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.
 

Boise Angel Alliance Seeks New Members

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

The Boise Angel Alliance (www.boiseangelalliance.com) 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 looncreekcapital@looncreekcapital.com.

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:  www.boiseangelalliance.com

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.

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 (www.boiseangelalliance.com) 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:

Baseline

Conex

Core Concepts

CradlePoint

DB3 Mobile – Meal Ticket

Fit Wrapz

Gogo Labs

Health Fundr (2014 investment)

IdeaRoom Technology

Inovus

Loan Tek

Nurture - Happy Family (sold 2013)

Paksense

Prosperity Organic Foods

Social Good Network

Voxbright

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. 

If not a business plan, then what?

I have been discussing the Lean Startup movement in my recent columns. The movement says that business ideas are based in testable assumptions, and that the first task of the entrepreneur is to test and refine the assumptions; NOT to write a business plan.  This is somewhat heretical as for the last fifty years we thought that the business plan was the first step on the journey to launching a business.

So, how might we organize these assumptions and test them if we are going to do this rather than craft a business plan?  Alexander Osterwalder and Yves Pigneur suggest an answer in their book Business Model Generation.  According to them, “a business model describes…how an organization creates, delivers, and captures value [emphasis mine].”

Their research revealed nine building blocks to describe the business model (definitions are quoted from the book):

1.  Customer Segments. The different groups of people or organizations an enterprise aims to reach and serve.

2.  Value Proposition. The bundle of products and services that create value for specific Customer Segments. 

3. Channels. How a company communicates with and reaches its Customer Segments to deliver a Value Proposition.

4. Customer Relationships. The type of relationships a company establishes with specific Customer Segments.

5. Revenue Streams. The cash a company generates from each Customer Segment.

6. Key Resources.  The most important assets required to make the business model work.

7. Key Activities. The most important things a company must do to make its business model work.

8. Key Partners. The network of suppliers and partners that make the business model work.

9. Cost Structure. Describes all the costs incurred to operate the business model. 

Osterwalder and Pigneur combine these nine building blocks into what they call the Business Model Canvas.  They put the canvas in the public domain.  You can download it at http://www.businessmodelgeneration.com/downloads/business_model_canvas_poster.pdf

The directors and entrepreneurs at Venture College have found this model incredibly helpful as a way to organize our thinking about a particular venture.  Over a period of several months the entrepreneurs tackle each building block by writing down their assumptions, and then testing those assumptions, primarily by interviewing prospective customers. 

To date, our entrepreneurs in the first cohort of Venture College have generated 480 assumptions about their business models.  They have conducted 121 customer interviews and rejected more than half of their assumptions as invalid. 

For example, one of our entrepreneurs believed that there would be a profitable market for an insectarium in Boise.  In the language of the Business Model Canvas, she believed there existed Customer Segments that would Value a visit to an insectarium sufficiently to allow her to make a profit.  What she learned through talking with prospective customers in the various segments is lots of people thought it was a cool idea, but very few were willing to pay the entrance fee (Revenue Stream) such that revenues would be higher than costs (Cost Structure). 

Rather than write a lengthy business plan discussing all the segments, she was able to quickly talk with enough possible segments to learn her idea wouldn’t work.  And, finding this out before she raised the million dollars it would take to create such a facility saved her from huge losses. 

The Screening Committee chair for the Boise Angel Alliance is considering modifying the application process to ask the entrepreneurs to use the Business Model Canvas as a way of applying for funding.  The angels know there are no sure things in startups.  But if an entrepreneur could lay out his or her assumptions and then present the evidence he or she has accumulated to validate those assumptions, it might help the angels improve their investment decision making.

Take a look at the Business Model Canvas as an alternative to writing an exhaustive (and likely very wrong) business plan. Search online for “Business Model Canvas” and you’ll find a great deal of information about this new way of planning for startups.

__________________________________

Kevin Learned is the Director of Venture College at Boise State University (http://venturecollege.boisestate.edu/) and a member of the Board of Directors of the Boise Angel Alliance (http://www.boiseangelalliance.org/).

 

Test your business model with a minimum viable product

Stanford Professor Steve Blank says “a startup is a temporary organization in search of a repeatable, scalable, profitable business model” (steveblank.com). You may recall from my last column that he believes an initial business plan is a series of unproven assumptions, and that the entrepreneur’s initial task is to test those assumptions quickly and cheaply.

He sees this happening in two stages:  (1) customer interviews and (2) bringing minimum viable products to the market place.  Both are designed to gain feedback from those who might purchase the product or service. 

