Posts Tagged ‘Entrepreneurship’

This Looks Like a Job for Super Angels!

Thursday, January 20th, 2011

Fast Company  recently reported on “the latest group of alleged tech marauders,” super angels:

These crafty interlopers represent a hybrid between the two investing models that have long ruled the normally placid world of startup funding. Super angels raise funds like venture capitalists but invest early like angels and in sums between the two, on average from $250,000 to $500,000. By being smaller, faster, and less demanding of entrepreneurs than VCs, super angels are getting first dibs on the best new ideas.

According to Smeal’s Anthony Warren, Farrell Clinical Professor of Entrepreneurship, super angels are nothing new:

The granddaddy of all angel groups, the Band of Angels,was founded in 1994 and has for many years had pre-committed funds available for investing in hot deals.  This structure avoided the horrendous task of  getting  to a decision when the group members have conflicting requirements and  are on a 24/7 schedule. As Wally Buch, one of the early members of the group, explained to me, “It’s like herding cats.”

The Fast Company article also implied that super angels are a purely Silicon Valley phenomenon, but such groups have operated nationwide for many years.  In Pennsylvania, for example, BlueTree Allied Angels in Pittsburgh has been successfully investing in life science companies for several years. There are nearly 30 companies in its current portfolio. 

We are seeing a growth in super angel groups inserting themselves at the early stage of company foundation before VCs get involved for a reason not really addressed in the article.  The Internet has enabled young companies to grow with less need for cash.  They can operate virtually, using experts as required from anywhere in the world without the need for full-time hires, and use social media marketing to enter markets. Business models using such capital efficiencies are opening up more opportunities for super angels at the expense of the VC firms, which  have to put larger amounts of cash to work.

Tags: Entrepreneurship, Venture Capital, Warren
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Smeal Faculty on the Fiscal Commission Recommendations

Tuesday, November 16th, 2010

The co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform last week released their preliminary recommendations for increasing tax revenues and reducing federal spending in an attempt to bring the deficit under control. Calling the debt a cancer that will destroy the country if not fixed, co-chairs Erskine Bowles  and Alan Simpson proposed cuts to everything from defense contracting to the White House budget to the federal workforce.

Below, Smeal faculty members Ron Gebhardtsbauer, Austin Jaffe and Anthony Warren weigh in on three of the recommendations.

Ron Gebhardtsbauer, faculty-in-charge of the Actuarial Science Program, on the commission’s Social Security proposals:

In the process of putting our fiscal house in order, the Obama Fiscal Commission also gets Social Security back in financial balance, which is great. The most important fix is indexing the retirement age to our increases in longevity, which makes Social Security sustainable, and encourages people to work longer.  Without indexing, Social Security’s finances go out of balance as we live longer.  And it’s not draconian at all.  They very slowly raise the normal retirement age for full benefits to age 68 in 2050 and around age 69 in 2074.  This won’t affect older workers, and middle age workers won’t be affected much.  Older workers in physically demanding jobs will be able to get disability benefits under an easier disability definition. 

I also like that they are finally making Social Security truly universal by covering the remaining state and local government workers (although that will be tough to get through Congress, as the large states have lots of power). 

There are many other fixes, which I’ll discuss in a later blog. 

Austin Jaffe, chair of the Department of Insurance and Real Estate, on the possibility of eliminating the mortgage interest tax deduction:

Perhaps the “sacred cow” of U.S. housing subsidies has been the mortgage interest tax deduction. Even when consumer interest was disqualified, interest deductibility from a mortgage was preserved. Recent discussion has raised the possibility that subsidizing mortgage interest payments is no longer a worthwhile policy. The Deficit Commission has suggested limits on mortgage interest deductibility: The benefit would only be available for primary homes, no interest would be deductible from home equity lines of credit, and no deductions would be available on mortgages larger than $500,000.

Here are some areas of current debate:

1.  The costs of lost revenue are being raised over and over again these days. The Joint Commission on Taxation estimated that it cost $80 billion in 2009 alone. About one-half of homeowners claimed tax benefits were a “major reason” to buy. Yet many households do not itemize their deductions (including about 50 percent of homeowners).

2.  Poterba and Sinai’s 2010 study found that 2.8 million households with annual income over $250,000 saved about $15 billion, while 19 million households with incomes between $40,000 and $75,000, saved only about $10 billion. The savings to middle- income households amounted to $542, or $1.48 per day. This is hardly sufficient to become a homeowner.

3.  Finally, commentators are now beginning to wonder if the deduction is a destabilizing force in housing markets. Inducing homeowners to borrow for consumption of housing services may add additional volatility to house prices since indebtedness adds financial risk to the system, especially when prices are dropping. This is another example of distortions created by providing incentives via the tax code.

There are other issues including the capitalization of tax benefits into current prices before the purchase takes place, comparisons of housing markets in countries without interest deductions, violation of horizontal equity of renters, and others.

