Bleeding Edge

Dr Pano Kroko has written the book titled: “The Tao of Successful StartUps” (c)

This book is really the definitive guide to the Successful StartUp, and I suggest you read at least the bellow excerpt.

Because the book centers around the kernel of truth which is the Art and Science of Innovation, Entrepreneurship and Angel Investing. And the simplified Mastery of the skills needed to secure funding and produce a product on the way to the Method… of doing this.

It’s like the previous book of mine called “Zen and the Art of Business Building” but written now with twenty years of Angel investing and company building experience behind me.

This write-up bellow is an excerpt from the Book: “The Tao Of The Successful StartUp”

The Art and Science of Innovation, Entrepreneurship and Angel Investing is an evolving progress all the way since the dawn of History and the marriage of capital with labour and ideas to create a combination of progress and history.

Much later the first companies came into view.

And along with maritime commerce and trade we also created the venture industry to finance the commercial endeavours of captains and traders alike.

However the Company formation act of 1600 in England gave a boost to the Equity sharing of companies.

A bit of History here: The word “corporation” derives from corpus, the Latin word for body, or a “body of people.” By the time of Justinian (reigned 527–565), Roman Law recognized a range of corporate entities under the names universitas, corpus or collegium. These included the state itself (the populus Romanus), municipalities, and such private associations as sponsors of a religious cult, burial clubs, political groups, and guilds of craftsmen or traders. Such bodies commonly had the right to own property and make contracts, to receive gifts and legacies, to sue and be sued, and, in general, to perform legal acts through representatives. Private associations were granted designated privileges and liberties by the emperor.

Entities which carried on business and were the subjects of legal rights were found in ancient Rome, and the Maurya Empire in ancient India. In medieval Europe, churches became incorporated, as did local governments, such as the Pope and the City of London Corporation. The point was that the incorporation would survive longer than the lives of any particular member, existing in perpetuity. The alleged oldest commercial corporation in the world, the Stora Kopparberg mining community in Falun, Sweden, obtained a charter from King Magnus Eriksson in 1347.

In medieval times traders would do business through common law constructs, such as partnerships. Whenever people acted together with a view to profit, the law deemed that a partnership arose. Early guilds and livery companies were also often involved in the regulation of competition between traders.
Many European nations chartered corporations to lead colonial ventures, such as the Dutch East India Company or the Hudson’s Bay Company. These chartered companies became the progenitors of the modern corporation. Acting under a charter sanctioned by the Dutch government, the Dutch East India Company defeated Portuguese forces and established itself in the Moluccan Islands in order to profit from the European demand for spices. Investors in the VOC were issued paper certificates as proof of share ownership, and were able to trade their shares on the original Amsterdam stock exchange. Shareholders are also explicitly granted limited liability in the company’s royal charter.

In England, the government created corporations under a Royal Charter or an Act of Parliament with the grant of a monopoly over a specified territory. The best known example, established in 1600, was the East India Company of London. Queen Elizabeth I granted it the exclusive right to trade with all countries to the east of the Cape of Good Hope. Some corporations at this time would act on the government’s behalf, bringing in revenue from its exploits abroad. Subsequently the Company became increasingly integrated with English and later British military and colonial policy, just as most corporations were essentially dependent on the Royal Navy’s ability to control trade routes. Many European nations chartered corporations to lead colonial ventures, such as the Dutch East India Company or the Hudson’s Bay Company. These chartered companies became the progenitors of the modern corporation. Acting under a charter sanctioned by the Dutch government, the Dutch East India Company defeated Portuguese forces and established itself in the Moluccan Islands in order to profit from the European demand for spices. Investors in the VOC were issued paper certificates as proof of share ownership, and were able to trade their shares on the original Amsterdam stock exchange. Shareholders are also explicitly granted limited liability in the company’s royal charter as is the case with this tock certificate bellow, representing an 1/8 share of the Stora Kopparberg mine, dated June 16, 1288, and issued in Falun Sweden. This exploratory mining enterprise was chartered as a stock corporation and is allegedly the oldest commercial corporation in the world, the Stora Kopparberg mining community in Falun, Sweden, having obtained an exclusive charter from King Magnus Eriksson in 1347.

