In times of fiscal challenge you can always count on government to come up with some pretty bad ideas to fund deficits. House Bill 1192 is a particularly egregious example of one such boneheaded idea.

The bill as it is currently constructed would place a tax on all software purchased or installed in Colorado. This is a tax not just on the software industry but on every business that uses software. And it’s an incredibly stupid idea.

According to the Colorado Software and Internet Association there are more than 5,500 software, hardware and IT businesses in the state and approximately 175,000 IT professionals (with a total payroll of nearly $5Bn). Across the sate there are thousands of additional businesses that make use of technology to run their businesses. All would be effected.  At a time when we’re trying to encourage business growth and new hiring, HB 1192 will have the opposite affect, stifling job growth and actually lowering overall tax receipts as businesses (smartly) move employees out of state and shift open recs from Colorado to states that don’t impose such a tax.

This sort of thing is unbelievably frustrating. My partners and I (along with many advocates for technology businesses in Colorado) spend countless hours advocating for the state of Colorado (despite the fact that we invest nationally, not just in our back yard).  We’ve invested in companies that have created thousands of jobs in Colorado.  We actively encourage new businesses to form here, existing businesses to move here and people who fund businesses to look locally for opportunities. Passing HB 1192 will be an outstanding way to undermine these efforts.

I made reference to the issue of immigration policy in a post last week (see “Want more jobs? Support Entrepreneurship”). In that post I referenced a WSJ OpEd piece that my partner Brad Feld wrote last week with Paul Kedrosky about the Start-up Visa Movement (the idea that we should make it easier for foreign born entrepreneurs who are starting their companies and who have obtained financing to stay in the United States to build their businesses). In my post I went on to say:

But let’s take this idea further. For example, how could it possibly make sense to deport a recent graduate school graduate (someone with the kind of technical degree that we so badly need here in the US and who received significant federal and state subsidies to study here)? We should be doing everything we can to keep smart, educated, motivated immigrants here – we want them contributing to our society and to our economy.

Susan Hockfield has a great OpEd piece in this morning’s Journal on this exact topic that is well wroth reading. Here’s my favorite quote from the article to give you the flavor but please click through and read the whole thing.

Our immigration laws specifically require that students return to their home countries after earning their degrees and then apply for a visa if they want to return and work in the U.S. It would be hard to invent a policy more counterproductive to our national interest.

 

There’s a great CNN opinion piece out today by Amy M. Wilkinson that argues strongly (and correctly) that the government needs to do more to support entrepreneurship and small businesses. I whole heartedly agree.

Quoting from the piece: “According to the Census Bureau, nearly all net job creation in the U.S. since 1980 has been generated by firms operating less than five years.” This conclusion is backed up by the National Venture Capital Association which tracks the impact of private companies who receive institutional venture financing. You can read the recent NVCA report on the impact of venture capital on the overall economy here (the quick take-away is that this impact is extremely significant).

With that as a backdrop, why is the US taking so many steps to stifle the innovation economy? Here are some thoughts, including and expanding on what Wilkinson proposes in her article.

1) Look to start-ups for job creation. Given the conclusions above, this may seem obvious, but it’s not how the government behaves. The vast majority of stimulus money that has gone to companies in the past 18 months has gone to prop up the nations largest employers (many of whom have continued to shed jobs). Instead of always looking for companies that are “too big to fail,” let’s look at some that are smaller and more likely to drive growth in the economy. With Obama about to endorse using bail-out funds for new job creation, let’s make sure that money actually gets directed to companies most likely to actually create jobs.

2) Stop being so xenophobic. As Wilkinson points out, “We are a country of immigrants, and yet in recent years, we have made it incredibly difficult for immigrants to launch companies in the U.S.”. The absurdity of our immigration policy is mind-blowing to anyone who has lived through the experience of trying to obtain a work permit in the US (or watched a friend or colleague do so). My partner Brad Feld along with Paul Kedrosky wrote a passionate argument in the Wall Street Journal yesterday about one immigration reform idea, the Start-up Visa movement (worth reading the entire piece, see it here). But let’s take this idea further. For example, how could it possibly make sense to deport a recent graduate school graduate (someone with the kind of technical degree that we so badly need here in the US and who received significant federal and state subsidies to study here)? We should be doing everything we can to keep smart, educated, motivated immigrants here – we want them contributing to our society and to our economy.

