Reporters' Roundtable Ep. 116: JOBS Act makes crowdfunding the lawHow the JOBS Act will change the rules for Silicon Valley entrepreneurs and investors, with perspectives from guests George Zachary, Chance Barnett, and Tim Rowe.
Everyone loved reporters' roundtable I am -- needle and in San Francisco -- listen. This is an important show that jobs act is about to rewrite the rules of Silicon Valley. Notoriously small businesses have always had challenges getting access to capital and even more so. In this economy but raising money is going to get a lot easier if the jump. -- our. There are two main fundamentals of the jobs that first -- -- it will let small businesses raise money from individuals that previously couldn't. That's -- in conflict because it. Make enough money they were accredited investors it's likely we'll let these businesses advertise. To raise money which has been illegal so for. And although the bill hasn't been signed by the president yet entrepreneur -- -- -- This act. Would fundamentally change access to capital was more small startups in the United States I guess the biggest probably the biggest deal tactics. But there are still a lot of concerns about the bill if you're somebody -- not. Too familiar with investing in you see an opportunity to invest in a small company listings cool thing you think that's sounds pretty cool. And you read some article somewhere and says this is a great investments and I'll I'll put my money -- it sounds like a sure thing well it's not a sure thing. Most small businesses fail. The SEC along with other investor protection groups have added to the criticism. The North American Securities Administrators Association released this statement. The -- -- sacrifices essential investor protections. Without offering any prospects for meaningful sustainable job growth but experts say ultimately the jobs act may not change the way most tech startups get funding most of them will continue to raise money through Angel investors -- venture funds. Or self fund. To raise money this way means to deal with a large number of investors you don't know. And who you may not trust for CNET news.com I'm -- -- Our daily record that a few days ago since that we record that -- intro video -- a lot -- -- of course we record that after the jobs axial through the House of Representatives the past. Issue with flying colors and then went to the senate where was debated for a few days -- but ultimately passed with a couple of interesting and important modifications. So just to reiterate what the jobs act is about as -- -- -- sense -- jumpstart our business startups although it has very little to do with actual jobs -- president talks about. It will go back to the house for approval and probably be approved and then certainly be sign -- president and it will mean. That crowd funding becomes law of the land that you and I can invest in startups a very small amount of money. It also means the start -- can advertise to you and me for investing which right now there are prohibited from doing. There's another big part of it which is how companies go public. IPOs. Companies that want to go public will be able to do so with reduced regulations are rolling back some of the sarbanes Oxley restrictions. That make it -- expensive for companies go public. Or if they want to delay going public and acquire more private investors they will also be able to do that -- becomes. Much companies have much more flexibility in how they -- -- public. To talk about these issues today which are. An unbelievably important for technology entrepreneurship and start a whole Silicon Valley economy we've got three great guests. First George Zachary whose a venture capitalist for Charles River ventures and got a short prerecorded interview with him we -- -- it yesterday and in here in the studio. I've got chance Barnett of the crowd funding portal crowd funder chance thank you. And via Skype from Boston. Came -- who's the CEO of the Cambridge innovation center. -- thanks for joining us. We'll be right back with you guys the first sits here what that George had to say from the heart of Silicon -- -- office at elemental part. Are so first up on reporters' roundtable they were gonna talk with George Zachary -- partner at the area. Venture capital firm Charles River ventures which is fairly large and influential firm in -- Boston and San Francisco. George has made some interest thing and investments in small little companies who may have heard of like Twitter and -- -- And also he was co-founder of shutter -- which is -- public company. George thanks -- -- the time. Thank you thank you -- much. I.s so we've talked a bit about the jobs act which is shortly to become law we all leave -- I I need to ask you this couple questions from your perspective as a venture capitalist. As somebody who's in the business of investing money in start ups. Is the jobs that a good thing or a bad thing for technology entrepreneur or -- for the valley. I think it's a great thing for technology founders and technology entrepreneurship it's another source of capital. And having multiple options as -- as -- founder is a great thing to do. Tablet for you -- because doesn't this increased competition for deals and drive up the amount of funds that you will -- put into coming to get -- -- it does it does increase the competition for every one increased competition for Angel investor seed investors -- -- EC's. Early stage venture capitalists like myself late stage investors. It sure does -- it's another form of competition but if were all about making the world better and increasing