That is a full 59 year after it was originally formed and functioned successfully and was fully funded, as an Angel Investor circle of friends and Entrepreneurs. Incidentally it was quite profitable, well before the King cut into the action… like most Vulture Capitalists like to do.

If you are an Angel investor you already know that this is a long term game and that the principles of value investing always apply. And that You will get diluted when the Vultures come along. So if you plan on becoming an Angel investor — please get armed with plenty of patience and perseverance…

And speaking of all these old corporations some of which are till with us today — they all created jobs, opportunity, and opened up new markets, thereby creating important wealth over a very long time. The East India Trading company till exits today as do scores of these companies operating around the world. In Japan many small and medium enterprises are a Thousand year old or more. But it took and Act of courage for the Administration to draft a law that helps usher-in a New Era of company creation befitting the modern age and the economics of distributed income and distributed wealth creation.

Thus today through enlightened Public Policy — we have another such momentous effect for propagation of wealth, job creation, and the opening-up of new markets.

This comes through the further Democratization of the Equity sharing and Investment in early stage StartUp enterprises by the newly applied JOBS Act for Start Ups and Angel Investors that was passed by the US Congress in 2013.

This is because the JOBS act has finally demarcated the field and allowed all of the people to participate in the early stage finance. It also created a clear distinction between Angels and Vultures. It’s no longer necessary for Colombo to get the permission of King and Queen to launch his StartUp expedition to find the New World. He does not need to get the Venture capital from Isabella and Philip to get his boat in the water. Now he can just run around the taverns and the pubs of Barcelona and get enough support form the various merchants, pub owners, sailors’ sweat equity, and middle class provisions to travel safely going always “West”

So today the JOBS Act, of America, affords all of you to participate in these journeys of Discovery undertaken by the contemporary Christopher Columbus in search of a New passage to seek the treasures of the East or find a new market, and reach a new West Indies.
You too can participate in his adventure today… through the provisions of the SEC that applied the JOBS Act in the world of StartUps and Angel investing.

And it is a good thing because the Crown of Spain, and Isabella were the prototypical Venture Capitalists, or as we politely call them — Vulture Capitalists.

And these Vulture Capitalists are todays’ Venture Capitalists who have enjoyed unchallenged access to new Start ups for far too long and without accountability much like the Royals of Spain have had for the last few centuries of their Crown. And look where it has gotten them. Scandal, upon scandal, upon scandal.

Even Christopher Columbus had to go to the Spanish courts to seek justice and some measure of his treasure that was greedily confiscated by the Crown without giving him his fair due.

Sounds familiar?

Similarly today’s Royals in America, the vaunted Venture Capitalists, had reserved the field of new company creation exclusively to themselves. And they kept it murky and unaccountable, totally unyielding to the obvious needs and pleas for help of the Idea creators and of the Entrepreneurs. The VC members of this “imperial court” had always taken very much like the Crown of Spain — the lion’s share of new enterprises, Greed prolongs indigestion, and the Vultures pretty much reserved only for themselves the “Discovery Game” for far too long — thereby almost killing the “golden goose” and driving Innovation abroad and in competing shores.

And even though many of the Vulture Culture adherents, are majorly incompetent and greedy beyond reason, as in most cases as the founders of Startup companies will attest — they managed to produce some incredible returns over the last quarter century. Monopolie tend to do that right before they sink the whole fleet. Think of Spain and Isabella’s wasteful empire and their creation of the Holy Inquisition, along with the rather expensive folly their fateful Armada, proved to be.

And today’s modern VCs have had the StartUp scene of America to themselves exclusively for the past half century — while squirreling away their vast profits only to built fresh “Armadas” with many billion dollars valuations and to keep pumping in them billions as pre-IPO startups that are sure to go belly up unless a greater fool is found till the time that the Tulip mania is exposed as what it truly is. A vast mental illness.

And they have been building this culture of funding “Unicorns” all the way to today’s crescendo of expensive “Armada” built up. A half century of effort is going to go up in smoke as another large scale Market correction is in the offing.

