of sleep medicine – an enormous group of serious and chronic diseases that remain largely undiagnosed.

One of these diseases – sleep apnea – has strong links to cardiovascular conditions (atherosclerosis, myocardial infarcation, hypertension, stroke, and heart failure) and metabolic disorders (obesity and diabetes).  Sean Heyniger, CEO of Watermark Medical (a portfolio company of ours) likens it to “cholesterol 30 years ago,” as it is “both a risk factor of and an agent that worsens other progressive and chronic diseases.”

The most common current diagnosis and therapy are expensive and suffer from a high failure rate – 50% of patients abandon treatment within the first year.  Even those who stay with the treatment regime fail to meet very low compliance standards, through misapplication of the device or removal of same in the middle of the night.

Watermark provides a medical device and software platform which empowers primary care physicians to prescribe home sleep tests, addressing the 90% of patients with undiagnosed (and therefore untreated) Obstructive Sleep Apnea (OSA).  The advantages to home-based sleep testing are simple:  increased patient comfort and compliance, improved diagnostic speed and accuracy, and lower cost.  Home-based, end-to-end, diagnostic-to-therapy platforms are a growing trend in health care.  Sean and his team at Watermark are already experienced in providing home-based monitoring from their success at PDSHeart (a previous portfolio company in our first BPV fund), a leader in the remote cardiac monitoring space.

The New York Times covered this “broad transformation”  last May in High-Tech Alternatives to High-Cost Care.  The Times singles out Watermark as exemplifying the promise of these changes:

…an array of technology-enabled, consumer-based services that provide a new form or primary health care [that] emphasize early detection, prevention, and management of chronic disease.

As insurers and the government begin to reimburse at-home testing and monitoring devices, the trend promises to: 

shift a lot of the diagnosis, monitoring and treatment of disease from hospitals and specialized clinics, where treatment is expensive, to primary care physicians and patients themselves — at far less cost.

The article further concludes that additional chronic conditions such as heart disease and diabetes could also someday be monitored by Web-based personal devices similar to Watermarks’ ARES (Apnea Risk Evaluation System).  It is exciting to partner with entrepreneurs like Sean who are at the forefront of efforts to use the latest technology to simultaneously increase the quality and reduce the cost of health care in this country.

Bands of Angels

The October 2010 issue of Florida Trend includes an excellent feature on a critical piece of the state’s entrepreneurial ecosystem: local groups of investors providing funding to emerging companies.

These “Bands of Angels” all work with early stage companies, and therefore have a higher tolerance for risk, but tend to operate in slightly different ways.  Some meet regularly, some don’t; some pool their capital, some leave the investing decision to each individual; some focus on industries or region or type of entrepreneur, and some by “what they know.”

Angels provide more than capital and expertise – their networks and reputations assist with introductions to additional sources of financing.  Rhys Williams of New World Angels in Boca Raton (whose recent testimony before the United States Senate on the importance of early stage investing can be found here)  explains:

For entrepreneurs, it’s the smartest money you can get.  You could be getting 40 investors committed to your success who use their networks to grow the company and who will help you find the next round of capital.

Sean Christiansen of Catapult Capital in Orlando describes how local sources of this type of funding are vital to the future of Florida.  Viable local capital can prevent high-growth companies from relocating to be close to their source of funding:

Historically, Florida has lost companies because they went to venture capital firms who prefer local businesses, and most of those [venture] firms were not in Florida.

The Florida Trend article also includes insights from Tim Cartwright of Tamiami Angel Fund in Naples, Barbara Boxer of Women Angels in Miami, Allan Keen of Winter Park Angels in Winter Park, and Alan Rossiter of Springboard Capital in Jacksonville.

Developing the state’s and region’s entrepreneurs and the infrastructure that supports them are favorite topics of ours.  Here are convenient links to the Florida Angel Funds mentioned in “Bands of Angels“:

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