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Venture Capitalist Funders and The Evolving Startup Investment World

In today’s climate of technology startups, the need for capital is in high demand. Funding and accelerator options are becoming more prevalent in some areas. Likewise, many investors find these early-stage opportunities ideal to invest in business startups. However, the traditional venture capitalist models have many problems. For one, later stage funding and opportunities for exits are less common than early stage resources. Also, startup founder interests often conflict with venture capitalist funders.

cartoon of venture capitalist funders enticing startups to fund their businesses
Increasing private fund access and opportunities can be the future landscape of investing in business startups.

In light of this, some companies are opting to buy their way out of their venture capitalist situation. Likewise, there are discussions about increased access to private investment opportunities. Considering these recent developments, the future landscape of investing in business startups looks very different from before.

Shifting Trends Between Public and Private Funding

Not long ago, investors enjoyed opportunities to invest in business startups early in the public markets. In many instances, IPOs were indeed the initial chance for investors to gain access to companies at their early stages of growth. Technology IPOs are still relevant but now less than they were previously.

Today, the venture capitalist structure has shifted these opportunities toward private markets. While public markets provide benefits in terms of immediate liquidity should things go amiss, private markets offer access. In fact, early access to invest in business startups is in high demand because of the potential for high returns on investments.

Venture Capital Quote from Troy Carter on why to  invest in business startups for minorities
Troy Carter on the need to invest in Business Startups for Minorities

In considering startup funding structures today, private investment markets have expanded significantly to an extent. For seed and early-stage funding, opportunities to invest in business startups abound. In tech sectors specifically, these private markets provide startups the means to launch into a growth phase and to an eventual exit. For those that do exit and go public, they are no longer considered at the ground floor phase for the public investor. Thus, trends have veritably shifted as investors are found willing to pay more for the opportunity to access these companies earlier in the game.

Problems with the Venture Capitalist Structure

While the private venture capitalists structure offers better opportunities to invest in business startups early, it has its issues. For one, the interests of startup founders and venture capitalists often differ from and contradict one another. This situation is notably the case when it comes to acquisitions. Venture capitalists want a venture fund to earn three to five times its amount. Thus, acquisitions for startups that are under $100 million typically pit the founder against the venture capitalist investor. Likewise, venture capital may be limited to some groups, like women business leaders and even worse for diverse leaders.

a photo quote by Bryce Roberts about how the venture capitalist community invest in business startups
Bryce Roberts on how the venture capitalist community invests in business startups

These are not the only problems with the venture capitalist model. Venture capitalists often demand rapid growth when they invest in business startups. Unfortunately, this can be counterproductive to the health of the business.

For example, Wistia Inc., a Cambridge-based startup involved in video management software, recently bought out its venture capitalist investors. The company needed to slow growth pressures and focus on long-term profitability. Thus, the company took out $17.3 million in debt to escape their venture capitalist stranglehold.

Buffer, a progressive startup involved in social media management tools for small businesses, recently pursued a similar strategy. This startup negotiated a buy-out deal where the majority venture capitalist received a premium interest rate on their investment. In return, Buffer was able to focus on long-term growth, company values, and organizational culture. While the funding was great, the growth pressures and assurances provided were well not worth it.

Increasing Access to Invest in Business Startups

The struggles faced by Buffer and Wistia are not uncommon. However, buying out a venture capitalist may not work for many startups. For one, revenues have to be substantial in order to be able to take off the funding training wheels. However, there is good news.

Recently, the SEC made moves that make it easier for small investors to invest in business startups. A recently signed proposal allows small investors to invest in business startups up to $1 million.

In addition, SEC Chairman Jay Clayton has publicly announced interest in giving individual investors greater opportunities to invest in business startups. As this evolves, the potential benefit for investors and startups alike is noteworthy. Not only will funding and investment opportunities expand, but interests can also be better aligned. This improvement would help reduce some of the issues now associated with the venture capitalist model.

Determining Which Investment Structures Are Best

In deciding which structures are best for startup funding, potential investors see that the diverse needs among startups can be a challenge. Funding is needed, yes. However, each startup requires unique considerations.

