Saturday, June 27, 2015

Plan for the exit when you start your company

The following was originally published by the Idaho Business Review on June 15, 2015.

Everyone who starts a company will need an exit one day. No one can work forever; at some time you will want to (or have to) retire and/or your investors will want to sell their stock.  An exit is how you monetize the value you have created in your company. You can either be intentional and plan for the exit, or unintentional, and likely not have a satisfactory transition out of the business. 

I have a friend who is a dentist.  He spent years building his practice and he made a good living from it. He consulted with advisors and built an exit plan. When it was time to retire, he sold his practice to another dentist. The acquiring dentist purchased the building, the equipment, the patient list and the reputation of the clinic.  The sale turned the value of my friend’s practice into cash he could use to fund his retirement. Without that sale, he had no way to monetize the value he had created. Worse, he might have been stuck with a specialized building and depreciating dental equipment. 

Angels invest in companies specifically designed for an exit. They expect the company to be acquired by another company. This is the way the companies create liquidity for their investors. 

I’ve just returned from attending the annual meeting of the Northwest Chapter of the Angel Capital Association where I attended a exit strategy seminar with Dr. Basil Peters.  Peters is a recognized expert on the subject, and is the author of the book Early Exits: Exit Strategies for Entrepreneurs and Angels.

According to Peters only 25% of saleable companies successfully exit.  Another 25% exit, but for less than might have been obtained.  And 50% of those companies could exit fail to do so; that is they fail to find a buyer and have to continue to operate, frequently in an increasingly competitive environment.  Many of them ultimately fail. 

Peters make a number of recommendations to improve the possibility of a successful exit. While he is writing specifically for angels, his advice is also applicable to cash flow type businesses. 

1.     Every company should develop an exit strategy at the time of its founding, not years later.  Company management should be intentional about how and when they intend to exit. For example, an exit strategy may be as simple as “Our exit strategy is to sell the company in about ___ years for around $___million.”  My experience is most entrepreneurs have a very vague strategy along the lines of “someday we will be acquired.” 

2.     Make sure the management and the investors stay focused on the exit strategy by making it the first item on the board agenda at every board meeting.  The board should begin its meeting discussing the exit strategy to be sure the company remains focused on the end game.

3.     Recognize that companies are sold, not bought.  Most people don’t wait for an unknown buyer to knock on the door of their home asking to buy it. When it’s time to sell it, they develop and execute a strategy.  Yet many entrepreneurs seem to be waiting until someone discovers them and makes an unsolicited offer.  Research shows unsolicited offers usually result in sub-optimal results, as it’s hard then to develop a plan to approach multiple possible buyers.

4.     Engage an investment banker to help you bring the company to the market.  Just as most of us engage a real estate broker to sell our homes, a banker knowledgeable in mergers and acquisitions in your industry will help you package the business, identify companies that should be interested, and approach them. The purpose is to try to create an auction market among multiple buyers.

5.     Understand the threshold for selling an early-stage company is not based upon size or profitability.  It’s based upon proving the business model.  When management can reliably show it knows how to acquire customers that produce a margin, at a cost of less than the lifetime value of the customer, then it is ready to be sold to a company with the resources to grow the company rapidly.

My experience as an angel investor suggests to me that most companies are not nearly as intentional about the exit as they might be.  For both companies built for cash flow and for those built for exit, be intentional about the exit.  Have an exit plan, and let the plan inform the day-to-day decisions.

Wednesday, March 25, 2015

Job Creation, Angels and Entrepreneurs

We know from US Census data that newly formed businesses are the prime job creators in the US Economy.  The Kaufman Foundation recently released a new study that confirms this fact (“The Importance of Young Firms for Economic Growth,” Kauffman Foundation Entrepreneurship Policy Digest, September 25, 2014).  They concluded “New businesses account for nearly all net new job creation…”  Read the report here.

Here are the data.  The blue line is the net job creation by young firms.  The red and yellow lines are net job creation by companies six years old and older. At best, the net new job creation by older companies is zero, and in some years, less than zero.

