[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
EQUITY FINANCE: CATALYST FOR SMALL BUSINESS GROWTH
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ECONOMIC GROWTH, TAX, AND CAPITAL ACCESS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
HEARING HELD
APRIL 19, 2012
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 112-064
Available via the GPO Website: www.fdsys.gov
_____
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76-471 WASHINGTON : 2012
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
ROSCOE BARTLETT, Maryland
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
CHUCK FLEISCHMANN, Tennessee
JEFF LANDRY, Louisiana
JAIME HERRERA BEUTLER, Washington
ALLEN WEST, Florida
RENEE ELLMERS, North Carolina
JOE WALSH, Illinois
LOU BARLETTA, Pennsylvania
RICHARD HANNA, New York
ROBERT SCHILLING, Illinois
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
MARK CRITZ, Pennsylvania
JASON ALTMIRE, Pennsylvania
YVETTE CLARKE, New York
JUDY CHU, California
DAVID CICILLINE, Rhode Island
CEDRIC RICHMOND, Louisiana
GARY PETERS, Michigan
BILL OWENS, New York
BILL KEATING, Massachusetts
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, General Counsel
Michael Day, Minority Staff Director
C O N T E N T S
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OPENING STATEMENTS
Page
Hon. Mick Mulvaney............................................... 1
Hon. Kurt Schrader............................................... 2
WITNESSES
Mary Dent, General Counsel, SVB Financial Group, Palo Alto, CA... 4
Jason W. Best, Co-Founder, Startup Exemption, San Francisco, CA.. 6
Tony Shipley, Founder and Chairman, Queen City Angels,
Cincinnati, OH................................................. 8
Angela Jackson, Managing Director, Portland Seed Fund, Portland,
OR............................................................. 10
APPENDIX
Prepared Statements:
Mary Dent, General Counsel, SVB Financial Group, Palo Alto,
CA......................................................... 29
Jason W. Best, Co-Founder, Startup Exemption, San Francisco,
CA......................................................... 41
Tony Shipley, Founder and Chairman, Queen City Angels,
Cincinnati, OH............................................. 44
Angela Jackson, Managing Director, Portland Seed Fund,
Portland, OR............................................... 54
Questions for the Record:
None
Answers for the Record:
None
Additional Materials for the Record:
None
EQUITY FINANCE: CATALYST FOR SMALL BUSINESS GROWTH
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THURSDAY, APRIL 19, 2012
House of Representatives,
Subcommittee on Economic Growth,
Tax and Capital Access,
Committee on Small Business,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:05 a.m. in
room 2360, Rayburn House Office Building, Hon. Mick Mulvaney
presiding.
Present: Representatives Mulvaney, Chabot, Schrader,
Cicilline, and Chu.
Mr. Mulvaney. If everybody is ready, we will go ahead and
get started. Thanks again for coming in today.
As I was just mentioning to Mr. Schrader, I am filling in
for Mr. Walsh, who was unexpectedly called back to Illinois. So
on his behalf and on Chairman Graves' behalf, thanks very much
for coming in today.
All of us in the room today know that small businesses are
important to job creation and the economy. But the question is
how does a business go from the idea of a business to an engine
of job creation? That is one of the things we will be looking
at today.
One thing entrepreneurs need to grow a business, obviously,
is access to capital. Most businesses begin with an original
investment from the entrepreneur or borrowed funds from friends
and family, as did the four businesses that I started. In these
early growth stages, the future is very uncertain.
Entrepreneurs are trying to prove that their idea is viable and
can attract customers for their product or their service.
For successful ventures, once the idea shows promise, the
entrepreneur will typically need more capital to expand.
Because of the high failure rate of new companies, financing
from a lending institution can be difficult to come by. So
where do entrepreneurs go for this access to capital when they
are turned away by a bank? They must rely on outside investors
who share in the vision that the entrepreneur has that the new
company can and will be successful.
While equity investment can come in many forms, an
entrepreneur receives funding in exchange for a stake in the
success of a company. While this is a risky proposition for the
investor, they are motivated by the belief they can add value
to the company and one day profit from the investment.
We are here today to hear from a distinguished panel of
witnesses about the current state of entrepreneurial finance
and recent legislative changes impacting this environment, and
finally, what can be done to focus our efforts as lawmakers on
job creation.
With that, I will yield to Mr. Schrader for his opening
comments as well.
Mr. Schrader. Thank you, Mr. Chairman.
And thank you, panel, for coming all this way to give us
your thoughts and advice, which we definitely need.
Today, more than ever, we are relying on America's small
businesses to create our jobs, driving the innovation that our
country is known for and to unlock new markets. In previous
recoveries, it has always been the entrepreneurs that have
paved the way. Companies like Microsoft, FedEx, Hewlett-
Packard, all those great companies started in someone's
basement or garage.
And at this time, we hope that entrepreneurship is again
the driving force that gets this economy going again. It takes
money to get a business off the ground, as I well knew in my
small business; mortgaged basically everything I had to start
my business. Probably wasn't the smartest thing I did, but I
was successful, thank goodness. It also takes capital to keep
the business running.
And under normal circumstances, access to capital has not
been a problem. Today, that task has become particularly
challenging for small businesses and continues to be a big, big
issue for small businesses.
During the hearing, hopefully, we will examine some of the
challenges these businesses face. On the positive side, it
would appear, now I stand to be corrected, at the same time
investment activity in early stage companies, the so-called
angel investors, is starting to pick up a little bit and
rebound. I would like to hear the extent to which that is and
what we can do to actually foster that.
We passed a JOBS Act bill, nice bipartisan bill that
hopefully is of some value in getting some of these small
businesses off the ground and continue to stay viable going
forward. These developments I think are a source of optimism in
the current investing climate. Still, there is much more we
need to do to get a robust return for our Nation and small
business. Although the JOBS Act is still in its infancy,
hopefully, it will prove to be of great value. And your
suggestions today will hopefully pave the way for the next JOBS
Act.
Thank you very much for coming.
Mr. Mulvaney. Very briefly, one logistical matter before we
get started. You will see that television screen change here
probably in the next 15 or 20 minutes, and we will be called to
our first vote series of the day.
Mr. Schrader and I will have to excuse ourselves to go over
and vote, hopefully for only a very short period of time. So
when we get to that, we will adjourn the meeting for as brief a
period of time as possible to allow us to go over and vote.
We will try and find a nice convenient stopping point when
we get to that point. Now what I would like to do is introduce
the witnesses for the record. And then, after we do that, we
will take your testimony, and we will finish with questions at
the end.
So we will begin, the first witness today is Ms. Mary Dent,
general counsel at the Silicon Valley Bank, located in Palo
Alto, California. Silicon Valley Bank provides financing for a
wide variety of entrepreneurs, investment funds, and start-up
companies. As general counsel, she is responsible for the
banks' legal and compliance departments, providing strategic
guidance to the company's management team and board of
directors.
It is always nice to hear your own bio read back to you,
isn't it? We go through it all the time.
Mr. Schrader. It is embarrassing.
Mr. Mulvaney. Every time I go through this on my Web site,
it gets shorter and shorter. Prior to joining Silicon Valley
Bank, Ms. Dent served as general counsel to New Skies
Satellites, a global communications firm where she was
responsible for the company's regulatory filings related to its
IPO.
Ms. Dent, thank you very much for being here today.
Our next witness will be Mr. Jason Best, co-founder of the
Startup Exemption. The Startup Exemption has played a key role
in developing the framework to change securities laws to make
crowdfunding a reality.
Prior to becoming involved in the Startup Exemption, Jason
has served in a variety of roles at Medem, Inc.--am I
pronouncing that correctly--a technology company that provides
communication services to the health care sector.
He has an MBA from the Thunderbird School of Management and
an undergraduate degree from William Jewell College.
Thank you again, Mr. Best, as well.
I am also going to introduce Mr. Shipley.
Mr. Shipley, I understand Mr. Chabot is on his way, but we
will go ahead and introduce you before he gets here. And I
apologize for stepping on his toes.
Mr. Shipley is the founder of Queen City Angels in
Cincinnati, Ohio. After being a successful entrepreneur, he
founded Queen City Angels, an angel capital investment group
with 50 investors which provides financing for seed stage and
small high-growth companies. Queen City has invested over $30
million in 52 entrepreneurial companies.
He is testifying on behalf of the Angel Capital
Association, a trade association representing more than 7,500
accredited angel investors.
Mr. Shipley, thank you again for being here today and for
your testimony.
With that, I will yield to Mr. Schrader for the
introduction of our final witness.
Mr. Schrader. Thank you again, Mr. Chairman.
I am really pleased to introduce Angela Jackson as co-
founder and co-managing director of the Portland Seed Fund, a
$3 million private-public seed fund investing in high-growth
capital-efficient companies in my State of Oregon.
