What’s Wrong With This Picture? Precipitous Decline in US Share of Global Equity Listings Continues Unabated

David Weild and Ed Kim originally exposed and reported extensively on the long-term decline in U.S. equity capital market share of public listings relative to other emerging and developed global markets.  Sadly, this graphic update confirms that the trend has gotten worse.  The implications for American innovation are negative.  New capital formation and new public equity listings are critical for economic growth.  New public equity listings provide  strong components of the lifeblood that nourishes economic growth at multiple levels.   Clearly, the root causes behind this trend have not been addressed in the financial and regulatory reforms implemented since A Wake Up Call for America was first published in 2009.

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The 2009 Grant Thornton report proved without a doubt that the U.S. capital markets for listed equities have been in systemic decline since 1997.  This condition is clearly not the result of the technology bubble or Sarbanes Oxley. Most importantly, the absence of U.S. IPOs negatively impacts American entrepreneurs most of all, regardless of whether they have venture capital or private equity backing.

As of 2012, things have not changed much.  For an updated historical perspective on US IPO’s see the chart below:US-IPO-Activity-2002-2012 (1)

In 2012, of the 128 IPO’s completed in the US, the median deal size of $124 million marked a drop of 2% from 2011.  Excluding Facebook, total proceeds from US IPO’s declined by 27% in 2012 from 2011.  According to the Renaissance Capital report ,all the ten top performing companies’ stock prices and the worst performing companies’ stock prices were from IPO deal sizes exceed $50 million.  This data confirms the continuing absence of IPO’s whose proceeds are below $50 million—and this fact remains a major problem for promising US startups. Our country will continue to suffer the consequences of this trend as long as positive economics for supporting small cap companies in the market are absent.

What can we do about it? One possible solution to this trend would be to establish an issuer and investor opt-in capital market that would make use of full SEC oversight and disclosure, and could be run as a separate segment of NYSE or NASDAQ, or as a new market entrant.  It would offer:

  • Opt-in/Freedom of Choice – Issuers would have the freedom to choose whether to list in the alternative marketplace or in the traditional marketplace.
  • Public – Unlike the 144A market, this market would be open to all investors.
  • Regulated – The market would be subject to the same SEC corporate disclosure, oversight and enforcement as existing markets.
  • Quote driven – The market would be a telephone market supported by market makers or specialists, much like the markets of a decade ago.
  • Minimum quote increments (spreads) at 10 cents and 20 cents and minimum commissions – 10-cent increments for stocks under $5.00 per share, and 20 cents for stocks $5.00 per share and greater, as opposed to today’s penny spread market.  These measures would bring sales support back to stocks and provide economics to support equity research independent of investment banking.
  • Broker intermediated – Investors could not execute direct electronic trades in this market; buying stock would require a call or electronic indication to a brokerage firm, thereby discouraging day-traders from this market.

Research requirement – Firms making markets in these securities would be required to provide equity research coverage that meets minimum standards.

This idea has been presented to our legislators before but has not gotten any traction.  In my view, these new statistics reinforce the need to take another look at constructive, market-based solutions to a severe problem that continues to stifle US economic growth.

Pascal Levensohn in New York November 8: Speech at Museum of American Finance on Risks to Angel Investors

MoAF_GREEN_GREY300I first visited the Museum of American Finance a couple of years ago, and it is not only a great space,it is a useful resource for visitors interested in a wide range of current exhibits on current capital markets topics, as well as documents and artifacts related to capital markets, money and banking. The collection includes stocks, bonds, currency, checks, prints, engravings, photographs, objects and books. The Museum has an extensive collection of stock and bond certificates from the Gilded Age, from companies that include US Steel, Standard Oil and the New York Central Railroad.

But I am coming to the Museum to talk about the leading of edge of startup financing in the digital age and about real time investment risk management in the new Wild West– crowd-funded Silicon Valley post the lifting of the ban on General Solicitation. While new entities and forums are sprouting daily to facilitate aspiring venture investors to fund new ventures with as little as $2,500, the investing risks are no different than they were during the time of the iconic entrepreneur Andrew Carnegie.  And, to be clear, the risks of failure then and now remain very, very high.

