As we all know, we are in a recession. In these difficult economic times, everyone is wondering where we can find money to help start or grow our businesses. It seems that everyone is holding their money close to the vest. In reality, however, there are many different places where a company can obtain equity or debt financing to help its business. The key is understanding what type of money is available.
Traditionally, the first place to find money when starting a new business is from family and friends. Obviously, investments from family and friends are made in large part upon the relationship you have with those individuals, but you need to be careful to comply with federal and state securities laws. This usually means that you want to make sure you investors are accredited investors and that you conduct your private offering in compliance with an exemption under Regulation D of the federal securities laws. There are limits on the number of investors and the amount of financing a company can receive in order to fall within one of the many exemptions. Family and friends are still providing capital during the recession, however the amounts that can be raised from family and friends have diminished as individual investment and savings accounts took a beating from the drop in the equity markets over the last year.
If you do not have close friends or families with the available cash to invest in your business, "Angel investors" can be and are a still a great source of capital. Angel investors are high net worth individuals that can provide large tranches of capital through equity or convertible debt investments. Typically, angel capital is the second round of capital that start-up companies and businesses receive and can provide capital in the range of $500,000 to $2,000,000 depending on the needs of the company and the willingness of the "angels" to invest. Although angel investors are more selective in these economic times, angels are still investing and are looking for the right opportunities and the right companies. Once again, when raising money from angels, you need to comply with federal and state securities laws and structure your offering to comply with on the private offering exemptions.
Venture funding is another source of capital that can be very advantageous for start-up companies. Venture funding comes at a price. Generally, venture capital firms will require a seat on the board, veto rights on major decisions such as additional financing and sale of the company, and a high return on their invested capital. There are numerous venture capitalists looking to deploy money right now. They are more selective in these economic times, but the venture capital firms typically do have the money to invest. Venture funding is one of the key types of financing that provides the necessary capital infusion to allow a company to take the next step.
Private equity capital is generally available for more mature companies that are looking to expand and grow. Private equity investments can take a variety of forms and generally involve a buy-out or a purchase of a majority equity interest in a company. As with venture funding, there are numerous private equity funds with millions of dollars to deploy right now.
Traditional debt financing from institutional banks is available to companies as well. The credit markets have suffered through the banking crisis and the recession, but the current administration's policies have encouraged banks to loosen the reigns to start lending money again. It remains to be seen whether that will work. A bank will generally require security interest the company's assets including inventory, real estate and/or accounts receivables, pledge of stock or a personal guaranty. Bank financing will also require meeting certain financial covenants.
A venture capital firm usually wants to receive "participating preferred" stock. The term describes rights that can become important in liquidation and, sometimes, dividends.
If the company liquidates, participating preferred stockholders will have an advantage over common stockholders. First, the preferred status means that the company must pay a specified amount to the holders of the preferred stock before any holders of common stock receive any money. That preferred amount (called a liquidation preference) may be measured in relation to the preferred stockholders' initial investment plus accrued and unpaid dividends but may be more than that. When the preferred stock is participating preferred, the holders of the preferred stock will share the remaining pot of cash along with the common stockholders, in addition to the liquidation preference already received. This means that less money will be available for the holders of common stock.
Participating preferred stock also sometimes (but less often) participates in dividends. This participation is in addition to the normal preference for dividends that generally accrue on preferred stock. If and when the company's board of directors decides that the company will distribute dividends to its stockholders, holders of participating preferred stock have priority over holders of common stock with respect to accrued and unpaid dividends. Plus, they may also "participate" with the common stockholders in the same manner as they participate with the common stockholders with respect to liquidation.
Venture capital firms generally demand a number of rights to protect their investments.
Venture capitalists usually receive shares of preferred stock when they invest in a company, while the founders and other initial investors hold common stock. Of course, if you raise successive rounds from venture capital firms, you will likely end up with several different series of preferred stock with different rights and preferences. Preferred stock has certain advantages over common stock, particularly dividend and liquidation preferences. This means that if the company decides to distribute dividends to its stockholders, or sell its assets and distribute the proceeds to its stockholders, the holders of preferred stock will have priority over the common stockholders. They will be entitled to receive some portion (or even all) of the dividend or sale proceeds before any of the common stockholders receive any money at all.
Preferred stock will probably have better voting rights as compared to common stock. For example, the company will have to get approval from the holders of a certain percentage of the preferred shares to take major corporate actions, such as approval of the annual budget, amendment of articles or bylaws, liquidation of the company, creation of a new class of securities with rights equal to or better than the preferred stock, sale of the company or acquisition of another company. This structure lets the venture capital firm have a say in decisions that will have a large impact on the company.
The venture capital firm will also likely demand representation on the company's board of directors. The number of members will vary depending on the current structure of the company and the amount of capital invested by the venture capitalists, but at least one, and often more than one, spot on the board will probably be reserved for members elected or appointed by the venture capital firm.
