We recently introduced a new recurring feature on our blog called “Carl Grant on Business.” These posts feature videos of ACG National Capital’s own Carl Grant, the Executive Vice President of Business Development for Cooley, LLP, discussing important topics for business students and young entrepreneurs.

In his most recent videos, Carl discusses angel investing for small, start-up enterprises. Angel investors are usually individuals that are unaffiliated with banks, private equity firms or other investment or financial company that invest their own personal money into a company. Angel investors are becoming increasingly popular in fundraising and can be extremely important in standing up a new enterprise.

In his first video, Carl sheds his tie and gets down to business, discussing how small companies can find and attract angel investors that they don’t already have relationships with:

In his second video in the series on angel investing, Carl dives into important questions that start-ups will most likely face from potential angel investors, including corporate valuation:

In a recent article on TechCrunch, Jon Bischke, the founder of RG Labs, discusses the current recession and its impact on the entire country. Well, more like its impact on the entire country minus some small parts.

Jon argues that the current start-up technology markets in places such as San Francisco, Palo Alto and Manhattan have insolated them from the harsh realities of the “Great Recession” and managed to keep the economies growing in those areas. He then goes on to draw a stark contrast between the economies in these areas to what is happening in the rest of the country.

One thing that was not mentioned was the local economies in other parts of the country that are currently showing signs of growth. Surprisingly, it’s not just start-up technology companies that are leading the way.

Take the National Capital Region, for example. The corridor that extends from Washington, D.C. into Northern Virginia has an unemployment rate that is under the national average, according to information from the U.S. Bureau of Labor Statistics.

What is driving the economy in this area? It’s not all emerging growth or start-up technology companies. The government contracting market, health IT and other hot industries continue to drive economy growth in the area.

Further evidence of the National Capital’s strong economy can be seen in the local area’s housing market. According to a recent article in the New York Times, the Washington, D.C. region is one of the few areas that have seen housing prices increase.

That same article attributes the area’s high-tech, media, software, biotech and government markets for driving the region’s economy.

Overall, the region has 5.5 million people and nearly $400 billion in economic output. The region is home to major corporations and the highly-educated staff that work for them, including engineers, scientists and more. Fairfax, Arlington and Alexandria counties in Northern Virginia are in the top 10 in the nation in income. Those three, plus Loudoun County, are in the top five in the nation in human capital.

So, Palo Alto, San Francisco and New York City may be getting by without seeing too many negative effects of the ongoing recession, but they’re not the only ones. The National Capital region remains one of the nation’s strongest economies, and it’s not just tech start-ups driving the region’s prosperity.

With new emerging industries, such as biotech, driving the D.C. economy, there should be hope for other areas as well. American innovation and ingenuity is driving a growing economy in the Washington, D.C. region, and it will bring prosperity back to many parts of our country, not just San Francisco, Manhattan and D.C.

A recent article in the Washington Business Journal discussed the online equity exchange, SecondMarket, and its seemingly increasing foothold in the Washington, D.C. region.

According to the article, SecondMarket, which had previously been much more active in the Silicon Valley, was just starting to see interest from investors in Washington, D.C. based technology firms.

But just what is SecondMarket and why is it becoming so popular?

When the Sarbanes-Oxley Act of 2002 was passed, it drastically increased the amount of scrutiny that companies undertaking the IPO process were subject to. It also significantly increased the overall cost and prolonged the time needed for a company to go through the IPO process.

What resulted was? a situation where typically only larger companies with revenues of $100 million or more can really consider an IPO. Unfortunately, the IPO used to be the best way for investors and executives at emerging growth companies to gain liquidity. In fact, these companies used to struggle to get venture funding unless they intended to go public one day.

That’s when venture capitalists starting talking about a secondary exchange where they could sell shares of stock in privately held companies that didn’t have the same reporting requirements. SecondMarket is that secondary exchange.

Second Market was established in 2004 for restricted securities in private companies and later opened up in April 2009. And unlike the claims of the Washington Business Journal article, SecondMarket and its interest in the D.C. area’s technology community are not new. Executives and investors of private companies in the Nation’s Capital have been using the exchange to increase liquidity and sell shares to accredited investors since 2009.

Regardless of the liquidity that Second Market can bring to executives and investors at privately owned companies, it will never eliminate the need for companies to undergo the IPO process and go public. When a company goes public, typically valuation goes up considerably. Getting the greatest valuation for a company more than justifies the expense and hassle of the IPO process in our post Sarbanes-Oxley business market. The IPO process also opens up investment in the company to ordinary individuals other than just accredited investors.

Although SecondMarket may be gaining steam in the Washington, D.C. region, it’s not a new concept. The exchange’s ability to help increase liquidity for investors and executives has been driving its increased interest here in the Nation’s Capital, but it will never replace the IPO process and the benefits it can have for a company.