The implication of these data is that one of the most important steps a community interested in economic growth can take is to create a robust entrepreneurial ecosystem.  One facet of that ecosystem is the availability of risk capital for early-stage growth businesses.  Angels typically provide that capital.

Some Boise angels have been investing together for nearly eight years through “angel funds.”  Angel funds are companies formed for the specific purpose of making early-stage investments.  Three have been formed in the Treasure Valley.  Collectively they have invested $2 million in 20 local companies.

One measure of impact is job creation.  As of December 31, 2014 these 20 companies have created 330 jobs since we made our investments.  This is a significant positive impact on our economy. If, for example, the jobs created averaged only $30,000 per year (I suspect, but don’t know that it is much higher), that’s an annual impact in the Treasure Valley of nearly $10 million, not counting multiplier effects. 

Also important are the sales of these companies.  In 2014 the total sales of all companies in the portfolios was approximately $185 million. 

Improving the entrepreneurial ecosystem is not a quick fix.  It takes time to have an impact. Here’s a table of the jobs created by these companies:

Year    Cumulative
            Jobs Created

2010               25
2011               66
2012               109
2013               208
2014               330                       

It's clear to me.  If you want to create more jobs, increase the number of start-ups.  One roadblock to doing this is capital.  We don't have enough early-stage capital in Idaho.  

A number of dedicated folks are working to increase the capital available. Jessica Whiting of Startup Grind arranged for Scott Kupor, Managing Partner of renowned Silicon Valley venture capital firm Andreesson Horowitz to come to Boise in early March, 2015.  Brad Bertoch, CEO of Salt Lake-based Wayne Brown Institute has brought its programs to Idaho to help connect Idaho companies to Utah angels and venture capitalists.  And the Idaho Technology Council has had an initiative almost since its founding to increase investment capital in the state.

While all these efforts are good and much appreciated, there is a simple public policy step that would directly impact the availability of startup capital. That step is to give a state income tax credit for equity investments in startup companies. At least 18 states and all of Canada does so.

For example, "Minnesota's Angel Tax Credit provides a 25-percent credit to investors or investment funds that put money into startup companies focused on high technology, new proprietary technology, or a new proprietary product, process or service in specified fields. The maximum credit is $125,000 per person, per year ($250,000 if filing jointly). The credit is refundable. Residents of other states and foreign countries are eligible.” (Quoted from their web site.)

How does an angel tax credit work? It’s simple. An angel makes an equity investment in a startup and receives a reduction in his or her state income taxes equal to some percentage of the investment. In Minnesota’s case, it’s a 25% credit. Minnesota is so committed to this, the tax credit is refundable. That is, an investor with no Minnesota tax due can get a refund equal to 25% of his or her investment, subject to the maximums. This means if I invest $100,000 into a qualifying Minnesota company, the state of Minnesota will send me a check for $25,000. The practical effect is I receive a $100,000 interest in the Minnesota company for a net $75,000 investment.

What do the taxpayers of Minnesota get out of this? They get a more robust startup economy, which will increase jobs, provide opportunity to its citizens, and ultimately increase taxes paid by those companies and their employees to the state of Minnesota.

An angel investment tax credit is an elegantly simple means of stimulating investment in our Idaho companies. The free market makes the investment decision. His or her tax savings increases the investor’s available capital. The company gets the investment. Our citizens get the jobs. Our state gets the tax revenue once the company begins to grow.

The Idaho legislature has flirted with this over the last few years.  I hope next year they will enact some type of credit that will favorably impact the availability of capital to our state's entrepreneurs.

Saturday, November 1, 2014

A Primer on Accredited Investor Status

The definition of an accredited investor is of paramount importance to angel investing.  The Securities and Exchange Committee has been considering changes to the definition.  The problem is if the SEC makes the requirements more stringent, they will reduce the amount of capital available to early stage companies. 

Here’s a brief primer and explanation of why this is so important.