Also, venture capital investors will want information and reports about the company so it can track its investment. For example, the company will likely have to deliver its quarterly and annual unaudited financial statements. Many venture capital firms will demand audited financial statements, which can be a significant expense for the company. Plus, venture capital investors will expect some other rights, such as the right to force the company to register its common shares with the Securities and Exchange Commission under some circumstances or to participate in any registration initiated by the company (registration rights), the option to purchase shares of stock of the company that other stockholders want to sell (right of first refusal), the right to purchase any new shares issued by the company (preemptive rights) and an adjustment of the conversion to common stock price in the event the company sells stock at a lower valuation (anti-dilution protection).
Looking at all of the ownership and control pieces likely to be obtained by a venture firm, it will probably end up exercising a lot of control over the company. Such is the price of venture capital. However a venture capital firm will probably allow the day-to-day operations of the company to continue to be handled by the business people.
Most business owners eventually deal with the issue of their company's worth, whether in establishing a strike price for options or in trying to sell or raise money for their companies. Stating the obvious, the value is what a willing buyer would be willing to pay and a willing seller would accept. That said, business owners are often understandably frustrated when they see the lack of objectivity in determining the value of their business. Unfortunately, like valuing baseball cards, valuing a business is less of a science than an art.
This is not to say that valuations do not have mathematical explanations, nor that there are not industry starting points (as discussed below), but all of that is academic without a willing buyer or investor making a real offer. Using the right advisors, particularly valuations experts, can add to your bargaining leverage, ground negotiations on both sides, offer a variety of creative methods and financing options, and introduce new potential investors.
There are several well-accepted methods of valuing a company in both an investment and a capital raise context. Buyers and investors often use one of the following valuation methodologies: (i) a negotiated multiple of EBITDA (earnings before interest, taxes, depreciation and amortization); (ii) a discounted cash flow analysis (which is often used in the leveraged buy-out setting where acquisition debt payments need to be covered from free cash flows); and (iii) market comparables (where comparable businesses are identified and their stated valuations are used as a basis, and differentiating your business may be the primary point of negotiation). A good valuation expert can help identify other valuation methods that would be most favorable to your company.
The different methodologies rarely have the same outcome. The above methods are all attempts to create some kind of baseline which can be useful to both buyers or investors and sellers.
Once a business decides to raise money, management is left to figure out how to make it happen. Strong advisors help, but there are some steps that any business can take to make it easier to raise funds. Collecting information to give to investors is a good place to start.
Regardless of who invests, the information that investors will want to see will be pretty much the same, and the business can get this ready ahead of time. The information should be readily available to the business.
Managers can be surprised at the amount of information they need to provide. When a business takes money from an investor, it gives something back – an interest in the business. What the business gives back – whether it's called "stock," "partnership interests," "LLC interests," "notes," or some other name – is often a security. When the business gives a security to the investor for their money, the investor is protected by securities laws. One of the protections provided by securities laws is that, before the investor decides to invest, the business has to tell its investors everything material about itself – that is, it has to make a "full disclosure."
Many managers see full disclosure as the opposite of marketing. Sure, full disclosure includes the good parts about the business. But investors will need to know all of the bad things too, as well as all of the indifferent but important things about the business. To some managers, it seems that after convincing the investor that buying into the business is a great idea, the manager then needs to tell the investor all of the reasons that they should not invest. Although this can be contrary to a sales mentality, investors should be left with a complete picture of the business – the good, the bad and the material.
The way you end up raising the money will impact how the information about the business is presented. But the basic content that a business must provide will largely stay the same. Time invested collecting this information early is well spent, and will save time later. At minimum, any business looking to raise money should be sure to have the following available:
Financial Statements: These are the basic financial statements for the business. Investors will typically want to look back up to five years (if the business has been around that long). If the financial statements are audited, investors will want to see the audit reports as well.
Organizational documents: These are the official documents that govern how the business exists and will vary depending on what kind of business it is. For example, if the business is a corporation, they would be the articles of incorporation, bylaws, amendments, board minutes and resolutions, shareholder minutes and resolutions, etc. If the business is a limited liability company, they would be the articles of organization, operating agreement, amendments, minutes and resolutions, etc. These are often compiled in a "minute book" for the business. Many businesses operate with multiple companies – subsidiaries, holding companies, etc. If this is the case, you should keep one set of organizational documents for each subsidiary. Investors will want to review these documents, as they are important to the kinds of investments that can be made.
Tax information: This includes tax returns, tax registrations, tax ID numbers, listings of taxes for which the business has registered, etc. Many businesses have tax advisors; if yours does, the advisor should be able to help compile and present them. Investors will probably want to look back three to seven years.
Information about legal proceedings: Investors will want to see if the business is in the middle of any lawsuits or if it has been threatened with a suit. Lawsuits involving major owners and managers could be important as well. The lawyer representing the business can help prepare the information that most investors would seek. Working with the lawyer to put it together is usually advisable to protect against losing attorney-client privilege or disclosing things against the business's interests.
Information about real estate: Investors will want to see a listing of all of the properties where the business has an interest. Does it own the land? Is it leased? This will include all leases, deeds, mortgages, etc. on the properties.