Because of the obvious and continuous folly that will lead to another Tulip market crash — I say that 50 years is a very long time to hoard a whole market to yourself and to prevent any competition by using the SEC to stop new entrants in the game…

Capitalism is all about competition, because monopolies and oligopolies ruin markets and cause stagnation. And on top of it, oligarchies cause a market to crash sooner rather than later, due to lack of the collective wisdom that crowdsourcing always brings. And much like the Royal families of Europe intermarrying themselves the genetic pool of the vulture oligarchy suffers too.

Competition is GOOD because without any competition you tend to become insular and introverted.

And as the tulip mania proved with today’s Uber valuations of Mobile Apps, it gets progressively worse…

When you reach the dizzying heights of Uber Tulip valuations of any market, you inevitably assume a certain degree of exceptionalism.

You avoid paying taxes, you don’t behave as a Good Citizen, and you become imperious in relation to the working stiffs — that are the real entrepreneurs building the Great Companies and producing the awesome products we all dearly love.

This lack of competition has not been a good thing for the Vulture Capitalists, because it has made them feel like they are some sort of high priests in the cult of Mamon.

And along the way it has made them like their brethren, fat, arrogant, and lazy. They became like the Banker-Wankers who are afraid to cross the road and are terribly risk adverse. Or like Romney’s mittens, who wouldn’t consider haring the car space with the family dog and instead strapped the hapless creature on the roof of the car, like dead game, and travelled that way all the way to Canada…

So the Administration wisely, has managed to introduce a Good legal frame work to begin to change things right about now.

When we started looking at the problem as a simple effort to find a way to level the playing field — between the various funder and backers of startUps — nothing came out of it.

Mainly because people are adverse to change.

But when we started looking at the problem as a way to create jobs, and new industries, our eye opened up big.

The potential was extraordinary for us to create whole new sectors of the economy with minimal effort and little cash. And incidentally that little cash would come from the most underserved and unrecognized community of funders — the Angels.

We came to see the Angels as the engines of growth because they foster change by taking simple risks.

The Angel customarily take the kind of risks that VCs never bother to take, but are happy to ride on the wings of the Angels, as “Johnnies-come-lately”

We thought long and hard, about what distinguishes the successful early stage StartUp companies that made it — from those that didn’t. When you quantify the big things and look at the statistical inferences from the numbers representing the whole sector of the startUp community, it all becomes very clear. Because it always came to companies dying while attempting to cross the valley of Death. That valley s the dearth of finance between the early stage bootstrapping and friends and family StartUp equity and the later stage finance that usually comes to companies and founders themselves offering themselves up as “food” to the Vultures.

And as it turns out most founders are not willing to prostitute themselves but in Think-Tanks — we came to see that their options for getting enough “water” to survive and be able to cross the valley of Death were very limited.

Thus came the formation of the JOBS Act by the Executive and by the White House corps of economists, as the only way to create a Darwinian green and level playing field where the best ideas coupled with the best capital resources, could win.

And we decided that the best way was to convene all the resources and come to the rescue of the early stage Company Founders. Because we reason that if the funding necessary to cross the valley of death was agnostic and tolerant of high risk — then many more people would engage in the extreme sport of early stage company formation and finance.

And that is why we chose the One Million capital mark as the high-water-mark, in order to allow the companies to flourish up to the point that they will be able to reach the debt or equity markets. Of course it appears to be little capital when you look at the burn rates for company scale and growth, but with most Startups this is enough to get them through to the other side.

Because if a company having relied on Angels manages to get to the stage of having viable products and services on their own — they can seek follow on investment from the Vultures or from the Banks and Finance institutions, as well as from the Investment Banking community and the Equity Markets themselves.

I personally lobbied for this change, since we presented it as the job of the Angels to get the early stage startUp companies off the ground.

So far thing have worked well enough, since the US Congress passed the bill labeled as the popular and bipartisan “Jumpstart Our Business Startups” (JOBS) Act.
On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law by President Barack Obama. The Act requires the SEC to write rules and issue studies on capital formation, disclosure and registration requirements.