My talk on November 8 is about some of the immutable laws of risk in startups. While you can package optimism in many different wrappers, in my view it is essential, especially for unsophisticated accredited investors, to understand critical concepts such as equity dilution from follow on rounds. And most important, they need to have some due diligence process in place before they writ the first check, as well as a similar re-evaluation process whenever they are called upon to fund a follow-on round.

I look forward to a lively discussion on November 8 at 12:30 PM.

New Video: Key Startup Investing Risks for Friends, Family, and Angel Investors

Establishing a mutual understanding between investors and entrepreneurs as to what each expects from the other is essential to a harmonious beginning for a new venture.

The future is likely to be challenging;  if entrepreneurs expect to be able to count on additional support from their friends, family, and Angel investors, several key risks that must be addressed in advance.  This video focuses on four of those fundamental risks:

(1) A startup’s high probability of failure;

(2) The mathematics of dilution;

(3) The tendency to misunderstand a company’s stage of development and, therefore, its capital needs;

(4) Understanding the risks associated with investing good money after bad and knowing when to call it quits.

Some important statistics:

In 2012, the average amount of seed or angel capital raised per company was $880,000 (Source: Pitchbook)

61% of seed-funded companies will not be able to obtain follow-on funding (Source: CB Insights)

Those seedlings that won’t find capital will be the victims of the so-called Series A Crunch

While seed investments increased by 64% in 2012, Series A investments declined by 2%. This defines a supply/demand imbalance exists between institutional VC capital and the ‘Seed Crowd’ .

It is a tribute to America’s innovation culture that, while most startups fail, we are currently experiencing such a boom in seed financing in the United States. Institutional venture capital is not increasing; on the contrary, the industry continues to consolidate by firm and is declining in total.

Being aware of the risks inherent to startup investing and having a clear understanding of the basic parameters of dilution mathematics should be helpful to investors and entrepreneurs alike.  If you are an entrepreneur, this video may be very helpful to you so that you can explain these risks to your investors.  If you are an investor in very early stage companies, this video provides useful perspective on risk and portfolio management.

This video is Chapter 2 of the Entrepreneur Essentials Video Series.

How to Break the Familiar Pattern of Board Dysfunction in a Startup

After watching Board Dysfunction: Root Causes and Solutions, an experienced CEO told me that the video succinctly identifies and summarizes issues that are intuitively clear but often overlooked in practice. Experienced investors know that successful investing often employs pattern recognition. But when it comes to boards of directors, the unfortunate recurring pattern that is familiar to many experienced directors raises red flags about dysfunction. This is particularly acute for startups because most startups have inexperienced board members, and usually the least experienced directors come from the management team. This problem is compounded in the earlier stages of a company’s development because inexperienced co-founders often make common mistakes that could be avoided. Left unchecked, such errors in board management, board configuration, and in board process can cripple a company’s future growth path.

If you are an entrepreneur involved with your first startup, a venture capitalist who wants to educate management on acceptable and unacceptable board behavior, or an independent director new to small company board dynamics, this video should be helpful to you. The video combines PowerPoint slides with specific anecdotes to illustrate frequent errors made by inexperienced boards. The content also highlights typs of behavior that are unacceptable and that should raise concerns among all directors.

It’s easy to say that directors need to communicate more frequently and openly.  But how do you accomplish that? How do you hold directors accountable to each other? The video outlines process tools that are readily available to boards and that can help solve problems. Ironically, viewers may watch this and feel that a number of the points raised are intuitively clear. That is actually the point of this work– most of the time, the people in the room know what’s wrong, they feel it, but they either don’t feel comfortable articulating the problem or can’t easily implement the solution. By watching this video with your peer directors, you can now raise issues that are already in your mind but have not been comfortably stated out in the open.

Please consider this video to be a management tool. It is for investors and entrepreneurs alike, with a focus on the perspective of the entrepreneur.

How to Sell High Quality Video Content to Your Fans Using Social Media: Introducing LittleCast

LittleCast LogoDigital content providers from traditional print media franchises to traditional television have finally figured out that giving away your valuable content on the Web will only accelerate your ability to go out of business.  We are still in the early days of video monetization, and one of the great gaps in the landscape has just been closed by a new startup, LittleCast, that I co-founded with Amra Tareen and Stephen Ackroyd.  What is the gap that LittleCast now fills?  The discovery problem that plagues most video content on the Web.