Material contracts: Investors will want to understand the business's important contracts. Examples can include employee contracts, contracts with key customers and suppliers, leases, licenses, and other arrangements that are important for the business. You probably do not need to include the office copier lease.
Regulatory issues: Investors want to confirm that the business has the right authority to do its business. It is helpful to prepare a listing of all of its applications, licenses and permits that the business has. This can cover anything from investment advisor registrations to elevator permits.
Intellectual property (IP): As IP continues to be critical in the economy, investors are sensitive to it. It is helpful to have a list of any patents, trademarks, copyrights, licenses and any other registrations and applications that the business keeps. It is also important to include any contracts that let the business use someone else's IP.
Insurance: Prepare a listing of all insurance policies the business has of any kind. It is also helpful to get a current insurance certificate for each of the business's policies as well.
Employee benefits: Prepare a list of the business's employee benefit plans, including health plans, retirement plans, 401(k)s, employee discounts, etc. and get copies of all of the plan documents (contracts, summaries, etc.).
These are general rules that can help any kind of business get ready to work with its investors. Every business is different, so not all businesses will have all of the information discussed above. Others will need much more detail about some or all of these categories. So the listing above is not a checklist but rather a guide to start reviewing your own business. By preparing and collecting these materials ahead of time, businesses can better balance the burdens of raising funds, save time later in the process and reduce professional fees to collect these items.
When you are raising money for your company, a private placement memorandum (PPM) can be used to provide information to potential investors to help them evaluate the merits of an investment in your company. It is intended to disclose material information to potential investors about the securities you are selling, your company and its business, in particular, the risk factors associated with an investment in your company. A PPM is not always required for full legal compliance with securities regulations, but it is a useful way to show that you provided all material information to investors. Generally, each PPM will include a business plan, risk factors, a description of how you intend to use the proceeds of the offering, a capitalization table and a description of the closing process for the investment.
However, there is no "one size fits all" PPM. They will vary according to the company's size, industry, development stage, offering size and other factors. Therefore, it is important that a company offering securities retain competent legal counsel to assist with preparing the PPM and conducting the offering.
Business Plan
The business plan section lets you educate potential investors about your company's strengths and weaknesses. This section should describe the products and services offered by your company, the needs of the market place, the risks which may be posed by actual and potential competitors, your strategic plans with respect to innovation, marketing and financing, and the overall business environment in which your company will operate during the term of the investment. In most cases, the business plan section is drafted by you and reviewed by legal counsel. One of the major purposes of legal counsel's review is to ensure that the PPM, taken as a whole, is not misleading to potential investors.
Risk Factors
The risk factors section of the PPM is a specific description of some of the risks that may be associated with your company, the industry and the particular terms of the offering. If well drafted, the risk factors section can provide useful protection against some potential claims by investors. Although the actual risk factors for your company will depend on your company's specific business and activities, there are some fairly standard disclosures found in most PPMs. For example, a "development stage" company will likely include in its PPM the following as risk factors: lack of revenue, losses and financing requirements, product development risks, technological risks, manufacturing and distribution risks, dependence on key employees, competition, regulatory risks, potential inability to exercise a redemption right, dilution, no market for shares, and difficulty of determining an appropriate offering price. The company should also include any other risks relevant to its particular business.
Use of Proceeds
The PPM should include a section that describes how you intend to use the proceeds of the offering. Naturally, you will want to retain some flexibility regarding the use of the funds, but the investors will likely require at least a general breakdown of uses. The use of proceeds section might list product development, acquisition of new technologies, facilities expansion, hiring of new employees or general working capital requirements as possible applications of the proceeds. The key to this section is to strike the delicate balance between flexibility for your company and certainty for the investor.
Capitalization
The capitalization section describes the capital structure of your company. The capitalization section should include a capitalization table which will allow a potential investor to determine how much of the company he will own (or how much of the company's debt he will own). The capitalization table should reflect both the actual debt and shareholders' equity of the company prior to the offering, as well as the adjusted figures reflecting the completion of the offering on the terms contemplated in the PPM.
Closing Process
The closing process or subscription procedure (as some refer to it) can be foreign and confusing for investors. Therefore, it is helpful to provide investors some guidance in the PPM regarding how the closing will proceed. You can require that a minimum amount of money be raised before you will proceed with the offering. If that is the case, the PPM should disclose the minimum aggregate capital commitments. After any applicable minimum is met, qualified investors generally have to complete and return a subscription agreement which obligates them to buy the securities, along with a check for the amount of the purchase price (payment may also be made by wire transfer), by a date specified in the subscription agreement. Sometimes the subscription agreement is included with the PPM.
The investor may also be required to complete and return an "accredited investor" questionnaire to allow the company to comply with certain exemptions from the securities laws. If required, the questionnaire is typically attached to the subscription agreement.
