Tag: Access to Capital

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Accelerators McNair Center Startup Ecosystems

Social Capital Wins over Financial and Human Capital

Entrepreneurship can spur economic growth and job creation. As a result, state and local governments are seeking ways to establish entrepreneurial ecosystems. One way to strengthen an ecosystem is to increase its social capital. Social capital is the networks of relationships among people who work in a particular field.

Lack of social capital is among the top reasons that nine out of ten startups fail. Money and skills are not enough for success in entrepreneurship. Aspiring entrepreneurs also need social capital, which along with financial and human capital, is essential to grow a business.

Human, Financial and Social Capital

It is useful to differentiate between human, financial and social capital. Human capital comprises the knowledge and skill sets that enable people to successfully create new enterprises (Davidsson and Honig 2003; Snell and Dean 1992). Financial capital is the funding needed to get a business off the ground, sustain growth and develop operations.

Human capital is further classified into general and specific capital. General capital is associated with education, which provides the knowledge and the skills to solve problems. Specific human capital refers to the know-how for entrepreneurial activities, which has few applications outside of this context (Becker 1975; Gimeno et al. 1997). An example of specific human capital is the previous startup experience demonstrated by serial entrepreneurs.

Financial capital is key for early-stage startups to fund their ventures. Personal funding, debt, equity, crowdfunding and grants are among the funding sources available for entrepreneurs.

In entrepreneurship, social capital refers to all the interpersonal and interorganizational relationships through which entrepreneurs have access to the resources needed to discover and exploit business opportunities and succeed (Davidsson and Honig 2003; Wiklund and Shepherd 2008).

Social capital is, in simple terms, equivalent to individual and community networks. Networks can have strong or weak ties. Strong ties occur between people or firms with a family, working or professional history. Through these ties, people tend to develop high levels of trust, and therefore, are willing to share more detailed information and are more apt to collaborate. Weak ties occur between people or firms working within different contexts or economic clusters where contact is sporadic. These ties provide access to new information and new contacts outside of existing networks.

Figure 1 illustrates the relationship between the three kinds of capital.

Source: Patricia H. Thornton

Why Is Social Capital the Key to Entrepreneurship?

The obstacles entrepreneurs encountered due to a lack of knowledge or skill and a lack of funding can be solved through social capital. Networks connect entrepreneurs to the right people who will provide information, collaboration and partnerships as well as access to financial resources.

Entrepreneurs with higher social capital have greater chances of getting funding for their ventures.

Fried and Hisrich (1994) noted that since investors receive multiple funding requests, social connections play a significant role in determining the allocation of capital. The findings show investors tend to finance the entrepreneurs and ventures they have heard about as part of their network.

Based on a study of 202 venture capitalists in the priming phase, Shane and Cable (2002) observed that direct and indirect links between entrepreneurs and investors have a positive impact on the selection of projects financed. Shane and Stuart (2002) also noted that social capital of company founders represents an important endowment for early-stage organizations.

Social capital can also increase the human capital of a venture since the network can further advance innovation by merging ideas from different individuals. Investment in social relationships leads to the creation of socially embedded resources that can be mobilized by individuals (Lin 1999). Assuming that the social resources of entrepreneurs are more important than the possession of personal resources, social capital assists in achieving financial and human capital objectives that would be otherwise difficult to obtain (Lin 1999).

Social Capital in Nascent versus Mature Ecosystems

The genesis of startup communities is fueled by entrepreneurs’ individual attributes, their human capital. A high-impact startup can find traditional financing, such as personal funds, loans or investment by friends and family, yet social capital may remain as a challenge. Startups founded in regions with poor infrastructure lack the agglomeration needed to transition their ideas into successful companies.

In the absence of a cohesive startup network, incubators and accelerators can serve as a substitute for entrepreneurs from regions with less social capital. Local stakeholders who sponsor and support these programs have an interest in strengthening entrepreneurship in their communities.