She brings significant experience securing angel
investments in multiple business sectors for the seed fund. She
advises hundreds of entrepreneurs and seed stage companies
across the broad spectrum of industries at AB Jackson Group.
Also oversees Portland State University's Business
Accelerator, which is a really neat deal in our State.
Ms. Jackson is president of the Portland Chapter of the
Keiretsu Forum----
Ms. Jackson. Well done.
Mr. Schrader [continuing]. The largest angel network in the
world, and was chair of the State's premiere angel investment
event, Angel Oregon, in 2010.
She holds a B.A. from Boston University, M.A. from
University of Oregon.
Go Ducks.
And thank you for being here today.
I yield back, Mr. Chairman.
Mr. Mulvaney. We are not going to have a quack attack in
this meeting, are we? My brother married into a family of
Oregon Ducks. It is a disturbing group of people sometimes.
One housekeeping matter. For those of you who haven't
testified before, the general rule is that the testimony is
supposed to take about 5 minutes. There should be some green,
yellow, and red lights that you can see in front of you. While
that is the rule, we don't typically enforce it very strictly
here. So if you feel the need to go over a few minutes, that is
fine. If you get extraordinarily long-winded, and believe us,
we know what it is like to be long-winded, you will hear me
very quietly tap the gavel. If you could start to wrap up at
that time, that would be great.
And what we will do is we will go through as much of your
testimony as we can before we have to break, and then Mr.
Schrader and I will ask questions after we come back.
STATEMENTS OF MARY DENT, GENERAL COUNSEL, SVB FINANCIAL GROUP,
PALO ALTO, CA; JASON W. BEST, CO-FOUNDER, STARTUP EXEMPTION,
SAN FRANCISCO, CA; TONY SHIPLEY, FOUNDER AND CHAIRMAN, QUEEN
CITY ANGELS, CINCINNATI, OH; AND ANGELA JACKSON, MANAGING
DIRECTOR, PORTLAND SEED FUND, PORTLAND, OR
Mr. Mulvaney. So Ms. Dent, with that, please tell us why
you are here.
STATEMENT OF MARY DENT
Ms. Dent. Representative Mulvaney and Ranking Member
Schrader, thank you very much for having me here today to talk
about the very important question of how we make sure that
small businesses get the capital they need to thrive.
As you said, my name is Mary Dent, and I am here as general
counsel for Silicon Valley Bank. I will focus in particular on
a small but critically important part of the overall landscape,
which is high-growth, small young businesses.
As you said, we all know why these companies are so
important. It is because they are the single best source of job
creation we have as a country. High-growth companies create
roughly 12 million jobs and more than $3 trillion in annual
revenues. They are also helping us solve challenges in fields
like health care and energy. And importantly, they serve as the
growth pipeline for mature American corporations around the
country.
SVB, as its name implies, works pretty much exclusively
with these high-growth companies. We work with about half of
the venture-backed companies all around the country through 27
different offices, and we are one of the only banks in the
United States that will lend to startups before they are
profitable.
I will first talk for a minute about what I see in bank
lending. I will then touch on what is happening on the venture
capital investing side of things and then a bit on the
intersection between policy and the world of startups as we see
it. So, first, on bank lending, while access to credit does
remain an issue in the broader economy, in the sectors that we
serve, actually loans are readily available. There are few
other sectors today that can deliver the kinds of risk-adjusted
returns that banks can get lending to high-growth technology
companies, and so competition there is actually fierce.
Even for very early stage companies, on the debt side, we
think about the right amount of financing is generally
available. The availability of debt does, however, vary by
sector. And in clean energy, for example, companies face a very
well known what we call valley of death as they try and scale
from technology proof to commercial scale production.
Turning to the equity front, we recently did a survey of
early stage companies, and their executives said that access to
equity funding is their second most significant challenge,
right after scaling operations for growth. And we think this
reflects a few underlying trends.
On the positive side of things, companies are adopting much
more capital-efficient models, which means they just need less
money to get started and to begin growing. Venture capital
investing levels have largely recovered from the steep falloff
we saw during the financial crisis. And other sources of
capital, including many of those you are going to hear from
today, are providing more and more funding to early stage
companies.
Public equity markets are also starting to rebound. And the
health of the IPO market, as you understand from your work on
the jobs bill, is very important, because traditionally about
90 percent of growth, of job creation by high-growth small
companies has occurred after they have gone public.
But the picture isn't universally rosy. While venture
investing has recovered, venture fundraising actually has not.
In addition, access to capital remains more difficult in
capital-intensive, heavily regulated sectors, most notably life
sciences and clean technology. This is already affecting the
kinds of innovation that is occurring, and it has potentially
serious long-term implications for our country.
Turning to the question of the role of policy, we believe
that the innovation economy depends first and foremost on the
people who build and back high-growth companies. But we also
think that policymakers can have a dramatic effect on the
overall ecosystem.
To thrive, startups need government leaders who take the
long view, who understand the importance of letting people take
risks, who base decisions on facts, and who refuse to entrench
the status quo. Top of my issues for start-up entrepreneurs
include education, access to talent, the regulatory
environment, intellectual property protection, health care, and
R&D funding.
Like you, Mr. Schrader, I see the recently enacted JOBS Act
as a very positive sign, and I commend the House for its
leadership and its bipartisan approach to passing this
important piece of legislation. I have also been heartened by
steps that Members of Congress have taken and are taking to
make sure that Dodd-Frank is implemented in a way that doesn't
inadvertently stifle the amount of capital flowing to high-
growth small businesses.
Looking forward, I hope the House will reauthorize the U.S.
Export-Import Bank soon. To give you a sense for this agency's
impact on small business, in 2010 just our EX-IM loan
commitments helped 75 small businesses generate more than $1.4
billion in sales and support more than 6,000 U.S. jobs.
The United States is lucky. We have a vibrant innovation
sector. Other countries are trying desperately to recreate what
we are lucky enough to have naturally. All we need to do is
avoid stifling it.
I commend this Committee for holding this hearing, and I
look forward to working with you to strengthen the vibrant part
of our economy that we are here discussing. Thank you for your
time, and I am happy to answer any questions you may have.
Mr. Mulvaney. Thanks, Ms. Dent.
Mr. Best.
STATEMENT OF JASON W. BEST
Mr. Best. Chairman Mulvaney and Ranking Member Schrader and
members of the Committee, thank you very much for the
opportunity to discuss crowdfunding and how it can function as
a part of the solution for the small business funding crisis in
the United States.
I would like to begin by thanking the members of this
Committee and the House at large for their bipartisan and
overwhelming support for the crowdfunding as part of the JOBS
Act the President signed on April 5. It was a great testament
of the willingness of both parties to work together in support
of small business and entrepreneurs, which we all know are
America's economic engine.
When entrepreneurs have access to capital to grow their
organizations, it translates into new American jobs and
American innovation.
My name is Jason Best, and I am an entrepreneur who has
been part of the executive management team also of Kinnser
Software, that was ranked as one of the 500 fastest growing
private companies in the United States both in 2010 and 2011.
I am also co-founder of Startup Exemption. Startup
Exemption was formed to advocate for the legalization of
equity-based crowdfunding. I and my co-founders, Sherwood Neiss
and Zak Cassady-Dorion, saw firsthand the realities of the
capital formation crisis in January of 2011. We created a
proposal to update securities laws that were written almost 80
years ago to enable crowdfunding to take place in the U.S.
We began working with the House on our ideas. And thanks to
the collaborative leadership of the House, the Senate, and the
President, crowdfunding has now become law.
Now the SEC has begun its 270-day rulemaking process, and I
appreciate the opportunity to share my perspectives on what
this means for small business, as well as what I would
respectfully suggest that this Committee and the House consider
between now and the conclusion of the rulemaking period.
Crowdfunding will enable organizations to use SEC-regulated
Web sites to raise modest amounts of capital from large numbers
of regular Americans. In exchange for that capital, these small
businesses will issue equity or debt securities. If we think of
the Internet as Web 1.0 and then the rise of social networks,
like Facebook and Twitter, as Web 2.0, this legislation really
creates Web 3.0. Web 3.0 is where the social Web meets capital
formation. Finally, we are able to harness the power of social
networks as well as communities of geography and communities of
interest to build businesses that create jobs and innovation.
I live in San Francisco, California, where venture capital
and angel investors are plentiful. The same can be said of
places like Austin, Texas, and New York City. How will this
crowdfunding benefit companies in these places? It really is
looking at providing them with another option for some early
stage businesses who need to establish proof points with
professional investors that the management team can execute and
there are markets for its goods and services.
Mr. Chairman, I believe that companies may use crowdfunding
as an onramp to professional capital and investment from angels
and VCs.
