Monday, October 29, 2012

Transcending Small Business Obstacles: An interview with Arturo Noriega

Arturo Noriega is an entrepreneur, small business expert and founder of Centro Community Partners.  His career includes work as a manager of advisory services at Ernst & Young, consulting for Deloitte and Aon, and business development at Barclays Global Investors.  

I first met Arturo through my work as an MBA Advisor at Centro.  I thought he would be a great resource, as someone who works every day to help small business owners and entrepreneurs overcome obstacles.  Here's the transcript from an interview I did with him a while back: 

LBBB: When professional investors assess the viability of a startup, they often examine three core ingredients: the Market, the Team, and the Technology/Innovation...not necessarily in that order.  Which of these core elements do you find to be the most important, and why?

AN: Most important to success?  I think there’s a pecking order from most to least, the most being the people.  Regardless of how good your tech is, unless you have a great team, you don’t really have anything.  Anything good starts with good people.  But you have to have a complimentary set of skills, meaning that everyone has a different sweet spot that contributes to the overall success of the company.

The next I’d say is market, the unmet need.  Then it would be the innovation or advantage that you’re offering but only so far as it responds to the need of the market.  And everything comes back to the team, the leadership.  You need that vision – leadership – that’s able to respond quickly to market demands, and really leverage whatever tech is being created here.

LBBB: What would you say is the greatest obstacle that small businesses tend to face?

AN: The greatest obstacles?  Time and money – the two things that kill any startup, especially in tech.   Lack of capital, running of money, underestimating capital requirements for carrying out operations…If the company does run out of capital it obviously can’t meet requirements of the market.  Also time, time for setting up and carrying out processes.  In one of the ventures I’ve been working on, everything has proven to cost twice as much as I thought and taken twice as long.  See, no one ever forecasts how much money and time it really takes.  Usually, take your forecasts and multiply by two.  That 2x multiple – most startups don’t see that coming and it’s really a killer.

LBBB: What about the flipside of that coin?  What would you say is the greatest asset that small business have but often overlook or fail to take advantage of?

AN: Ideas that are generated by the team because no one asks the question – in other words, the unidentified opportunities.  In startups, people are so focused on specific things and tasks that they don’t fully explore ideas or opportunities, don’t really look at the big picture.

Also, communication.  Because people are not available, they’re working virtually, or working on different projects, they don’t get that interaction and cooperation that stimulates the process, asking those what-ifs.  Human capital is the greatest asset – the potential is not fully recognized.  Leaders don’t even ask “what do you think?”

Another asset that’s overlooked is networks.  People feel they have a limited amount of professional advice to navigate waters of startup when really there are unlimited resources outside of the organization to help the startup succeed.

LBBB: We had a guest speaker talk to our class about the importance of space.  How important do you think brick and mortar is to a small business? What kind of pitfalls have you experienced that you would advise readers to avoid?

AN: Getting an office is important…if your budget allows it.  Many people now meet virtually or work from home, maybe even meet up in a cafĂ© somewhere to get certain things done, though that’s not always conducive to work.  The key thing is making sure you have appropriate office space.  You know what I mean?  Many startups get office space – because they don’t know better – and it’s just  inappropriate for their level of growth.  It’s either too expensive or too small, but either way it doesn’t allow for organic growth.  The trade off here is productivity, right?  That’s the whole point of office space, to make your company more productive.  You also want a physical address and that sense of legitimacy, that you’re a legitimate business in the eyes of your customers and the public.

LBBB: Besides the obvious issues of liability and regulations, what is it about HR and staffing that proves so difficult for small businesses? 

AN: You know that’s a really good question…(laughs) and I haven’t really come up with a solution yet.  HR is ongoing challenge, not just for startups.  The big thing I think is that vetting process – you want someone to be able to walk right in and be able to do [the job].  But that comes with a premium beyond the reach of small businesses.  What happens is that as they’re forecasting growth and allocating capital to staff, that’s done really poorly.  Roles and responsibilities are not well defined because people do multiple things.  In order to manage that , managers must really be sure to create detailed job descriptions.  You might realize you can split work between part-time workers instead of getting one fulltime professional.  I’ve done that and that works great. 

What happens, too – you don’t know how committed they are to the mission.  Motivation is so key. It is rocky.  You can navigate and manage that situation but until you measure performance… Another solution is to give up more equity to attract better people.  That way they have a vested interest in the success of the organization.  Motivation becomes the big issue and keeping people committed to the mission. 

Friday, October 12, 2012

5 Things You Should Know About Crowdfunding and the JOBS Act

Chances are you're aware of crowdfunding.  But what is all the fuss about?  

The JOBS Act is a controversial, multifaceted piece of legislation, shrouded in hype.  Proponents promise that it will be game-changing for startups and small businesses, while detractors dismiss it as a Trojan horse of deregulation.  So what does it all mean?  Will the JOBS Act really change the world?  It is really a license to print money?   The following post aims to shed some light on the topic of crowdfunding. 