After all of these years, it would truly be amazing if this well-liked tax subsidy would be rescinded even if the benefits are not as great as is typically thought relative to the costs.

Anthony Warren, director of the Farrell Center for Corporate Innovation and Entrepreneurship, on the Bowles-Simpson recommendation to merge the Department of Commerce with the Small Business Administration and cut the new entity’s budget by 10 percent:

For many years the Small Business Administration has been the poor cousin among government agencies with the result that small companies have suffered from inadequate representation in Washington.  Recently for example, the administration has supported larger corporations rather than the lifeblood of the economy, innovative job-creating small firms. Therefore there is a concern that smaller companies will now lose any voice that they may have had for the illusion of ever elusive cost cuts.  It would be better to double the Small Business Administration and half the Department of Commerce.

Tags: Economy, Entrepreneurship, Gebhardtsbauer, Jaffe, Politics, Real Estate, Social Security, Taxes, Warren
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Micro-Lending and Venture Capital

Monday, August 2nd, 2010

Smeal’s Anthony Warren, director of the Farrell Center for Corporate Innovation and Entrepreneurship, weighs in on the micro-lending trend and what it means for venture capitalists:

In the business section of The New York Times on July 28, reporter Kristina Shevory describes how so-called “micro-lending” is being taken up by small businesses in the United States that are starved for cash in the current uncertain economy.  Micro-lending originated in India. Small amounts of money are loaned from special banks such as Grameen, under terms that are much less onerous than those at established commercial banks.  The loans are given based more on trust than on financial analysis. And a little money can be made to go a long way by frugal entrepreneurs once given the chance to develop their dreams.

The article however did not mention another underlying driver of micro-finance.  The Internet has made it much less costly to build a company. No longer is it necessary, in many cases, to build expensive sales forces, hire experts full time, or spend fortunes on broad advertising campaigns. The Internet allows small companies to “bootstrap” their growth without spending a lot of hard-earned dollars.  They are what is now being termed “highly capital efficient.” Having websites designed in Croatia, using Twitter and Facebook as free and “viral” marketing channels, buying highly targeted advertising from Google one hit at a time, and getting access to specialists only when needed from anywhere in the world for an hour’s advice  have become the norm rather than the exception.

Alongside the emergence of micro-lending banks, we see new micro-equity funds such as DreamIt Ventures in Philadelphia and YCombinator in the Bay Area.   These  provide small amounts of cash, enough to pay one or two founding entrepreneurs minimum wage for three months while accessing a network of volunteer experts who guide the foundlings through the difficult early stages of a new venture.  At the end of this incubation, the new companies are ready for bigger things that may not demand large amounts of investment.

These new sources of micro-cash are a threat to the conventional early stage venture capital sector which is still in a multi-year downtown, unable to return any profits to their own investors.  The VC model has been based on raising large amounts of capital and investing several millions dollars in each portfolio company often leaving little ownership and motivation for the founders.  Managing large funds provides high management fees to the venture capitalists of course, but if companies become far more capital efficient there is much less need to take the expensive VC funds at all.  Micro-lending and micro-equity are moving in to provide the early stage funding and thereby reducing the need for vast amounts of venture capital. 

Tags: Entrepreneurship, Venture Capital, Warren
Posted in News | 31 Comments

Entrepreneurship Struggling in Pa.

Tuesday, January 26th, 2010

According to a recent report from the Kauffman Foundation, Pennsylvania is ranked dead last out of all states in entrepreneurial activity. Smeal’s Anthony Warren, director of the Farrell Center for Corporate Innovation and Entrepreneurship, weighs in:

Pennsylvania is ranked well below our neighbors Delaware, New Jersey, Ohio, Virginia, and West Virginia. And Philadelphia is worst among all major cities.  What has gone wrong? There is ample evidence that the creation of new innovative companies is the lifeblood of long-term economic growth, sustainable high-paying jobs, wealth creation, and tax revenues. Companies are like people—eventually the old ones die off,  to be replaced by energetic youngsters.

Some say that the problem is with Pennsylvania’s history and farming culture.  Are we worse off in this regard than Alaska, Louisiana, or North Dakota—certainly not.  Do we lack world-class higher education? Hardly, with leading research institutes such as Carnegie Mellon, Penn, Temple, and Penn State all with highly regarded educational programs in entrepreneurship.

Unfortunately we have to look at our leaders in Harrisburg, who, a few years ago, took on an outdated model for economic development, namely Porter’s cluster analysis method. This is  best suited for established industries and designed to support the old, rather than nurturing the new. Politically expedient perhaps, but not good for the long haul.  With markets globalized, and technology changing by the hour, new corporate structures must be fast and flexible, not solid and slow to change.