In the first stage the entrepreneur interviews people who may be able to give feedback on the assumptions such as potential customers, suppliers, and channel partners.  As data is collected from the interviews, the assumptions are refined until the entrepreneur believes she has validated all the assumptions in the business model.

In the second stage the entrepreneur further tests the business model by offering the market place an actual product or service, but the minimum (the “minimum viable product”) necessary to find out if the market will pay for the product and how the customers will use it.  In other words, it is a mistake to try to bring a full-featured product to the market before learning what features the market values.  And the best way to learn this is to bring out a modest model.

Steve Jobs was a master at this.  Think back to the first iPod, iPhone, or iPad and the iterations since they were released.  These early versions had just enough features to learn if the market were interested. Then Apple could watch how the products were used, and modify them accordingly.

We use this approach at Venture College.  For all fall the student-entrepreneurs have been out interviewing prospective customers.  As they gained insight from potential customers they modified their assumptions about their business model—in some cases radically.

Several of the entrepreneurs in our first cohort are beginning to bring modest products or services to the market, still in a test mode.  For example, one of our entrepreneurs has a passion for teaching financial responsibility to teenagers. Through her interviews she learned that teenagers want to know how to afford to move out of home when they are ready to go to college.  But teenagers don’t have the funds to pay for such knowledge. 

Further interviews with the parents of teenagers, led her to the insight the parents are also interested in how their children can successfully move out of home when the time is right, and at least some parents are willing to pay for this information.

So now she is creating her service, a seminar to teach financial responsibility to teenagers.  Initially she is producing a low-cost brochure that sets forth the content of her seminar. The brochure is the minimum viable product. She will use the brochure to try to obtain paying customers for her seminar.  Should sufficient customers sign up, she will then proceed to develop the seminar itself.

In the local angel community there is wide acceptance of the notion that an early stage company is an experiment in search of a repeatable, scalable and profitable business model.  The local angels often fund companies just as they are ready to bring the initial version of their product or service (the minimum viable product) to the market. 

This allows us to invest modest amounts and give the company an opportunity to refine its business model.  Once the business model is proven, the risk is reduced and it is generally easier for the company to then raise substantial capital to execute its business model.

______________________________

Learned is the past-president of the Boise Angel Alliance and the Director of Venture College at Boise State. This column was originally published in the Idaho Statesman's Business Insider on December 17, 2013. Learned writes monthly on angel investing and startups for the Business Insider.  Columns are subsequently published in this blog. You can reach him through kelearned@msn.com. 

Lean Startup: Business Planning for Startups Has Been Wrong

Entrepreneur, Stanford/Berkley/Columbia professor and startup expert Steve Blank in May, 2013 published an article in the Harvard Business Review titled “Why the Lean Startup Changes Everything.”  The article is available for free downloading at steveblank.com.  

Blank says “no business plan survives first contact with customers.”  By this he means we have startup business planning all wrong. Rather than assume the plan is correct, Blank urges us to realize the plan is based upon a series of assumptions, some of which are highly likely to be wrong.  This is because a startup, by its very nature, deals with uncertainty.  It’s trying to do something new and different.

That was certainly my case.  In one of Learned-Mahn’s (a computer software company I co-founded) blunders, we designed and programmed a very specialized accounting system for trusts and estates.  We wrote the system because my father, a retired accountant, was the trustee and executor for a large estate.  Once the program was complete, we learned no one else did trust and estate accounting the way my father did.

One accounting firm that tried the product, however, forced the system into something it wasn't meant to do—keep small company books. We then modified the program to allow accountants to use it to keep books for their small business clients.  Turned out that most accountants found that uninteresting as well.  Finally, almost in spite of ourselves, large companies found the system and began to use it.  By then several years and most of our capital was gone.  If only we had first gone to the market and then built the product rather than the other way around.

For the forty years or so we have been teaching entrepreneurship, the standard prescription for an entrepreneur intending to start a business has been to write a business plan.  Once written, the entrepreneur proceeds to execute the plan, building the product or service, and bringing it to the market.  Yet we know many, if not most business startups fail.  Rather than accepting this fact as immutable, Blank argues persuasively that what entrepreneurs have been doing frequently leads to failure because the startup business-planning model is wrong. 

Here’s the hallmark of Blank’s approach:  A startup is a temporary organization in search of a scalable, repeatable and profitable business model--how the business will create and capture value.  The founder’s vision initially is a series of unproven assumptions about the market. The job of the founder is to turn the assumptions into facts as quickly and inexpensively as possible—hence the phrase “Lean Startup.”

I've seen in my business counseling and angel investing career dozens of examples of the entrepreneur raising capital and beginning to execute to a series of assumptions that turn out to be wrong.  Most heartbreaking is when an entrepreneur invests his or her life savings, and perhaps that of family and friends into inventory of a physical product only to learn the design is wrong, or the price needed to produce a profit too high. 