The presence of accelerators or incubators can bring the community together as a destination for entrepreneurship and bolster local social capital. A study by the University of South Wales notes accelerators’ direct impact on entrepreneurial skills for the start-ups supported by accelerators and their positive indirect impact on the broader ecosystem. Acs (2001) recognized that entrepreneurship can be more challenging in underdeveloped areas, given their remoteness, which limits their access to skilled labor, technology, capital and networks. The alliances built by accelerators and incubators are the strongest assets in ensuring sustainability and building an ecosystem.

Cities with mature ecosystems reflect strong social capital, which plays a major role in fostering entrepreneurship. Kwon et al. (2013) sees a community’s social context as a public good. In high-social capital communities, entrepreneurs are able to take advantage of high levels of community trust and well-being, as well as more robust social networks. Individuals who feel support from cohesive communities will experiment with innovative ideas.

Conclusion

Social capital theory explains the value of networks as an integral part of a successful entrepreneurial ecosystem. Entrepreneurs need to increase social capital to increase funding and improve the human capital in their ventures.

As ecosystem actors come together to strengthen startup culture, communities should foster social capital through strong and weak ties. The Harvard Kennedy School’s Social Capital Building Toolkit is a valuable tool for understanding and creating social networks.

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Government and Policy McNair Center

The Carried Interest Debate

In the 2016 election, carried interest and its taxation was a hot topic. Often explained as a “loophole” that allows the rich to exploit tax codes, carried interest is not a political issue that clearly fits within party lines. Lobbying by the financial sector occurs on both sides of the political aisle, and there are opponents and supporters within both parties. What are the dynamics of this debate, and what are the arguments for whether carried interest should be taxed differently?

Private Investment Funds

In the 2016 election, both Donald Trump and Hillary Clinton rallied against “hedge-funds” for paying so little tax. However, these comments were misleading. Clinton and Trump were actually talking about a tax rule that applies to a range of private investment funds.

A private investment fund invests capital with the goal of making returns for its investors. But within this description there is a lot of variety in the types of funds. Funds vary in their sources of capital, the targets of their investments and the roles they play in the economy.

https://commons.wikimedia.org/wiki/File:Fund_Structure.pngPrivate investment funds are typically set up as limited partnerships, rather than limited liability companies (LLCs). They organize themselves as general partners and limited partners. The general partners are the funds’ managers, which may be structured as a managing firm. Managing firms are often incorporated as an LLC. The limited partners are the funds’ investors. They are called limited partners because they are required to have limited involvement in the funds day-to-day activities. These investors are usually financial institutions, pension funds, insurance companies and wealthy individuals.

Rewarding General Partners

General partners invest in their own funds (typically contributing less than 5 percent of the capital) to make money. However, their compensation comes through management fees and carried interest. Usually around 2 percent of a fund’s raised capital goes to management fees.  Management fees are paid regardless of the fund’s performance and are there to cover operating costs and base salaries.

When a firm is set up it negotiates how excess returns – those paid after invested capital has been repaid – are shared. An 80/20 split between investors and managers is typical. Managers with strong track records can and do negotiate for more, sometime even offering to forgo management fees.  This 20 or so percent that goes to the managers is called “the carry” or, formally, the carried interest.

Types of Private Investment Funds

Common types of private investment funds include private equity funds, venture capital funds, hedge-funds and mutual funds.

Private equity funds generally invest in large companies with the intent to restructure and sell the firms for a gain. These investments usually mean acquiring controlling interests in public companies through stock purchases. The fund will then take the company private. Private companies can then be sold to another buyer or back to the public with a new initial public offering. However, private equity firms do also sometimes acquire private companies.

Venture capital funds invest in high-tech startup companies with high-growth potential. Once the fund purchases a stake in the company, it also provides coaching and other services to the company in order to increase its chances of success. Venture capital funds sell their positions at initial public offerings or when their portfolio companies get sold to incumbents or private equity firms.

Hedge funds focus on achieving high returns through risky investments. They differ from mutual funds in the diversity of their strategies and their underlying assets. Mutual funds typically only take long positions in stocks and bonds. Hedge funds can invest in anything. Their underlying assets include stocks, bonds, commodities, derivatives, warrants, futures, options, currencies, land, real-estate and much else besides. Hedge funds will often simultaneously take both long and short leveraged positions.