After the company has received all signed documentation and funds, it should provide the investor signed counterparts of the documentation. The company may also provide the investor share or unit certificates or promissory notes, if applicable, and signed copies of the company's governing documents. If the company is making the private offering pursuant to certain registration exemptions, after the closing it may need to file various documents, including Form Ds and U-2 Uniform Consents to Service of Process, with the state and federal authorities where the investors are located.
There are a lot of avenues worth exploring when you are trying to raise money for your company. Placement agents and existing advisors are some of the options.
A placement agent is a person (likely a company) who has contacts with potential investors that may be interested in helping a company raise capital. A placement agent's value is really in his or her rolodex, so you need to make sure your agent has contacts in the right places. Using a placement agent could result in a larger capital raise and could decrease the amount of time you personally would have to devote to the fundraising process.
However, there are potential dangers in using a placement agent. Many of these firms take the position that they are “finders” and therefore exempt from broker-dealer registration requirements. Although it is possible for a consultant to be exempt from such requirements, as a practical matter the limitations on what can be done as a finder before “crossing the line” into the world of broker-dealer registration are so stringent as to make finders mere bystanders in the sales process who offer nothing more than an introduction and do not participate in any negotiations or make any recommendations.
Further, a finder will generally expect a contingent fee based upon a percentage of the amount invested, but the SEC has allowed payment of those kinds of fees only in unique circumstances involving finders who are involved in solely introductory services in an isolated transaction and who have never before been engaged in any other securities offerings. For this reason, payment of a contingent fee measured as a percentage of investment capital raised is problematic in the case of most finders; payment of a non-contingent fee for finders' services is the safe option.
For the above reasons, most “finders” are (if their activities were ever challenged) likely to be considered unregistered broker-dealers, a conclusion that could result in liability not only for the finders themselves but also for the companies that hire or contract with them. Involvement of a finder could put a company in violation of federal or state securities law and could entitle investors to get their money back from the company or its controlling persons.
The best, and only safe, advice for companies seeking to raise capital using a finder or placement agent is to avoid using the services of sales organizations that are not already registered as broker-dealers in all required jurisdictions.
Don't forget existing advisors and other existing relationships you may have. Your lawyer, accountant and other advisors often have large networks of clients and contacts and may know of some individuals who may be interested in investing in your company. Even your family and friends may have business contacts that will help you reach the right investors. As an added benefit, this latter group is likely to assist you without charge, which is always helpful in these rough economic times.
Blog written by Harry Gonso and Jennifer Rhodes.
In the fifth in a series of life science distinguished speakers luncheons we were honored to have Jim Pearson who is the president and CEO of NICO Corporation, a medical device company providing patented technology for minimally invasive neuro, skull base and spinal surgeries.
Pearson, who is the former president and CEO of Suros Surgical Systems, discussed the successful internally-focused model he has used to grow two thriving life sciences companies.
One of his key discussion points was that to have a successful life sciences company you need a relevant innovation which can lead to intellectual property clearances which in turn can lead to sustainability and new markets. He later mentioned that one of the pitfalls that companies or individuals may face is not truly understanding the reality of their ideas; a realistic evaluation to determine if the idea is a product, a company or is still in the idea stage.
Pearson's presentation also focused on the key ingredients that led to success at both Suros and NICO. Companies, and in particular life science companies, need to have a several components in place in order to achieve and sustain growth – some key factors he mentioned were communicating and measuring progress, establishing cultural norms, and making sure every team member has "a win" (ownership, cash, and personal and professional growth). NICO is run with a deep-rooted belief in the company's top 5 principals: execution, team work, unity, rewards system and balance. The same philosophy was employed at Suros.
Potential business traps that entrepreneurial companies can fall prey to were also outlined. Of particular focus was not assembling a strong management and board that can appropriately guide a company through its many phases. Some of the other key pitfalls he discussed were related to staff. One of which was not understanding the true power (or potential) of human capital and the other was not staying in touch with what is happening in the field on a weekly basis.
It was an interesting and informative luncheon. We look forward to watching the progress of NICO and the impact it will have on Indiana's growing life sciences industry.
The following blog was posted by Kristine Danz, a partner at Ice Miller LLP.
We can now officially relegate 2008 to the records books. Wall Street took a beating unlike anything we've seen since the 1930s, we witnessed a historical presidential election and a bailout of an unfathomable magnitude. Main Street felt the pinch as well with unemployment on the rise. So what awaits us in 2009?
By all accounts, we're looking at a rough first quarter. According to a survey by the National Venture Capital Association (NCVA), U.S. venture capitalists are forecasting a difficult 2009 for, "the country's economy, the capital markets, and the venture industry as the global financial crisis takes its toll on the entrepreneurial system." Other highlights, or rather lowlights include:
- Continued slowdown in the number of IPOs;
- Limited investments in seed and early stage investments;
- Difficulty in securing funding for newer companies;
- Declining returns for VCs.
And now for the good news. Investments in clean technology, life sciences and biotechnology are expected to grow and debt markets will likely improve.
Like they say in the news business, we don't make the news, we just report it.