In previous posts, we’ve discussed the impact that the current state of the economy is having on the government contracting industry. With the government facing large budget deficits and seeking to trim back spending wherever possible, they’ve looked to defense budgets and defense acquisition processes as places where they can possibly save money and cut costs.

As a result, the government contracting space is expected to face some lean years and even experience a consolidation similar to what occurred when defense spending cuts took effect in the 1990s. Many pundits expect large government contractors to begin to acquire smaller government contracting companies that enable them to bid for niche business that they previously didn’t have the capabilities to compete for, such as network security.

With the business opportunities for government contracting companies shrinking, many of the small and medium-sized government contractors are banding together to ensure their survival.

In October, an organization called MissionLink was profiled in the Washington Post. The organization is an invitation-only forum designed to foster collaboration, knowledge sharing and innovation among national security focused government customers and the CEOs and decision makers at defense, intelligence and national security companies.

By providing a forum for knowledge and best practice sharing among the chief executives at defense related companies, MissionLink is expected to help strengthen defense companies to survive the challenging economic environment facing the government contracting community.

MissionLink’s membership comprises the chief executives from a wide range of small and medium-sized government contractors. Each year, participants will be graduated and new government contracting leaders will be added.

Many of the companies involved on MissionLink’s board should look familiar, they’re members of ACG National Capital. In fact three quarters of the members are based right here in the DC region.

MissionLink is an incredible example of an industry banding together to share best practices and knowledge to survive in what will be a trying and difficult period of reduced government spending. It’s also a testament to the business savvy and know-how of the National Capital region.

The venture finance world has its good days and let’s say, not so good days. The investment community continues to operate with a strategic and consistent approach to deals. 

In fact, the Q3 financing results revealed an ongoing mix of optimism and caution, with deal volume and money going at a robust level.  At the same time, we saw an increase in median pre-money valuations for both Series A and Series B transactions, with a decrease in media pre-money valuations in later rounds. 

Deals also told a cautionary tale with several trends in financing terms pushing investors toward caution, such as:

• Increases in the use of participating and preferred drag-along provisions
• Increase in utilization of pay-to-play provisions in later state deals
• Increase in the percentage of tranched deals 

Because we have witnessed both positive and cautionary trends in the market, early 2011 deals will send strong signals for what’s to come. As we kick off this New Year in the coming days, the glass for 2011 begins half ______, you fill in the blank. 

To view the Cooley report, click here.* This report provides a summary of data reflecting our experience in venture capital financing terms and trends. Information is taken from transactions in which Cooley served as counsel to either the issuing company or the investors.

With all of the Bush tax cuts set to expire in January 2011, the capital gains tax rate would have jumped from 15 to 20% for high earners and from zero to 10% on low earners.  Up until just recently, the rhetoric was on the side of letting the tax cuts expire for high earners, which included letting the cuts on capital gains expire as well.  

The looming increase in capital gains taxes set off a flurry of M&A activity in Q4 of 2010.  Letters of intent were in place, due diligence complete and companies were too far down the road on transactions to put the brakes on when the political climate began to shift following the mid-term elections.  It was apparent until the past few weeks that rates are not going to go up – at least not for two more years. 

With the tax cuts being extended, we may see the rapid pace of M&A slow back down to expected levels. Regardless of the tax cuts or not, M&A and corporate growth is expected to continue in the Nation’s Capital and across the country, well into 2011. The pressure of selling before the tax hikes take effect has simply been lifted…for now. 

By Carl Grant, Executive Vice President of Business Development at Cooley LLP

Disclaimer: The postings on this site are my own and do not represent Cooley LLP’s positions, strategies or opinions.

I followed this year’s Web 2.0 Conference in San Francisco, a preeminent place for leaders of the Internet Economy to gather, debate and determine business strategy, and this year was especially interesting.

The focus this year was on the shifting landscape of the Internet Economy, which is becoming increasingly competitive and crowded. In addition, discussion about rapidly growing market segments, such as social media and mobile, and their impact on the Internet Economy was rampant.

The continued growth of the Internet, coupled with the rapid adoption of mobile Internet and social media, is not only creating opportunities for innovation and the rise of new companies, it is simultaneously creating challenges.

Morgan Stanley’s Mary Meeker delivered a very detailed and interesting presentation on the state of Internet adoption and monetization. Her presentation (available here) was a great reminder of how much and how rapidly the Internet has changed over the past 15 years, how it will continue to change and what questions arise from these changes.

Some of the questions she looked to address included:

• With an increasing global presence in the Internet Economy, does your company know which players in which countries do what you do? Do any of them do it better or differently? Does your company study or implement it?

• Mobile Internet usage and the adoption of smart phones is ramping up faster than any new technology. Is your business leading or lagging in embracing mobile Internet?