Tax Treatment

The carried interest controversy stems from its tax treatment. Carried interest is subject to a maximum capital gains tax rate of 20 percent (the long-term capital gains rate). This is compared to the maximum ordinary income tax rate of 39.6 percent, which is also the maximum short-term capital gains rate.

Those in favor of the current system believe that a higher rate would reduce the incentive for general partners to take risks. They sometimes specifically claim that greater taxes on carried interest could discourage innovation and efficiency in markets.

Those opposed to a reduced tax rate for carried interest frequently argue that carried interest is performance-based compensation.  Comparing it to a bonus, they say that it should be subject to the ordinary income rate.

The controversy surrounding carried interest has faced increasing media scrutiny since the 2012 election. Former Presidential Candidate Mitt Romney paid taxes of just $1.9 million on $13.69 million in income in 2011, an effective rate of 14.1 percent  Perhaps in response to the media and public uproar, the American Taxpayer Relief Act of 2012 raised what was then the long-term capital gains tax rate of 15 percent to 20 percent. President Obama signed this change into law on January 2, 2013.

The Economics

To economists the key question is one of efficiency: Would free markets achieve the efficient outcome without the additional incentive that carried interest provides? The answer probably depends on the type of private investment firm.

Venture capitalists face enormous information problems when trying to assess their potential investments. And many of their portfolio firms create value for outsiders who aren’t investors and who don’t use the firm’s products themselves. Each of these reasons leads to inefficient under-investment, which carried interest could help address.

Hedge-funds may make markets more complete by allowing investors to place capital into a wider range of underlying assets. Private equity firms may provide a “market for management” that disciplines publicly-traded firms. It is possible that without these types of investment vehicle there would be market failure, but it is unclear that they need additional incentives to address it.

Because mutual funds just aggregate and manage stock and bond portfolios – a job done by brokers and investors themselves – it is hard to see why they need subsidizing.

Looking to the Future

The House Republicans’ 2016 Tax Reform Proposal includes no explicit mention of carried interest. However, it does advocate for “reduced but progressive” capital gains taxes. If the administration chooses to adopt this plan, carried interest tax breaks could become even larger.

However, it is difficult to predict the fate of carried interest tax breaks, especially given President Trump’s past statements. During his campaign, Trump was highly critical of these tax breaks. He claimed that fund managers were “getting away with murder” by taking advantage of the rule. However, since taking office, Trump Administration has made no mention of its plans to address this tax code provision. The administration plans to reform U.S. tax law in the coming year, so carried interest is definitely a topic to look out for.

See the McNair Center’s wiki page on Carried Interest for further explanation of the dynamics of carried interest.

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McNair Center Weekly Roundup

Entrepreneurship Weekly Roundup 3/10/17

Weekly Roundup is a McNair Center series compiling and summarizing the week’s most important Entrepreneurship and Innovation news.

Here is what you need to know about entrepreneurship this week:

A Tale of Untapped Potential: Cincinnati

Eliza Martin, Research Assistant, McNair Center for Entrepreneurship and Innovation

McNair’s Martin focuses on Cincinnati’s entrepreneurial ecosystem this week. While this midwestern city might appear a surprising or unlikely choice, many of Cincinnati’s entrepreneurs have thrived in recent years due to the city’s ample resources. For starters, the city is home to ten Fortune 500 companies, including Macy’s and Kroger. Its large corporations offer an invaluable network of resources and access to capital for aspiring entrepreneurs.

Furthermore, the University of Cincinnati, which boasts a marketing program that ranks among the top five in the nation, and Xavier University both offer university accelerator programs designed to support young entrepreneurs as they look to launch a business plan. In addition to university accelerator programs, entrepreneurs in Cincinnati also have the option of applying to three other accelerators within the region, The Brandery, UpTech and Ocean Accelerator.

Although Cincinnati is home to a variety of different VC funds and investment options, like CincyTech and Cintrifuse, the city closes significantly fewer deals on average per year than the likes of Austin or Denver. Martin explains this smaller number of deal closures as a function of lower levels of VC activity and fewer funding rounds. To compete with major entrepreneurial hubs, Cincinnati must increase its VC presence even further.

