CircleUp is a Potential Source of Capital for Idaho Entrepreneurs

"CircleUp is an online social marketplace where individual investors can invest in small private consumer companies and be part of their success" https://circleup.com/

Idaho-based company Prosperity Organic Foods (www.meltbutteryspread.com) recently concluded a successful raise of equity capital using CircleUp. Disclosure:  I am an investor in Prosperity.  Prosperity produces and distributes a line of delicious and healthy substitutes for butter under the brand Melt® Organic.

Prosperity CEO Meg Carlson reports the process was quick and easy.  It was about eight weeks from the time Prosperity first submitted documents to CircleUp until it received the funds.

I visited with CircleUp COO and Co-Founder Rory Eakin. CircleUp was founded with the vision of providing the means for small consumer products companies to efficiently reach accredited investors.  Growing consumer products companies need capital to support their inventory and receivables, but it is often extremely difficult for small consumer products companies to raise expansion capital. 

Companies most appropriate for CircleUp’s services already have some traction in the market place and are seeking equity capital to support expansion.  In the case of Prosperity, this was the company’s third round of investment capital and will support national expansion from about eight hundred stores to several thousand.

Companies seeking capital submit an on-line application.  CircleUp reviews the application, does a background check on the entrepreneurs, and conducts its own research on the company and the industry.  They accept around 2% of the applicants.  Once accepted, the investment opportunity is opened up to potential investors.  Companies must declare a minimum and maximum raise.  Unless the minimum is reached, the company does not receive any funds.  After the minimum is reached, the company can continue to raise capital until the maximum is reached. 

For investors, there is a simple process to join CircleUp.  You must certify that you are an accredited investor. Once your account is set up you can then browse the potential investments. Each potential investment has a deal room where documents have been posted.  Potential investors can ask questions of the company management and exchange comments among themselves. 

Once an investor decides to make an investment, money is sent to CircleUp’s escrow account and held until such time as the company achieves its minimum raise. Then the funds are transferred to the company and the company issues its investment certificates to the new shareholders.  CircleUp withholds a commission for their services.

CircleUp is similar to the coming crowd-funding platforms authorized by the JOBS act (The JOBS act will change fund raising for startups).  Unlike the anticipated crowd-funding platforms, CircleUp is limited to accredited investors only. Accredited investors have a net worth of more than $1 million exclusive of the equity in their primary residence or meet an income test.

Based upon Prosperity Organic Food’s successful experience, other Idaho entrepreneurs in the consumer goods space may want to consider CircleUp for a portion of their capital needs.

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Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is past- president of the Boise Angel Alliance (www.boiseangelfund.com), and is a principal in Loon Creek Capital (www.looncreekcapital.com), which assists angels in forming angel funds. He can be reached by email to kevinlearned@boisestate.edu or by phone at 208-426-3875. 

Treasure Valley Angel Fund -- A Lesson in Raising Capital

The valley’s second angel fund, The Treasure Valley Angel Fund is now open for business. It reached its first close milestone of $750,000 in July.  Full disclosure:  I am an investor in the fund and my firm, Loon Creek Capital helped guide the fund through the organizational effort.

The new fund presents a case study in the process of raising seed capital in Idaho. It took about 24 months from early discussions until the capital was raised.   Active fund raising began in January of this year and reached the minimum in July. 

Why does it take so long to raise capital?  There are several reasons:

• Investors are conservative.  There are always more reasons not to invest than there are to invest. 
• Investors are busy.  It’s hard to get the attention of busy people. In most cases someone has to sit down personally with an investor to review the business plan, explain the risks and the potential benefits. It takes time to get these appointments.
• There is usually a “minimum raise.” Most security offerings have a minimum amount to be raised before capital can be released to the company.  In the case of the angel fund, that minimum was $750,000.  While a minimum raise protects the investors, it usually means it will take longer to conclude the offering and begin to put the capital to work. 

The implication for entrepreneurs is it takes a long time to raise capital.  You must plan for this and be sure you are beginning to raise capital well in advance of the time you actually need it. 