IN Partners, LLC announced today the initial closing of MidPoint Food&Ag Fund, L.P. and MidPoint Food & Ag Co-Investment Fund, L.P. for a total of $27.8 million in the aggregate.
IN Partners is an Indianapolis-based venture capital firm specializing in the agribusiness sector. MidPoint is IN Partners’ inaugural fund. MidPoint’s investment focus is in six specific areas of food and agriculture: (1) biobased products and processes; (2) human wellness; (3) food safety; (4) animal health; (5) environmental technologies; and (6) production technologies.
Read the IN Partners press release.
The following blog was posted by Jennifer Rhodes, a partner at Ice Miller LLP.
In our fourth in a series of life science distinguished speakers luncheons we were privileged to have Dr. Eric Meslin Ph.D., Director IU Center for Bioethics, Associate Dean (Bioethics), IU School of Medicine, Professor of Medicine, Medical and Molecular Genetics, and Philosophy. The topic was “What In The World does Ethics Have To Do With Health Research.” Dr. Meslin’s point was not just to talk about the world but the people who are working in it, on it, for it and with it.
Dr. Meslin started out by telling the group that there is much more research going on in the world involving a collaboration of researchers from different countries and cultures, but the problem then becomes, who is reviewing the research and what ethical guidelines apply. There is also a lot more money than ever before. Studies show that between 1998 and 2003, global expenditures on health research have quadrupled, to about $125 billion. By 2000, 70% of all clinical trials were funded by the private sector. It's not simply the federal government or the pharmaceutical industry, but there are also public and private players, including large philanthropic players.
And yet the shift in the epidemiology of diseases is happening in economically developing countries just like it's happening here. People who live in developing countries are not just dying of malaria, TB or HIV. They die of heart disease, cancer and diabetes just as people in developed countries such as the U.S. do. He pointed out that drugs are still too expensive, despite the efforts of many in the healthcare industry that donate drugs and have humanitarian aid programs. And still, the Global Forum on Health Research coined the phrase the “10/90 Gap” which means that of all of the dollars spent on research in the world only 10% is going to diseases that affect 90% of the world's population.
This begs the question which was Dr. Meslin’s topic of discussion, what in the world does ethics have to do with health research? And the answer is: all studies involving human subjects must receive prior science and ethics review. He went on to state that despite the increased investment in research and development and international philanthropy, there is still a demonstrable inequity in access to benefits of research. Which led to his next big question, are there universal ethical principles that apply irrespective of country or culture? Bioethics has been working on this question for quite some time. There are 17 articles in the universal declaration on bioethics and human rights. But what do you do when they conflict? Which one takes precedence over the other? And what is really meant by each of them?
Collaborative research not exclusively, but especially between economically developed and developing countries requires some common set of ethics guidelines or procedures. Not feeling that there was a single set of ethical principles, Dr. Meslin and his international colleagues have written a memorandum of understanding that is the first of its kind to describe the common principles that will be followed in their research and guide those relationships and activities. The guidelines address the following issues: Who may be asked for informed consent? What procedures will be in place to prevent exploitation? When is it acceptable to use a placebo? Where else is it acceptable to conduct studies that can feasibly be carried out in one’s home country? Why is research conducted on some groups and not others? And how should any benefits be distributed?
Despite the significance of the guidelines, Dr. Meslin emphasized that there was still work to be done in order to make this document live and work. Simply stated, they had to figure out what its limitations were, and this is what they realized, not only do cultural differences have a real impact on how people think about ethical issues in different countries, but economically developing countries are not necessarily ethically developing countries. He made the point that we should not be thinking that just because a country's GDP is lower than ours, that the people who are in that country are any less concerned about ethics, are any less concerned about how to carry out ethically relevant research and ethically consistent research. The question of ethics in healthcare research is an ongoing one and will always be.
While we are all biting our nails as we wait for yet another shoe to drop in the economic situation, there are some actions we can take in our own businesses. We all know that we are in an economic slowdown (now officially labeled a recession by the National Bureau of Economic Research) and that there will be a recovery period of some duration. So let's look at some things we can do to help our businesses weather the storm and maybe even come out stronger on the other side. While the bailout, or lack thereof, of banks, insurance companies and automakers may not be within our control, we do have significant control over our own companies.
In looking for inspiration for this article, I actually Googled the phrase "happy news articles." I came up with some very interesting hits. Here's the way I boil it down: people are still compelled to help others; there is still a general concern about our environment; people are finding creative ways to make money in the downturn; and we all need to refocus our businesses.
One of the keys to surviving the downturn is finding your business's market niche. You need a way to differentiate your business from those of your competitors and keep your competitors out of your space – a sort of business Great Wall of China, if you will. It seems to me that this wall needs to be both strong enough to survive attacks over the long term and sufficiently flexible to deal with change. (For example, the changes in our economy between September 2008 and December 2008.) There are a number of ways to differentiate your business – on the basis of target customer, region, branding, innovation or others. Pick one and run with it, but evaluate periodically (especially now) to make sure it still fits your circumstances.