But what about places like Natchitoches, Louisiana, where I
grew up, or Arnold, Nebraska, where my family first settled in
this country? There are great ideas, talented entrepreneurs,
and hardworking small business people in towns like these all
across the country, and many of these individuals have no
access to venture capital or even bank loans. Many Main Street
businesses may never fit the typical venture-backed business
model, but may be really good investments for individuals in
those communities. Now, crowdfunding can provide these
businesses and entrepreneurs the chance to raise capital from
their own communities. Soon the dry cleaner could crowdfund to
add much needed equipment or a restaurant could open a second
location. While crowdfunding alone cannot solve all capital
formation challenges, it may provide benefits to many
businesses.
Mr. Chairman, there is still a great deal of work to do in
the 256 days remaining in this rulemaking process. As the
President noted during his signing ceremony, the crowdfunding
industry has formed the Crowdfunding Leadership Group. I was
meeting with this group yesterday in fact. This group's goal is
to collaborate with the SEC during the rulemaking period as it
seeks to provide oversight, education, and investor protection
for the industry. These 14 crowdfunding companies and industry
experts that created this group have already begun their work.
And as a board member of this group, I ask for this Committee's
help in ensuring the SEC can complete its work within the 270
days mandated by the legislation of the JOBS Act.
The crowdfunding industry has committed to do all it can to
create an orderly market with investor protection, investor
education, transparency, and data flows that can demonstrate
that the market can create jobs, innovation, and successful
companies. Please help us as we collaborate with the SEC to
create rules that will enable this industry to thrive.
Thank you, Mr. Chairman and this Committee, and I look
forward to your questions.
Mr. Mulvaney. Thank you, Mr. Best.
If you can give me just a second to go over a couple
housekeeping things with Mr. Schrader.
At this point, with Mr. Schrader's approval, I would like
to yield a few minutes to Mr. Chabot for an opening statement.
Mr. Chabot. Thank you. I will be very brief. I just wanted
to welcome and thank Tony Shipley, who is from my district,
from my city, Cincinnati. And Cincinnati is known as the Queen
City. And they are the Queen City Angels. And they have
invested I believe in 52 entrepreneurial companies now, have
raised about $30 million, and have I believe about 50 investors
in your company.
And Tony Shipley is testifying on behalf of the of the
Angel Capital Association, which is a trade association
representing more than 7,500 accredited angel investors. And I
know we have got a vote, so I don't know if we want to get his
testimony in before.
If so, I will yield at this point.
Mr. Mulvaney. Actually, I think we have just enough time
for that.
Mr. Shipley, if you would present your testimony. And then,
after that, we will adjourn for a brief time.
Mr. Chabot. So, welcome to Washington. You have 5 minutes.
STATEMENT OF TONY SHIPLEY
Mr. Shipley. That is what I was told.
Thank you very much.
Chairman Mulvaney, Ranking Member Schrader, Member Chabot,
and all the other members of the Subcommittee, thank you for
holding this hearing on equity finance as a catalyst for small
business growth.
The capital that equity investors provide, both financial
and intellectual, is important for the successful creation and
growth of innovative entrepreneurial companies. My name is Tony
Shipley, and I am a co-founder of the Queen City Angels, a
Cincinnati, Ohio, group of 50 angel investors that have
invested more than $30 million of our own money in 52
entrepreneurial companies in 11 years.
We make multiple investments in these small businesses to
support their development, and as such, we have made a total of
115 investments in our portfolio companies. Our money has
leveraged an additional $60 million in direct co-investments in
our companies and $120 million in follow-on venture capital.
I am pleased to represent the Angel Capital Association, a
growing community of sophisticated private investors known as
angel investors, who invest money and expertise in high
potential start-up companies. The Angel Capital Association,
ACA, is the professional alliance of angel groups in the United
States and Canada, and includes 165 member angel groups in 44
States and another 20 affiliated organizations.
The Angel Capital Association has about 350 angel groups in
its database, located in every State, compared to about 100
groups 10 years ago. The new HALO Report from the Angel
Resource Institute, Silicon Valley Bank, and CB Insights
describe the investments angel groups made in 2011: Median
round size of $700,000; 58 percent of investments were in
health care/life sciences and Internet/IT sectors; two-thirds
of the investment rounds were syndicated, often with multiple
angel groups; and investments were distributed throughout the
country. Two-thirds of the deals were outside of the
traditional equity centers California and Boston.
Queen City Angels' experience fits within these national
statistics. From conversations with my colleagues in Cincinnati
and across the country, my angel journey has a lot in common
with many active angels, including past entrepreneurial
experience and interests, investing for more than financial
returns, connecting with other smart investors, becoming part
of a start-up ecosystem, and providing continuing support to
entrepreneurs and start-up companies.
Angel groups like Queen City Angels actively work to market
and brand themselves so that entrepreneurs can find us. We work
with many organizations to conduct initiatives, such as monthly
mentoring sessions and incubators, and conduct an annual 2-day
entrepreneurial boot camp to prepare entrepreneurs who are
making effective presentations to investors, judging business
plan competitions, participating in regional venture forums,
and many other events.
I recommend a few things to help strengthened the
environment for starting and growing businesses, including
leverage the large number of Baby Boomers. In addition to their
equity capital, they can bring many of the skills, experience,
and mentoring needed by startups and early stage companies to
help them be successful in shorter periods of time without
making many of the costly mistakes that startups tend to make;
leverage private investments to get companies out of the
capital gap that was testified to a moment ago, the valley of
death; ensure enough angel capital to support new ideas.
The Angel Capital Association calls your attention to a few
public policy issues to ensure the health of these investors.
Reinstate the 100 percent tax exemption on gains in qualified
small business stock; consider tax credits for angel
investments in qualified entrepreneurial companies; and develop
education, training, and awareness programs for investors and
entrepreneurs.
Thank you for this opportunity to describe the unique role
and significant impact that angel investors have in our economy
supporting the innovative startups that create important jobs
in our country. I would be happy to answer any questions you
may have and for the Angel Capital Association to provide you
with additional information where and when you need it.
Thank you.
Mr. Mulvaney. Thank you, Mr. Shipley.
And Ms. Jackson, with our apologies, I think we are going
to draw a temporary close right now.
Mr. Schrader and I and Mr. Chabot need to run over. So what
we will do, three votes, gentlemen, best guess 30 minutes? We
are going to shoot to be back here as close to 11 o'clock as we
possibly can. So as soon as everybody is back in the room, we
will get right back to it and wrap up this afternoon.
Thank you very much. We will see you in a little bit.
[Recess.]
Mr. Mulvaney. If it is all right with everybody else, we
have got one more witness to testify, and we have got some
questions.
We also welcome Ms. Chu from California.
And so, Ms. Jackson, when we were so rudely interrupted, it
was your turn. So fire away, and then we will move to the
questions.
STATEMENT OF ANGELA JACKSON
Ms. Jackson. Thank you very much.
Thank you, Chair Mulvaney, Ranking Member Schrader, members
of the Committee.
As you know, I am Angela Jackson, and I am delighted to be
presenting my testimony here today.
I am fortunate to be involved in the entrepreneurial
ecosystem from several angles, one as fund manager of a
professionally managed seed fund, called the Portland Seed
Fund; one as a chapter president of an angel group of private
citizens getting together to invest angel capital; and third,
as the director of the Portland State University Business
Accelerator, which is a facility housing 25 to 30 fast high-
growth technology, biotech, and clean-tech companies.
In addition, I grew up in a serial entrepreneur household.
And much like Mr. Schrader, got to witness my father betting
the last $2,000, $3,000 on starting a company, which
fortunately one day did have a nice exit and generate a lot of
jobs and economic activity. I got to go to college off the
earnings for one.
Like my father, many entrepreneurs do choose to bootstrap
their companies. And in that case, they trade sort of a slower
level of growth--this was a 20-year overnight success--for the
faster, explosive growth that you might achieve by seeking
venture or angel capital, where you can accelerate that growth.
So I look forward to answering questions later. I thought
it would be helpful to talk about some things that are going on
in Portland, Oregon, which is a real entrepreneurial
destination. We are actually having entrepreneurs start to move
to Portland to build their companies because of the quality of
life, the access to tech talent, and the cost of living vis-a-
vis other communities where they might like to be.
So, from my vantage point, things are looking good and
getting better. Investors are coming back into the game,
startups are creating companies. So from the Portland Seed Fund
standpoint, my partner, Jim Huston, and I raised $3 million in
a hybrid public and private fund; $3 million doesn't sound like
a lot by anyone's measure. But what we do is invest initially
very small amounts of capital, $25,000 to start, in who we see
as the highest potential, high-growth, capital-efficient
companies that we can find in Oregon. We do these in classes or
cadres of eight at a time. And with the capital comes strings
attached in the form of mentorship, intensive connections and
investor introductions, as well as introduction to the ABCs of
running a business. Very often these seed stage entrepreneurs
come at it from the standpoint of the product, but they don't
understand the other nine-tenths of what building and running a
successful business encompasses. And we expose them to that.