Now that the fund has reached its minimum raise, it is accepting applications from entrepreneurs for funding.  Applications will be managed by the parent organization, the Boise Angel Alliance and can be submitted at www.boiseangelfund.com. 

In the first fund about 5% of the applicants actually received funding.  I don’t expect the second fund to be any less restrictive.  So entrepreneurs should make sure they have done their homework before applying.

The web site contains information on the kinds of deals in which the fund will invest, the typical terms, and the processes used to make the investment decision.  I strongly advise entrepreneurs to read through this information before submitting an application.  And they are welcome to contact me for an informal discussion if they believe that would be helpful.

The fund is authorized to raise a total of $2 million and will continue to seek qualified investors as it begins considering investments in local entrepreneurs.  To be qualified, investors must be residents of the State of Idaho, must qualify as an accredited investor (generally a net worth of more than $1 million not including the equity in his or her primary residence), and must represent that the investment does not exceed 10% of the investor’s net worth, exclusive of the investor’s home, automobiles and furnishings.  Additional information for potential investors is available at www.treasurevalleyangelfund.com.

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Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is President of the Boise Angel Alliance (www.boiseangelfund.com), an investor in both of its funds, and is a principal in Loon Creek Capital (www.looncreekcapital.com) which assists angels in forming angel funds. He can be reached by email to kevinlearned@boisestate.edu or by phone at 208-426-3875.

New Angel Fund Under Development

I am delighted to report that a new angel fund, to be known as the Treasure Valley Angel Fund is in formation and seeking investors.  The purpose of the Fund is to support economic development efforts by providing capital and advice to local entrepreneurs while providing an opportunity for the investors to make a return on their investment.

The CORE, an economic development group based in Meridian and focused on creating a CORE competency in the state in Health and Research sponsored the initiation of the fund. Leadership of the Core worked extensively with the Department of Finance to develop offering parameters that ensure that sales of interests in the Fund are properly qualified under the Idaho Uniform Securities Act.

Over the past few years both the Boise Angel Fund and Highway 12 have been potential sources of early stage capital for local entrepreneurs.   However, Highway 12 is no longer accepting applications for new investments and the Boise Angel Fund is nearly out of capital.  So a new source of capital interested in supporting valley entrepreneurs will be a welcome addition to the entrepreneurial ecosystem.

The Fund will be a “member-managed” LLC.  That means the investors (called “members”) in the fund will make the investment decisions. Once capitalized, the Fund members will appoint a screening committee to consider initial applications from entrepreneurs.  When the screening committee recommends an investment, a due diligence committee will be formed to thoroughly investigate the entrepreneur and his or her business plan, and if warranted, to negotiate the terms of a possible investment.  The recommended investment will then be brought to all the members for a vote.

Whether or not the Fund members agree to make an investment, members will be encouraged to help the entrepreneur by providing advice, access to their contacts, and such other assistance as may be appropriate.  Individual Fund members will be  free to make an investment in the company whether or not the Fund members decide to make an investment of Fund capital.

Before the Fund can make any investments, it must first raise capital to invest.  The Treasure Valley Fund is raising between $750,000 and $2 million.  Units of $50,000 each are being offered to qualified Idaho residents.

The offering to form the new fund is subject to a number of restrictions, the most important of which are:

1.  Only accredited investors (who generally must have a net worth greater than $1 million, excluding the equity in the investor’s primary resident or income greater than $200,000 per year) can participate in the Fund.

2.  Investors must be residents of the State of Idaho

3.  Any investment must not exceed 10% of the net worth of the investor excluding the value of the equity in the investor’s principle residence, furnishings and automobiles. 

Of course, such an investment is very risky and no one should invest in the Fund unless they can afford to lose their entire investment.

If you meet the above criteria and would like to know more, additional information and a copy of the Fund’s Confidential Placement Memorandum can be requested through the Fund’s web site at www.treasurevalleyangelfund.com.

I hope to chronicle the formation of the Treasure Valley Angel Fund over the coming months so that others interested in forming such capital pools might learn from the experience of the Fund.