Now is also the time to bust out the business cards and kick your networking into high gear. Everyone is experiencing difficulties right now. The more people you talk to, the more ideas you can gather as to how to deal with those difficulties. In addition, because everyone will be to some degree shifting their business focus to accommodate the economic situation, networking can help you to better align your business to serve other businesses as well as consumers. Also, when we finally do emerge from economic oblivion, you will have built yourself some strong relationships that can continue to benefit your company.
In addition to focusing on our external markets, we need to evaluate the internal workings of our companies. First, dust off the strategic plan and re-examine it. Does it still make sense given current and expected market conditions? If you don't have a strategic plan, now is definitely the time to adopt one. A business without a solidly defined direction is unlikely to succeed in this economic environment.
In addition to the big picture strategic plan, you should have operating plans that show how you will fulfill the goals of the strategic plan. Look at your sources of revenue and your expenses. Refocus on the customers who are likely to continue to purchase your products or services, or the types of products or services that are likely to continue to sell, under these economic conditions. Review your marketing materials to ensure that those customers or products are the focus of your materials. Consolidate or eliminate suppliers and service providers if at all possible. Consider whether your staffing levels are appropriate and properly allocated. Think about increasing employee training. There are free, or low cost, online training programs that will give your staff enhanced skills that can benefit the company in the long-term without adding significant cost in the short-term.
So, let's focus on what is in our control. Recognize the realities of the economic situation and adapt your business as needed. And keep your chin up – we're all going through rough times but there are actions we can take to improve our situations. The worst reaction would be to sit back and passively wait to see what happens to your business.
Financial times are tough, but let's take a step back. Rather than making things worse for ourselves by stashing all our savings under the mattress, let's take a deep breath and look at the situation.
Fed by a culture of consumerism, our real estate and other consumer credit-based markets have been lending at very high levels for years. Loan-to-value ratios have been way out of whack. (There are very few scenarios in which it would be financially responsible for a new college grad making $70,000 a year to take out a $400,000 mortgage and a $50,000 car loan.) In order to spread the risk relating to these loans, banks have entered into swap transactions and myriad of collateralized debt transactions and otherwise sought to offload the risks onto other players in the market. This is a massively over-simplified explanation, but clearly this cultural phenomenon had to come home to roost at some point.
So let's look at some of the consequences. The real estate markets have crashed. Large investment banks and insurance companies have failed. Some were "bailed-out." Others were not. Some major mortgage market players such as Fannie Mae and Freddie Mac joined the spiral. Deposit banks looked like they might fail, and that's when we really saw things become interesting in terms of government involvement. Rumors of a "bail-out package" began to circulate long before we saw the first four-page draft (which was 451 pages in its final form - the KISS principle went out the window on that one). People began to worry about the security of their money in the banks. FDIC limits were raised. Some of us felt better.
Early on in the "financial crisis," the fear showed itself in relatively small changes in the Dow, often in response to the most recent headline failure of a financial institution. But it has now gotten to the point where Dow-watching is a sport. How many times in the last three weeks have you walked into someone's office to find them staring fixedly at Yahoo Finance? How many people do you know who have taken a large portion of their savings out of the equity markets and put it into government bonds (or their pillow cases)? How many people do you know who have suddenly become part-time day-traders? In my view, all of these developments are disturbing and, even worse, are contributing to the problem.
The Dow has fluctuated wildly every day for the last few weeks. If you have any concern for your blood pressure, it's best not to follow it too closely. Talk to your financial advisor. Don't panic. The recent removal of large amounts of capital from the equity markets have significantly depressed the returns on government bonds. While short-selling has been restricted, the increasing speculative trading only exaggerates the market's swings.
Now, I am by no means a financial advisor, and I make no claims to any ability to see the future (through the stock market or otherwise), but I can see the past. Our economy has seen every form of up and down, from the Great Depression to the dot com bubble. None of the extremes have been a result of people acting rationally and in their own long-term best interests.
The fundamental fact is that our markets will recover. The questions are, how long will it take and what will we have to do to get there. In the meantime, let's try not to exacerbate the problem.
As Associated Press business writer Michael Liedtke observed in his October 20, 2008 article Feeling Financial Squeeze, VCs Curtail Investments, “Although a drought hasn't set in yet, it's looking inevitable as the ripple effects of a worldwide financial crisis rattle venture capitalists.”
According to data released by Thomson Reuters, PricewaterhouseCoopers and the National Venture Capital Association, venture capital investments have recently experienced the largest decline since spring of 2003 following the dot com bust.
Many venture capital firms are advising the management teams of their portfolio investments to revise their short-term business plans to reduce costs by laying off staff and trimming budgetary spending in expectation of a worsening recession.
Although venture capital investments have experienced the largest drop off in the last decade, there is a silver lining in the form of a rising interest in biotechnology and alternative energy. As stated by Terry Kosdrosky in Private Equity Has Toolkit to Ease Troubled Market, “Political leaders and the public are hungry for renewable sources of energy that will lessen the country's dependence on foreign oil and cut down on pollution.”