To date--this is quite new--we kicked off the fund with our
first investments last July, eight at a time, and we did a
second class just in early March. So 17 total investments to
date. Those companies, even after we just invested an initial
$25,000, have created 60 jobs and have gone on to raise over $4
million in follow-on priced capital.
So we are very proud of the progress to date. But I also
want to point out and set expectations, we are playing at a
high-risk, high-failure rate asset class, the seed and angel
class, and we know that failure is a key part of the game. And
we do expect failures.
So we call this the catalyst and the crucible. The
discipline around what we do at the seed fund is we think what
makes the difference in accelerating these company's success.
We take a similar approach at the Portland State University
Business Accelerator. But the types of businesses that we serve
are a little different, and they have a longer time to market.
Bioscience cannot be a $25,000 overnight success, for example.
So, instead, we help these companies access larger formal
rounds of capital. And we are proud to report that those
companies were the subject of a Portland Business Journal lead
article last November, something along the lines of, What is in
the water at 2828 Southwest Corbett? These companies have
attracted $128 million in private capital to Oregon, which is
kind of a cash-starved venture State, through their great work.
And that was over a 5-year period. These companies are hiring
rapidly. These 25 to 30 companies have 15 open positions today.
So these are in fact job-creating companies.
The third hat I wear is with the Keiretsu Forum, the angel
group. And this is actually a global angel group, but I
participate in the Northwest Circuit, which encompasses 240
members. Those 240 members last year invested $24 million of
their own capital in 36 companies, to grow them and to expect a
return. I would sort of tap groups like Keiretsu Forum as a
logical partner with the new crowdfunding legislation to put a
face in a room to create an online-offline experience to vet
out some of the deals, the due diligence, and the deal
screening that will be a necessary part of crowdfunding, which
we are excited about, by the way.
If there were, if I could wave a magic wand and ask for a
couple of things, I am seeing that--first of all, we are
supportive of the crowdfunding legislation. We also know, we
are cautiously optimistic, we know that the devil will be in
the details of rulemaking. So we are hopeful that that process
will go well. But it is early to tell. We are probably more
excited about the easing of the nonsolicitation ban in the
short term anyway from Reg D, which will make it easier for the
already in place angel infrastructure to advertise, attract,
and recruit new members, who, by the Keiretsu example, you can
see are ready and willing to put, you know, funds into good
companies.
In the yet-to-do column, increased incentives to angel
investors who are putting risk capital into place to grow the
economy would be a top priority as well as easing the friction
through the Tax Code to startup companies, who are struggling
to create these jobs. And I know you are well aware of many
proposals. I am not going to suggest or back a specific one.
A couple of other potential upstream choke points to be
aware of. I am not experiencing the easing of lending with the
small companies that I work with yet. I would like to see some
provision where the top performers, as vetted by groups like
mine, can access loan capital earlier in the form of working
capital and inventory financing. These are huge potential choke
points to the growth that they could put on. And they are
still, in my experience, struggling to get those loans. And I
am happy to talk to anyone who knows a way around that.
And lastly, we are seeing a choke point of talent actually.
So the training, and whether we are training organically here
or recruiting highly skilled tech workers to fill out these
jobs that are becoming available, this is the new choke point
that I am seeing in the job-creating companies.
So, with that, I am looking forward to your questions.
Thank you.
Mr. Mulvaney. Thank you, Ms. Jackson.
Thanks to all the witnesses.
As is my custom, I usually defer to the ranking member.
So, Mr. Schrader, you are recognized for as much time as
you will consume.
Mr. Schrader. Thank you, Mr. Chair.
Appreciate everyone for coming. Both the chair and I were
kind of anxious to hear your testimony and learn how we can
continue to help this critical part of our economy develop and
grow.
I guess I would start with Ms. Jackson, if that is all
right. Elaborate maybe a little bit on your last two points
about the choke points. And maybe Ms. Dent could chime in also
about--I agree, in my State at least, the small, small
businesses are still having a lot of trouble with the credit.
The middle stage and larger businesses I think are in much
better shape. So, you know, a little bit on what some of the
solutions are that you think.
And Ms. Dent, if you could follow up on that.
Ms. Jackson. Sure. Understanding bank underwriting, that is
not my sweet spot. But what I can report is when we put in the
hours and--you know, we are professional fund managers; we are
able to select top performing companies and surround them with
everything they could possibly get and need to ensure their
success. And again, there will still be failures. But there are
companies that will fail first because of lack of access of
that next year capital and not for any other factor. If there
is a way to achieve some sort of seal of approval or some sort
of loan guarantee that those particular hotshot companies could
achieve some, you know, kind of line of credit--again, it is
not for every company. It is not for small business, Main
Street America; this is a different type of company I am
talking about----
Mr. Schrader. Are you familiar with the new market venture
programs SBA has? Are they too cumbersome, too whatever? What
is the deal?
Ms. Jackson. In my experience, again, I work with hundreds
of entrepreneurs, I have yet to meet one who has successfully
accessed those programs.
Mr. Schrader. That is telling.
Ms. Jackson. It is not to say that they aren't elsewhere,
but in my experience in Oregon, that is true.
Mr. Schrader. Ms. Dent, any comments?
Ms. Dent. Sure. I think there are probably at least two
things going on. One is, by definition, we see the companies
that we see, and there are relatively small lenders who will
lend to these very small startups. So some of it may be an
information flow thing. If the companies can't find their way
to one of the handful of people who is open to lending to very
early stage companies, by definition, we will believe everybody
is getting the credit they need, and they won't be getting the
credit they need. So I am happy to introduce you; we do have an
office in Portland, and I am happy to introduce you to my
colleagues there and let them continue the conversation.
Ms. Jackson. I know your colleagues. They are lovely
people. Thank you.
Ms. Dent. The second is, frankly, harder to solve. And that
is that lenders have relatively little upside; they earn
interest, and they really can't therefore take the downside
risk that an equity investor can and often chooses to take.
In addition, under the banking regulations you have to have
one or two sources of repayment. That doesn't mean potential
repayment, that means accounts receivable, cash on hand, or
something else that you can count on as a source of repayment.
And if you don't have that, you actually have to treat the loan
as a loss. It doesn't matter if you remain optimistic that it
will be recovered, but you have to take it out of income in
this period and then hold it basically in a separate account.
And then when you recover that, that flows back in. But it does
impose a rigidity on what banks can do on potential they
believe in, potential they see and they share with the
investors. A belief that the company will perform well and will
be able to pay, that is not enough for a bank to be able to
lend. They really need to see the actual source of repayment.
And there usually have to be at least two sources of repayment.
And that is a basic gap between I think the desire for
credit, the realistic and reasonable desire for credit on the
part of the entrepreneurs in these startups and the legitimate
views of the lenders looking at the credit from a credit
perspective.
Mr. Schrader. So then a question for the whole panel I
guess is, I agree, banks never lent me money unless I really
didn't need it. And that is not a slam on the banks; it is just
the real world. Because like you said, they have to have some
sort of asset. And when I started, I didn't have a whole heck
of a lot.
So what do you use to guide your decisions? You know,
obviously, you have more flexibility as angel investors. How do
you decide which is a better risk than another? Because
eventually, you do want to make some money on your investment
at some point in time. So what are some of the things you look
for to guide your decisions?
Ms. Dent. There are probably two big differences between
Silicon Valley Bank and most banks. One is that we will lend
against the probability of the next round of financing as a
source of repayment; that when we are in conversations with the
investors and we know that they are backing a company and we
know that when that company reaches the next round, they will
be there. In the near term, the company usually has cash
because equity goes into companies in chunks. So they sort of
get a load of cash, we can lend against that cash. As they use
that cash and develop their product or service, as it gets
closer to the point where they are going to need to raise
another round, then we can engage more with the investors. And
it is our focus on the ecosystem and our deep relationships
that let us have all the conversations we need to have to go
figure out, is this company going to get that next round, in
which case we can hang in there with them, or not going to, in
which case we would work with the management to wind down the
company because it is approaching that end point. And it is
better to do it gracefully if they are not going to make it.
I think the second difference that we believe really
differentiates ourselves comes later. It is after you get the
credit, so you get past that initial gate, what happens when
you hit the inevitable bumps in the road? And I think we
believe, again, because we focus on the sector and we work so
much with entrepreneurs, that we are better able to understand
what is really going on and not react too strongly to things
that happen, and sort of hang in there and figure out, again,
we have an obligation to the Federal Government and to our
shareholders to continue to be safe, sound lenders. But the
more you understand, the more you can differentiate real risk
from perceived risk and hang in there where it may look like
there is a risk, but you understand the facts, and it actually
is a risk that is manageable and can you stay with the
management team and let them work through that risk.