If nobody knows who you are, it doesn’t matter how great your content is, because you will remain unknown until you get lucky or become a one-hit wonder.  And the economics of advertising driven models for earning money are not very attractive for the content producer.

But on Facebook, LinkedIn, and Twitter, you are part of a community of people who opt-in to following you.  LittleCast lets any videographer sell video on social networks. The videographer sets the price and LittleCast does the rest: the solution publishes the video, of any length up to 3 hours, in standard definition or high definition, to social networks, iPhone, iPad and Android devices.

In addition, LittleCast provides detailed analytics and engagement tools to the videographer to manage the distribution, customer engagement and revenue.

LittleCast is extremely easy to use:  the process is entirely automated and self-serve.  It costs you nothing to try LittleCast—you upload content and start earning money as soon as your Facebook friends and fans buy your videos.  The economics are totally transparent and detailed on the LittleCast website, which is where you go to upload content: www.littlecast.com .

LittleCast has created a real–time mobile and social store for video; the platform is similar to eBay in that the content producer can set the price and change the price.  The viral nature of social networks will also maximize the reach of video sales among friends.  Try it, you’ll like it!

Introducing the Entrepreneur Essentials Video Series

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I’ve written about board governance challenges for startups since 1999, publishing one book, a series of three white papers, and many articles and blog posts on this topic. Because I am both a venture capitalist and a technology entrepreneur, I understand the different perspectives of entrepreneurs and investors from both sides of the boardroom table.

With this new video series, I updated and expanded fourteen years of collaborative work and have structured the content to focus on the entrepreneur’s perspective. The first video will be released on September 5.

Stay tuned for

Chapter 1      Board Dysfunction: Root Causes and Solutions

Chapter 2      Managing Risks in A Startup: Four Key Issues

Chapter 3      10 Things You Need to Know About VC’s (Before You Meet Them)

I intend to help management teams get much more of the flavor of the issues they will undoubtedly face as directors of startups.

Chapter 1, Board Dysfunction: Root Causes and Solutions, updates the material I have developed with other experienced investors and entrepreneurs, emphasizing the challenges that entrepreneurs face.

In these videos, I don’t just ask difficult questions, I answer them.

To learn more, go to my Facebook fan page Entrepreneur Essentials

Field Report From Israel: Things Are Changing, Watch Events at the Western Wall

It’s different this time.  Why?  Because in Israel the reality of demographics is catching up with those who previously believed that wishful thinking makes for sound public policy.

AO5A3900It’s hard to distill into a sound bite what’s going on in Israel and the West Bank.  Knowledgeable pundits are fond of prefacing their answers to meaningful questions about the region with, “It’s complicated…”  And it’s true.  In Israel, especially in Jerusalem, everything is complicated, because politics permeate every crevice, from issues of local real estate to childhood education.

I’ve just returned from a week in Israel, including visits to Tel Aviv, Herzliya, East Jerusalem, and the fascinating work-in-progress at the ambitious construction project of Rawabi City, as well as other sites in the West Bank.

While I have been to Israel many times since my first trip in 2002, I was fortunate join an outstanding program sponsored by the Philanthropy Workshop West for this trip.  Among the highlights of our trip, we visited a wide range of community outreach programs for ethnic groups at risk (Israeli Arabs, the Ethiopian Jews, the Bedouins) sponsored by groups including the Portland Trust, the New Israel Fund, and the American Jewish Joint Distribution Committee.

What struck me most about this visit was that Israel finally appears to be acting more introspectively to address its painful social and political contradictions, acknowledging that these can no longer be left to fester from salutary neglect.

Chief among these contradictions is the discrimination of Jews against other Jews, particularly by the ultra orthodox against Jewish women who seek the right to pray at the Western Wall, and by the State of Israel against Reform and Conservative Judaism (which define Judaism in the United States) by denying these branches of Judaism official recognition and fiscal support in Israel.