Wanted: More Women Entrepreneurs

Taylor Jacobe, Research Assistant, McNair Center for Entrepreneurship and Innovation

In her latest post for the McNair Center, Jacobe analyzes how improving female representation in entrepreneurship could boost economic growth in the U.S. Currently, women-owned businesses account for only 16 percent of employing companies. While women entrepreneurs tend to perform as well as, if not better than, their male counterparts, many cite lack of access to capital and limited mentorship opportunities as major obstacles to success.

According to a study from the National Women’s Business Council, women entrepreneurs start their businesses with 50 percent less capital than men. A survey conducted by the Kauffman Foundation revealed that 79 percent of women entrepreneurs drew from their personal funds when launching their business. Perhaps more telling, women are three times less likely than men to receive funding from angel and seed investors for their startups. By tackling gender bias in VC firms and other barriers to capital, public and private initiatives can better integrate women into America’s entrepreneurial ecosystem.

As Snap Ascended, These Rival Apps Faltered

Joanna Glasner, Reporter, TechCrunch

According to TechCrunch’s Glasner, VCs love messaging apps for a number of reasons: “massive scalability, low startup costs, loyal users and the potential to mint billions without having to turn a profit.” Messaging apps present a huge potential for success for investors in the modern age, exemplified by Snap’s recent IPO and WhatsApp’s acquisition by Facebook for $17 billion in 2014. Despite this rosy picture, many VC-backed startups that were messaging apps have fallen through the cracks over the years. TechCrunch recently took a closer look at how much capital has been invested into messaging apps only to find that VCs have poured hundreds of millions of dollars into companies that haven’t raised a funding round in two years. Glasner concedes that it is too early to dismiss these once promising startups as failed investments. Regardless the outcomes of these startups, prospects of success in the messaging app arena are daunting.

Y Combinator Opens Registration for Its Free Startup School Online Course

Ken Yeung, Contributor, VentureBeat

Y Combinator,one of the most successful seed accelerators in the U.S., has funded over 1,464 startups since its founding in 2005. Known for its excellent track record of spotting tech giants (Dropbox, Reddit and Airbnb, to name a few), its companies have a total valuation of over $80 billion. The famous accelerator recently announced that it would be opening up its Startup School event to the masses through a massively open online course (MOOC). The 10-week online course will offer entrepreneurs, who are not enrolled in Y Combinator’s core program, access to online courses taught by successful entrepreneurs, venture capitalists and industry greats. Lessons will focus on important topics in the startup business, such as “idea generation, product development, growth, culture building, fundraising and more.” Y Combinator partner Jessica Livingston told VentureBeat  back in 2015 that the accelerator’s mission was “to help startups at whatever stage they’re in become billion-dollar companies.”

Lemnos Just Raised a $50 Million Third Fund to (Mostly) Focus on Hardware

Connie Loizos and Katie Roof, Contributors, TechCrunch

San Francisco-based VC firm Lemnos was founded in 2014 as a firm focused on seed-staged investment into hardware companies. Successful companies like Fitbit, Oculus, Square and GoPro have boosted investor confidence in hardware companies in recent years. Lemnos recently announced that it will discontinue its incubator program to focus solely on investing in promising software development and hardware startups. The announcement marks a new stage in the VC firm’s short history, as Lemnos used to invest exclusively in hardware companies. When asked about possible investment opportunities moving forward, Lemnos executives told TechCrunch that they were very excited about the field of robotics.

This Program Uses Lean Startup Techniques to Turn Scientists into Entrepreneurs

Greg Satell, Contributor, Harvard Business Review

In 2011 the National Science Foundation (NSF), headed by Subra Suresh, founded I-Corps, a program designed to help transform scientists into entrepreneurs. The idea for the program originated when Suresh noticed that many of the scientific discoveries, made possible with NSF research grants, were not breaking out of their academic silos and into the marketplace. Harvard Business Review’s Satell describes the program as an initiative by NSF to “foster better links between government and industry.” Errol Arkilic, director of I-Corps, initially reached out to Steve Blank to help design the program, which is now an 8-week course for graduate students. The curriculum adopts the philosophies of Blank’s lean startup movement. Blank stresses the importance of developing products that actually address consumer needs; early on, Arkilic realized that many aspiring scientist-entrepreneurs create solutions to problems that consumers don’t want. Upon completion of the entrepreneurship training, participants partner with VentureWell, a nonprofit accelerator.