During the midst of the great depression, Congress passed the Securities Act of 1933.  This act set for the basic framework governing securities sales.  Under this law, all companies selling securities must register them with the Securities and Exchange Commission, unless an offering qualifies for an exemption.  Registration is a long and expensive process and simply not feasible for most early stage companies.  Therefore, most sell their securities under one of the available exemptions.

One such exemption is the private offering.  The 1933 Act provided an exemption for transactions “not involving any public offering.” However the act didn’t define what was a private offering. In 1953 the Supreme Court ruled “An offering to those who are shown to be able to fend for themselves is a transaction ‘not involving any public offering.’”

So who is able to fend for themselves?  The SEC adopted Rule 506 of Regulation D, which allows for sales to “accredited investors” that do not involve “general solicitation.”  The assumption is that if an investor has sufficient wealth, he or she does not need the protections afforded by registration with the SEC. 

The SEC defines an accredited investor under Rule 501.  A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person” or “a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.”

In 2010 the Dodd-Frank Act in 2010 required the SEC to periodically review its definition of an accredited investor.  It has not yet done so, but has asked its Investor Advisory Committee to make recommendations. Over the past six months there has been much discussion as to whether the definition should be revised.  One of the proposals was to index definition to inflation, the result of which would be to decrease the pool of eligible accredited investors from about 50%. 

My own view is that this is a solution in search of a problem to solve. And I believe we need more angel capital, not less.  I support the Angel Capital Association view that the definition should focus on financial sophistication of the investor, not an arbitrary net worth level. 

Happily, on October 9, 2014 the Investor Advisory Committee to the SEC recommended that the SEC consider adopting rules that would enable individuals to qualify as accredited investors based upon their financial sophistication, but did not recommend changing the net worth level at this time.
The above was originally published in the October 22, 2014 issue of the Business Insider, the business magazine of the Idaho Statesman

Saturday, August 23, 2014

Boise Angel Alliance Seeks New Members

Published in the Idaho Statesman Business Insider, August 20, 2014

The Boise Angel Alliance ( is ten years old.  It was formed under the leadership of Mary Andrews, who at the time was working with the Idaho Department of Commerce after positions in private equity and venture capital.  Mary had a vision that local people could come together to provide capital to local entrepreneurs. She is now the Director of Economic Development for Boise State, and was just elected president of the Boise Angel Alliance for the second time after an eight-year hiatus.

Today more than 100 individuals belong to the Alliance; nineteen local companies have received more than $2 million in equity capital, and those companies employee more than 400 people in the Treasure Valley. 

Angels invest first of all to help the local economy, but returns are important also.  Here the record is not complete.  We ultimately have to sell our investments to know our returns.  We continue to hold positions in seventeen of the nineteen companies.  One was sold for a substantial profit; one went bankrupt and we lost our entire investment.  It will be another five years or so before we can really begin to assess our investment returns.

We know this, however.  Entrepreneurs continue to need capital.  Members of the Alliance just finished raising capital for our third angel fund.  Known as the Capitol City Angel Fund, it now has approximately $1 million of fresh capital available to invest in local start-ups. 

Our process is thorough and takes time.  We are appropriate for only a small portion of startups in the Treasure Valley.  Information our criteria and application process is on the Alliance web site under the tab Entrepreneur. 

Most successful applicants will work with one of the many service providers in the valley to prepare their applications and their pitches.  We recently provided training to local resource providers in our process and criteria.  A list of trained resource providers is listed under the tab Resources.  We strongly recommend entrepreneurs seeking capital from us consult with one or more of these trained service providers. 

In addition to making capital available to the entrepreneurial community, the Alliance works to enable local individuals who have the financial capacity to invest to do so using best practices.  We generally meet monthly to listen to investment pitches.  We have three standing committees that do initial deal screening, consider follow-on investments in companies where we have already made an investment, and to review deals proposed by other angel groups in the northwest.  When we are considering an investment, we form a due diligence team to look into the entrepreneur and the company, and to report back to the entire group.

The Alliance invites people interested in learning angel investment practices to apply to join us.  The Membership fee is $500 per year.  Members are invited to attend all general and committee meetings, and to participate in our education program. 