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Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital (www.looncreekcapital.com), which assists angels in forming angel funds. Loon Creek Capital provides consulting services to the Treasure Valley Angel Fund. He can be reached by email to kevinlearned@boisestate.edu or by phone at 208-426-3875. 

Improve your Chances of Receiving Angel Funding

I recently attended a seminar on Trends in Raising Capital in Palo Alto sponsored by the Angel Capital Association (ACA).  The ACA is an association of about 300 angel groups throughout the US and Canada.  Those 300 groups collectively represent about 10,000 active angel investors.

The seminar provided information to leaders of angel groups on the current state of the angel capital market.  One section I found particularly interesting was titled “Meeting Investor Expectations.”  The information, which I summarize below, was based upon a membership survey by the ACA.  58 groups participated representing more than 3,400 individual angels.  Those angels participated in more than 200 deals in 2010, and invested more than $45 million.  

Generally only one out of ten or twenty applications receives funding. According to this survey, there are things the entrepreneur can do to improve the chances of favorable action. While the survey was of member groups of the Angel Capital Association, I believe the findings can inform entrepreneurs approaching individual angels as well.

Get a Referral.  The typical group receives 15-30 applications a month, which is more than they can thoughtfully respond to. A referral to a group by a trusted party (e.g. another angel group, a respected individual angel or VC, an entrepreneur in which the group has invested) may help move the application to the top of the pile.  Referrals from economic development organizations and websites are viewed as having little value.  The perception is that the interests of these organizations are not aligned with those of the angels and therefore their referrals cannot be trusted. 

The Importance of the Executive Summary. The executive summary is like a resume.  The purpose is to get a interview.  Likewise, the purpose of the executive summary is to get a meeting with the angels. In the case of the Boise Angel Fund, over four years we received 214 applications.  Only 66 were invited to a meeting. So two thirds of the executive summaries did not capture sufficient interest to result in a meeting.

Good executive summaries are hard to write. In my experience entrepreneurs often spend weeks on their business plans and minutes on their executive summary, when in fact they should devote a great deal of effort to the executive summary.  In the ACA survey, only 38% of the executive summaries were rated as good.

Writing the Executive Summary. Compelling executive summaries are not more than two pages in length.  They are well written and without grammatical and typographical errors. They are delivered in PDF format so there are no accidental changes or formatting problems.

They cover the following both “POST” and “STORM.”

P-the Problem

O-the Opportunity or market size

S-your Solution (your product or service)

T-your Technology

S-your go to market Strategy

T-your Team

O-Others in the market (the competition)

R-Resources needed by your business

M-Milestones you intend to reach with the resources

Obtaining a referral to a group or an individual angel and preparing a thoughtful executive summary will improve your odds that you will be invited to a meeting with angels, which is the first step in the funding process. 

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Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital (www.looncreekcapital.com), which assists angels in forming angel funds. Loon Creek Capital is working with The Core to help create the new Treasure Valley Angel Fund (www.treasurevalleyangelfund.com). He can be reached by email to kevinlearned@boisestate.edu or by phone at 208-426-3875. 

New Data on Pre-Money Valuations

I thought my previous article was going to be my last for a while on the topic of valuation. But some germane new research has just been published.

In previous articles I discussed the concept of pre- and post-money valuation. Pre-money valuation is the value the entrepreneur and the angels negotiate before the angels invest. Post-money valuation is the pre-money value plus the amount of the investment, and it used for computing the percentage of stock the founders will retain after the investment by the angels.

In the second article on valuation I noted that one of the factors in setting pre-money valuations is the average regional deal value; that is at what value have other similar deals in the area been done? Since angels tend to invest close to home, the entrepreneur will have to compete for funding locally. Angels will look at the value of other similar deals in the area in deciding what value to offer or accept from the entrepreneur.

Bill Payne is a well-regarded angel investor in Montana. He is a member of the Frontier Angel Fund. The Boise Angel Fund and the Frontier Angel Fund have a close working relationship, from time to time investing in each other’s deals. Bill teaches classes on angel investing for the Angel Capital Association and has made more than 50 angel investments himself.

