Friday, August 14, 2009

A Matter of Stage

The terms seed stage, early stage, and startup are bantied about as if their definitions were self-evident (or more likely as if their use were intended to evoke an emotional response without regard to the precision of their meaning). But the meaning of these terms in context is crucial to understanding the availability of funding for innovation, and just why SBIR and similar resources are so critical to the well-being of our economy.

The following definitions come from PriceWaterhouseCooper's MoneyTree™ report:

Seed/Start-Up Stage: The initial stage. The company has a concept or product under development, but is probably not fully operational. Usually in existence less than 18 months.

Early Stage: The company has a product or service in testing or pilot production. In some cases, the product may be commercially available. May or may not be generating revenues. Usually in business less than three years.

Expansion Stage: Product or service is in production and commercially available. The company demonstrates significant revenue growth, but may or may not be showing a profit. Usually in business more than three years.

I attended a luncheon yesterday ostensibly addressing "The State of Angel Investing." Oddly, the speaker, Joe Kremer, director of the Wisconsin Angel Network, insisted against all evidence to the contrary (and providing none of his own) that "Venture Capital is entering into more and more earlier stage deals."

Um... what? He provided a chart of the "Financing Continuum" (which to his credit is a very clear and useful resource -- a larger version of the chart can be found on p. 4 of the Wisconsin Technology Council's report "Wisconsin Portfolio"). If you look at Kremer's version, you'll note a line running through the middle of "Product Development" and toward the end of "Start-Up Funding". To the left of that line is what Kremer called "early stage". Venture Capital is almost entirely above that line.

"Do you mean that VCs are funding more deals below that line, because my understanding and experience say that VCs have no interest, 0% in funding pre-prototype R&D." Uh... well, I consider prototype a pretty early stage event, was his reply.

Down at the earliest level of funding is SBIR/STTR. It rivals only the Four Fs. In other words, without SBIR for seed stage funding, only the wealthy can afford to enter the realm of innovation. Anyone can have a great idea, regardless of their present financial status.

If founders, family, and friends are simply not able to provide the seed capital to develop that idea into a proof-of-concept then a prototype, and no other source of funding is available, that idea will die. Period!

SBIR provides a means for open competition of ideas to gain such funding that is simply not otherwise available: no where, no how.

It's all about seed capital!

Wednesday, August 12, 2009

Claiming stakes

Worthy of note:

Growthology reports on an NVCA study that
"claims that VC-backed companies accounted for ten percent of employment in 2006 and some large share of recent job growth. Yet when you scroll down to the data tables, you see that they take year 2000 employment of a company that once received venture capital (e.g. Intel), then year 2006 employment in that company, and attribute the change to the fact that company once received venture capital. Voila! Are you telling me that the VC investors in Intel played a role in the company's job growth between 2000 and 2006".
NVCA has a penchant for staking claims on all the good that has ever been done by anyone once affiliated with a company that at some point in its life cycle had permitted itself to take some funding from an organization that at least had some association with a relative of someone who once walked in front of a building that was in part owned by a future or former venture capitalist.

Look! Let's make this clear: good ideas become innovations. Good businesses are built on the foundation of those innovations. Researchers and entrepreneurs provide the ideas that become those foundations. At best, venture capitalists provide some funding, insight, marketing, and business sense to contribute to the success of a venture based on the good ideas that emanate from a researcher or entrepreneur. It is possible for a symbiotic relationship to accrue, whereby a mutual respect permits innovators and VCs to collaborate on building great businesses. But it is in no way a foregone conclusion that a good idea requires VC funding to become a great business, nor is it in any way assured that the receipt of VC funding will positively impact such a company's potential success.

Period! Full stop!

Legislative Process & Authority

The following is an extract from the OpenCongress pages on "how a bill becomes a law". This is relevant not only to HR 2965, which is currently in Conference Committee, but also importantly to the deceitful, harmful, and arguably unauthorized actions by the Conference Committee that was entrusted to reconcile the House & Senate versions of the bill that became HR 1, the American Recovery and Reinvestment Act (ARRA). Those actions excluded NIH from its statutory obligation to provide $229 million for SBIR/STTR from the stimulus funds alloted to the agency.

Authority of Conferees

The conference committee is sometimes popularly referred to as the "Third House of Congress". Although the managers on the part of each House meet together as one committee they are in effect two separate committees, each of which votes separately and acts by a majority vote. For this reason, the number of managers from each House is largely immaterial.

The House conferees are strictly limited in their consideration to matters in disagreement between the two Houses. Consequently, they may not strike out or amend any portion of the bill that was not amended by the other House. Furthermore, they may not insert new matter that is not germane to or that is beyond the scope of the differences between the two Houses. Where the Senate amendment revises a figure or an amount contained in the bill, the conferees are limited to the difference between the two numbers and may neither increase the greater nor decrease the smaller figure. Neither House may alone, by instructions, empower its managers to make a change in the text to which both Houses have agreed.