change. It's the right thing to do and I we -- as will get on that and adapt to change sooner vs later. With regards to the crowd funding provision. What would you advise the entrepreneurs that you talk to -- -- once you don't know about how to use it. So far I have her acts very few questions from founders about it there -- most outages really focused -- wanting to build business and product. And so they try to get as much capital in as few meetings as possible. That only issue with the jobs act is that. You know collecting ten and twenty and fifty -- from individuals. He could be hundreds of meetings. Or -- founder to raise that from an individual and so my take is I don't think it's really NS client. Angel Investing seed investing in early stage venture I think it's gonna be an initial -- capital to allow grounds. -- so. I actually it's gonna be more complementary than competitive and early on on the might be more competitive for Angel investors but usually one founders are showing up -- that -- -- wanna talk to me in the usually are trying to basically raised. Two -- six million dollars. And having one per person to deal with to get the capital from makes it easier. And we've seen this before about ten years ago bill -- of Yahoo! is the founder amber and qwest tried to democratize IPOs by operating. On a reverse -- -- Dutch auctions. An increasing the amount that went to retail investors that this is -- really changed starter and startups going public still went to mutual funds first music. Cause throughout the U. Meetings you could raise a big volume of cash so I think it's gonna remain true. Saw -- and much more as complementary. Epic story are rambled on their too long -- -- integrated vote now -- what about for investors who wanna get in on this I -- there's gotta be a lot of individuals -- of people on a smaller and comes -- finally feel they can take part. In the technology rocket ship of -- via the financial rocket -- of technology what is your advice to all these people think they can now play in and get -- on the next FaceBook. Well. It's a fantastic opportunity but they should realize that -- -- -- 4000 Angel and venture funded companies drive around 80% of the game. This comes to us from one of our limited partners historically. Com. -- Horsley bridge which is a big limited partner. And we've heard that data from other people so people that need to realize that. Every company can't be -- -- FaceBook. And that this is much higher risk than investing in the public stock market and itself and risk it somewhere between investing the public market in the lottery. Where I mean that's a pretty broad slot here yet is which was -- you think it's on more lottery more. It -- that you. The portfolio so I would advise individuals. To build a portfolio not of one -- 25 -- ten -- investments. But probably up fifty. And you want to basically invest. More dramatically alumnus -- this is what mutual funds to -- great they look for companies that are going that are gonna go public and they fit into a -- or sector. And then they tried it basically. Diversify the risk. They try to decrease the risk by diversifying. Their investments into lots of different companies so I think -- be. You'll need to develop good sources as to which starts at the right wants to invest and you'll have to think through the royal wanna buy a bundle of these -- -- -- come in through some aggregators. There's there are lots of issues. I'm what you then then the legal issue about. Newsletters right now if you're an individual you can subscribe to any one of thousands of financial newsletters which tell you. How do invest in the best way for the public market. It's my guess is we'll see the rise. Of that kind of reporting Apple put it that way. I I struggle to call it journalism because it's not it probably won't be a -- lately prob OK crop again fish. You'll want to get these research reports on what on a hot private organism. And you're gonna have to be armed with information and knowledge -- quality people trying to commit fraud and raise my Paper completely dubious things. So it's gonna require more work and part of individuals. Com. On that part so the probably new service providers to help individuals figured this out. Sounds like wild west is -- when it comes to small company stock advice. That's that's right and we have a little bit of this wild west -- years ago. You know now that. People -- kind of forgotten the -- of 992000. And some of the products of that and people are starting to. It's the crisis they're now looking for the next big thing of the U what I call the rolling thunder -- Which as it tends to move from one sector and -- right now it's really about technology once FaceBook goes public. I think it's gonna be a -- -- moment in the sense that would generate a lot of excitement on the part of individual investors about public market technology companies. As well as private ones -- -- I think it's really exciting it's a great thing that's happening but its new. They'll be people say bad because there's fraud and other reasons but. The needs to be a problem probably need to be more disclosure that probably means a new -- certain purposes to kind of fit these investors. Okay George any -- final advice for people on either side of this equation either the entrepreneur hours -- the investors. -- it's a new world. So think carefully about what you're gonna get by tapping into the new opportunities and on every site investor site underside small investor side. Do your homework it's called diligence we -- it as a venture investors. And just get armed with