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I was not expecting to hear from multiple individuals what I have felt since I first visited Israel 11 years ago: that the country cannot allow the ultra orthodox to be exempt from military service and from carrying their economic share of public services.  And there is a sense of urgency that also surprised me, a sense that this must be addressed by the legislature now.  To wit, the newly formed government majority in the Knesset, for the first time in the history of the State of Israel, excludes the ultra orthodox block, effectively taking the keys to the religious car away from these intolerant and uncompromising constituencies.

The release of the Women of the Wall from arrest, without consequence, on April 11 brings this new political reality home.  The courts overruled the police and squarely placed the blame for public disturbance on the haredim at the scene.  This is a big deal! As reported by the New York Times:

“The judge said the people disturbing public order on Thursday were a group of ultra-Orthodox protesters who were demonstrating against the women. The police said an ultra-Orthodox man was also arrested after he grabbed a book from one of the women and burned it.”

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Job training centers for the ultra orthodox are springing up, supported by U.S. NGO’s and the Israeli government, and there are waiting lists because of excess demand from haredim who wish to change their lives to consist of more than Torah study.  I view continued progress or renewed failure to achieve change in this area as a canary in the coal mine in terms of handicapping Israel’s prospective trajectory toward broader achievements with the Palestinians.

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Returning to East Jerusalem…

 

 

April 7, 2013      East Jerusalem

Local time: 4:00 AM

The wailing chant of the muezzin woke me up.  As an outsider, this unfamiliar daily call to prayer for muslims reminds me that I am not just 7,397 miles away from my home in Napa, California; I am centuries removed from the familiar frames of reference that define my daily existence.  But there is also a familiarity to all of this for me…

I started this blog in early 2005 because of a chance encounter I had with an elderly Palestinian man in East Jerusalem on November 3, 2004.  Almost nine years later, I am back…

On the surface, East Jerusalem seems cleaner and quieter to me today than it did in 2004.  I’ve been here about 14 times since my first business trip to Israel in 2002.  This Spring the weather is dry, clear, and cool.  Walking through the Old City, things feel calm, not riddled with the tension of active conflict and imbalance that I have felt on many other visits.  I’ve been asking local friends for an update on the most pressing issues in Jerusalem and, so far, I’ve been told me that one social issue of increasing concern is the degree to which gender segregation has become more pronounced, even though the public buses are no longer segregated.  At the same time, the struggle for the recognition of reform and conservative in Israel continues unabated. Some progress has been made, but it remains painfully slow due to the entrenched political power in the Knesset of the ultra-orthodox minority.  I asked one friend what the “top of mind” political issue in Israel is likely to be in the short term this year, and she said “elimination of the exemption from military service for the ultra orthodox”.  Security and Iran were not on the top three list…

This is my first time back in Israel since December 2009.   I remember vividly my first visit to East Jerusalem in 2003, when I was introduced by Rabbi David Saperstein to Anat Hoffman of the Israel Religious Action Center and founder of Women of the Wall.  We met at the Jerusalem Hotel, and this led to a random meeting with a Palestinian man who spoke fluent Spanish outside of the Interior Ministry in East Jerusalem, an encounter that started this blog.

Much has happened in my life since then- professional successes, professional failures, the death of close friends, my own divorce.  And today I look ahead with renewed vigor as I open a new book, not just a new chapter, in both my family and professional lives: remarriage, personal renewal, new business ventures, and revitalized new and old friendships.

I feel fortunate to be back in Jerusalem this week as part of a trip with the Philanthropy Workshop West.  This extraordinary group has chosen to come to Israel this year for their international workshop for a series of meetings with thought leaders and experts on the region in order to better understand the complex social fabric that defines is at the center of the conflict that defines Israel. It is a privilege for me to join them.

 

New From OpenView Venture Partners: Two Podcasts on Emerging Company Board Governance Best Practices

Firas Raouf of OpenView Venture Partners, a Boston-based venture capital firm, recently interviewed me for two podcasts on the topic of  optimizing the contributions that a board of directors can make to a startup.  Seasoned venture capitalists are well aware of the challenges that emerging companies face in the boardroom due to conflicts of interest and misalignments.  Entrepreneurs must be equally aware and enter the boardroom with their eyes open as to these critical issues because they can undermine the success of a promising venture.