He just completed a survey of 35 angel groups in 26 states and two provinces. The complete results are available on his blog at http://www.billpayne.com/. His survey asks the question “What was the average pre-money value for investments made by your group in pre-revenue companies?” The average answer was $2.1 million, an increase of $400,000 from the previous year.

However, averages hide a lot of data. Valuations ranged from a low of $800,000 to a high of $3.4 million. Interesting for local entrepreneurs is that the Boise Angel Fund was one of two with the lowest valuation of $800,000. The other was Fargo/Morehead Angels, another group with which the Boise Fund has a relationship. In fairness, the Boise Angel Fund only did one pre-money deal in the past year, so that value was very specific to the deal that was done.

There are several implications for Idaho entrepreneurs.

1. Many Idaho angels have generally avoided pre-revenue deals due to their inherent riskiness. In order to entice investors to accept that risk, you have to offer a terrific deal, which means a low valuation.

2. While it is even more difficult to secure money outside of Idaho than inside, an entrepreneur with a truly exceptional opportunity may want to try to get the attention of non-Idaho groups.

3. Some valuations are skewed by the fact that bioscience and medical device deals typically receive higher valuations at the pre-revenue stage. Most Idaho angels will not do such deals.

4. Your pre-revenue deal will likely receive a lower valuation in Idaho than it might receive in a money center. The cure for this is to not seek funding until your company has secured its first revenue, thereby lowering the risk to investors. With a lower risk profile comes a higher valuation.

In our consulting practice at the Idaho Small Business Development Center at Boise State we frequently work with entrepreneurs to help them set a value on their businesses before they go to the market to raise capital. Our services are free and confidential. Call the SBDC at 426-3875 for an appointment if you would like to discuss your company’s value with one of our counselors.
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Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital which assists angels in forming angel funds. He can be reached by email to kevinlearned@boisestate.edu.

Valuing Early Stage Businesses, Part III, Understanding Angel Math

This is the final article in a series on valuing early-stage businesses from the standpoint of the angel investor.  You can find the earlier articles at my blog, http://kevinlearned.blogspot.com.  Thanks to Mark Woychick, a participant in the MBA Honors Program for his assistance in preparing this series.

In the earlier articles we talked about the riskiness of an investment in your company and how lowering that risk will result in a higher valuation. We also talked about the importance of comparable such as the average regional deal value and similar businesses and about the value of the team.

In this article we want to present the math that most investors go through in order to validate a valuation.  It’s pretty simple.  Take these variables:

1.      How much money does the company need in this round?

2.     How much can the company be sold for and in how many years?

3.     What multiple of my investment do I believe I need to have the potential to earn to justify my taking the risk?

Given the answers to these questions, we can compute a preliminary valuation of the company.  For example:

1.     The company needs $500,000.

2.     The entrepreneur and our own due diligence suggest the company can be sold for $20 million in five years. 

3.     Given the risk profile, we believe we need to have the potential to receive ten times our investment. Therefore we need to have the potential to receive ten times the investment of $500,000 or $5 million when the company is sold.

4.     If the company will sell for $20 million and we need $5 million of the sales proceeds, then we need to own 25% of the company at exit ($5 million/$20 million).

If we need 25% of the company at exit in order to meet our return objective, and IF the company does not need to raise any more funds between now and exit (admitted a tenuous assumption in that most companies will need to raise additional capital which will dilute our ownership), then we can compute the value of the company today as follows:

1.      Money raised, $500,000

2.     Percent of company needed for this investment, 25%

3.     Value of the company after investment (the “post-money” value) must be $2 million.  That is, with a value of $2 million, our $500,000 investment will purchase 25% of the company.

4.     This means the value of the company before the investment (the “pre-money” value) must be $1.5 million (post-money value of $2 million less investment of $500,000).