as much facts and data but remember great investment decisions -- is usually made by intuition first with data that supports its second. Good advice George thank you very much for your time panda was -- right -- you're gonna be out here in Ghana. In a in a couple of days for hey -- live event here at CNET right that's right I'm very excited for the chemicals clone our active will CNN thanks a lot -- -- -- looking. All right we're back that was a George Zachary of the venture firm Charles River ventures we've got two great -- guests now I've got -- chance -- here in the studio and Tim -- -- dialing from Boston and until I -- start with -- In -- you run the Cambridge innovation center I got that correct. -- -- -- What do you make of all this thing should of people jumping into these -- funding opportunities right away or it would make more sense for them to sit and wait and see how things -- level out after this bill. Because of this bill becomes law which is almost -- going to certainly didn't happen. Well so -- it won't be able to do it right away because the bill gives the SEC a little bit of time to do -- I think it's 270 days. So I bought a little -- tiny bit ridiculous. -- -- George's comments I have a slightly different perspective on how this is gonna play out. While overall I think by the way you and -- captured you know extant great weight to the potential here it's huge. I'll -- things that I see is that -- proclaiming it's going to be used much more for people to raise money from friends and family and the next level of acquaintances beyond that ma for businesses that may never see venture capital. -- -- -- Dining kitchen that already I mean people who -- had been racing friends and family for -- forever so what makes says that the -- The jobs at different about them so I thought it what you can't do right now or you think you can't invest. In a company. If you are an accredited investor. Or it in a very small number investors under 35 investors. Under current laws so if you wanna be able to go out hands -- across the sun you know Facebook. Let your friends went to -- the way it went to college live or people in your church group or whatever let them know that you're starting out in new. A new plumbing business -- new catering business and you want to raise a 100000 dollars to get the equipment to get going up that wasn't something you could do before. And so there's you -- the -- one notion is that the you know almost. 97% of businesses I think that they never see venture capital or Angel capital may see this is a waited for them to get -- -- is a very different thing than any of the wild west picture is more -- you know excellent -- starting a company let's all put in 500 Buxton opera. What is the mood of the controversy work with that that came innovation -- what are you what are their thoughts of -- thinking no this isn't for us or this is a great opportunity for us to raise money so little to deal with those pesky angels NBC's. I think it's more the latter announced this yesterday up there were cheering crowds of people loops of joy about this is. And this is that long awaited. I you know I can tell you stories of companies recently -- -- and kick starter and love it and people see this as you know kick start her on steroids. Not just for the record it's everybody's watching the show -- kick start as a fundamentally different model and -- model. You invest in a project it's kind of a donation and you get the work product you don't ever own a piece of the company's let's say the fundamental difference. That's right yeah so you but people actually don't see it is that there will kick starter does is gets thousands of people to support you in your project right. And this laid out -- can actually get equity and put more money. -- there's data there is if there is one crap and a company out there and now that's that's the traction it's in the UK expo crowd -- -- Invested in its new it's it's last year -- up. In what they found is that most of the investments that they get most of dollars in these investments over a thousand dollars restrict starter is more like fifty bucks a hundred bucks. So it really ups the ante in terms of how much money -- raised witness. This approach. It chance Barnett is the a CEO of craft under which is one of these crap on and portals and and chance -- Your business is based on the passage of the jobs that it is not absolutely so this means a lot -- -- out on the circuit. But. The jobs that changed as a went through the house and originally the bill said if you make up 200000 dollar to invest up to 10%. Of your income and start -- and the senate version of the bill which -- the back perhaps now has a tiered a sliding scale caps talk about that about what they are and why that is so important that your great question. So what are the things it's. And be happening with the bill that it was the ascendant -- amended version and the -- got its hands on what it in the original bill and said. We wanna -- and and really push for her what we see as important investor protection. And one of the ways of doing that is putting a maximum cap on how much money in the -- a -- individual personally. You and I could invest -- -- someone's mom could invest in their -- company. And and I think that's one way of going about trying to protect investors -- and I think that's a reasonable start. -- boat what I think is important here is to keep the whole -- in mind it not just pieces apart and and to take a more holistic systems approach to thinking that this. In any system generally UC. Each when he principal play -- not