When a disagreement to an amendment in the nature of a substitute is committed to a conference committee, managers on the part of the House may propose a substitute that is a germane modification of the matter in disagreement, but the introduction of any language in that substitute presenting specific additional matter not committed to the conference committee by either House is not in order. Moreover, their report may not include matter not committed to the conference committee by either House. The report may not include a modification of any specific matter committed to the conference committee by either or both Houses if that modification is beyond the scope of that specific matter as committed to the conference committee.

Under a recent reassertion of a Senate rule, Senate conferees are bound to consider only those matters that bare a certain relevancy to a House or Senate provision in conference.

The managers on the part of the House are under specific guidelines when in conference on general appropriation bills. An amendment by the Senate to a general appropriation bill which would be in violation of the rules of the House, if such amendment had originated in the House, including an amendment changing existing law, providing appropriations not authorized by law, or providing reappropriations of unexpended balances, or an amendment by the Senate providing for an appropriation on a bill other than a general appropriation bill, may not be agreed to by the managers on the part of the House. However, the House may grant specific authority to agree to such an amendment by a separate vote on a motion to instruct on each specific amendment.

Tuesday, August 11, 2009

H.R. 2965 EAS

As far as I can tell, S. 1233 is no longer under consideration. The current bill is H.R. 2965 as passed in the Senate (dubbed "Engrossed Amendment Senate"). This version of H.R. 2965 includes several alterations from the original House version, incorporating certain aspects of S. 1233 (as for example "Sec. 103 SBIR allocation increase" which appears in H.R. 2965 EAS, but not in the version "Received in Senate").

To see these differences visit the link above, and click "Show Changes". GovTrack is also covering the progress of H.R. 2965.

Those more experienced with how laws are made may have greater insight, but the best I can gather is that in order to constitute a Conference Committee, one of the bills needed to be passed by the other House of Congress. That was done, when the Senate voted on and passed H.R. 2965 on July 13. What remains are for the differences between these versions to be resolved, then it goes to the President for his signature.

Thursday, August 6, 2009

Commercial Real Estate: expanding the office headquarters

Worthy of note:

"At the moment transactions have dried up in the commercial-property market as owners try to avoid selling at a loss. Those owners are implicitly assuming that a rebound is imminent, yet the downturn may be prolonged."

--"Commercial Property: A concrete problem," The Economist, August 1, 2009

This is of particular relevance to me today, as I'm looking to obtain a new headquarters for my company. I'm increasing staff and need a larger space. Lease vs. buy is a relevant consideration. Because prices are somewhat depressed, it would seem a reasonable time to buy. But as the article cited points out, low prices may be around for a while:
"In Japan land prices are still nearly 60% below the peak they reached in 1991."
Granted, I'm not in a market that was among those severely overheated. Cost of living here is about 15% below the U.S. average. Asking prices for small commercial office space (2000-5000 sq. ft.) are around $45-60/ sq. ft. That said, the general principle is to compare rent vs. buy on similar properties. There's little point in locking up cash in real estate equity if you can rent a comparable space for less. It's just finding comparables that's the trouble.

The jury's still out. I'm leaning toward putting down an offer to purchase, knowing full well that it might not become much of an investment. But I'm prepared to walk away if I can't transact on my terms. I'm counting on the prospect that I will be needing office space for my business for the long haul; I'm betting on the success of my company, and the assumption that it'd be better to own the space than rent from some unknown landlord. But leasing remains an option.

The advice I've been given, from attorney and accountant, is to establish a separate LLC as holding company for any real estate purchase, then lease back the property to the main business under a triple-net lease. The key is establishing a reasonable fix on going lease rates in the area so as to neither overcharge nor undercharge in rent. That separates the office property from the core business, and permits additional investors in the real estate to be distinct from the ownership of the core business.

We'll see how it goes.

Tuesday, August 4, 2009

The Color of Money is a relatively new website described as "The U.S. Department of Defense New Idea Portal". Thanks to the SBIR Coach, where I first read about this resource. This morning, I received an email notification of their latest update, removing some fulfilled requirements, and adding a few others.

Of note was the following statement regarding why some worthy endeavors were not funded:
... because is a research-oriented endeavor, we could not fund some good ideas because they required little or no research to complete the associated development. This is a legal, "color" of money restraint. Our appropriated funds are designated for research and development. By law, we cannot spend them for anything else.

Whatever legal restraints exist on their funding ought naturally to be part of SBIR as well. Small Business... Innovation... Research. The argument I have been making all along is that SBIR represents a pot of funds for early stage research. Without a funding source for independent researchers, innovation suffers, simply because established researchers affiliated with established institutions, have established expectations and established assumptions, regarding established practice.

If SBIR fades as a resource for seed funding, what alternatives exist for independent researchers, entrepreneurs, and small businesses to pursue early stage R&D? Will organizations like the National Association of Seed and Venture Funds step up to the plate? Will agencies, like the DoD continue to provide alternative sources, like What other resources are out there?