Most investors will triangulate on a number of different approaches to valuing the company to substantiate the value.  In the above example, they will compare the computed value of $1.5 million to what they believe similar companies in the region are worth.  They may adjust the value up or down depending upon the quality of the management team or the strength of the intellectual property.  They may run a discounted cash flow analysis on the pro forma projections to see how it compares. 

Valuation of early-stage businesses is difficult and as much art as science.  In the end analysis, the value is what the investors and the entrepreneurs can agree upon.  But the well prepared entrepreneur will understand the different approaches and be prepared to negotiate with the investors based upon them.

In our consulting practice at the Idaho Small Business Development Center at Boise State we frequently work with entrepreneurs to help them set a value on their business before they go to the market to raise capital.  Our services are free and confidential.  Call the SBDC at 426-3875 for an appointment if you would like to discuss your company’s value with one of our counselors.

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Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital (www.looncreekcapital.com), which assists angels in forming angel funds. He can be reached by email to kevinlearned@boisestate.edu.

Valuing Early Stage Businesses, Part II, Comparisons

This is my second article on the valuation of early stage businesses. These articles have been written from the perspective of angel investors in the hope that I can give some insight into this mysterious process for entrepreneurs who have to negotiate valuation with prospective investors. I have been assisted in preparing these articles by Mark Woychick, a participant in the Boise State MBA Honors Program.

The focus of these articles is valuation from the standpoint of the investor.  I hope they will give entrepreneurs some guidance in how their businesses may be valued when they seek capital.  I assume your business plan (e.g., business concept, market size calculations, competitors, use of investor capital, etc.) makes sense.

I should point out that in my opinion the traditional discounted cash flow method of valuing businesses doesn’t work for an early stage business. This method may be appropriate for a stable business with an operating history where you can have some confidence in the projections.  But an early stage business has neither an operating history nor stability and therefore projections for such businesses are unreliable. In the many deals I have reviewed, I have never seen an investor do a discounted cash flow analysis.

Last time I discussed the fundamental relationship of risk and return, how the earlier in the business cycle a business is, the riskier the investment is likely to be, and therefore the lower the valuation of the business will be for purposes of seeking investment capital.  Of course this is an important factor but not the only one.  Here are some others that will likely impact the value of the company:

Average regional deal value. Sophisticated investors know the current valuation of deals in their region.  For example, the Boise Angel Fund participates in a monthly phone conference with about ten other angel groups throughout the Northwest.  We talk about the valuation of the deals we are seeing.  This gives us a basis for the initial valuation of a local deal.  For example, we know from this discussion that pre-revenue deals in the Northwest rarely have valuations of more than $2 million, and they are usually substantially less no matter how exciting the potential.   So if you approach local angels for your startup company with a valuation of $3 million, you are likely to not even get to negotiations as your proposed value is completely out of line with what other deals are being done for.

Comparable businesses. If there have been other companies started in your space, then angels may want to use the valuation of those deals as a basis for the valuation of your deal. For example, many Software as a Service (SaaS) deals have raised capital in the last year.  Generally well thought out SaaS deals are valued a bit higher than businesses which carry inventory and accounts receivable as they have the potential to be very capital efficient and to be highly profitable.  

Team. All businesses are dependent upon the quality of the management team.  A superb team with background and experience in bringing a company to market in your space is unusual and valuable.  In my experience, all investors will increase or decrease the value of a business based upon their perception of the management team.

In the next article we will examine the most important, and most difficult component, which is projecting the exit value for the investors and then try to bring all these factors together.  

Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital (www.looncreekcapital.com), which assists angels in forming angel funds. He can be reached by email to kevinlearned@boisestate.edu.

Valuing Early Stage Businesses, Part I: The Value of an Early-Stage Company is Related to its Riskiness

One of the toughest things to do is value an early stage business. Yet, in order to sell stock, the entrepreneur has to set a value on his or her company. Today’s article is the first of several on this topic. I’ve been assisted in these articles on valuation by Mark Woychick, a participant in the Boise State MBA Honors Program.