As of last May, I-Corps successfully trained over 700 teams. In aggregate, I-Corps teams have raised over $80 million from government grants and VC firms. Significantly, 90 percent of the program’s participants say that I-Corps changed their approach to conducting research and writing grant proposals. In response to the program’s success, the Department of Energy and the Department of Defense implemented programs that resemble the I-Corps model.

When Will All the Unicorns Exit? VC Liquidity Lagging behind Expectations

Mikey Tom, Senior Financial Writer, PitchBook

PitchBook’s Tom explains that “for the VC model to work, huge rounds need to lead to huge exits.” However, while 2015 was a year of unicorn funding rounds, 2016 did not bring large exits. In fact, VC-backed exits reached their lowest point in six years in Q4 of 2010. Part of the decline in exits could potentially be explained by an increased buildup of capital in private markets; abundance of VC in private markets might lead startups to wait longer to go public or get acquired. Another important statistic revealed by PitchBook’s analysis of VC liquidity in 2016: the median size of corporate M&A deals increased – by a lot. The total exit value of corporate M&A deal reached its second highest level in the decade, indicating larger and fewer acquisitions. On the other hand, the amount of capital raised and the number of completed IPOs in 2016 reached lows not observed since 2010 for VC-backed firms.

These Are the 50 Most Promising Startups You’ve Never Heard Of

Ellen Huet, Reporter, Bloomberg

Bloomberg recently released a list of the 50 most promising U.S. startups. Market researcher Quid generated the list by looking at over 50,000 startups and considering factors, such pace of funding, industry and history of the company’s founders.All 50 startups were founded within the last six years, and they represent a variety of industries. Startups involved in online security, fraud detection, AI, autonomous driving and AR drew the most capital. VC firms Andreessen Horowitz and Sequoia Capital each invested in six startups that made the cut.

 

The Weekly Roundup will return on March 24.

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Government and Policy McNair Center Small Business

Crowdfunding

What is crowdfunding?

Crowdfunding is constantly evolving and hard to define. Elizabeth M. Gerber at Northwestern University defines crowdfunding as “an open call over the Internet for financial resources in the form of a monetary donation, sometimes in exchange for a future product, service or reward.” Due to the ease and availability of crowdfunding sites, crowdfunding has changed the way entrepreneurs source funds.

A typical modern crowdfunding campaign begins with a page on a crowdfunding website. The page describes the concept of the project, the fundraising goal and the rewards for backers. Videos, sketches and graphics demonstrate the potential of the idea. From there, backers can donate money in exchange for tiered rewards, usually depending on the amount of money contributed.

History

The first popular online crowdfunding platform, AristShare, launched in 2003 as a way for musicians to receive funds to produce new music. Artists could offer incentives to investors, like exclusive access to content or previews. This reward-based structure made the deal appealing to both artists and contributors.http://i.vimeocdn.com/video/590376642_1280x720.jpg

After the success of smaller, niche-based crowdfunding sites like AristShare, larger and broader sites took hold of the crowdfunding scene. Two of the most successful, Indiegogo and Kickstarter, were founded in 2008 and 2009, respectively. Kickstarter boasts that since their founding, more than 12 million people have contributed funds to entrepreneurs, pledging more than $2.9 billion. Indiegogo is similarly successful, raising more than $1 billion from 11 million backers.

A crowdfunding project meeting its goal does not always mean that the project will be successful in the long run. Crowdfunding campaigns can be successful if their product seems exciting to backers, but if their business plan is not sound, then it is hard to maintain success beyond the initial crowdfunding. For example, one of Indiegogo’s most popular campaigns, a high-tech smartphone concept called the Ubuntu Edge, was unable to go into production due to financial issues even though the project had raised the second highest amount of money in Indiegogo’s history.

In 2015, Crowd Expert estimated that the crowdfunding industry was worth approximately $17.25 billion. In comparison, Venture Capital in 2015 was estimated at $58.8 billion.