Back on April 5, 2012 President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act (sorry, no relation to the late Steve), after being passed by an uncharacteristically bipartisan Congress.  The JOBS Act aims to encourage funding for small businesses and startups by easing the regulatory burdens on smaller companies, and permitting a form of fundraising known as crowdfunding, made possible by online crowdfunding platforms (CFPs) like Kickstarter and RocketHub.  The underlying premise is that small companies should be able to access funds from small investors without having to jump through the same hoops as giant corporations like Apple or Google. 

To learn more about the history of the JOBS Act, take a look at this nifty infographic here.

Okay, without further ado, here’s my list of the top five things to keep in mind about crowdfunding under the JOBS Act:

1.       The Crowdfunding Gold Rush Has Only Just Begun

The proof of concept for crowdfunding was established with the help of microlending platforms like Kiva, which connects people with money to impoverished entrepreneurs who lack access to traditional financial resources.  The basic premise behind crowdfunding platforms, or CFPs, is not totally dissimilar.

Like me, you’re probably most familiar with Kickstarter, the CFP launched in 2009 that has emerged as the brand name in the crowdfunding arena.  Kickstarter is a funding platform for creative projects supported by fans in return for rewards.  I was surprised to learn that a competitor, IndieGoGo, had actually launched in 2008, a year earlier than Kickstarter. 

With just a cursory web search, I found over 20 different CFPs – I’m sure there are many more out there, and even more in the pipeline. 

2.       The JOBS Act Really Does Change the Status Quo of Fundraising

As Morrison Foerster researchers explain, “[c]rowdfunding can be used to accomplish a variety of goals (e.g., raising money for a charity or other causes of interest to the participants), but when the goal is commercial in nature and there is an opportunity for crowdfunding participants to  share in the venture’s profits, federal and state securities laws will likely apply.”

The JOBS Act eases the longstanding prohibition against ‘general solicitation and general advertising’ in securities offerings.  The law will now provide a special exemption under the Securities Act for ‘crowdfunding’ offerings.  The reforms will also enable both accredited and non-accredited investors alike to participate, albeit with separate rules and thresholds.    

Learn more about some of the law's key parameters here.

3.       The Type of Funding Is Key

While the coverage of crowdfunding tends to lump all CFPs together, funding can take a variety of forms, each with different implications.  Platforms like Kickstarter, RocketHub, IndieGoGo and Go-FundMe use a model wherein project creators raise contributions from funders –- in exchange for rewards, rather than an ownership stake in the project.  These rewards can take many forms –- copies of products, mementos, experiences -- pretty much anything that has value and satisfies backers.

One idea underlying the rewards model is that the funds are considered business income, rather than securities (like common stock), which would fall under the auspices of the SEC.  While Kickstarter focuses on creative projects and has publicly stated that it does not intend to offer equity, others like RocketHub and IndieGoGo may attempt to transition to an equity model, requiring strict adherence to the SEC's forthcoming crowdfunding rules.

It appears that the JOBS Act -- and its pending SEC regulations -- are primarily concerned with equity and lending-based  crowdfunding platforms, which more closely resemble traditional securities offerings.

Graphic courtesy of Forbes 
Forty-nine percent of the total $585 million in funds raised by crowdfunding platforms has come through donation-based platforms.   Meanwhile, 18% has come from equity and 22% from lending-based models, which remain highly constrained until the SEC sorts out its approach to implementation.  Surprisingly, only 11% has come from rewards-based platforms like Kickstarter. 

4.       The SEC Has Until 2014 to Release Its Implementing Regulations

The SEC has until 2014 to create and implement its regulations, which will provide the specific rules of conduct permitted under the JOBS Act.  There have been a few previews of what’s to come; the SEC announced back in August that it would create distinct classes of crowdfunding investors, with separate rules for each class.  Until the SEC regs are released, pure equity platforms like Crowdfunder are stuck in a sort of legal limbo.  It will be interesting to see the SEC's approach, considering their justifiable concerns about the potential for fraud and abuse -- not to mention their naturally self-defensive resistance to any form of deregulation.  

5.       Crowdfunding Is Not Free Money

Crowdfunding has become increasingly popular with contributors and fundraisers alike.  As an example of crowdfunding's rapid growth in popularity, Venture Beat recently did a story on so-called Kickstarter addicts.  

“What you absolutely cannot do,” Forbes contributor Suw Charman-Anderson warns CFP users, “is treat crowdfunded money as some sort of magic bonanza that is exempt from normal business rules. It’s not.”

Despite its reputation as free – or at least cheap – money, the reality is that crowdfunding is NOT a tax-free windfall.  Reward-based crowdfunding proceeds are considered income by the IRS, just like any other sales income.  That means that companies raising funds will most likely face some sort of tax liability, especially for wildly successful projects. 

Many users also fail to read the fine print when it comes to the fees charged by the CFPs.  Kickstarter, for example, charges a 5% commission on all funds raised (once the target threshold has been reached).  On top of that, there’s a 3-5% fee from Amazon Payments for managing the transaction. 

The bottom line is that businesses and individuals raising money through CFPs need to factor in the costs and expenses, just like with any other source of capital. Crowdfunding may ultimately prove to be an attractive alternative for companies seeking to raise relatively modest amounts of capital from a large number of investors.  That said, companies will need to weigh the costs and risks that arise, including the tax implications and reporting requirements contemplated by the legislation.