To date, the venture capitalist structure has provided expanded opportunities to invest in business startups. But it, too, has problems. Increasing access to smaller investors seems like a good move, but it remains to be seen how far the SEC will go in this regard. Regardless, these are great conversations for business-savvy people to be having, especially in today’s dynamic business environment.

Elon Musk Bad Leadership Leads to Him Handing Over the Chairman Reigns

Elon Musk on Saturday, September 29, 2018, acquiesced to resign from his post as Tesla Chairman and pay a $20 million fine to settle charges brought forward by the Securities and Exchange Commission. On August 7, 2018, Musk posted a tweet saying “Am considering taking Tesla private at $420 [a share]. Funding secured.” This tweet caused Tesla stock to soar. The SEC claimed that Musk was misleading investors because he had not secured the funding he spoke of.

Details of the Settlement

The settlement requires court approval. Also, it stipulates that Musk may remain as CEO of Tesla but must leave his role as chairman of the board within 45 days. He may not become chairman of the company for three years.

On top of the $20 million fine, Tesla separately agreed to pay a prior $20 million fee to settle lawsuit claims that the company failed to oversee the tweet. The penalties thereupon total to $40 million, which will then be distributed to the affected investors through a court-ordered process.

Tesla agreed to appoint two new outside board directors. They will also create a board committee that will police Musk’s communications about the company. Musk also cannot serve as an officer or director of any publicly traded company.

Cause and Effect

Elon Musk accepted the SEC deal without admitting or denying the allegations. He expressed that the lawsuit is unjustified. He said, “I have always taken action in the best interests of truth, transparency, and investors.” He also added, “Integrity is the most important value in my life and the facts will show I never compromised this in any way.”

The SEC filed the lawsuit after Musk reportedly turned down to pay the earlier settlement. Under this offer, he was required to pay a nominal fee and exit as chairman for two years. He refused to settle as he believed this would be an unbecoming gesture.

Since the SEC filed the lawsuit, Tesla stock dropped almost 14 percent.

Musk the Personality

More than his reputation as CEO and innovator, Musk’s personality has been taking center stage in the past few months. He exchanges swipes with people on Twitter, especially those who criticize Tesla. In addition, the company has been experiencing struggles to meet lofty production goals for its Model 3 vehicle. Tesla has also been jumping from one crisis to another in the past year.

Tesla’s shares experienced a 6 percent crash in September following his guesting at Joe Rogan’s live web show where the pair smoked marijuana. Two of Tesla’s heads, Dave Morton and Gaby Toledano, consequently quit the company. They believe Musk’s actions have been drawing unwanted attention that could compromise Tesla.

In July, people were celebrating Elon Musk when he volunteered to create a mini-submarine to rescue the stranded Thai soccer team inside a cave. However, he later garnered criticism after claiming that Vern Unsworth, the British expat diver helping the team, was a pedophile. (Unsworth is now considering legal action against Musk.)

a photo of Elon Musk looking upwards beside a photo of the Tesla logo regarding Tesla board of directors
Elon Musk with Tesla Logo

 

SEC Chairman Jay Clayton said that when corporate leaders make statements, they must act responsibly and be held accountable. They must ensure that they are not giving false claims or be misleading in any way.

Elon Musk and an Ego on Autopilot

Not more than a month ago, we published an article about the transforming leadership style of Elon Musk. The SEC lawsuit further reinforces that being too bold has dire consequences for leaders, especially for Musk.

Elon Musk went back on his word and rejected the SEC settlement. He threatened to resign immediately if the company opted for the settlement. The Tesla board of directors—of which Musk is a member—issued a statement endorsing their confidence in Musk, his integrity, and leadership. This response ultimately is a show of obstinance, a path to self-destruction, and, potentially, the beginning of Tesla’s collapse.

Elon Musk as his own celebrity brand is pulling down the prestige of the Tesla brand. If he keeps at this trajectory, Tesla, and his other companies will have less interest from investors. People will lose confidence and trust in an overconfident CEO. Investors won’t want to support narcissistic business leaders—especially who make bold and thoughtless moves that negatively impact everyone else.

Elon Musk and the Future of Tesla

Nonetheless, investors hope that all these issues around Elon Musk are just a glitch in the broad history of Tesla. The $40 million fine is basically chump change for someone like Elon Musk, and will, most likely, not make a significant dent in its finance.