Venture capital and private equity funds have followed the emerging trend of new companies seeking to stake a founding interest in these industries. For example, Liedtke cites statistics supporting a 21 percent increase in venture capital investments in biotech startups from last year, while alternative energy, was close behind with a 17 percent increase.
In addition to venture capital opportunities in the U.S. biotechnology and alternative energy industries, Kosdrosky also points to growing opportunities overseas, stating “With growth stunted in the U.S., many private equity firms are looking to put their money to work in growing markets such as China and India.”
The current financial climate has forced venture capitalists to focus their resources on existing investments rather than taking on new challenges. What does all this mean? Despite the downturn in the global economy, opportunities for lucrative venture capital investment still exist, albeit in new forms and perhaps in sectors not previously considered. As blogger Seth Levine wrote in his October 22, 2008 post of VC Adventure, “Be flexible. Seek outside input. Be introspective. Stop and consider what you're learning and if it effects key assumptions behind your business idea. Tweak what you're doing. Repeat.”
The following blog was posted by Joseph DeGroff, partner at Ice Miller LLP.
For those like me who tend to be somewhat challenged when dealing with rapidly changing technologies, ponder for a moment about how large companies, institutional investors and government are also trying to keep pace. To be sure, the pace of change is increasing as companies, investors and government regulators embrace – or at least accept the reality of – access to information at company Web sites and the growing use of SMS or text messaging, RSS feeds, message boards and blogs.
Just recently, the SEC released interpretive guidance regarding how public companies provide information to the public and the investor community over the Internet. The SEC also has announced that its EDGAR on-line filing system will be replaced with a successor system called IDEA (for Interactive Data Electronic Applications), which will allow investors, analysts and others to more easily extract and analyze financial information from company reports and more quickly compare those financial results with other companies.
These developments follow the 2007 "notice and access" SEC rules that allow companies to provide proxy materials to investors by posting the materials on their Web sites and providing notice that such materials may be obtained on-line.
For securities lawyers, investor relations officials and regulators, these technological advances raise as many potential concerns as benefits. The recent SEC release provides important guidance to companies that want the public coming to their Web sites for information (and not simply send folks to EDGAR or to other third party sites) but without increasing potential exposure under securities laws. Important SEC messages include:
- Information posted to a company Web site will likely be deemed to be “publicly available” provided that the company satisfies the Web site awareness, standard practice, basic format and waiting period considerations included in the SEC release.
- While the anti-fraud provisions of the securities laws will continue to apply to information posted to the Web site, steps may be taken to manage risk including the separation of dated information into an archive or similar section.
- Hyperlinks may be included, but the SEC suggests certain steps to head off assertions that the company has directly or indirectly "adopted" any or all information accessed via the hyperlink.
- Summary information about the company and its financial results may also be included with appropriate safeguards such as "alert" language, explanatory language and references to publicly available information that has been filed with the SEC (including risk factors and forward-looking information disclaimers).
- For interactive Web site features such as message boards or stockholder forums, the guidance confirms that the company will not be held responsible for third party postings and is not required to respond to or correct any incorrect information or misstatements made by others.
Time will tell whether companies, the investor community and regulators will take full advantage of these technological advancements. Or, will challenges, regulatory actions and lawsuits chase companies back into yesterday's disclosure regime? At the very least, this recent SEC guidance should help companies look to the future and utilize these new information delivery tools while taking appropriate steps to minimize risk. Stay tuned for further development.
In our third in a series of life science distinguished speakers luncheons we were honored to have Dr. Ora Hirsch Pescovitz the Executive Associate Dean for Research and Edwin Letzter Professor of Pediatrics at Indiana University School of Medicine. She served as director of Pediatric Endocrinology and Diabetology at Indiana University School of Medicine from 1990-2004. In September 2004, she was named to the position of CEO and President of Riley Children's Hospital. In her role in the Dean's office, she oversees all research at the School of Medicine
Dr. Pescovitz asked the question why do life science research in Indiana? And the answer lies within the state’s national ranking for five major health indicators in Indiana: cancer deaths, smoking prevalence, obesity, cardiovascular deaths, and diabetes. The state ranks in the bottom half of each of these health indicators, and in the bottom 10 of all states in most cases.
Not only the health impact, but the economic impact is another reason for the state to focus on the life science industry. Dr. Pescovitz mentioned that high-tech research driven industries have contributed to over a third of the nation's economic growth over the past decade and the U.S. biotech industry had revenues of over $65 billion in 2007, which is up 11% nationally over 2006, so why shouldn't Indiana be getting a piece of that important pie?
Dr. Pescovitz also discussed how Indiana University School of Medicine is driving the life sciences initiative in Indiana and provided examples of new Indiana businesses, such as Fast Diagnostics, CS Keys, EndGenitor and Immuneworks, not only expanding the technology and research but also bringing in new forms of revenue to the State. She pointed out that success in the life sciences industry requires a significant amount of collaboration.