Mr. Schrader. Very good.
Mr. Best. We will just go right down the road. Comment?
Mr. Best. I guess we definitely see, in my work with
Kinnser Software in the last 4 years, we spent a lot in Austin,
Texas, and certainly a lot of venture capital there. But from a
small business lending perspective, definitely a very
challenging environment still.
I think Mr. Shipley has made an investment in a company
that is part of the leadership group, this crowdfunding
leadership group that we are working on on the debt side,
SoMoLend, and he may have some more specific comments about
them. But certainly this crowdfunding on the debt side, the
opportunity there really is in the research work that that
platform has done, the typical amount of money that a small--a
Main Street business needs is around $20,000 to $25,000. So it
is a fairly small amount. It is an amount of money that could
certainly be crowdfunded effectively for Main Street
businesses. So I think whether that is on the equity side or
the debt side, I think there is a lot of opportunity there.
Mr. Schrader. Very good.
Mr. Shipley.
Mr. Shipley. Yes, just a couple of follow-on comments.
Mr. Best talked about the company that we have invested in,
which is SoMoLend. And it is a part of this crowdfunding. In
fact, the lady who started that business is going to be working
with the SEC and the committee that they are putting together
to finalize the regulations on this. So we are really
interested in what will come out of that.
And as Ms. Jackson pointed out, I think the devil will be
in the details. So it is going to be very interesting to see
how that shakes out at the end of the day. And I think the
question is, is it going to be more appropriate, ``it'' meaning
crowdfunding, for those companies that are more lifestyle
oriented, or will it also apply to companies that are venture
oriented, that can actually get organized angel rounds of
capital or VC rounds of capital. So I think we are going to
shake that out over this next several month period.
There is another company in Cincinnati that we are
affiliated with. One of our angel members started a company
called the Business Backer. And it is exactly for those
companies who need--maybe it is a pizza parlor and, they need a
$25,000 loan that they can't go through the bank and get
because they don't have the collateral to support the loan. And
as long as they have a revenue stream, they can get a loan from
this organization. And the way the loan is repaid is on every
revenue transaction they take a little piece of that revenue
and repay the loan. So over a several month period, and
generally a 9-month period, they have repaid that loan. So it
is one way to fund these companies who need these small amounts
of capital.
Another concept that one of our ACA members is working on
is this idea of revenue funding. And it is a higher level of
activity that I have talked about with the Business Backer. And
a gentleman that is looking at all of the ins and outs of how
you would do revenue funding, in fact he is Rob Wiltbank. I am
sure you know Rob.
Ms. Jackson. Yes.
Mr. Shipley. I think that is a very interesting concept,
because there are a lot of companies that are never going to be
the strategic kind of companies where venture debt or
recognized angels or VC money will come to the table. But they
can be very nice $5 million, $10 million, $15 million kinds of
companies, and they may need a half a million or a million
dollars, and they could raise this through revenue funding. It
is the same concept where the people lending will take money
back on the revenue stream until they have gotten the returns
that they expect to get. If it is a 2 return or a
3 return, once that happens, there could be some
follow-on warrants that you retain some small equity sliver in
the company. But it is another way for those more lifestyle
kinds of companies can actually get the revenue--or the funding
that they need to grow their business. So I think that as a
pretty nice concept.
And Rob Wiltbank is doing a lot of work around standard
term sheets, standard documentation that these kinds of
companies would sign and put in place for that kind of funding.
So we are really looking forward to see what comes out of that.
Ms. Jackson. Thanks.
I would agree with Mr. Shipley; that is a really
interesting and important new trend. And Professor Rob Wiltbank
and also Thomas Thurston, both in Oregon, are taking a
leadership role on defining what those types of deals would
look like.
The type of investor that that might attract is a little
different than a pure angel investor, who sometimes is going
for more of a home run return. So I think what is important
here is there is a role for everyone to play.
And to Ms. Dent's point, absolutely, we understand there is
certain regulatory issues and covenants. But there is an
opportunity for somebody to lend money--and I don't know who it
is--to lend money quickly to the right types of companies, and
they will get a nice return. Now, who that is I think, you
know, bears some discussion. But it is an interesting topic for
filling in the gaps.
We need to create this seamless capital ecosystem. And I
think we are doing a really good job now on a seed level, where
3 years ago, that was seen as the area of greatest paucity.
Now, I almost think we might be--I hate to say we are over-
allocated on the seed side, but I promise you companies will
get funded that probably don't deserve to be because there is a
lot of seed capital out there right now.
I think the next place we need to turn our sites is just
upstream of that, so the real top performers get the capital
they need to continue.
Another issue I just want to mention, loan versus equity.
Professional investors don't want to come into a deal that is
over-allocated to other investors. And so everyone has a role
to play. Can grants, can loans create a nondilutive sort of
capital influx into the company at the key moments? If that
can, it is a better deal for the investor. You can have an
easier time attracting upstream institutional financing. So
these are all things to consider at the early stage.
Mr. Schrader. Last question for me, Ms. Jackson, and anyone
else who wants to comment. You talked about the talent pool
choke point. Could you elaborate a little bit on that?
Ms. Jackson. Absolutely. So, in Oregon, we are benefitting
from an extreme talent choke point in Silicon Valley right now
and a lot of competition for individual developers and teams.
Some people say acquisitions are happening just to acquire tech
teams. So there is a dearth of that top talent.
Now, in Oregon we have a lot of that talent. It has also
become very competitive for that talent. But we have the
advantage of you can build in scale a company and hire top
talent for less than you can in those talent pools.
But if a company is scaled, you know, to take the next step
and has 50 open key positions, it is a choke point. So how do
we address that through training and acquiring by any means the
appropriate talent to keep our businesses growing?
Mr. Schrader. Very good.
Ms. Dent. If I might briefly add, we do an annual survey of
very early stage start-up companies. And we have just gotten
the results back. We will be releasing it in a few weeks. But
there were a number of findings from that that speak to your
question. One, the biggest challenge they see is scaling
operations for growth, which, based on our conversations with
them, we do think is directly tied back to talent. Two, only
one in five believe that the higher education system is
training people with the skills they are going to need. And
three, on a more optimistic note, I think there are emerging
sectors with enormous potential. We talk a lot about regaining
manufacturing in the United States. There are huge sectors that
require new skills where the fight is not going to be based on
the lowest cost producer; it is going to be the highest skill
force. And so there is an opportunity, if we address this and
start really getting our educational institutions, mostly at
the higher ed level and then percolating down to earlier
education, training people with the skills they need, I think
that the opportunity for the U.S. economy is really enormous.
Mr. Best. Just to echo that, one of the things I heard a
couple weeks ago is there is now a vocational school in
Massachusetts that is offering a vocational degree in
development, software development. And so to begin--and so in
addition to the traditional vocational education programs that
occur today, to add an information technology track, the
ability to train people to write code in Java and Ruby and
these other languages that are desperately needed. Having spent
a lot of time in Austin and in San Francisco, there are so many
open positions now for developers. And so, especially in States
like where I am from, Louisiana, or in other places where there
are not a lot of--where you can develop software and you don't
have to be physically in the same place as the company, a lot
of virtual workers that could be in South Carolina, or Oregon,
or other places, there is an opportunity to create these kind
of vocational education programs that could make a huge
difference in local economies and also to stop the gap we have
right now in these technical positions.
Mr. Mulvaney. Thank you, folks.
Thank you, Mr. Schrader.
At this time, I yield to Ms. Chu for any questions she
might have.
Ms. Chu. Thank you.
A very important point of the Community Reinvestment Act is
that it brings lending investments and services to low- and
moderate-income neighborhoods that are traditionally
underserved by lending institutions. And we have a situation
here where historically minority-owned businesses have not
taken advantage of equity financing. In fact, it is estimated
that of the total amount of equity capital invested in the
United States, minority businesses receive 1 to 2 percent.
So how can we work together to help underserved
entrepreneurs learn more about equity financing and start to
utilize equity financing? Do you have any policies with regard
to diversity in lending and helping these underserved small
business communities through equity financing? For everybody on
the panel, if you have any thoughts on that.
Mr. Best. At the Startup Exemption, the organization that
worked on the crowdfunding portion of the JOBS Act, one of our
early supporters actually was Whoopi Goldberg, because she
really believed that it was an opportunity to bring financing
on an equity basis to underserved communities. So in her
neighborhood in New York City, the ability to allow women
entrepreneurs the ability to get microfinance and community-
based lending, community-based equity investments to those
people who are able to build businesses.