3) Stop putting up barriers to investment and making it hard for start-up companies to operate. My partner Jason Mendelson wrote about Senator Dodd’s recently proposed changes to the accredited investor regulations, the result of which would be significantly increased costs for companies raising money. This will surely result in fewer companies being able to obtain financing (and as far as I can tell provide no meaningful added investor protections). Fred Wilson wrote about this a few days ago as well. This is bad for investors, bad for companies and bad for the economy.

While we’re talking about administrative and costly burdens, can we please address 409(a)? (here’s a quick explanation of 409(a) for those that want a refresher) As far as I can tell the only ones that benefit from 409(a) are the valuation firms that charge $6k-$8k to provide companies reports that allow them to price the stock options they issue to employees. Collectively, it amounts to a massive tax on private companies – but one where the neither the government, the companies or employees benefit.

4) Stop treating venture capitalists as the enemy. Honestly, we’re really not bad people. And we’re not here to take advantage of the system. Most of us are passionate about entrepreneurship and about helping companies grow and prosper.  We don’t need to be regulated more than we already are (it looks like we’ve avoided this for the moment), we don’t need our taxes raised for the long term work that we do and we definitely need to have some clarity on FAS 157 which is a complete mess at the moment and is at best going to introduce significant incremental costs into the system (which will take time and money away from our investing activities). [note: we have more to say on FAS 157 – look for that in an upcoming post]

This is a cross-post from our Foundry blog entry on our latest investment – in the microblogging company StockTwits. I’ve been working closely with Howard and Soren from the company as well as StockTwits investors Roger Ehrenberg and Tony Conrad as we’ve looked at the investment and worked on the financing. These guys are fantastic! For me it’s the chance to work with this team that’s the most exciting thing about today’s announcement. If you haven’t tried the service I’d encourage you to do so – there are links in the post below to grab the desktop client or directing you to the site. Give it a try and let me know what you think!

Today StockTwits announced (release here) that it had raised a $3m Series B financing led by Foundry Group and returning investor True Ventures. For us, StockTwits represents a unique opportunity to leverage the increasingly active conversation taking place on (and off) the Twitter platform around stocks and markets. We’ve witnessed in other investments the power of 3^rd party networks to drive the scale and reach of new businesses and we believe StockTwits represents a huge opportunity to harness the Twitter community’s ongoing conversation around stocks and investing.
If you’ve ever tagged a tweet with the $ tag or tweeted a stock symbol using that tag you’ve participated in the StockTwits conversation. StockTwits uses the familiar Twitter microblogging format (140 characters) and allows users to seamlessly cross-post from and to their Twitter stream. Users can tag their Twitter posts with the $ tag to be picked up in StockTwits, use the StockTwits web interface or download the StockTwits desktop for even greater functionality (we’d highly recommend the desktop client – you can get it here if you don’t already have it). Below is a screenshot of the desktop client to give you a sense of what’s available. This view can be customized to follow specific tickers or topics as they’re mentioned. You can also see StockTwitsTV on the right half of the desktop – look for more programming as we roll out additional content in the coming months on the StockTwits Network.

But can stock advice really be offered in 140 characters or less? The answer is a resounding yes. There is a large and extremely active conversation taking place in StockTwits (to get a sense of it click over to the StockTwits site and watch the dataflow). And large trading organizations are taking notice. The NASDAQ recently released an iPhone application that features StockTwits data (see the screenshot to the left). Look for other StockTwits integrations to be announced soon as the company uses this new round of funding to accelerate its pace of development as well as its work with partners. You’ll also see the company releasing additional features in its desktop client and on its site as well as rolling out new data features and the ability for users to create custom data feeds from the StockTwits datastore.
Of course great investments require great people. And we couldn’t be more excited about working with StockTwits founders Howard Linzdon (whom we’ve known for years) and Soren Macbeth. We’re joining Roger Ehrenberg of IA Capital Partners and Tony Conrad of True Ventures in this investment – two experienced entrepreneurs and venture capitalists with whom we’re extremely pleased to be teaming up.
Look for more announcements about the company soon.

Online technology magazine Xconomy wrote an article yesterday that focused on the controversy surrounding Boston based Revolutionary Angels – the angel group that is sponsoring a business plan competition in which companies are charged a $4,995 “entry fee” and vie for a $250k investment from the group. I wrote extensively last week about my distaste for the “pay to pitch” practice in general and Revolutionary Angels’ spin on that practice in particular. The Xconomy article picked up that post and used it to effectively represent one side of the story.  They also talked to Chris Hurley, the CEO of Revolutionary Angles, who defended the group and their practices. Clearly this question has struck a chord with VCs, angels and entrepreneurs (it’s worth checking out the comments to my blog, the Xconomy story as well as the original NY Times blog that kicked off this round of discussion) and I thought it was worth addressing Hurley’s views with another post here.