Information on membership is available from the web site under the tab Investors.

Seek Help from Boise Service Providers before Applying to the Boise Angel Alliance

The Boise Angel Alliance (BAA) is ten years old.  During those years the BAA formed three angel funds with total capital of nearly $4 million.  To date, these funds have invested $2.1 million in the stock of nineteen Treasure Valley companies.  As of June 30,  these companies have created more than 300 jobs since we invested in them.

During this ten-year period we have been active in mentoring local entrepreneurs prior to their applying for funding with us.  But, under the leadership of our new president, Mary Andrews, we have recently announced a shift in our strategy.  We will no longer mentor entrepreneurs before they apply to us.  Here’s why.

1.  The Treasure Valley has lots of support for entrepreneurs.  There are many entrepreneurial service providers available to help entrepreneurs including SCORE, the Idaho Small Business Development Center, the Women’s’ Business Center, Zion’s Bank Business Center, the Tech Connect, Startup Grind, and Activate Boise.  We don’t need to offer mentoring services any longer because there are others focused on providing this service.

2. Our mission is to help angels.  We know there are lots of people in the valley who have the financial capability to make investments in early-stage private companies.  But most don’t do so.  We want to help these people learn how to make these types of investments using current best practices. We do this by organizing angel funds and through our education program.   To the extent we spend our time mentoring entrepreneurs, we have less time to help our existing and prospective angels.

3. Mentoring by investors can be problematic.  Sometimes our angels work with pre-funding entrepreneurs, only to later turn them down when they apply for funding.  Naturally this can confuse the entrepreneurs and not infrequently causes anger. 

The BAA is modifying its business processes to match this change in strategy.  Here’s how the new model will work.

1.  Train those organizations that support entrepreneurs.  On July 31 we are holding a training session for service providers that are interested in assisting entrepreneurs who may seek funding from local angels including our funds.  If you are a service provider and would like to attend, please let the BAA know by sending an email to

2. Refer entrepreneurs to the service providers.  Our web site will be changed to encourage potential applicants to first seek the counsel of one of the local service providers.  Of course, entrepreneurs may apply directly to us without seeking such counsel, but our experience is many who do so file not well thought-through applications and rarely receive funding.

3. Encourage service providers to serve as an advocate for the entrepreneurs.  If a service provider is working with an applicant for funding, the service provider will be invited to attend our screening meetings with the entrepreneur.  In this manner, the service provider will serve as another set of eyes and ears for the entrepreneur as we engage with them.

Interested service providers and entrepreneurs can learn more about the process from our web site:

Disclosure: I am past-president of the Boise Angel Alliance, a principle in Loon Creek Capital that provides administrative services to the Boise Angel Alliance and its funds, and am an investor in all three angel funds.

Mainstreet Businesses -- Kelli Soll and Global Service Partnerships

I have been remiss in keeping my blog up to date. This blog re-posts articles I write for the Business Insider at the Idaho Statesman.

Here's the May, 2014 article about Venture College entrepreneur Kelli Soll, and her business Global Service Partnerships