• The amount of time consumers spend online is starting to trump traditional forms of media. Is online advertising some thing that your company could benefit from?

• Mobile commerce is seeing constant improvement and revolutionizing the consumer and retail experience. Is your business keeping pace?

I suggest clicking through to her presentation and reading for yourself. The information within raising interesting questions and highlights important trends that are affection Internet companies today.

For companies in the nation’s capital outside of the Internet market, the usage statistics and information included could help to change your mind on the technologies and tactics that you’re employing within your company. Online advertising, mobile commerce and other online trends are disruptive technologies that are changing the way all businesses need to operate to keep up in this changing landscape.

Is your company keeping up?

On Friday, Nov. 19, most venture capital funds let out a huge sigh of relief. Why? Because after several months of soliciting input from the investment fund industry regarding the proper scope and nature of the “venture capital fund” definition, the Securities and Exchange Commission (SEC) proposed its much anticipated set of proposed rules.

If you are questioning why the SEC is defining venture capital funds, it is because the Dodd-Frank Wall Street Reform and Consumer Protection Act that President Obama signed into law on July 21, 2010, assigned the SEC with the task of defining “venture capital fund.”

As for a little background, the Dodd-Frank Act eliminated the cost-prohibitive requirement that VC fund managers register with the SEC under the Investment Advisors Act of 1940.

Prior to the Dodd-Frank Act, many venture capital and private equity fund managers did not registration under the Advisers Act because of the “private investment adviser” exemption. According to this exemption, firms that had fewer than 15 clients over the course of the preceding 12 months and neither had held themselves out generally to the public as an investment adviser nor acted as an investment adviser to any investment company registered under the Investment Company Act of 1940 were exempt.

However, Title IV of the Dodd-Frank Act replaced the private investment adviser exemption with new, more narrow exemptions, including an exemption for private fund managers that provide advice solely to one or more “venture capital funds.”

So, what did the SEC suggest? According to the proposal, the definition of a “venture capital fund” would be any private fund that meets all of the following criteria:

• The fund represents itself as a venture capital fund to investors
• The fund owns solely equity securities of private companies and cash, cash equivalents and certain U.S. treasuries
• None of the portfolio companies of the fund: issue debt obligations (directly or indirectly) in connection with the fund’s investment in such company; redeem, exchange or repurchase any securities of the company or distribute to existing security holders cash or other company assets in connection with the fund’s investment in such company; or are themselves a private fund or other pooled investment vehicle
• At least 80% of the equity securities of each portfolio company of the fund were acquired by the fund directly from the portfolio company
• The fund and/or its managers: offer to provide significant guidance regarding the management, operations or business objectives and policies of each portfolio company (and, if accepted actually provides such guidance) or control each portfolio company
• The fund does not borrow, issue debt obligations, provide guarantees or otherwise incur leverage in excess of 15% of the fund’s committed capital, and any such borrowing, indebtedness, guarantee or leverage is for a non-renewable term of no longer than 120 calendar days
• The fund does not offer its investors redemption, withdrawal or other similar liquidity rights except in extraordinary circumstances
• The fund is neither registered under the Investment Company Act nor has elected to be treated as a “business development company”

In addition, new reporting rules are applicable even to exempt VC funds. Even if an adviser is able to avoid registration under the Advisers Act by qualifying under the VC Exemption, the Proposed Rules requires them to comply with new reporting, recordkeeping and other compliance requirements proposed under the Private Fund Act.

Keep in mind, however, this is just a proposal. The SEC is asking for public comment over the next month or so. Given the importance of the Proposed Rules to the venture capital community, and the immediate reaction of many firms to certain aspects of the VC Exemption, I expect the comment process to be very active and am hopeful that the SEC will see fit to make at least some corresponding revisions.

For more information on the Proposed Rules, please click here.

It is important that fund managers review the Proposed Rules and Exemption Release as soon as possible to assess the likelihood of whether they will need to register under the Advisers Act, and, at a minimum, familiarize themselves with the obligations and contours of the new recordkeeping, reporting, and other compliance requirements applicable to exempt fund managers as a matter of initial compliance readiness. To review the proposal and submit comments to the SEC, click here.

By Carl Grant, Senior Vice President of Business Development at Cooley LLP

Mergers and acquisitions happen for many reasons. A company may choose to pursue a merger to expand corporate growth, acquire emerging technology, acquire customer segments, streamline business processes, and so on. However, it’s very rare to hear about a company acquiring another company for its talent. Unless, that is, the company is Facebook, which considers one thing when buying a company – the people.

It makes sense. Who wouldn’t want the best talent? Founder and CEO Mark Zuckerberg, recently said (as reported by the Huffington Post), “Facebook has not once bought a company for the company itself. We buy companies to get excellent people.”