“Cost-effective access to capital for companies of all sizes plays a critical role in our national economy, and companies seeking access to capital should not be hindered by unnecessary or overly burdensome regulations. We look forward to hearing the public’s views as we write rules that both facilitate capital formation and promote investor protection.” –President Barack Obama

In the last two years since the beginning of the implementation of the JOBS Act — the whole experiment, was met with negative expectations of imminent and fundamental changes to the financing environment for early-stage businesses, mainly spoken by the VC community and the Banks fearful of losing their Monopoly status…

This blunt sentiment was mainly propagated in the community of StartUp Founders through fear and skepticism shared by the “Masters of the Universe” — the Vulture Capitalists.

But this “allergic reaction” to the JOBS Act and the Angel Funders and Crowdfunding developments came to life only because they were afraid of having to start working for a living again, and as a reaction to Obamacare medicine provisioning for the broken system of the Early & Seed Stage StartUp Finance.

But those of us, who saw the JOBS Act as a Great & Positive Game Changer, focused on the JOBS Act Angel Funding and Crowdfunding provisions of the Law for the benefit of the StartUps.

Specifically, Title III amends existing law to exempt certain crowdfunding activities—that is, the use of internet and social media to raise relatively small individual investments from a large number of investors—from registration with the U.S. Securities and Exchange Commission (SEC). While these provisions potentially create a much larger pool of startup investors, Title III also significantly restricts the scope of lawful crowdfunding and establishes new disclosure and other compliance requirements for crowdfunding issuers and intermediaries.

Notably, Title III:

• Limits the total amount raised via crowdfunding to $1 million per issuer, per year;

• Limits the total amount sold to any individual investor to a percentage of the investor’s net worth or annual income (for example, an investor with an annual income of $50,000 and a net worth of $100,000 may only be issued $5,000 worth of securities during any 12-month period);

• Requires that crowdfunding transactions be conducted through a qualified broker or funding portal that complies with new disclosure, investor education, anti-fraud and privacy regulations; and

• Requires crowdfunding issuers to disclose detailed information about their finances, operations and uses of capital.

All in all the new JOBS Act rule democratize the process of company creation and in the long term this Policy Innovation will have the same effect that the first multishareholder company charter had back in the days of the East Indian Company. In a word it will all be “smashing” = wonderful and monumental.

It is important to note that the registration exemption created by Title III takes effect only upon the SEC’s issuance of definitive crowdfunding regulations and the State regulations for Angel funding are still guided also by State regulations to limit who can qualify for the risk of early stage StartUp company finance.

So as an Angel it is vitally important to educate yourself about the rules and procedures and see that you observe the limitations of the laws and SEC as well as State rules & regulations — as you play this fun game of ANGEL Capital Investing.

Since the JOBS Act and the SEC issued their guidelines based on these new rules, crowdfunding from the Angels who are part of the general public became totally legal. Of course startups are already using online networks and resources to raise capital but are now also well integrated with their IP. The SEC also sanctioned the business models of the two main online crowdfunding platforms, and by inference all others. The SEC ruling that the companies’ targeted crowdfunding activities comply with existing securities laws helps all Angels and their mini networks blossom.

So today these Angel crowdfunding platforms, which pool money in investment funds, which in turn invest in startups, are only open to so-called “accredited investors,” or those individuals that either have: (a) a net worth of at least $1 million or (b) consistent annual income of at least $200,000 (individual) or $300,000 (joint). Such accredited investor or Regulation D crowdfunding (that is, the existing SEC rule establishing private placement exemptions) does not rely on the JOBS Act exemptions and, therefore, avoids the requirements and limitations listed above. In addition, the SEC’s recent elimination of the longstanding ban on general solicitation or advertising for securities (a less-publicized JOBS Act provision) may allow these platforms to significantly expand their operations by targeting the approximately 7.5 million accredited investors in the United States who do not currently participate in private placements.

The SEC adopted the rules implementing Title III of the JOBS Act, and now startups seeking crowdfunded capital have the option to seek funds from the general public and/or, as they would have prior to the JOBS Act, solicit investment from high-income or high-net-worth individuals. The definition of “General Public” is based on the State Regs and so is the final definition of accredited investors.