You know, so I think that is one of the opportunities that
is there. I think that providing education programs and
providing, you know, through the SBA or other touch points
where we could reach out to those communities and explain the
opportunities for crowdfunding, for crowd lending, I think
would be really powerful.
Ms. Dent. I have a couple of thoughts. One is there are
programs for kids that are really interesting. There is one at
the high school where my kids attend. It is a very mixed high
school with a very high dropout rate. And it is a program
called BUILD. And they spend the first 3 years working with the
kids to develop little micro businesses, maybe making a cover
for a cell phone or something like that. And local
entrepreneurs and VCs from the area coach the kids. They build
the business. They sell their products. They make a few hundred
dollars. And then, during their senior year, they still work
with them, but they use all those skills they have developed
over the prior 3 years to help them select a college and get a
college application. And they have a wonderful success rate
with the kids, and the kids learn entrepreneurism. And they
also increase dramatically their chances of going to college.
It as relatively young program, but at least the data they have
so far shows that the chance they stay in college and finish
college also seems to be higher. So I think programs to teach
entrepreneurship to kids and give them the skills and the
aspirations is part of it.
The second, there is a program in San Francisco called
Astia that works with women entrepreneurs, because actually
funding for women entrepreneurs is also surprisingly less
prevalent than for companies led by men. And they do a lot of
coaching of very early stage companies to help them get ready,
develop their business model, develop their staffing plans,
their marketing plans, their pitches so that they get ready and
are more successful when they go to seek institutional
investments from venture funds or others. And I think that kind
of--it really takes I think a lot of mentoring. And that kind
of program might also be helpful.
And the third is a little bit more to a legislative fix.
The Community Reinvestment Act was enacted a long time ago,
where banking was much more physically based. And it has moved
to a more virtual system. Silicon Valley Bank, for example,
exists in 27 different offices all over the country, but we
only have four--five branches, and they are all in California,
in Napa Valley and in Silicon Valley. All of the other offices
don't count as branches. So, from a Community Reinvestment Act
perspective, they are irrelevant. And I think if you stepped
back and realized that so much of banking is now virtual and
rethought about Community Reinvestment Act in terms of, how do
you get pools of capital into the communities that need them,
and that may or may not be a strict geographic tie between a
bank that physically sits in a location with a branch and the
community that physically surrounds that branch, that might be
a really interesting way to go.
Mr. Shipley. Just a couple of other comments. I absolutely
agree, pushing entrepreneurship down to the lowest level we can
to get kids interested in it is--that is a longer-term program,
but I absolutely endorse that.
You know, kids these days have their heroes. And most of
them that they think are rock stars or sports figures and
people like that, movie stars. But most of them don't have rock
star heroes that are entrepreneurs. And so one of the programs
we are looking at in Cincinnati is how do we take our
entrepreneurs and really elevate them to that rock star status
and give them special privileges in the city so that we become
a magnet so that people who want to be entrepreneurs come into
our city because we treat entrepreneurs in a special way? And
of course, sports stars are really treated in a special way. So
why don't we do that same thing with entrepreneurs?
And one other idea, this lady I mentioned that started this
crowdfunding company also has a venture called Bad Girl
Ventures. And it is for women who want to start basically small
businesses, and they need $5,000 or $10,000 or $15,000 to allow
them to start the business. I don't know a lot of details about
how it operates, but she has had a successful--or a number of
classes of women who have gone through their program and then
have started their own lifestyle kind of business. So that
would be something to look into.
Ms. Jackson. These are wonderful ideas being shared by my
fellow panelists.
I just want to point out a trend that I think is exactly
the opportunity you point out and that crowdfunding is serving
so well, and that is just the democratization of information
and entrepreneurship. Literally, anyone can be an entrepreneur
today. The costs of entry have come down so far. Anyone can
study and learn how to write--can create a mobile app, get it
out on the marketplace very quickly. So anyone can be an
entrepreneur for very little capital.
With that democratization of entry comes more competition.
And people actually need to get better at what they do to stand
out above the other entrants. And that is where I think it gets
trickier. You can get a lot of people to play, but how do you
nurture them so they can actually succeed? And, you know, I
maybe have more questions on that than answers at this point,
but there are some great programs.
The other point is just to keep in mind, we are at the
point now where over half the world's population is under 25.
And the acquisition in the news lately is Instagram and a
billion dollar market cap by 15 people. I am not sure of any
other example of a per-head-count market cap like that in 3
years. And these are all, you know, young people. But if you go
upstream, the fish that acquired Instagram was created by
someone at the time who was under 25. So how do we really bring
not just access to create a company, but that velocity
education to scale a company quickly? Because as these two
examples have pointed out, they can create a lot of economic
value in a short time.
Ms. Chu. Thank you.
Mr. Mulvaney. Thank you, Ms. Chu.
I have a couple of general questions to begin with, and
then I will have some final questions for you as individuals.
But one of the things several of you mentioned in your
testimony was the recent JOBS Act that we passed. And I know
the parts that I liked, and I know the parts that my colleagues
across the aisle liked, but I would be curious to know the
parts of the bill that stood out as being particularly helpful
to each of you. And then perhaps as a follow-up to that, things
that you would have liked to have seen in that bill that were
missing if we decide to take it up again in sort of a 2.0
version next section.
So I will start down here, Ms. Dent, with you. If there is
anything about that bill that particularly stood out to you,
let's hear about it.
Ms. Dent. We probably knew best the IPO onramp provisions.
We had worked on and off with that committee over the course of
last year developing the recommendations. And we see the impact
that the lack of IPO--or maybe better said, the
unpredictability about whether an IPO will be a possibility. It
takes about 2 years to get ready for one. And so it is not a
question of whether you can pull it off when you are ready; it
is a question of do you devote the resources to try to get
ready and the costs, millions of dollars of costs, away from
all the other things you could use that money and your time to
do. So we think that providing a more predictable path, scaling
those requirements is really, really important. The other piece
that we had worked on, the other pieces we had worked on were,
what if you don't want to go public? What if you still are the
right size to be a private company, and so the Reg A, the Reg D
and the shareholder limit provisions, we think in some ways the
bill was strong because it addressed both halves, from the
earliest stage to the latest stage, to give people different
options. I forget who it was who said, there is no single
answer; it is a mosaic.
In response to your other question, I guess I don't have a
version 2.0. What I loved about the IPO act was it avoided the
desire to solve all problems. And it said, let's going
something done. So I think it is great if you are looking to
2.0, but I think what you really should be commended for is
being willing to do 1.0, get it done, move it forward, pass
something and then keep moving forward.
Mr. Best. Obviously, for us, for Startup Exemption and
myself, it would be the crowdfunding act that was part of the
JOBS Act, and the opportunity to raise--for regular Americans
to make investments in their communities and with ideas--
entrepreneurs they believe in and ideas that they love. For a
while now, the donation-based crowdfunding space has been in
act. So companies, like Kickstarter and Indiegogo, where you
can go and contribute in sort of the PBS model of, I would like
to donate money to an artist or a filmmaker or a band, and in
return for that, I get a prize. And typically that is the movie
or the CD or whatever it is that that artist is creating. There
will be more money that is donated through those platforms this
year than the NEA will distribute this year. So well over $100
million. And that has all been delivered with virtually no
fraud. And so it is a real huge opportunity.
To give you a sense of the scale of what crowdfunding could
become from an equity or debt perspective, I think it is a data
point to look at. So I think that is one of the things that we
are really thrilled about. And again, from the opportunity to
say let's get something done, let's put a stake in the ground
and move forward, we were so grateful for that, for taking, you
know, for really moving forward with a new idea in this way in
a really rapid and meaningful way. And we appreciate that so
much.
From a 2.0 perspective, I think that I would like to ask
for the opportunity to continue to engage with you, Mr.
Chairman, and this Committee during the SEC rulemaking process.
Because that is where we are really going to need support in
making sure that we create a process that does protect
investors really well but also doesn't create so much friction
on the process of making these small investments, these modest
investments, that it kills the market. So it really is going to
be that delicate balance, because so much of--a few data points
about what is happening today on those donation-based
platforms. Only about 40 percent of those, of projects that are
posted on those platforms that say, please, we would like to--
please, fund my idea, only 40 percent actually reach their
funding goals. So what that says is the crowd is doing a pretty
good job of vetting the ideas that they think are good ones and
bad ones.
My guess would be that as we look at the equity side, that
those numbers may be even a little smaller than that, as people
really are looking at, what are my returns, and really taking a
very close look at those things. So making sure--and also
typically these investments will be made by people you know.
And so your first-degree connections on LinkedIn, or your
second-degree connections, or third-degree connections, people
who know you or know people who know you. What we see on these
donation-based platforms today is you have to get to a tipping
point of about 30 percent of your funding goal being reached by
people that know you or know of you before strangers will
invest in you. I think that also will be true with equity-based
or debt-based crowdfunding as well.