Successes and Failures

The most basic measure of success for crowdfunding campaigns is whether the project reaches its goal. Research from Ethan Mollick at the Wharton School of the University of Pennsylvania indicates that being successful in a crowdfunding campaign requires strategic planning. “Crowdfunding projects mostly succeed by narrow margins, or else fail by large amounts,” Mollick asserts. Kickstarter’s records back up this claim. Kickstarter’s success rate is only 35.72 percent, meaning that only about one third of projects reach their goals.

Researchers at Northwestern attempted to understand the dynamics of successful crowdfunding campaigns. Using data from previous Kickstarter projects, they used machine learning to try to predict the success of projects. Their algorithm analyzed different factors of project pages, considering aspects like number of sentences in project description, length of campaign, goal of project and number of rewards available, among others. The accuracy rate for this research was 67 percent. This research shows that although some factors can success in some cases, there is no exact recipe for a successful campaign. The researchers explained, “There is a possibility of the existence of a hidden variable that would help us classify better.”

Nonetheless, certain crowdfunding projects receive immense support and go on to experience long-term success through being acquired, undergoing an IPO or surviving as an independent business. The most successful Kickstarter campaign of all time, a smartwatch called Pebble Time, was able to raise over $20 million even though the initial goal was only $500,000. Pebble produced and shipped over 2 million watches before shutting down operations in December 2016, selling its key assets and intellectual property to Fitbit. Indiegogo has also seen projects that turned into profitable businesses, like the Flow Hive and the SONDORS Electric Bike. Both of these startups have grown since their campaigns and expanded their product lines.

Economic Implications

Crowdfunding might be an effective way to use private action to stimulate the economy and help small businesses and startups. For individuals who have difficulty initially accessing angel investment, venture capital or bank loans, crowdfunding can provide an alternative. A successful crowdfunding campaign can enable small businesses to access these more traditional types of funding later in their lifetimes.

A study in 2015 in the Thunderbird International Business Review qualified crowdfunding as a Fast-Expanding Market. FEMs are characterized by youth, rapid growth and highly lucrative results. Crowdfunding encourages virtual “formation of clusters of expertise and capability,” encouraging collaboration across the world. Adding to the “efficiency and productivity in the community value chain,” researchers also speculate that crowdfunding has the potential to bring Small and Medium-sized Enterprises (SMEs) out of sluggish growth rates.

Crowdfunding Policy

Equity crowdfunding allows investors to purchase a small equity or bond-like share in a business.

In 2011 and 2012, mainstream media brought attention to the Facebook Problem. Facebook filed complaints regarding the threshold on private investors that a company could have without registering with the Securities and Exchange Commission. Facebook considered the threshold, 500, far too low. In response, the SEC’s JOBS act in 2012 raised this threshold to 2000. Although this policy change initially intended mainly to help companies like Facebook, it inadvertently affected equity crowdfunding positively. The regulations allowed more investors per equity crowdfunding campaign.

In May 2016, another SEC regulation update gave equity crowdfunding sellers and investors even more leniency. The new policy exempted small crowdfunding operations from certain SEC regulations on investing. To qualify for exemption, issuers may only raise up to $1 million in crowdfunding per year; investors can only contribute a certain percentage of their income per year. The SEC also regulates the extent to which crowdfunding portals can involve themselves in users’ crowdfunding transactions. Although equity crowdfunding may help small businesses get initial capital, it may affect the firm’s ability to raise follow-on funds later in the process.

Nonetheless, there are still other crowdfunding policy issues that the SEC may need to address. The updated regulations place a financial burden on portals, holding them liable in certain cases of issuers not keeping promises. They may also pay too little attention to the size of businesses/individuals that use crowdfunding to raise funds.

Conclusion

Crowdfunding has potential to shake the dynamics of investment in the coming decades. We need to ensure that the regulations surrounding this market are desirable for investors, issuers and crowdfunding portals.

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McNair Center Weekly Roundup

Entrepreneurship Weekly Roundup: 12/02/2016

Weekly Roundup is a McNair Center series compiling and summarizing the week’s most important Entrepreneurship and Innovation news.