True enough, following the dip in the Tesla stock last week, its shares increased more than 17 percent—obliterating the traces of the SEC lawsuit.

What the past few months with Elon Musk have told us is that bold leadership can sometimes morph into bad leadership. When good business leaders start to exhibit questionable behavior and shift the attention toward them instead of the good their businesses do, unseemly fissures sully their reputation. Truly, a tarnished reputation does not make a successful brand.

Implications and Consequences to Tesla Board of Directors

Elon Musk must step aside from his ego and adopt an objective stance on how Tesla can flourish without him as its poster child. However, perhaps it is the best decision for Musk to step down as chairman of Tesla. This way, Tesla benefits from Elon Musk being its visionary central figure—but without the liabilities, given his eccentric personality. 

As CEO, he still wields a lot of power within the company—a CEO has the utmost influence on the day-to-day operations of a company.

Elon Musk stepping down as chairman has a neutralizing effect on Tesla. The company will soon have a new replacement chairman, making management more autonomous and less incestuous—as Musk will have to answer to someone else, not himself. Also, having a team to mediate his communications to the public would effectively rein in the sometimes-reckless delivery of Musk’s ideas. Essentially, this move helps create a more predictable Elon Musk, which will consequently represent stability for its shareholders and millions of admirers.

Sources:

Elon Musk agrees to pay $20 million and quit as Tesla chairman in deal with SEC

Elon Musk Steps Down as Chairman in Deal With S.E.C. Over Tweet About Tesla

Tesla shares rebound, erasing losses from SEC-Elon Musk showdown

Elon Musk’s Ultimatum to Tesla: Fight the S.E.C., or I Quit

Best Cities to Start a Business for Entrepreneurs and Startups

The global market may ebb and flow around gigantic companies and worldwide conglomerates, but the tides of economic change are driven by entrepreneurs and startups. Apple Inc.’s beginnings can be traced back to a garage in Los Altos, CA. There, one of the three company founders hand-built his notion of what the future of personal computing held. Facebook, meanwhile, began as a program written by a sophomore at Harvard University in Cambridge, MA. Both were humble startups hatched from the minds of entrepreneurs. Both are now corporate giants. Yet every budding Apple and would-be Facebook needs fertile soil in which to grow. And when it comes to planting these seeds in the US, all are not equal. Which are the best cities to start a business for entrepreneurs and startups?

Best Places to Start a Business

Ranking the best cities to start a business should involve empirical data on the cost of living, cost of housing, unemployment rate and support offered by local governments. However, crunching the numbers doesn’t always paint the clearest picture. For entrepreneurs and startups to grow, there needs to be a healthy startup ecosystem – a system that must include:

  • Access to venture capital
  • Governmental support
  • Talent
  • Innovation
  • Educational Ecosystem

The fruits of this kind of fertile soil are evident in the cities that produce them. When it comes to Bold Business, Austin’s’ entire ecosystem of support from venture capital, key big companies, large entrepreneur community, governmental support and innovative use of blockchain to transform into a smart-city puts it on this list for best places to start a business.

For Atlanta, the wealth of talent has produced a growing FinTech hub as well as one of the primary cities that is incubating BioTech start-ups.  While Tampa/St. Petersburg‘s Waterstreet Development, Synapse and top awards of women-owned businesses and recognition as a top spot for women to launch a company earn it its spot.

So here, in no particular order, are the top 20 best cities to start a business for entrepreneurs and startups, as seen through the lens of Bold Business.