Hurley had a few key responses – let me break them down.

Companies actually get consulting help for their entry fee. Xconomy reports Hurley saying that “Revolutionary Angels panel members are acting as consultants” and that “every startup that enters the competition “gets support and help with their business plan and their strategy.” (a benefit so great that companies should be willing to pay the $4,995 even if there was no chance for a prize, he says). Here Hurley hits on one of my main pet peeves of poorly run angel groups – that they really are just comprised of out of work executives looking for consulting fees. Consulting projects are consulting projects. They should include a clear scope of work, deliverables, project timeframes, etc. To me Hurley’s “we’re really consultants” argument is a poor rationalization. How do you justify charging companies to enter your competition? Talk about all the feedback you give them, of course! You’re a successful business person – just put a dollar value on the few hours you plan to spend with each company and voila! Your “entry fee” is justified! Not so. Business people who are attempting to support their local entrepreneurial ecosystem should be liberal with their time and provide feedback and advice to startups without looking for cash or equity. I do this all the time – and not just with companies that we’re looking to fund (although everyone who gets in to pitch a VC gets feedback in my experience) but with people in the community who seek me out, with companies that we’ve turned down but who stay in regular contact as well as with people whom I’ve never met before but who take the time to email me and ask a question. All of my partners do the same, as do most of the VCs I know and, importantly, most of the successful executives I know. While not everyone can respond to every request (nor will they all have the background to be relevant) but the kind of “support” that Hurley refers to is given out for free thousands of times a day. To be clear, I’m not saying that there isn’t a role for paid consulting work or equity compensated advisers – just that there’s a difference between a longer term consulting or advisory relationship and “providing feedback.”

Revolutionary Angels offers an above-market equity deal to the winner of their competition. The article paraphrases Hurley as defending the group’s practices because the deal they offer to the winning company is, by venture and angel standards, a really good one: “By funding Revolutionary Angels’ investments from the entry fee pool, he says, the group has the ability to invest in startups that may never provide returns on the scale angel or venture investors usually expect.” Basically the gist of this argument is that because RA suckers companies into funding the actual investment that the group makes (not to mention leaving a large sum left over presumably to cover the group’s fees and expenses on top of the investment) they can offer a really good deal. He’s correct that by national standards the deal that they say they will offer is probably above market (they claim that the winner of the competition will receive $250k in exchange for 10% of their business). But the argument falls short. Scam 100 companies into contributing to your investment pool, pick one to win the lottery and call yourselves the champions of entrepreneurs? And then justify this activity as some kind of community welfare (funding startups that may never have the chance to get funded)? And this may not actually be all that good for the winning company either. While $250k for 10% of your business may sound like a good deal, it may create the start of a cap structure that prevents other investors from wanting to participate (because they’re actually funding the investment themselves) and could just as easily act as a market disruptor rather than a lottery win for the chosen company.

There’s simply too much demand for quality feedback. Revolutionary Angels is filling a key gap in the market. “These investors don’t understand the scale of the demand, Hurley says. “If people think everybody has access to experienced entrepreneurs, that’s just not true,” he says. “In my talking to entrepreneurs, not enough of them are getting access to the people who have been there and done that. There is a much larger pool of people who aren’t being served.”” Not surprisingly, I don’t buy this argument either (and think it argues that Revolutionary Angles is very clearly preying on those that just don’t understand the entrepreneurial economy). While I agree that there is a large demand for feedback and agree that not all entrepreneurs are receiving the feedback they’d like I don’t think this is a supply and demand issue – it’s a connection issue. Too many entrepreneurs don’t know where to turn (and thus are susceptible to the kind of scheme that Revolutionary Angels has set up). I want to be careful about placing too much blame on the victim here, but I do believe that entrepreneurs sometimes don’t think broadly or creatively enough about how to expand their networks and gain access to people who can give them advice and feedback. This is really the topic of another post (which I’ll try to get up this week). In the meantime Micah has a few ideas on his blog here.

Fundamentally my issue with Revolutionary Angels and groups like them is that I don’t believe that they put the entrepreneur first (which I believe is how the dynamic should work). Instead they ride the backs of entrepreneurs to fund their “investment” and take advantage of their respective position in a market in which both sides don’t have the same access to information. The CEO’s of the companies that participate simply don’t know where else to turn – Hurley and the Revolutionary Angels are taking advantage of this. And hiding under the guise of a “business plan competition” rather than just hanging their hat out as business consultants suggests that they’re simply preying on the aspirational dreams of entrepreneurs.