Here is what you need to know about entrepreneurship this week:

Keep Austin Entrepreneurial

Eliza Martin, Research Assistant, McNair Center for Entrepreneurship and Innovation

In 2016, Austin was ranked as the number one U.S. city for startup activity by the Kauffman Foundation. Austin’s entrepreneurial ecosystem began in the 1970s and 1980s, and was originally focused on computer and semiconductor manufacturing.

Austin’s “Silicon Hills” has diversified into “more than the computer chip and semiconductor industry that first enabled its growth.” The annual South by Southwest Festival draws thousands of tech startups to the city and provides excellent networking opportunities for entrepreneurs. The University of Texas at Austin adds thousands of skilled employees to the city’s labor force each year. Additionally, UT Austin’s boasts the Austin Technology Incubator, a startup-focused incubator run by the university’s IC2 Institute.

Austin provides entrepreneurs with supportive policy infrastructure, skilled and energetic laborers and access to valuable mentorship opportunities. If efforts to grow Austin’s economy continue on their current path, the city will be well poised to solidify its presence as a thriving entrepreneurial ecosystem.

Overtime Rules in Limbo: What Businesses Should Do Now

Jeremy Quittner, Reporter, Fortune

Last week, a federal judge judge in Texas granted a preliminary injunction against the Department of Labor’s new overtime rules that were set to go into effect on December 1st. The new overtime rules would have increased the threshold salary for overtime workers to $47,476 from $23,600. Many small business owners, acting in preparation for the new rule, made the difficult financial decision to switch salaried workers to hourly status.

The preliminary injunction still must go through an additional 60 day period of court hearings before it becomes an official injunction. Additionally, the Obama administration’s Department of Labor could still appeal the judge’s decision to the U.S. Court of Appeals for the 5th circuit. It is not yet clear if the administration will challenge the judge’s decision. Even if the decision is appealed, success on appeal is doubtful; in the court’s recent history, the U.S. Court of Appeals for the 5th Circuit has tended to challenge the Obama administration.

McNair Center’s Catherine Kirby previously examined the effects of new overtime labor laws on small businesses in her blog post Small Business and Overtime Regulation.

One simple way billionaire investor Peter Thiel identifies game-changing startups

Eugene Kim, Reporter, Business Insider

Peter Thiel, serial VC investor and founder of PayPal, is known for his profitable investments in successful billion dollar startups, such as Facebook, Palantir, Stripe and SoFi. Business Insider’s Kim reports possible insights into Thiel’s keen eye for return on investment.

In an interview at VC firm Khosla Ventures’ KV CEO Summit, Thiel recently said, “I think in some ways the really good companies often couldn’t even be articulated…we didn’t quite have the right words. Or maybe they were articulated but were articulated in terms of categories that were actually misleading.” Thiel cautioned investors away from startups that rely on buzzwords, such as big data or cloud computing, in their pitches. Thiel said, “…when you hear those words, you need to think fraud and run away as fast as you can. It’s like a tell that you’re bluffing, that there’s nothing unique about the business.”

White House expands platforms for inclusive entrepreneurship

Kate Conger, Reporter, TechCrunch

The White House recently announced “new and expanded plans to improve diversity and inclusion within the startup economy.” The plans are focused on promoting diversity in higher education, investment and entrepreneurship. The initiatives reflect the Obama Administration’s commitment to improving minority representation in universities, investment firms and tech companies. By focusing the initiatives within the private sector, these efforts will hopefully continue after his departure from office.

More than 200 universities, all members of The American Society for Engineering Education, have signed a pledge to promote diversity in their engineering programs. Additionally, more than 30 VC firms and accelerators signed a pledge to diversify access to seed and early stage capital for underrepresented entrepreneurs and reveal information regarding their portfolios’ diversity. Furthermore, 46 tech companies, including Xerox, have joined the Tech Inclusion Pledge, demonstrating a commitment to publicly publish recruitment goals and diversity metrics.

Tom Kalil, deputy director for technology and innovation at the White House Office of Science and Technology Policy, reportedly told TechCrunch there is existing data that indicates diverse firms are more diverse are more likely to be successful. According to Kalil, “A lot of innovation comes from diversity, people with different backgrounds.”