something more dramatic. You'll see 80% of any activity or let's say in this case investment coming from 20% of the participants with people on a platform. So what this -- can potentially do is while it provides some some -- to how much money someone might lose an investment. It also limits the amount to which. The market can really start to fund effectively. -- and so I think we want to be careful in making sure that. This -- doesn't too much pushed down that that limit for Rite -- people what those limits actually are by the latest since you asked that direct question. Plan to build points out that they want to limit people with 40000 dollars or under -- come to 2% of their annual. And income and then people over a 100000 dollars -- -- -- invest around 10% of their. So there has been -- the constant. -- at as the bill you know bubbled up in. In media buzz that became kind of the rallying point of all the content was via the concept of fraud and of course people who run the public markets. I say this advisedly as a as a journalist for more than twenty years are obviously against this because this this takes some of the control in the power and the money flow. Often their plate so of course they're gonna fact that it's just reality -- -- money people control money want to keep the control but. Be the rallying cry around fraud I think is relevant and in this. And that has been pushing -- how much do you make this a free market and at how much do you protect people who don't know any better now. You as running a crap crap from her dot com which is a place where investors -- entrepreneurs can go and say this is our company you can come invest in us now. You have a lot of competition there are at least five companies and -- -- -- compete directly with you they all pitched me so very Smart you to be here today. They're out. Use your business though it's not you can't buy stocks and then -- can you do jobs that mutual fund is that your business -- -- -- make any money. Now also there's this this. Important role that crowd filling out forms like Jessica -- -- -- to play which is to remain very much hands off of any representation of what's good or not while providing really important. Safety that checks for. That deals are legitimate and that the founder city's complaints that legitimate so this is where I think the rallying cry of some the opponents of the bill and they're. Their argument doesn't hold water because they wanna just claim that haters can you won't -- and -- -- and even. As the bill is. Suggests now there's regulatory framework -- and -- some of the requirements and don't look like at background or. Background check requirements for principals companies anyone who use 10% are over. And a owner company that's looking to raise money they'll also be. Probably standardized disclosures about the company that might include use -- -- including your existing cap table. Things like that how much money is in a bank account of the company. And then what I think is interesting are two other -- -- points to say what's the quality year wars some qualitative measure of what this person as. Or with this company might look like which are. Some level transparency around identity and I think the web is done an interest in job and come along way in the last five. Six years about making that easier for a -- people who do and -- the simple ways they can speak to that is. Connecting your FaceBook account connecting -- -- an account to your profile as not -- money. -- those things how some social checks and they're not as powerful and is important as a background check. That's a really good signal if you were potential investor. I can you go and look and immediately see someone's job history check them -- only -- and make sure they're legitimate. That's a nice checked out a and the other thing that I think -- -- -- will be data. So. Right now the investing world that you either early stage testing world is very opaque. Meaning at if you wanted to train -- -- understand how much should a company at a certain stage in a certain industry be worth. Really hard to get a fixed number on and there's good and bad reasons why that's true where the industry's opaque. -- what I think crowds and nesting is really needed it's interesting is start to open that up and -- a lot of transparency around data. And the funding -- these companies and help investors from outside and not. Am -- about experience investing. Tim from Cambridge generation -- -- do you think that entrepreneurs are are ready to open the kimono this much in order to get you know 500002000. Dollars from investors here there. -- absolutely and it I think we're seeing it right now I think we're seeing. Creek unionize if there's credit -- sites like across Africa problem that are up and running right now also in in Europe's -- people are very happy to go out there share their information. Raise money from the crowd. There is that a company called stop and -- -- here at Cambridge innovation center that. Recently. You -- -- -- kick started it needed 181000 dollars. They sure -- stories videos but what they're doing etc. got 60000 dollars in ads you know their adherents right that this -- but this is the way to do it. I think I think this concern about fraud is overplayed. There -- -- -- -- think that what is that if you look at all the sites now that allow people to raise money online. -- the crowd lending sites like the existing product -- sites. Angel list which is an accredited investor only crowd funding site right now they they all report that they are not experiencing product. -- is cross her crowd -- circle lending these guys are to be binding circle. These guys of all of about you know. -- gone on record saying it had zero cases of reported fraud at this point. So I think that that's probably less about a real issue -- it appears to be. Although obviously we'll have to wait and see how the samples. You know I want to transition from that statement which I think is very telling. To that it even bigger picture economically which is the the new rules that the jobs act. Outputs on place for the public markets which is when and how -- company goes public now. As I understand it. And I am new to understanding the way public markets the history public markets the SEC was created in response the 1929 stock market crash which was. A bubble. Which happen because a lot of people invest in very bad investments. And then we have sarbanes Oxley which happened after in 2002 someone after -- and -- out via the dotcom crash. And the jobs act rolls back many restrictions on how companies go public. They can stay private longer -- -- go public a more easily. Are there. What are the real advantage -- -- first of all this talk about the going public -- that the sarbanes Oxley restrictions do you think that it's going to be good for technology businesses. Overall -- they'll be able to go public -- is that a good thing they have more. Less regulated public technology companies. Imminently first and there. There's no question that would be -- -- it. Well first of all the other two ways that investors she reasons an investor is investing companies in the first place -- either consultant company it acquired or you can go public. Between open in -- much more money if the -- because -- So you gotta understand it making it feasible to go public is really. Driver or investors to invest in new startups and respond to you don't make it easy to go public. There are going to be people -- starts. Second -- you know the argument is not we're gonna relieve these companies that did -- with sarbanes Oxley for all time. -- just saying that for the first five years or even less than that if the companies grow quickly. -- these that the restrictions are gonna be somewhat more limited than they are today. So they're what they're doing is there's there's scaling or are graduating in those new rules slowly to let companies learn how to deal with it all of the reporting -- -- require. Up. They -- professionals and industry event that that I talk river are a lot of lawyers about this I thought with a lot of Apple's about -- And people working public market since -- we really went just a bit too far with sarbanes Oxley particularly in the sense that it was hard to get our first -- to go public. Because the rules for so tough. Get a new company just couldn't comply -- all of them from the -- Now another group part of the jobs act as the companies if they want to state drive longer on the -- total flip -- can do that. Chance to be studied that -- is there an advantage to staying private longer will there certainly is. You -- of the -- this message are seeing is when you become a public company there's certainly -- shift in the focus of what you think you businesses out. And you know there is a great article written a while back that -- -- which was management to -- stockholder value. And this is not ideally. What treats long term value company is trying to meet expectations on a continual basis and a quarterly basis. Earnings reports and it might in the short term. And help your stock price long term that's not always the best way to -- company and think about your product or your customer value. And so I think it's an important for companies to think really hard. If the barrier the costs and the time it takes to go public. Suddenly there's a new capital markets -- raise money that's really expensive and it's important we really -- balance -- What -- the core values my company. Who my seeking to serve families seeking -- -- make. Company best comic customers army seeking -- seek the market and there's a balance to be played there are so I think it's on a case by case basis -- company needs to consider that. But I at an don't think anyone is really rushing announcing -- in the public right now. And it it's a beer be consideration I don't -- -- is allowed to take lightly because of these regulations. But that would be the big thing that that I would look at as that a founder and entrepreneur looking to take the company public as a really huge consideration because there's. At cultural. And there's business considerations. About. How you. A lot act you know there there are extraordinarily innovative public companies and I mean -- I I guess your point is probably more difficult to keep the fire alive. In a public inspired innovation and excitement the start mentality but it's not impossible. So -- maybe this just makes for. You know these restrictions make for. Better management I mean they may be I don't know yet -- -- and to say that. I really think is really what's of key importance -- -- Marty touched on it is that this is. A source of revenue -- capital market and that -- companies can access -- You know there's two ways to have a big success with the company to have an exit which -- you're getting acquired entity public. And taking it public -- me. By leaps and bouts often times much more secretive and I'm provides more -- long term stream of -- for now I don't ask you both this question for against the last topic com. As we've been discussing the potential here is that up. A little smaller investors lower income investors can win by playing in this market although it can also