Austin
Austin leads the US in number of startups per capita. This makes it a shoe-in as one of the best cities to start a business. Partnerships and investments reached $600 million in 2016. This explains why it ranks ninth in growth rate among all metropolitan areas. In addition, there were around 100,000 new residents in 2017 and 2018. This has helped the population get closer to a million people. The startups are mostly in education, tech, data science and healthcare. A disadvantage is the median housing cost of $409,000, which is higher than the country’s median housing cost. However, Texas has a low state- and local tax rate, and there’s no personal or corporate income tax in Austin. The population is close to a million, with an unemployment rate of 3.2% and a per capita income of $34,959.
Springfield
Springfield’s cost of housing is about 22% lower than the national average. The cost of living is also 10% cheaper, and the average commute time is just 20 minutes. These are big draws in attracting millennials and their families. Springfield has a population of 159,498, with a per capita income of $23,691 and an unemployment rate of 3.3%. The median housing cost is $134,900. The reason Springfield is on the list of best cities to start a business? Missouri State University’s Small Business and Technology Development Center, which is dedicated to assisting small businesses and startups, and it provides training, products and solutions aimed at helping small business owners and entrepreneurs.
Oklahoma City
The capital city of Oklahoma tops most lists of best places to start a business. It is praised for its low energy costs, low cost of living, and overall low cost of doing business. It also has reasonable local- and state tax rates. In addition, Oklahoma provides incentives to start a small business, or to transfer to or expand in the state. Companies can receive cash back on payroll if they pay better than the county’s average. Oklahoma City’s population is 620,000, with an unemployment rate of 3.5%. The median housing cost is only $184,900, while per capita income is $26,275. With a business accelerator program that helps startups get funding for expansion and growth, Oklahoma City is one of the best cities to start a business.
Durham
Durham is part of the North Carolina Research Triangle, which includes Raleigh and Chapel Hill. The main draw is Duke University, which makes the area family-friendly, and a source of tech personnel to feed the growth of startups. There is also a demand for other tech specialists, like those focused on clean tech, pharmaceuticals and medical care. Around 30,000 migrate to Durham every year, as the area has a strong job market and a low unemployment rate of 3.7%. Startups get good financial support in the form of tax credits for job creation, investment, and research and development. It has a population of 257,636, with a per capita income of $32,362, and median housing cost is $260,000.
Raleigh
Part of the Research Triangle, Raleigh has a ready pool of talent courtesy of North Carolina State University, Duke University and the University of North Carolina. It is estimated that there will be 12,000 new jobs in the area in the coming years, with IT leading the demand. Raleigh has a population of 451,066, with per capita income of $32,362 and an unemployment rate of 3.7%. The median housing cost is $314,900.
New York City
The most populous city in the country has long been a major seat of commerce and industry. It’s also a financial and cultural nexus point for the world – making it a great place for entrepreneurs and startups to incubate and innovate. A number of top tech companies have staked out real estate in the Big Apple, not the least of which is Google LLC, but it’s almost impossible to walk ten blocks without running into a fledgling startup or venture capitalist.
Washington D.C.
The nation’s capital doesn’t belong to any particular state, but Washington, DC can boast a broad pool of talent that stretches from nearby Northern Virginia to the Maryland suburbs just north of city limits. In terms of cash floating about, DC is ranked as the sixth largest metropolitan economy. And though much of the business done in DC is of the “governmental” variety, with 25% of those working in DC working for the federal government, there’s still plenty of venture capital for startups to soak up.
Tampa and Saint Petersburg
Tampa and Saint Petersburg lie on the West Coast of Florida, and the sun-drenched metropolitan area has become a great incubator for startups of late. The city ranks among the top ten in high rate growth in the nation, and the Tampa Bay region offers tremendous recreational opportunities, world-class restaurants, and thriving retail businesses. The city is also home to top research and educational institutions, like University of South Florida and the Moffitt Cancer Center.
Salt Lake City
Salt Lake City is home to a growing number of tech entrepreneurs and other tech startups. It has a highly-educated pool of potential employees from the University of Utah, Utah State and Brigham Young University. This is one of the reasons for eBay’s decision to set up a facility that employs 1,500 workers there. Recently, Utah topped a US Chamber of Commerce list for innovation and entrepreneurship. Salt Lake City has a population of 186,440, with a per capita income of $28,192 and unemployment rate of 3.1%. The median housing cost is $369,900.
Orlando