Not everyone wants to start and build a business with investors, high growth and an exit. Some prefer to simply work for themselves.  We call these businesses Main Street or Lifestyle businesses.  Lean startup principles apply to starting a Main Street business as well as to scalable businesses attractive to angel investors.
Venture College entrepreneur Kelli Soll, a partner in Global Service Partnerships (GSP) is an example of the application of lean startup principles to a Main Street business. Kelli and her partner had a vision that they could somehow create a business in Idaho that would deliver value to people here and at the same time attack a literacy problem in Belize.  They wanted to create a profit making social venture that would enable them to earn a living while impacting this social problem in Belize.  How do you do that?
They began by proposing service learning trips to high school students.  Kelli interviewed 90 high school students and educators.  She learned they would love to go to Belize, but there was a problem.  High school students don’t have the money to go. So she had to pivot.  That is she had to find a customer for whom such a trip would provide value and who could and would pay.
She spent 50 hours talking with parents. She learned they might be willing to pay to send their children to Belize, but only if she could assure the parents their children would be safe.  Pivot number two.  She needed to redefine her relationship with her customers. This wasn’t just a commercial transaction; she needed to develop a very personal relationship with her customers to gain their confidence.
Armed with this information, Kelli developed a “minimum viable product” or an MVP.  An MVP has just enough features to see if the customer will in fact pay.  She spent $20 to print brochures.  Note, this was her first cash investment.  She invited those she had previously interviewed to meetings where she gave them her flyer that said she would be taking people to Belize in March 2014 and the fee would be $3000.  Fifteen grandparents, parents, senior citizens and four teenagers signed up to go.  Wow! That was $45,000 of presold revenue.  Kelli’s total investment to date, other than her time, had been $20.
Based upon this assurance that she had paying customers, Kelli then (and only then) went to Belize to set up the partners and activities such a trip requires.  The end of the story is the trip happened, Belizean children’s lives were changed, and fifteen Americans had an amazing experience.  Kelli has now presold two more trips.  That will result in a total of $135,000 of revenue in her six months of operations.  You can learn more about GSP at
The lesson is that she did not first make a significant investment and build a product.  She talked with potential customers and kept talking and changing her plan until she nailed down the customer segment, the value she would create, and a revenue stream.  Only then did she begin spending money on her product—the opposite of most entrepreneurs. 

Update on Boise Angel Alliance

I have been remiss in keeping my blog up to date. This blog re-posts articles I write for the Business Insider at the Idaho Statesman.

Here's the March, 2014 article titled update on Boise Angel Alliance:

Update on Boise Angel Alliance Investments
The Boise Angel Alliance ( is ten years old.  Mary Andrews, who at the time was with the Idaho Department of Commerce, Phil Reed of Highway 12, Steve Simpson, retired CEO of Extended Systems, and Phil Bradley, who was CFO of ProClarity, thought the time was right to organize those in the valley who were in a position to invest in early stage ventures.
The Alliance has two purposes.  One is to enable local people who can afford to invest in early stage companies to do so using best practices. As new investors join, those who have experience share what they have learned.  Some of our members attend regional and national angel meetings, bringing back practices from money center angels.   The second purpose is to make capital available to our entrepreneurs.
In the early years only a handful of investors showed up at the meetings, and frankly not much money got invested.  But thanks to the vision of the founders, today more than 100 investors are actively engaged with the Alliance. 
Here’s what has been accomplished (data are for April, 2007 through December, 2013).
Total invested in the Treasure Valley:   $1.7 million
Number of Treasure Valley companies funded: 15
Jobs created since investment: 220
We also invested about $250,000 outside the Treasure Valley along side other angel groups in five deals.
It’s a lot of work to invest thoughtfully.  In the seven years we have actively been accepting applications, we have reviewed 363 investment inquiries.  Of these 85 received serious consideration.  Of those receiving consideration, we invested in about 25% of them.
The number of angel appropriate deals in the Treasure Valley is increasing.  We invested $650,000 in 2013 in five deals or about 30% of our investments in the last seven years were made in 2013. We’ve already closed one investment in 2014.
Here are the companies in which we have invested:
Treasure Valley companies:
Core Concepts
DB3 Mobile – Meal Ticket
Fit Wrapz
Gogo Labs
Health Fundr (2014 investment)
IdeaRoom Technology
Loan Tek
Nurture - Happy Family (sold 2013)
Prosperity Organic Foods
Social Good Network

I am happy to report that every one of the above companies is still in business. 

We obviously don’t make many investments.  Our processes and expectations are stringent.  However, we hope that all companies that come in touch with the Alliance gain value, regardless of whether or not we invest.  We have a mentoring committee that advises companies regarding their strategies.  We have partnered with the Idaho Small Business Development Center and the BSU TECenter to coach entrepreneurs seeking funding on their pitches.  Our committees try to give feedback whenever they meet with an entrepreneur. 
If you are an accredited investor interested in participating with us, or an entrepreneur seeking funding, additional information is available the web site.