And so really allowing this market that is very delicate
from a social interaction perspective to take place, I think
there is a way to do it and ensure--create some prudent
investor protections. But just making sure that we can work
with the SEC effectively to do it in a way that doesn't
restrict the market so much that it kills that market dynamic.
So thank you.
Mr. Mulvaney. Thank you, Mr. Best.
Mr. Shipley. The other panel members are much more expert
in the JOBS Act than I am. But certainly we--and we have never
had a company that has gone through an IPO. But certainly with
the modifications made that would allow some of our companies
to perhaps go through that process much quicker and for less
cost, we like that feature of the bill.
On a personal basis, I like the idea that companies that
previously couldn't get access to appropriate amounts of
funding to start their companies, because I think there has
been comments made on that, it could be more lifestyle kinds of
companies, they may never be an organized angel or a venture
capital kind of opportunity, but they are companies that if you
can put a half a million bucks or a million dollars a year into
those companies, they can be very significant lifestyle
companies.
And I like to tell the story of when I was a part of a CEO
group of about 15 members, and we had low-tech, no-tech, and
high-tech folks in the group, but the most successful company
in the group was a lifestyle business. It was $250 million in
annual revenue. He wouldn't tell us the profits that he made,
but I am sure they were much more significant than the profits
we ever made. But that was considered to be a lifestyle
company. So the fact that we could get more of those kinds of
companies, and probably 80 or 90 percent of the companies that
we have in the country today are lifestyle kinds of companies.
So to be able to give them funding to them get the traction
that they need in the marketplace I think is pretty
significant.
Mr. Mulvaney. Ms. Jackson.
Ms. Jackson. Thank you.
Again, supportive and complimentary that this exciting new
form of crowdfunding can be passed this quickly and soon will
be available to the market.
A couple of concerns, and they have yet to--we have yet to
know if they will be concerns, but this is an area for possible
future work. As a large number of investors relates to
converting into follow-on rounds, there may be the need for
some changes in regulation on some upstream funding to
accommodate the crowdfunded investor invested companies. Again,
it is too early, I think, to know whether that is going to be
an issue.
Mr. Mulvaney. And that sort of transitions into my next
question. Maybe it is you, maybe it is Mr. Best, anybody else.
You mentioned something that was of interest to me. I am
not a new-tech kind of person. The companies I have started
have always been old-tech, very old-school, boring companies.
But you mentioned the restaurant in Louisiana. Maybe now there
is the opportunity for them to use this crowdfunding. Why don't
you walk through how you would like to see that work? Ideally,
how would it work if you are a small business owner of a
restaurant in Lafayette, Louisiana, and you want to do this?
And then I would like your input into what needs to happen
during this rulemaking process that we are in the middle of
right now to get to that ideal outcome.
Mr. Best. So, in the best-case scenario, I am a restaurant
owner, I want to add a second location. I would go to a Web
site that would be what we call it a funding platform, a place
where all of these transactions will take place. I as a
business owner and equity--investment seeker would then put in
a lot of information about myself and my business. My Social
Security number, and my business information, and my sources
and uses of cash, and some pro forma kind of business
statements, accounting statements so that I am able to explain
fully to my potential investors what I am going to be doing
with that money and how I am going to be utilizing it. There
will be a video there, like there are on a lot of these sites
today, letting you sort of get a chance to virtually interact
with this entrepreneur.
And then I would then go out to my social network, both
physically in the community, and I love the idea Ms. Jackson
has of creating a physical space for this to take place as well
as an online space, but also through my virtual community of
saying, you know, to my customers and my friends and my
relatives and say, please, invest, I want to add a second
location. That money would come in over some period of time.
Let's say, you know, typically, we would say between 60 and 90
days would be a typical window you would want to leave this
open for. And then, once the funding goal was reached, because
the legislation requires, obviously, there to be a 100 percent
of the funding goal to be reached, if I reach that goal, then
the cash call occurs and I am able to then receive that money
and then continue to communicate through this funding portal
with my investors. And so there would be, you know, standards
required for this restaurant owner to be able to then say on a
quarterly basis.
Mr. Mulvaney. Tell me what those are. Now we have moved
into what has to be done during the rulemaking. So give me the
standards. Tell me the type of things that when the SEC calls
my office and says, what happened at the hearing today, what is
your input, what am I supposed to tell them? What do we want to
focus on as we go through this rulemaking process?
Mr. Best. You want to provide the same type of quarterly
reporting that would be expected from a bank loan or an
investor. Just, you know, provide that basic level of
information on----
Mr. Mulvaney. Does it have to be audited?
Mr. Best. The legislation--I think it depends on the level.
I think that below a half-million dollars, it basically should
be just a signature of the CEO. Above a half-million dollars,
what we have called for is not fully audited, but that it would
be certified by a CPA. Reviewed and certified by a CPA.
Mr. Mulvaney. Now tell me, you mentioned something else,
about it is not the charitable, but the other type----
Mr. Best. Donation based?
Mr. Mulvaney. Exactly. And you mentioned something very
interesting to me, which is that it is almost completely fraud
free. How is that happening?
Mr. Best. I think it is just the power of the social Web I
guess is one way to say it. And I guess what that means is it
is, to use a term Ms. Dent used, it is an optimistic way of
moving into this sort of arena, where I say I really want--
because people make donations for a number of reasons. They do
it because they want the perk that comes along with what you
get. Like if you give me $50, I give you my CD of my band. They
do it because they believe in the individual and want to help
out. They want to be a micro patron of the arts. Or they just
believe in the cause or the idea, or want to be part of
something bigger than themselves. I may never be in a band--I
will never be in band--but I might want to support someone who
is. And so those are the things that, reasons that people would
donate.
I think that when you add the equity return piece to it, I
think all those things still exist. But you are adding also to
it the desire to be part of something bigger that may have a
financial return for you.
Mr. Mulvaney. And do you think that the risk for fraud
would be higher or lower? Because you have just described
essentially the old-fashioned charitable--you are right, you
are a micro patron of the arts, which is a slightly different
calculus that you go through versus investing in that
restaurant. Do you think when we switch over into that return
on equity, that the risk of fraud goes up, goes down, or stays
about the same?
Mr. Best. I think it stays about the same. I mean, there
may be some--it is totally hard to predict because it is kind
of a whole new area. But I don't see it being orders of
magnitude different than what we are seeing today with the
donation-based platforms. Because I think that the main reason
is the disinfectant quality of social media, the ability--the
power of sunlight, if you will. If I am signing into these
platforms, both as an investor and as an entrepreneur, and I am
signing in with my online identity, and all of my network is
there, it is really hard to hide. Because in the past, the
fraud that took place was I knocked on a door, or I made a
phone call, or I sent you a one-to-one communication email that
said, you know, I got this great idea. This is you putting
yourself out in front of the entire Web, with all of your
social connectivity watching. And there will be online rating
systems, just like there are on Amazon or on the other Web
sites.
Mr. Mulvaney. So it sounds like there is a strong argument
for a fairly light hand when it comes to prophylactic fraud
prevention. Because it is people that you know, because of the
forums that you are moving in, that I guess you are trying to--
I am trying to make an argument for you that the SEC and
whoever else gets involved in rulemaking should not go too
heavy on trying to anticipate fraud and hope that perhaps the
market will insulate itself against that to begin with. Okay.
That is great.
Ms. Dent, very quickly, and I don't want to have a hearing
and mention the words IPO and not have somebody saying
something about Sarbanes-Oxley. So you win by default, because
I have got my angel investor, my crowdfunder, and you are the
closest we get to IPOs. And you actually mentioned it a couple
times. Is it working? We all know that formation of public
entities is at an all time low. I think it was you who
mentioned, I think accurately, that it is when that company
gets over that hump and becomes public that we see the dramatic
increase in jobs because the access to capital allows the
company to grow so dramatically. So how are we doing on IPOs,
and if you have some suggestions on fixes to Sarbanes-Oxley,
would there be any? And what would they be if there are?
Ms. Dent. I think for growing companies the two most
important things are they have scarce resources, so you really
want to make sure--it is not a question of I wouldn't say get
rid of Sarbanes-Oxley across the board. Personally, there are
things I would get rid of about it. But it is really scaling to
the level of risk. And so I think what the JOBS bill did, for
example, which is reduce the number of years of audited
financial statements you have to provide when you go public,
and remove the audit, the external auditor attestation around
the 404 controls, those were both steps in the right direction.
Because for a smaller company, those don't add almost any value
to investors, and yet they add a lot of costs. And that cost is
coming out of somewhere else, hiring an engineer or expanding
into a new market.