So Blank prescribes a rigorous, formal process of testing assumptions as quickly and cheaply as possible in the search for the business model.  It involves consciously writing down the assumptions about the business model and then designing inexpensive tests of those assumptions.  Getting these assumptions right before a lot of time and money is invested is important to both entrepreneurs and those who finance them. 

Fellow Venture College directors Ed Zimmer and Mary Andrews, and I were privileged to sit at Blank’s feet in New York recently as we learned his methodology.  We have embraced the methodology at Venture College and our entrepreneurs are successfully implementing it. In coming articles I will write about how entrepreneurs can utilize Lean Startup techniques to search for a scalable, repeatable and profitably business model.

________________________________

Kevin Learned is former software executive, entrepreneurship professor and business counselor.  He is a board member of the Boise Angel Alliance and co-founder of its two related angel funds.  He is the director of Venture College at Boise State University, a program to help current college and graduate students start businesses while continuing their studies.  He can be reached at kevinlearned@boisestate.edu or 208-426-3573.  

This blog post was originally published by the Business Insider, a business magazine of the Idaho Statesman.

A Report Card on the Boise Angel Alliance

I have been arguing for some time in this column (these blog posts are originally published as a column in the Idaho Statesman's Business Insider magazine)  that an important component of the ecosystem for entrepreneurship is the availability of risk capital.  I have also argued that using best practices, angel investments can produce nice returns to the angels in addition to helping entrepreneurs.

Here’s a report card of sorts on some of the Treasure Valley angel activity.

The Boise Angel Alliance was formed about 2003.  Unfortunately, we didn't keep any investment records in the early days.  But for the first five years there was relatively little activity.  As a result, a group of us formed a “fund” to try to stimulate more investment.  A fund is a limited liability company.  The members of the fund agree to contribute cash capital to the fund as investments are made.

Our thought in forming the fund was that it would result in making investments since the cash would be in the bank waiting to be invested.  A fund has the added advantage of spreading risk since each investor has a small piece of a number of investments.

We formed our first fund in the spring of 2007.  Members agreed to contribute up to $50,000 each.  We received commitments for $1,350,000 and began to invest. It took us five years to fully invest the first fund.  Last year we formed the second fund.  Coincidentally, we also received commitments for $1,350,000, so between the two funds up to $2,700,000 will be available to local entrepreneurs.

So what’s happened? 

We have invested a modest amount of money outside the valley with partner angel groups around the northwest, but this article is about the local impact.

The two funds have invested to date a total of $1,535,000 into 14 Treasure Valley companies. Now that is not a large amount of money per company (our largest investment is $160,000 and our smallest is $25,000).  But the money was generally invested early in the companies’ lives and helped the entrepreneurs move their companies to the next level.  We haven't kept track of how much capital the companies have raised since we made our investments, but it is tens of millions of dollars more.

How have the companies done?  All 14 are in business and continuing to execute their business plans.  Some are growing rapidly; some are struggling to find the right path forward. But today all are still in business. 

Collectively their Treasure Valley employment as of June 30, 2013 has increased by 146 positions since we made our investments in each.  If the positions average  $40,000 a year in salary, then that’s an annual impact of nearly $6 million in salary alone in our valley.  

How have the investors done?  It’s too soon to know as angel investments take years to mature.  One of our local companies and one of our non-local companies have been acquired.  One non-local company went bankrupt and we lost our investment.  However, we are starting to get a picture.

Investors in the first fund have received back nearly all of their capital.  Of the $1,350,000 of committed capital, the fund has returned all but about $50,000.  And the fund still holds about  $1 million of stock in portfolio companies at cost.  Those companies will be sold over the next few years and the proceeds distributed to the investors.  At this time it looks like the investors in the first fund will likely be quite happy with their returns.

So, thus far the angel funds have been good for the Treasure Valley economy, good for the entrepreneurs, and good for the investors.

Invest in What You Know

We know from angel research that returns are positively correlated with experience.  That makes sense from two perspectives.  One, angels with experience in a field can better recognize a good value proposition.  Two, those angels can bring their expertise to new companies.

We know a lot about food in the Treasure Valley thanks to Albertsons, Simplot and Ore-Ida to name a few major producers and sellers.  The angels in the Boise Angel Alliance and its funds thus far have invested in three food companies. Each has taken advantage of the knowledge of food available in the Treasure Valley.

Nurture. (www.happyfamilybrands.com) Selling under the Happy Family brand, Nurture produces a line of organic, natural baby and toddler food.  This is an unusual company in that the CEO lives and works in New York and the COO, Jessica Rolph lives and works in Boise.  Both officers are mothers of toddlers with an interest in creating good-for-you food for children. 