Orlando has a high startup density, as it has 105 firms younger than one year old for every 1,000 businesses. In addition, 72.2% of entrepreneurs consider their business as their primary source of income. Attracting startups may be easy for Orlando- its tax-friendly policies put it high on lists that quantify tax friendliness. Orlando’s proximity to a track used for testing a driverless-vehicle program puts the city high on the list of best cities to start a business.
Missoula
Missoula is Montana’s second largest city, with a population of 107,320. The median home price is $260,000, which is relatively high for the Montana. The startups in Missoula focus on education, small business, government and healthcare, which includes companies focused on medical devices, as well as biotech startups. Most local tax breaks are for eco-development projects, but startups can get help from the nonprofit Montana Community Development Corporation. It lends a total of $3 million yearly for startups and small businesses.
Miami
Miami is one of the most entrepreneurial cities in the US, with 560 new entrepreneurs and startups for every 100,000 adults per month. It also ranks highly in startup density, with 107.8 employer startup firms younger than one year for every 1,000 employer businesses. In terms of total venture capital investments, it ranks within the top 10 with more than $1.3 billion. Miami’s use of face-scanning technology at their airport secures their spot on this Bold Business list.
Grand Rapids
Grand Rapids has evolved from a city focused on the production of furniture to a growing hub of small-business startups - clear evidence it is one of the best cities to start a business. The city’s economy grew by 3% in 2016 and 2017, and the Michigan Small Business Development Center is devoted to helping startups and entrepreneurs alike. Affordable housing has attracted millennials and young families to taking up jobs in the city. Grand Rapids has a population of 188,040, with a per capita income of $28,029 and an unemployment rate of 2.4%. The median housing cost is $374,900.
Denver
Denver has one of the lowest unemployment rates in the country, and in 2016 was ranked the best place to live in America. It has a low business-operations cost, and is highly regarded for having a business-friendly economy. The city has a high rate of startup growth at 74.9%, making Colorado one of the fastest growing states in the country in terms of business. Denver has one of the lowest unemployment rates throughout the country. The state’s effort to bring in Virgin Hyperloop One to link Denver with local cities puts this city high on this list.
Cincinnati
Considered one of the fastest growing economies in the Midwest, Cincinnati is the third largest city in Ohio. Both the cost of living and the unemployment rate are below the national average, and the city is home to such Fortune 500 companies as General Electric and Proctor & Gamble. “Cincy” has also become a hub for startups, with numerous accelerators helping to promote innovation and growth. Add to this equation a tightly-knit entrepreneurial community, and you have a city that’s more than earned its spot on this list.
Chattanooga
This city in Tennessee was hit hard from post-industrialization, but the efforts and investments of the local government have made Chattanooga a major tech hub in the South. Part of that is due to the fast (but cheap), city-owned Internet network, which is run by the Electric Power Board of Chattanooga. There’s also an Innovation District, with a healthy startup ecosystem that has attracted entrepreneurs and venture capitalists alike.
Charlotte
Charlotte is a prime Sunbelt location with 200 days of sunshine a year. This may explain the continuing growth in population, which is expected to double by 2030. Bank of America and Duke Energy have headquarters in the city. Factors for relocating to Charlotte include the low cost of living, which is 1.2% below the national average, the quality of life, and the affordability housing. It has a population of 827,097, with an unemployment rate of 4% and a per capita income of $31,844. The median housing cost is $284,900.
Buffalo
The second largest city in the State of New York was, until recently, considered economically depressed. But the metropolitan area sitting on the banks of Lake Erie has transformed itself. This has come thanks to a state-sponsored revitalization program called “Buffalo Billion”. Now the long-dead manufacturing industry that once fueled growth has been replaced by tech companies. For instance, there's Tesla, which chose Buffalo for its photovoltaic cell factory, Gigafactory 2.
Bismarck
North Dakota, Montana and Canada sit on top of the Bakken Shale Formation, which has an estimated four billion barrels of oil reserves. The primary benefit from this modern “gold rush” is an unemployment rate of 3.1%. North Dakota itself has garnered a lot of attention from startups. The oil boom has not only attracted oil companies, it has also drawn in whole industries dependent on oil companies. This influx of opportunity makes it one of the best cities to start a business.
Atlanta
Atlanta has a very entrepreneurial attitude. There are 430 new entrepreneurs for every 100,000 adults per month. Additionally, 72.1% of business owners rely on their businesses as their main source of income. These businesses pay a total $117.5 billion annually to their employees. Georgia Tech University is located within the area, which helps in promoting businesses and entrepreneurship. In terms of diversity, census data from 2007 showed that African-Americans owned 30.9% of Atlanta businesses. Women-owned firms represent 33.4% of the Atlanta businesses.
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