So I think continuing to really look at what have we
learned from Sarbanes-Oxley for a larger, more complicated
institution that it may be that the costs are justified, but I
think as you go down the curve, it gets into a much bigger
question.
I think a second thing that really came out during the
debate over the JOBS Act is, do people understand small
business? I think there is still in Washington policy circles a
view that small business is really, really small. And the
reality is that for these technology companies, you can get
pretty big in terms of revenue and still be investing
everything you have got in new products and not profitable.
Mr. Mulvaney. I can assure you we don't understand small
business. Right now, the current debate right now was a small
business tax reduction that could go to companies that have
several tens of billions of dollars in revenues. But go ahead.
Ms. Dent. Oh, really. That is probably a whole different
problem. But I think the tendency is sometimes to cut off small
business at a very low level. So I think Sarbanes-Oxley had a
$75 million threshold. And that is just not really that
relevant. I think something that slides is more relevant than
saying small ends at a certain end point.
And then the third I would say, which arguably is the most
important, which is predictability; that in a sense what people
need to know is what they have to do. And they can cope with
any reality. Different things will happen. And so, for example,
there are some things that won't happen if the cost of doing
them is higher. And that is a loss to our country. But at least
with predictability, you can start to make investments that
make sense. And I think that is what we are seeing play out
right now in life sciences; there is so much unpredictability.
The cost of getting through the regulatory process has
increased so dramatically--and I recognize this isn't Sarbanes-
Oxley, but it is that same theme of, how much do we require
companies to spend on extra levels of protection? And are we
really sure that we are getting extra levels of protection that
warrant that additional investment, recognizing that it is
coming out of somewhere else? And I think those are the
questions I would really recommend this committee look at,
because my guess is there is still more movement to scale 404,
other parts of Sarbanes-Oxley and regulation more generally
back, so that it hits companies with a responsible level of
regulation.
Mr. Mulvaney. One last question for Ms. Dent. You mentioned
earlier that you all have the ability to lend against the
likelihood of the next round of equity funding or next round of
funding. Is that a choice that you make, or is there something
specific to your bank that you have done that you can do that,
or is it something all banks could do if they chose to do it?
Ms. Dent. All banks could do it if they chose do it. It
does take very deep relationships and a very deep understanding
of how companies grow in order to do it well.
Mr. Mulvaney. So that is not our problem or our issue. That
flexibility exists in the marketplace already. Some choose to
do it; some banks choose not do it.
Ms. Dent. Yes.
Mr. Mulvaney. Mr. Shipley, before we wrap up, and I am
trying to wrap up here by noon, you had three recommendations.
And I want to make sure I got all three of them, because I am
pretty sure I missed one. You talked briefly about your 100
percent exemption suggestion. The last one was develop
education and training. And then I didn't even get notes on the
second one. So if you could maybe walk me through those for the
record, that would be helpful, sir.
Mr. Shipley. Sure. These are recommendations that are
generally approved by the Angel Capital Association, with our
public policy group that we have as part of ACA. First one was
reinstate the 100 percent tax exemption on gains of qualified
small business stock. And I think a number of organized angel
groups saw a dramatic increase in investments that they were
willing to make. I think they felt like they were on the clock,
so they were pushing investments into that time period. So we
think if you made this a permanent part of the bill, that we
would get more investments in companies because people would
be--the idea in angel investing or venture investing or
basically any kind of investing is to have greed overcome fear,
and so if we think we can get enough return so that we are
willing to make the investment in a company, and this is one
way to help people step up to the plate and make that
investment.
The second point there, consider tax credits for angel
investments. There has been a very successful program in our
State and other States that are using investor tax credits.
Mr. Mulvaney. We just passed a bill in South Carolina this
week I think.
Mr. Shipley. Is that right?
Mr. Mulvaney. Yeah.
Mr. Shipley. In Ohio, we give a 25 percent tax credit. And
we have had literally hundreds of millions of dollars invested
in companies over the period of time that this has been in
play.
I know, in the State of Wisconsin, which is part of the
testimony, you can see the impact that it has had on both job
creation and on amounts of money that angels have invested in
companies. And I think, from my perspective, we view it as a
way to derisk the investment in some ways. Because as we have
all talked about the kinds of investments that we make, the
failure rate is going to be about 50 percent. These are stats
that have been generated through studies that the ACA has done,
where we surveyed literally hundreds and hundreds of deals that
angels had invested in. And 52 percent was the number that came
back. So we invest in 10 deals; five of them we expect to write
those off. So I think some people--they are going to invest in
the deal not because there is a tax credit, but it is a little
more icing on the cake. And if it is a failure, then we have
got some of the money back by virtue of the tax credit. So I
think that has been very important in our State.
And the third point was then developing educational tools,
training, and awareness programs for both investors and
entrepreneurs. I think a lot of the panel members have talked
about those issues. But certainly from an investor standpoint,
to have more accredited investors who understand the process of
angel investing. When we first started, we actually created a
one-day boot camp to teach prospective angel investors what it
means to make an angel investment. So the ACA now offers those
kinds of programs, which I think are invaluable, so that you
teach people not only the process, but the fact that it is a
high risk that you are taking. And so they understand that risk
profile before they start writing checks. You don't want an
angel investor to write one or two checks, see those
investments go south, and then declare that angel investing is
not worth it. You have to understand that risk profile.
Mr. Mulvaney. Thank you, Mr. Shipley.
Last question, and it is to you, Ms. Jackson. You mentioned
a suggestion, an idea you had about at some point companies
that you term ``vetted companies'', companies that sort of
received a seal of approval at some level of early equity
financing, would have better access to debt. And I am just
wondering if you have any suggestions on how the government
could help that happen. Are there regulations that need to
change? Are there specific things we need to do in order to
encourage that type of behavior?
Ms. Jackson. I will use a community bank as an example. We
have use run into lots of cases where there is a desire to
support a specific company with a loan product but the
inability to overcome, you know, some of the regulations in
order to do so. Again, I am not an expert in banking, so I
don't want to go too deep on what specifically. But what I do
see is an opportunity to have another couple of conversations
to put people together.
I think it is because of the failure rate; I understand why
people don't want to loan money to this risk pool. But if we
have a known behavior of selecting, nurturing, vetting, you
know, the least likely to fail, then is there something that we
could do to get them a loan product? And is there any
regulation that could be eased to make the community banks, for
example, comfortable doing that?
Ms. Dent. Might I also offer one suggestion?
Mr. Mulvaney. Please.
Ms. Dent. There is a provision in the Dodd-Frank Act called
the Volcker rule that says that banks--it was intended to deal
with very high risky activities, proprietary trading and
investing in hedge funds in particular, private equity funds as
well. And one of the issues before the regulators right now is,
will it apply to venture funds? And that includes both venture
equity funds as well as venture funds that provide credit,
debt. And if it is applied broadly to all those funds, banks
will no longer be able to sponsor or invest in venture debt
funds.
I think they are an incredibly important part of this
overall ecosystem because they aren't regulated banks; they do
have more flexibility to come up with some hybrid solutions
that I think are more likely to be able to address the
opportunity Ms. Jackson says. But if Volcker is applied broadly
and all bank capital is legally prohibited from going into
those funds, arguably the investors who are most able to
understand and back those funds are now locked out of that.
And so I would encourage the committee to join with other
Members, there have been a lot of Members of Congress who have
gone on the record saying that the Volcker rule should not dry
up equity going into venture generally. And I think that is an
important thing, because it will affect the very people who are
most likely to solve the gap you are talking about.
Mr. Mulvaney. Thank you, Ms. Dent.
Thank you to everybody. I really appreciate you all taking
the time to do this. I know that sometimes it seems that you
spend all this time to come all this distance, as many of you
have, and then you get maybe 5 minutes to ask questions--or
give your testimony and then get a chance to just do a couple
of questions. And I can't overestimate for you the importance
of what it is that you all do when you come and do this. What
we are helping to do here is drive the debate.
Inevitably, something that you said today, all of which
goes in our permanent record, will end up being discussed in a
trade association paper someplace. And then it turns into a
discussion at the next symposium. And then it turns into
something that somebody brings through an association to their
Member of Congress. And that is how we drive the debate. And I
have seen that firsthand.
I know then that at some times, you think it is a complete
waste of time to come out here and talk for 5 minutes and
travel for 3 days to do it, but I can assure it is not. The
opportunities we get to get your ideas on Sarbanes-Oxley and
the Volcker rule, the trends about the donative funding or
whatever, I can't remember the term, and then the experiences
with the fraud especially, it has been very helpful. And we
certainly do appreciate your input into the process.
With that, since there is no objection, because there is
nobody else here but me to object, I will allow members to
submit questions for 5 days after the hearing.
And with that, we will stand adjourned. I thank you for
your time.
[Whereupon, at 12:04 p.m., the subcommittee was adjourned.]
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