This “old is good” mindset is recently evidenced by major cuts in the budgetary support for Ben Franklin Technology Partners, a long-standing and successful program for helping early stage companies.  While other states have envied this model and are looking to introduce similar programs, Pennsylvania is rapidly destroying any fertile ground we once had for growing new companies. Currently the economic environment has never been so bad for start-ups; those states that realize this, and provide support, will reap rich harvests in the future.

Tags: Entrepreneurship, Pennsylvania, Warren
Posted in News | 30 Comments

Charged by an Angel

Thursday, August 20th, 2009

The New York Times reports that angel investors are tightening their purse strings during the recession and some are even “levying fees on entrepreneurs for guidance on finance and introductions to sources of capital.”

Smeal’s Anthony Warren, Farrell Clinical Professor of Entrepreneurship, comments:

The belt-tightening in the current economy has spread to so-called angel investors who invest their own money into startup companies. This is making it even harder for entrepreneurs to find money to build their companies. Unfortunately this has spawned a group of intermediaries that promise to “train” entrepreneurs on how to make a pitch to investors and then make introductions. For this, the entrepreneurs pay a fee of perhaps a few thousand dollars out of their already meager funds. And to little end. If you cannot figure out how to make a good pitch and locate and approach possible sources of money, then you are hardly the person to build a successful company in any case. Finding investors and pitching them is your first challenge. Smart entrepreneurs network to narrow their targets to just a few potential investors who are a great fit to their company, and use free resources such Smeal’s IdeaPitch Web site, which provides all an entrepreneur needs to put together the perfect investor pitch.

That is not to say that getting advice is not a good idea. But it is important that the objectives of the entrepreneur and mentors are aligned. This is hardly the case when advisers take a fee just for a meeting. It’s much better for both parties when they have a common  interest in long-term outcomes. This can be through a small investment with a lot of networking provided by the investors. New “micro-equity” programs such as Y Combinator and DreamIt Ventures provide much better opportunities for budding entrepreneurs.

So hold onto your limited funds, use them to “bootstrap” your idea to the first milestone. Then work on your pitch targeted to a narrowly defined investor audience. After all, if you are not the best person to tell your story, then maybe you do not really believe in it yourself.

Tags: Economic Crisis, Entrepreneurship, Warren
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Rethinking Venture Capital

Tuesday, July 7th, 2009

The New York Times reports today that venture capital firms are rethinking their strategies due to the lower returns they’re seeing lately. Several venture capitalists quoted in the article are concerned about overfinancing in the sector and argue that VC firms need to scale back their investments and revert to strategies used decades ago.

However, Smeal’s Anthony Warren, director of the Farrell Center for Corporate Innovation and Entrepreneurship, contends that “saying the VC industry must go back to basics misses the point because the basics have changed,” due in large part to angel investors.

Warren explains:

Business angel investors have gotten more organized and wise. In the past, they worked more as individuals on a hit-and-miss basis, and when a company eventually sought venture financing, the angel’s stock ownership was wiped out by the low valuations imposed by the richer VCs. Now angels hunt in packs, and are able to take a company all the way to an exit without facing the valuation pressure from VCs.

Previously, angels were a source of deal flow for the VC funds taking the early stage risks. But the lessons have been learned; angels now avoid taking good companies to VC firms. If the VCs try to compete with angels by going down in deal size, then they will be unable to maintain their cadre of highly compensated partners. Even today, a startup rarely gets the attention of the best partners in a firm, with a junior partner being designated to the board. This will only get more prevalent. 

In addition, it costs much less to build a company now.  The growth of broadband Internet has drastically reduced the cost of marketing and distribution, which were a drain on expensive VC money in the past. Techniques like viral marketing, partnered supply chains, etc., have changed the fundamental business models for a startup. In the past, $20 million was a typical cash need for a startup; now it can be as low as $2 million. 

We now teach students how to grow a company without venture capital funds rather than how to raise venture capital. This is a much more realistic approach in today’s economy. 

Tags: Entrepreneurship, Venture Capital, Warren
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Small Business Stimulus

Tuesday, March 17th, 2009

President Obama yesterday laid out his plan to free up credit for American small businesses. Under his plan, the Small Business Administration will increase its payback guarantee for small business loans from 85 percent to 90 percent. The proposal will also lower the loan fees paid by borrowers.

Smeal’s Anthony Warren, Farrell Clinical Professor of Entrepreneurship, made the following comments in response to the president’s plan:

It’s better to spend money on stimulus for the future than on supporting the dinosaurs of the past. Obama’s plan is a welcome sign that the new administration recognizes the importance of small company survival for the long-term health of our economy. 

Certainly the SBA has been neglected for too long. But changing the guaranteed level by 5 percent will not in itself provide sufficient stimulus to this vital sector. Many companies do not avail themselves of these guarantees currently because of the onerous paperwork and bureaucracy that is associated with the applications. There must of course be a balance between ease of loan acquisition and oversight, but  the loan application and approval process needs to be streamlined along with the higher guarantee levels.

Tags: Economic Crisis, Entrepreneurship, Warren
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