lose because -- are highly volatile investments. Onto ignores win because they more flexibility in how they raise funds and then was the company's get bigger they have more flexibility in their approach to -- public markets. -- New businesses trance like yours can win because there's new opportunity to aggregate information. Incubators venture capitalists -- -- I believe they win because there's more money enters the market the spread between. The amount invested and the exits gets bigger which means as Mormon to be made. Who looses. -- -- I think you see trends and both in the business models that you -- on the web and how humans behave economically. Towards a more -- model. And so. If you take that the record industries and -- example. -- -- used to be only a few distribution points have a few radio stations that would place so it was a hits business and there's a few people make those days. Hits and and that was it and everyone else was left scrambling. Flash forward to today there's a mass of niches there's tons of Internet every -- so there's a lot of winners. And the people who lost are the industries that -- that to mean. Radio distribution networks that dot all the values from the hits in the few record labels who are able to get into those all time. So what I think we're gonna see now with this -- environment any. Environment it's open up to this more distributed model which is. Really what the went out and you see. A wider distribution I think we're gonna see really interesting alignment of communities. That want to take over the funding -- themselves. And that's essentially what crowd funding without humans self organizing. I -- and ends you know. I think that the tech world and start up world. Is RT relative to most of the community's very organized them so I think this will have a significant packed impact in the tech industry. I think it's gonna have a much broader and more revolutionary impact on small business in the states because they don't -- of a rally -- they don't know how of -- -- who talks about the time a -- just read a small business heroes and and this is going to be a huge part of the economy him. -- you know I think it up saying that they're you know look at the -- you losers is a little too narrow. In the sense that this is really gonna expand apply. On the high right now is the number of new businesses that get funded in the United States and I think -- suspicion is that this is gonna vastly increase that. Obvious there is a loser it it's probably those that are competing for that same talent. So perhaps that's bigger businesses that now. We're gonna see more more people going into businesses start -- I think that vanished may shift the mix works more smaller businesses in the United States and pure -- businesses. Well I'm not sure that that's entirely about being -- -- -- -- -- shipments can. Interesting now which bring some meat to the final topic this is called the jobs act which is -- reverse engineered -- jumpstart our business startups. But what impact will this jobs act have. On jobs will more people be hired or -- we just changing the distribution of unemployment. Tim first mention -- So there. You may be familiar with a study that that tuchman foundation did recently. That showed we -- just come -- in -- -- states. It was a groundbreaking research they said it built up over thirty years and found that. Companies five years old and younger created all the jobs in this country and ends -- For every three jobs that were created by these companies five years old and not in younger. The older -- the six years old and older companies lost a job. But -- collectively -- companies lost jobs and almost every year the last thirty years. So we know that the jobs are coming from businesses. Adds that it it only follows that if you have more -- -- activity you're gonna have more of job creating activities. Chance there's injuries that -- and -- data rather than pontificate should oftentimes so. Timid mentioned crowd -- at witches. When the only other -- references to business company where people actually investing in this is going on UK. And they had -- at bowed out with the estimate the job impact. Is of the investments -- people made in the companies that crowd funded by doing a survey. And that -- was roughly -- -- -- across a few of the companies in the sample that they had there was about a 150. Employees in those companies the estimate -- who is gonna be. You know I think the number was around three and in seventy. Employees as a result of this funding. Until that yes this movement more than -- doubling the jobs. And and then you also have to imagine that. And hiring is just one piece of that -- companies also do is spend money with other people in the business ecosystems and whether -- advertising. Whether that's partnerships. Whether it's web hosting. And there's always a -- community that as companies are investing around it with and so those those people and ecosystem -- also between providers are now all benefit and that jobs active. Cool well listen guys thanks. Very much a real interest -- conversation on on the jobs act you can find more information on this on rates radar dot com -- and writing about this ad nauseam. On chance Barnett is the CEO of crowd funder which -- crowd -- dot com. Check it out can learn more about. Investing in small and emerging businesses. A team rose CEO of the Cambridge innovation center sea ice CTR dot com -- thank you so much for the time. We will see you guys all next week and another great addition of reporters' roundtable thank Steve for producing instill in our.