Risk and Return

Investors expect to be compensated for the risk they assume. The higher the risk, the higher the potential return must be to entice the investor to accept the risk. And early-stage investing is a risky proposition. Research suggests that around 40% of all angel investments in early-stage companies result in a loss of the investment, even after extensive due diligence. So investors must see the potential to make substantial returns in order to justify accepting the risk.

Business Stage

Risk is, in large part, correlated with the stage of the business. Here is a rough listing of risk, stage and returns expected in order to accept the risk.

Stage           Level of Risk           Return expected (compounded
                                                    per year)

Idea             Extremely high        100%+

Prototype    Very high                 75%

Initial
revenue       High                        50%

Multiple
customers   Modestly high            40%

Growing     Intermediate              25%

To put this in lay terms, if angels invest in a business that has started to generate some revenue, and if they expect a return of 50% (called the internal rate of return), then they are seeking to make about ten times their investment in five to six years.

Terminology

Most sophisticated angels use the concepts of “pre-money” and “post-money” valuation. The pre-money valuation of a company is the value that the entrepreneur and the investor agree the company is worth immediately before the investment. The post-money valuation is the pre-money valuation plus the amount of investment. If the entrepreneur and the investor agree that the company is worth $500,000 before the investment (the “pre-money” valuation) and the investor invests $250,000, then the company must be worth $750,000 immediately after the investment is made (the “post-money” valuation).

You can derive percentage ownership from the pre and post-money valuations as follows:

Pre-money valuation          $500,000        67%

Plus investment                  $250,000       33%

= Post-money valuation       $750,000      100%

After the financing the entrepreneur (and those who have previously invested) would own 67% of the company and the new angel investors would own 33% of the company.

Relationship of Risk and Current Value

The riskier your business proposition, the lower the current value of your business and the higher the proportion of ownership the angel will demand. If the angel is considering two deals, one which is only at the idea stage and the other is at the initial revenue stage, then, all other things (e.g. management, size of opportunity) being equal, the value of the company at the initial revenue stage will be higher than the company at the idea stage and the percentage ownership the entrepreneur will have to give up will be less. For example:

Stage:                     Idea                    Initial Revenue

Money needed         $100,000            $100,000

Value of company    $200,000             $400,000

% of company
to investors               33%                    20%

The lesson for the entrepreneurs is the further developed you can get your company before you seek outside capital, the more valuable your company will be and the less you will have to give up to investors.

Of course, valuation takes into account more factors than stage of business. We will explore other factors in subsequent articles.
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This article was originally published in the Idaho Statesman's Business Insider on August 10, 2011 under the title "How to set a value on your business so you can sell stock."

Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center  at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital Group which assists angels in forming angel funds. He can be reached by email to kevinlearned@boisestate.edu.

What is an Opportunity?

Published in the Idaho Statesman Business Insider, July 6, 2011

I recently spoke to BSU Professor Kent Neupert’s MBA class on opportunity recognition. How do we know when an idea is a good business opportunity?

This is an important question for entrepreneurs and for investors.  Seemingly great ideas don’t necessarily result in viable businesses.  The idea has to be paired with a market that will demand the product.

For example, an entrepreneur may have a terrific salsa recipe that has been in the family for generations.  Family and friends encourage her to go into the salsa business because everyone loves this homemade salsa.  Is this an opportunity worth pursuing?

Or some professors have developed a computer game platform that can be used by teachers to create learning quests.  Early research shows that some students may be able learn faster and retain more by using the game rather than more traditional teaching methods. Is this an opportunity worth pursuing?

Here are three questions they might ask themselves before leaping into either business:

            1.  Is there an unmet need in the market place?

            2.  Is the market large enough to allow the company to make a profit?

            3.  Can the market be reached for reasonable cost?

Let’s see how these questions might be applied to these two ideas.

Need. It’s hard to argue that the market place needs another salsa.  The supermarket shelves are filled with national brands.  Specialty stores such as the Boise Co-op carry smaller less known brands, even local brands.

On the other hand, there is a trend in education to reduce costs by deploying more technology.  If in fact this gaming platform does lead to improved student outcomes along with lower cost delivery, then it seems to speak to an unmet need.