While some boards of directors are effective, many boards perform well below their potential, and some boards are dysfunctional.  This is particularly the case for emerging companies, largely for two reasons: (1) startup boards omit necessary processes because they feel it is “too early”; and (2) inexperienced entrepreneurs and first-time CEO’s are often not aware of best practices in this area.

These two podcasts provide useful practical advice for early stage company boards of directors:

OpenView Leadership Lab Podcast I:  Building a High Performance Board

OpenView Leadership Lab Podcast II: How to Run an Effective Board Meeting

 

 

 

Book Review: The Founder’s Dilemmas, by Noam Wasserman

Founder DilemmaWhile every company founder makes trade-offs in building a company, few entrepreneurs appreciate the far-reaching implications of several critical decisions they will be required to make at the outset of a startup’s evolution.  Noam Wasserman, Professor of Entrepreneurship at Harvard Business School, classifies this sequence of inevitable decisions as “The Founder’s Dilemmas”, which is the title of his important new book on this topic.  A refreshing contribution to the business literature on startups, Founder’s Dilemmas is engaging without sacrificing substance and statistically sound without being turgid.  One of the core differentiating strengths of the book lies in that it weaves seven highly relevant case studies of entrepreneurs throughout its 11 chapters, providing concrete anecdotes and illustrations to back up the author’s general observations and recommendations.  “The Founder’s Dilemmas” is required reading for entrepreneurs and for the professionals who work with them, particularly venture capitalists.

Wasserman notes that venture capitalists attribute 65% of the failures in their portfolio companies to problems with the startups’ management teams.  Focusing on the critical decisions that founders have to make, he observes that entrepreneurs who are company founders are naturally inclined to be passionate, optimistic, and to prefer to avoid conflict with their co-founding team members; these tendencies lead to short-sighted decisions.  Most founders tend to make decisions with no process, based on their gut instincts. Wasserman concludes, backed up by a data set of 10,000 companies compiled over 9 years, that the entrepreneur’s most common choices are the wrong ones, particularly co-founding with friends and splitting equity equally among co-founders at the outset of the new venture.

In The Founder’s Dilemmas Wasserman revisits his most well developed dilemma, Rich vs. King. He convincingly argues that, while the passionate desire among entrepreneurs for both wealth and control seem complementary, as entrepreneurial motivations they turn out to exist in perpetual tension with one another.  Why?  Because founders are resource constrained and need to attract three key outside resources: people, information, and money.  Consequently, Wasserman concludes that “wealth and power are decoupled for entrepreneurs and, indeed, in active conflict.  As a result, few founders of high-potential startups can achieve both wealth and power; most choose between one or the other and often end up with neither.”

These sobering words are backed up with specific examples and recommendations.  Among the most useful, Wasserman points out that the most durable business teams are formed between people who have had prior working relationships and that, though these may “be less endearing”, they are “more enduring.” In determining how to split equity among co-founders, Wasserman prescribes a “dynamic allocation model”, complete with charts, as he points out that founders, from Steve Jobs and Steve Wozniak at Apple to Evan Williams at Blogger/Odeo, rarely correctly identify the future contributions that will actually be made between each other at the outset of the venture.

Turning to the critical issue of raising capital, Wasserman cogently describes the trade-offs associated with taking venture capital, focusing on critical issues such as board composition, understanding the implications of liquidation preferences, vesting of equity stakes among co-founders, and the phenomenon of creeping dilution—both of economic interests and of management control.  Many of these issues come to the foreground once entrepreneurs have raised money from VC’s.  The book makes a great contribution to practitioners on both sides of the table by shining a light on the difficult conversations that entrepreneurs need to have with their colleagues and with their investors.

The Founder’s Dilemmas is effective because of its plainspoken, common sense conclusions: “…core founders are often missing skills, connections, and financial resources to build the most valuable startup possible.  They can make up for this by attracting complementary cofounders or by hiring talented nonfounders.  A third possibility is to add investors to the team, but founders must first think carefully about the often-hidden implications for themselves, for the startup, and for the board of directors.  For a founder-CEO, losing control of the board is only the first step on the way to losing control of the major decisions in the startup…”

This book is a useful tool to facilitate important dialogue between VC’s and entrepreneurs before they decide to make an investment in each other.