The NY Times is reporting today on the question of entrepreneurs paying to pitch their companies to prospective investors – “Should Start-Ups Pay to Pitch?”. Highlighted in the piece is a Boston-based group – Revolutionary Angels – that charges companies $4,995 to enter their “business plan competition” (the winner of the competition receives an investment from the group). To be clear on my view of this:

THERE IS NO CIRCUMSTANCE IN WHICH ENTREPRENEURS SHOULD PAY TO PITCH THEIR BUSINESS TO PROSPECTIVE INVESTORS.

PERIOD. END OF STORY.

This kind of activity makes me absolutely sick. And the fact that Revolutionary Angels calls their scheme a “business plan competition” is reprehensible.

In the Revolutionary Angels setup they are asking 100 companies to each pay $4,995 to pitch to their group, after which they’ll select one to invest in (with the proceeds from the losers) with a runner up company getting the consolation prize of a smaller investment (and Revolutionary Angels pocketing the remainder of the cash? – it’s not completely clear). You can see who is involved in the group here. The reason there’s no actual venture capitalists on the list is because no respectable venture capitalist would ever be involved with such an underhanded hustle. I really don’t understand what would drive an entrepreneur to participate in such a scheme nor how the people associated with Revolutionary Angels can justify their involvement or the fees they are charging entrepreneurs. Because they give feedback on the plans? Because participating in a competition gives entrepreneurs access to the Revolutionary Angels? Pathetic. And the fact that more than 100% of their investment dollars come from the entrepreneurs they are supposedly helping out makes it even more pathetic.

My view of angel groups is simple. If you’re not rich enough to screen your own potential investments then you’re not rich enough to be an angel investor.

I’ve given the “don’t pay to pitch” advice to countless entrepreneurs over the years, but felt it was time to come out publically and take a stand on this. Kudos to Jason Calacanis for leading the charge against such practices. We need more credible investors to back him up (see Fred Wilson’s thoughts on the subject here; Brad Feld’s here for example).

And if you’re looking for “access”, try emailing me, signing up for my community hours (or my partners Brad or Jason’s community hours, or any number of other credible VCs that are increasingly more open with their time).

And if you’re thinking of entering the Revolutionary Angels business plan competition, save your money.

So it’s really come down to this? News Corp is thinking about inking a deal with Microsoft/Bing whereby not only will Bing get access to News Corp data (WSJ, Fox, etc.) but they’ll also prevent Google from indexing their sites. This sounds like a lose/lose/lose/lose proposition.

News Corp loses – fewer page views, less revenue for their online content, and to the 90% of Internet users who use Google for search their properties will effectively stop existing.

Google loses (sort of) to the extent people miss the data (not sure what will happen when you force a search on Google to a News Corp domain – will they simply return no results?).

The rest of us lose because universal search will cease to be universal (and if MSFT is willing to pay for an exclusive with News Corp others will follow).

And Microsoft likely loses as well by paying for content that they likely can’t monetize and pissing a bunch of people off in the process.

I’ve been playing around with Bing a bunch lately and actually really like it. But proprietary search arrangements isn’t the way to gain market share – better search is!

In the latest lob into the morass that has become somewhat of a sport amongst journalists and those that follow the venture capital industry, Carl Schramm and Harold Bradley write in BusinessWeek about “How Venture Capital Lost Its Way”. The evidence? Venture capital funding is down – from an “astonishing” 1.1% of US GDP in 2000; and in the 3rd quarter of 2009 down 33% from the same period a year earlier. To add to Schramm and Bradley’s collective horror, “two areas crucial to American progress cry out for capital-intensive investment: clean energy technology and biotech. And the VC industry isn’t delivering it. (Info tech, which by now requires few capital investments, still accounts for the lion’s share of those shrinking VC investments)” 

While I strongly believe that the venture capital model is (and should be) changing, this kind of journalism, drawn on incorrect interpretations of the data serve only to sensationalize and add little to the real debate on venture capital. It poorly sets up the 2nd half of their article that talks about the VC funding model (more on that in a post later this week). Here’s my view:

Is there a problem with the current market for VC funding?