Size. Clearly both of these markets are huge.  It would not be unreasonable to assume there are hundreds of millions of dollars spent each year on salsa and on technology in education, just in the United States.  And the worldwide market must be considerably larger.

Distribution.  Customers have to be able to learn about and find the product or service. How might that happen with these two ideas?  The consumer products market is quite mature.  Most people will go to a retail store to purchase a product like salsa.  This is an exceedingly difficult and costly market to penetrate.  While it may be possible to build an Internet-based salsa business, shipping costs will likely be a significant barrier.

With regard to the technology product for education, distribution is not as defined as with consumer products.  Reaching the market will depend upon which market.  Will the target be school districts, home schooled children or individual teachers, just to name a few?  But since technology is frequently marketed through on line techniques, it may be possible to cost-effectively reach the market.

So is there an opportunity for either of these products?  I think the answer for the salsa is no.  The market appears saturated and the costs of distribution are overwhelming.  I think the answer for the gaming platform is maybe.  There appears to be a need for technology in education and the market is large, but it is yet not clear how the market can be reached.

Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital (www.looncreekcapital.com), which assists angels in forming angel funds. He can be reached by email to kevinlearned@boisestate.edu.

Where Do Jobs Come From?

We all know good-paying jobs are important to our economy, both locally and nationally.

Our legislative and congressional policymakers spend a good deal of time debating job creation policy. Each city in the Treasure Valley has an individual assigned to economic development. Our chambers of commerce work to improve the economy for our local companies.

But sometimes I fear all this effort, while well-intentioned, is under-informed on how jobs actually get created.

About 30 years ago, Professor David Birch of the Massachusetts Institute of Technology published groundbreaking research showing that about two-thirds of all net new jobs (jobs created minus jobs lost) between 1969 and 1976 were created by firms with 20 or fewer employees (David Birch, “Who Creates Jobs,” Public Interest, Fall 1981, pp. 3-14). This research led us to understand better the extremely important role of small business in the U.S. economy.

Now the Kauffman Foundation has published a surprising new study of job creation in the economy (Tim Kane, “The Importance of Startups in Job Creation and Job Destruction,” The Ewing Marion Kauffman Foundation, July 2010). Their research mined a new U.S. government dataset called the Business Dynamics Statistics, which includes age of company as well as employment data. Here’s what they found: “Startups aren’t everything when it comes to job growth. They’re the only thing.”

The data show that in all but seven years in the period from 1977 through 2005, existing firms on balance lost more jobs than they created.

Clearly employment didn’t drop in the other 22 years. So where did the job growth come from? It came from new companies.

How can this be? If you think about it, a startup by its very nature starts with zero jobs and with its first hire creates a job.

Over this 28-year period, startups created an average of 3 million jobs each year. But once started, some firms add jobs, others lose them. On balance, after the first year existing companies lose more jobs than they create. Of course, not all companies destroy more jobs than they create, but when summed together, existing firms stop growing, may lay off workers or even go out of business.

This has several public policy implications. Of course we should not ignore our existing businesses. Helping them grow is important. But I am intrigued about what we can do to encourage entrepreneurs to start businesses in our Valley. Here are several thoughts.

INVEST FINANCIAL RESOURCES

We should consider investing some of our economic development resources into support for entrepreneurs. Recruiting a company to come to the Valley may lead to good headlines, but may not lead over the long run to job growth. Some states have used tax policy, such as tax credits, for investing in new businesses to encourage capital.

FOSTER RESEARCH AND SUPPORT

Incubators, when combined with support such as that provided by the Boise State University TECenter in Nampa, can provide nurturing support for entrepreneurs.

Funding research programs in our universities produces new knowledge that can become the basis for a new business.

And joint public/private partnerships such as The Core in Meridian may provide a seed bed that will attract entrepreneurs and capital.

Kevin Learned is a counselor at the Idaho Small Business Development Committee, a member of the Boise Angel Fund and the finance committee of the Idaho Technology Council. Contact him at kevinlearned@boisestate.edu.