How can Facebook afford to acquire companies in order to acquire their talent? According to The Financial Times, the company is worth more than $33 billion since the company’s investors have paid up to $76 per share as a privately held company. Currently, Facebook is financed through a mix of private investment and venture capital. These investors have embraced Zuckerberg’s decision to acquire high caliber talent through acquisition since it has obviously benefited the company.

Facebook’s implied valuation places the company at a higher valuation than publicly traded tech giants like eBay and Yahoo!. This has put the company in a unique position to have the resources to simply acquire companies in order to get their people.

So, it’s no wonder that Facebook is stalking startups for top tech talent. Since the company has the capital, the easiest way for them to acquire this talent is to acquire their entire company. What better way to hire a few very talented people at a relatively low price. In all, Facebook has acquired seven companies, including:

• Parakey: Facebook’s first acquisition was this startup run by Mozilla Firefox co-founders Blake Ross and Joe Hewitt. According to the Huffington Post, Zuckerberg enlisted Ross to spearhead Facebook’s internationalization and Hewitt to build Facebook’s mobile apps. Since then, Facebook has enjoyed huge success in both areas.

• Nextstop: A travel recommendation service whose executives included former Google employees. This acquisition was integral in adding Carl Sjogreen and Adrian Graham, who had impressive tenures with Google. Sjogreen led the Google Calendar team at its launch and was very involved in Google Maps, while Graham launched Google Groups and Picasa.

• FriendFeed: Through this deal, Facebook added several ex-Google staffers, including FriendFeed co-founders Paul Buchheit, who created Gmail, and Bret Taylor, who developed an early prototype of AdSense and was the original manager of Google Maps. Taylor now serves as Facebook’s CTO.

Now, that’s an impressive amount of talent, all attained through acquisitions. With most of these deals, Facebook has done little with the actual companies they acquired. Instead, these high-caliber individuals have enhanced Facebook’s core team and products.

Typically, acquiring a company does not necessarily mean top executives will join the new company. But, who would want to leave Facebook?

To hear Zuckerberg firsthand explain why Facebook buys startups, watch this video:

Disclaimer: The postings on this site are my own and do not represent Cooley LLP’s positions, strategies or opinions.

By Carl Grant, Senior Vice President of Business Development at Cooley LLP

To spark its economy, the Cuban government announced this week that it’s cutting its spending by eliminating half a million state workers over the next six months. According to CNN.com, President Raul Castro’s announcement came as no surprise since last month he announced plans to eliminate one million state jobs over the next five years. Since the economy desperately needs a life line, President Castro is putting his plan on the fast track.

While these layoffs have begun, by March one-tenth of Cuba’s public workforce will have received a pink slip and will be in search of another job.

As a communist country, Cuban’s government has controlled 90% of the economy since Fidel Castro took over in 1959. The Cuban’s government has run everything from plumbers to gas stations and ice cream parlors to scientific labs, according the article.

However, in an interesting turn of events for Cuba, President Castro will allow more jobs to be created outside of the public sector to keep Cubans working, but off the state payroll. While Cuba says they are not looking to replicate the Chinese system of a communist government with a capitalist economy, foreign investors are paying close attention to what is happening on the small island.

President Castro has warned Cubans that they need to start expecting less from the government. Moving forward, the Cuban government will only employ workers in jobs that are indispensable, such as agriculture, construction, teachers, police, etc.

This is most significant reform by President Castro since he took over from his brother Fidel a few years ago. Cuba’s plan is to help its laid off state workers find employment in the private sector, such as collecting garbage and raising rabbits. This also opens the door to a major expansion of a self-employed workforce, in such fields as hair stylists and auto mechanics.

But, this will not be an easy process for Cuba. According to an article on Time.com, currently about 600,000 Cubans are privately employed. President Castro hopes to double in the next couple of years. But, there is not enough demand for taxi drivers and other small service sector jobs to employ the 500,000 who will soon be searching for a paycheck.

The Time article posed an important question, will Cuba change its law and allow the self-employed to hire outside of their families as well as acquire private investment and credit in order to promote small manufacturing. This could really change the economic prospects in Cuba. Time alluded to the possibilities of European governments and the Roman Catholic Church establishing microloan projects in Cuba to help fund small businesses. If this happens, Cuba will get a much needed major boost to its economy.

This brings up an interesting juxtaposition as the United States has been expanding public sector employment to spark its economy. Are we headed in the wrong direction? 

Also, how will the Obama Administration react? Will the United States change its embargo regulations to let Americans invest in private Cuban businesses? If so, what impact would this have on our economy and the global economy? Drop us a comment and let us know your thoughts.

Disclaimer: The postings on this site are my own and do not represent Cooley LLP’s positions, strategies or opinions.