In Washington State where We have set up our Angel Crowdfunded Capital Fund, the startups now have many options. They can get funding even from people who have resources and assets and disposable income and yet still are not up to the point of being accredited investors. This way many young people can get in this long term value investment game and support their local and home grown Science and Tech startUps. And so can your Mom & Pop or your uncle Joe whose great idea never made it to market because he couldn’t raise money from the VCs. On and on and on we have many more instruments like covered debt and convertible securities and equity sharing pools to help StartUps blossom today.

Here bellow is a bond issued by the Dutch East India Company, dating from 1623, for the amount of 2,400 florins:

And much like the Dutch learned the hard way through their Tulip mania and the resultant crash that redistributed the wealth of all the major Vulture Capitalists of their era, we have to be aware of the dangers and the risks involved and weigh those factor carefully and responsibly. Investing in early stage startups is like flying off the mountains with a para-foil strapped on your back — hoping and praying that the winds will not change and you’ll fly off the gravity pull instead of slamming back down into the mountain.

Still both Angel funders and StartUp Founders, will have to weigh the benefits of a greatly expanded pool of investors against the resources they have. Because the required paperwork in order to comply with the new JOBS Act reporting requirements is not insignificant. These reporting requirements are extensive and ongoing, and any misstatement or omission, even if there was no intent by the issuer to mislead investors, will expose the company to liabilities, and “Blue Sky” rules violations, similar to those associated with full-fledged SEC-registered offerings.

Angels are generally not well-advised and neither are lawyered-up fully. So it helps to combine their strengths, agility, and speed of writing checks, with the due diligence and legal observance of all the rules and regs, in order to effect a happy marriage between the Angel Funders and the Start Up Founders for the long term.

This is the ability of the Angel Fund to deliver and that is why we set up the Angel Capital Fund in WA state in order that startup Angels don’t have to spend significant time as well as incur expensive legal and accounting resources, but to pool their talent and money together to make more bang for their buck.

Similarly the startUp companies have expenses in compiling the required disclosures, and those are being minimized when they are dealing with a smart Angel Capital Fund that helps iron the deals and smooth out the road so the Founder can keep on building great products and Service and not spend their time in the lobbies of the law firms.

Lastly, we have had to create this Angel Capital Fund, otherwise the StartUp Founders themselves would not be able to support the JOBS Act, nor take advantage of the “Cool Mil” they can easily get. That is because given the admittedly modest amount [??? 1,000,000] that can be raised through Title III crowdfunding, many startups have to carefully ration their “cash” and thus may conclude that their scarce funding resources are best directed toward the traditional startup investor crowd. And if this were the case, the JOBS Act may not have succeeded in the effort to expand the crowdfunding sector for the startUps much at all.

But by allowing the Liberty & Democracy take root in early stage Company Finance — we have created a whole new ballgame open for all.

So what are you waiting?

Start Playing already…

And if you want to play “Angels in Seattle” come join me because I will be speaking in Pioneer Square, at the GoodBar this evening, about all these fun and weighty matters, and also we’ll be seeing about eight great StartUps pitch&demo their goods and services.

So if you want to join us tonight for a pint and to play the “Zero-Sum Game” of Angel investing with some cool Seattle StartUps and want to network with other Angels, come to the Good Bar in Pioneer Square at 5pm.

You can RSVP here: http://www.meetup.com/Seattle-Angels/

Yours,
Dr Kroko

PS:
The information contained in this article pertaining to the JOBS Act and its related SEC regulations is currently dated and since this is a progressing and evolving legislative business, especially on a State by state basis, we must always consult our SEC savvy attorneys, and also read up on the latest and up-to-the-minute information regarding JOBS Act regulations and implementation that can be located and consulted at:

https://www.sec.gov/spotlight/jobs-act.shtml

Be always well advised and read up on following the SEC regulations before you advance on Angel Investing as an Angel Funder and as a StartUp Founder because it is best to be aware and comply easily with both Tax and SEC Blue Sky Investment and Regulatory issues — before you agree to invest as an Angel or accept an investment as the Founder in your StartUp.