The Indiana Clinical and Translation Scientists Institute is a statewide partnership to transform life science research and health care delivery. The goals of this project are largely to use basic discoveries and translational approaches to new scientific discoveries from the bench to the bed-side and then to translate these discoveries from the bed-side and move them into the community and from the community into actual medical practice and then taking that feedback from the community back to the researchers so it really is a full cycle.
Dr. Pescovitz closed by commenting that the cost of life science research is high, but the return on investment is priceless.
Like the little black dress, socially responsible investing (SRI) is not new but is ever present and constantly updated. The history of SRI includes boycotting of investments in companies that profited from the Vietnam War, avoidance of investments in South Africa during apartheid and, more recently, investment in companies developing sustainable energy strategies, promoting clean water, preventing climate change, producing organic foods, promoting consumer protection and other categories.
SRI can be defined in a number of ways, but it generally refers to an investment strategy that considers not only profit but also the social, environmental or other impact of the investment. This "double bottom line" approach is intended to maximize both financial return and social good. Sounds great. Lots of people seem to think so. According to a recent study by the Social Investment Forum, approximately 11% of assets under management in the United States are involved in SRI. SRI assets increased from $639 billion in 1995 to $2.71 trillion in 2007.
As particular types of social activism (think environmental preservation) became accepted mainstream societal values, venture funds with a socially conscious agenda are becoming more common. There's also the growth of so-called "greenwashing" that has likely contributed to the increase in SRI. Companies wanting to cash in on this societal trend may use environmental protection essentially as a marketing strategy. But, the actual operations of the business may not be carried out in an environmentally friendly manner. Your typical investor would not be in a position to know and may therefore not effectively accomplish their identified goals with their investment dollars.
Will the growth in SRI continue?
Hard to say. Funds in SRI, so far at least, have had to be "patient capital." That is, there are no quick returns and the investor should not expect liquidity on the short timeframe that is typical for private equity transactions. SRI funds and SRI companies seeking investment will have to control expectations of their investors as they strive to meet their double bottom line goals. Another concern is that the trend will catch on in a manner reminiscent of the dot com bubble. Many investors funded dot com companies without adequate diligence and, as a result, many of those companies failed to meet their projected returns. The failure cast a dim light on all Internet-based companies, regardless of their merits as investments.
We can only hope the same does not happen to SRI. The idea of SRI is a noble one. I'd hate to see it fail because we all jump on the bandwagon before the underlying premise has been proven to make for a valuable investment
The Securities and Exchange Commission (SEC) has adopted amendments to its rules, known as Regulation D, governing private securities offerings. The amendments purport to modernize and streamline the reporting process with respect to private offerings and to enhance information availability to the investing public and regulators alike. I'm not so sure you can simultaneously streamline the process while increasing the information available.
The amended rules require the mandatory notice filing on Form D to be filed electronically rather than on paper, after a phase-in period in which issuers can file in either format. The data resulting from those filings will be publicly available through the SEC's Web site and is expected to be interactive and searchable. The overall goal of these changes is to ease the burden of filing and to provide easier access to information to investors and regulators.
Another purported goal of the electronic filing requirement is to coordinate efforts among regulators. The ultimate goal would be to have filing with the SEC become a one-stop-shop, eliminating the need to file in individual states. Have you ever tried to convince state securities regulators in New York or Florida, or any other state with a peculiar securities regulation regime, that the SEC has any jurisdiction or even influence over them whatsoever? Only a securities lawyer can relate to that quandary.
A noticeable source of conflict arises from the content changes to Form D. Among many other things, the new Form D will: require revenue range information for most issuers (subject to an option to decline to disclose); reduce disclosures regarding use of the proceeds to include only commissions and similar fees and payments to related parties; and permit a limited amount of "free writing" in response to certain questions.
Some additional amendments include: decreasing requirements to identify related parties; removing the requirement of a description of the business and replacing it with a code identifying the issuer's industry; and limiting reporting of minimum investment amounts so as to avoid affecting employee incentive plans adversely.
Essentially, the SEC has its heart in the right place with these amendments. The goals of streamlining the process for private offerings and increasing investor and regulator access to information are good ones, but they conflict with one another to some extent. Each amendment, insofar as it relates to the content of the required disclosures, either favors streamlined disclosure or favors increased access to information. You can't have it both ways.
The Indiana Supreme Court, in November 2007, decided a case which could impose significant new responsibilities on corporate directors. In Lean v. Reed, the court found a director of a Canadian corporation personally liable as a matter of law (i.e., without trial) for violations of the Indiana securities laws by the corporation. While this in itself is not groundbreaking, the facts underlying the case are rather startling.
This ruling has emphasized that directors and officers can be personally liable for a corporation's violations of the Indiana securities laws (and the similar securities laws of other states) under some circumstances. A director could have a defense against personal liability if the director did not know, and in the exercise of "reasonable care" could not have known, of the facts giving rise to the violation. In Lean v. Reed, the court found that the elected director had per se failed to use reasonable care because he assumed, without inquiry, that management had taken the steps required to comply with the Indiana securities laws in connection with a share exchange transaction approved at his first board meeting.
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