Under Rolph’s direction the company sources its raw materials, directs the manufacture of its products and coordinates the delivery to more than 10,000 stores throughout the United States.  Nurture employs more than 25 people in the Treasure Valley, many of them with prior food experience with some of our biggest companies.

In June, 2013 Danone, the French yogurt maker purchased the company. The local angels received approximately eight times their investment, a superb return over four years.

Prosperity Organic Foods.  (www.meltbutteryspread.com) Prosperity produces a line of organic, natural butter substitutes under their “Melt” label.  Hailey resident, Cygnia Rapp created the product when dietary restrictions meant she couldn’t eat her favorite foods (like butter).  As the company grew, Cygnia and her board (I was a board member at the time) determined that her best role in the company was as the spokesperson and chief science officer.

Meg Carlson, who was an angel investor in the company and board member, became the CEO.  Meg had a very successful career as a vice president at Ore-Ida and brought to the company her in-depth experience in food development, manufacturing, marketing and distribution. Meg has attracted experienced food industry talent to the company, both as employees and directors.  The company is now beginning to scale with Melt available in about 3500 stores.

Fit Wrapz. (www.fitwrapz.com) Shige Toyoguchi was a personal trainer in Boise with an interest in healthy food.  He began creating foods for himself and his clients.  This led to a line of healthy frozen burritos available locally at coffee shops, athletic clubs and Albertsons.

Fit Wrapz is a seed stage company, now ready to expand beyond the Treasure Valley.  It recently concluded a seed stage round of financing led by the Boise Angel Alliance.  The capital will be used to fund the expansion as the company tests different channel strategies.

Shige attracted two very experienced directors to help guide his company at this critical time.  One is a former senior officer with Simplot; the other was a senior vice president in merchandising for Albertsons. 

Be Careful of Family and Friends as Board Members

My last post was on the importance of outside, knowledgeable board members and how some entrepreneurs unwisely try to control their boards.  I am expanding on that article with my experience with family and friends in management and on the board.

Gary Mahn and I cofounded Learned-Mahn in the early 1970’s.  When Gary and I joined together we were best friends. Bea Black had come to work for me right out of college. Later my wife Nancy Learned (now Briggs) joined us.

We were well educated, hard working, and totally dedicated to the success of the company.  But even with these attributes, I believe our personal relationships got in the way of our success.

When family and/or close friends run a company, management is often by consensus.  The problem with this is that options, which may be good for the organization but bad for an individual, are rarely discussed, much less implemented. Further, it is difficult for the leader to hold his or her friends and family members accountable. 

Our first board consisted of Gary (best friend), Bea (who I had mentored since she graduated from college), Nancy (my wife), my father (who had invested in the company) and me. For a while Bea’s father (who had also invested in the company) also served on the board. 

We thought at the time we were doing the right thing; but as I read this, it was ludicrous. I would never again invest in a company with this degree of family and friends in management and on the board. Boards need to inspire and to hold management accountable. But when management is the board, and half of it is family, there’s no real accountability. 

And if the company tries to change that structure, the results are predictable—everyone reverts to protecting their own interests rather than doing what is right for the company. Gary, Bea, Nancy and I all believed we should be on the board. After all, we were the founders and managers, we had capital invested and felt we should be on the board by virtue of our stock positions.

My father was a good businessman, but he knew little about the markets or the technology we were deploying.  We felt there were others who could bring more to the boardroom. When I tried to talk my father into resigning, he threatened a proxy fight.  This obviously impacted our relationship, but Dad and I were able to resolve our differences

Ultimately Gary, Bea and I left the company, Dad resigned from the board, and Nancy was made the president. The company made the transition from an inside board to an outside board. Ray Smelek, who was a senior vice president at Hewlett Packard, Chuck Jepson who left HP to run a technology company in California, and Gary Atkins who left HP to start Extended Systems joined the board. Their impact was huge. They demanded performance, constantly pushing Nancy and her team to move more quickly, to grow more rapidly.

I know the counsel of the board was often frustrating to management.  Its demands on management and the company were difficult.  But in hindsight, I believe the success the company ultimately achieved was due primarily to having a skilled president clearly in charge without any family or friends as employees, and to having an experienced, outside, demanding board. The company was sold to National Data Corporation of Atlanta in 1994 in a successful exit for the shareholders.  In 1999 National Data Corporation closed the Boise office.

Dr. Kevin Learned is the Director of the Venture College at Boise State and an experienced angel investor.  208-426-3875, kevinlearned@boisestate.edu