Comparing anything about Venture Capital to the markets of 1999 and 2000 is a fools errand. Without question, the venture markets (and the markets in general) were completely overblown in that time period. There were too many venture firms and too many companies getting funded. While this might have been good for some VCs that managed to cash in on the bubble (I, alas, was not one of them – my venture career started in the very dark days of late 2001) it was clearly bad for the industry as a whole (none of the participants benefit when an industry goes through a bubble and burst cycle such as the one that venture capital and technology did during that time period – and we’ve been struggling to “normalize” the industry ever since). I’d argue forcefully that we’re still searching for the optimum level of venture capital funding. Schramm and Bradley seem to be relying on a “less = bad” analysis of the funding markets and are completely ignoring the question of equilibrium (whether we’ve reached one, what the right level of funding should be, etc). Markets function optimally when there is balance and while this balance in private markets such as venture can be illusive, we’re much closer to that balance now than we have been at any other time that I’ve been a venture capitalist (and certainly much more so than in 2000).

Are VCs falling short in their funding of CleanTech and Life Science and favoring IT?

Schramm and Bradley site the PriceWaterhouseCoopers study on 3rd Quarter 2009 investing to back up their assertions. Yet the study contains data that completely contradict a number of their key points. In fact event the title of the PWC press release that announced the 3rd Quarter funding results contradicts the conclusions that Schramm and Bradley draw from it: “Venture capital investment increase in Q3 2009 driven by clean technology sector, according to the MoneyTree Report” (I’ve added the italics). The very first paragraph of the release states in part: “The increase in dollars invested was driven by several large rounds in the Clean Technology sector, one of which is the ninth largest deal since 1995.  The Life Sciences sector (biotechnology and medical device industries combined) also had a solid quarter relative to other industry sectors, leaving Software as the third highest investment sector, a notable decline in industry ranking.“ I won’t quote it here to limit the length of this post, but if you click over to the press release take a look at the 3rd paragraph which is entirely focused on the shift of capital from IT to CleanTech and Life Sciences.  Also missing from the Schramm and Bradley article was that the 3rd Quarter funding totals were actually up from the 2nd Quarter (their article implies that venture funding is falling off a cliff – clearly not the case).

Is there still a market for IT investing?

As an IT investor, of course my answer is going to be a resounding “yes"!” But don’t take my word for it – just look around you at the amazing pace of continued innovation in technology and the Internet. From new ways to communicate (Twitter, Facebook), to new ways to advertise your business (Google, AdMob, etc, etc) to new ways to play games with your friends (Zynga), there’s still plenty of innovation going on in information technology.

What’s sad is that there’s a real debate to be had on the future of venture capital and the changing VC model (see my partner Jason’s take on that subject here). If we drop the pretence that “VC is Dead” perhaps we’ll finally get to the interesting part of the conversation…

Shout-out to Sequoia for featuring Omar Hamoui on their home page today (he’s the CEO of AdMob which was acquired by Google today for $750M). Well done!

I’ve generally avoided political issues on this blog, but this isn’t something I can keep my mouth shut on.

Yesterday Meb Keflezighi became the first American to win the New York City Marathon in 27 years. Born in Eritrea on the east coast of Africa, Keflezighi moved to the US when he as 12 (more than 20 years ago), is an American citizen and has raced for the US Olympic team.

Still, there are some who are calling his achievement diminished because he’s not “technically” an American by virtue of having been born outside of the United States – chief among them Darren Rovell of CNBC.  Rovell writes:

It’s a stunning headline: American Wins Men’s NYC Marathon For First Time Since ’82. Unfortunately, it’s not as good as it sounds. Meb Keflezighi, who won yesterday in New York, is technically American by virtue of him becoming a citizen in 1998, but the fact that he’s not American-born takes away from the magnitude of the achievement the headline implies.

This is appalling (not to mention racist). I know I’m particularly sensitive to this kind of bigotry because two of our three children were born and lived for a time outside of the United States (not that far from where Keflezighi was). They are not any less American than our oldest daughter who was born in Colorado. It’s amazing (and sad) to me that people really think this way. By Rovell’s definition many of America’s Founding Fathers weren’t “technically American”.

This is  a nation that was founded by immigrants and built on the promise of equal opportunity for all those that come to this country. The vast majority of Americans are only a few generations from their immigrant pasts.  It’s unbelievably disturbing that we’re losing sight of what’s made our country great. From the basics of our immigration policy to how we handle foreign-born workers looking for jobs in America we’re increasingly becoming a nation of xenophobes.

Darren Rovell probably doesn’t think of himself as a racist or a xenophobe – and therein lies a large part of the problem.