Data science startup Civis Analytics raises $22 million

Ken Yeung, Contributor, VentureBeat

Civis Analytics recently announced that it bagged $22 million in its latest Series A funding round. Civis Analytics was born out of President Obama’s 2012 reelection campaign. Though originally focused on political campaigns, the data science company’s cloud-based platform provides data analytics tools and methodologies  to organizations focused in areas such as health care, media and education. Since its inception, the startup has relied on revenues, rather than funding, to support its operations. However, the startup announced its recent funding will go toward hiring more engineers and data scientists.

Civis Analytics CEO, Dan Wagner states the importance of data analysis to business success: “Everyone knows that they need to be using data, but most don’t know where to start. Or, if they are using data, they aren’t necessarily asking and answering the right questions.”

Stripe Investment Makes Cofounder The World’s Youngest Self-Made Billionaire

Ryan Mac, Reporter, Forbes

Brothers Patrick and John Collison are cofounders of San Francisco-based startup Stripe. Stripe is a tech company that enables private individuals and companies to engage in transactions via the internet and on mobile apps. MIT and Harvard dropouts, respectively, Patrick and John Collison recently joined the ranks of the world’s youngest self-made billionaires. Stripe recently announced a successful funding round, which doubled the startup’s valuation to $9.2 billion. CapitalG and General Catalyst Partners jointly invested $150 million in Stripe during its latest funding round.

Despite their early success, the Collision brothers are still hungry for more; Patrick Collison told Forbes in January of 2014 that, “Heartening as the success to date has been, we are so early in accomplishing the goals that we set out for ourselves. If anyone here believes that Stripe has already made it, that would be hugely problematic for us.”

QA with Kauffman’s Victor Hwang on entrepreneurship in the heartland

Ryan Pendell, Contributor, Silicon Prairie News

Victor Hwang, Vice President of Kauffman Foundation, and Phil Wickham, Executive Chairman of Kauffman Fellows set out on a road trip through America’s Midwest earlier this month to “take the pulse of entrepreneurship in America’s “middle.” Despite a nationwide political narrative that depicts the Midwest in a state of slumping stagnation, caught between booming coastal economies, Hwang and Wickham report that Midwestern entrepreneurs are actively seeking out business solutions to improve the quality of life within their communities. Since the benefits of the tech boom have been focused on the coasts, Hwang and Wickham cite the biggest challenges to Midwestern entrepreneurs as access to capital.

According to Hwang, the need to build infrastructure and capital should be considered both a challenge and an opportunity for Midwestern entrepreneurs going forward. Hwang expressed optimism for the future of the Midwestern economy, claiming that the region’s culture of “civic mindedness, that willingness to pitch in, that willingness to take risks and help others reach their ambitions” is still alive.

Policy Changes Needed to Unlock Employment and Entrepreneurial Opportunity for 100 Million Americans with Criminal Records, Kauffman Research Shows

Ewing Marion Kauffman Foundation

According to a report recently published by the Kauffman Foundation, rethinking America’s “occupational licensing policy could counter recidivism, encourage entrepreneurship and boost the American economy.” Currently, occupational licensing requirements prevent individuals with a criminal history from securing licenses that could open the door to financial stability and self-sufficiency. Many occupations that require occupational licenses are on low-skilled and high-skilled professions; increased labor participation, productivity and entrepreneurship by released inmates within these fields could therefore produce benefits for the overall economy. According to the Kauffman Foundation’s study, over 60 percent of inmates released each year from state or federal prison are still unemployed after one year of their release.

The Kauffman Foundation’s Emily Fetsch notes that the high levels of recidivism and unemployment among ex-convicts indicate a fundamental issue with the country’s occupational licensing policy: “Hundreds of professions that require occupational licenses could provide paths to economic independence for those formerly incarcerated, except for the fact that their criminal histories alone may ban them from receiving licenses, even if their convictions had no relevancy to the job.”

Fetsch recommends reforms to occupational licensing policy that would exclude only criminal defendants who pose a a public threat or when convictions are recent and relevant to the context of an occupation. Additionally, Fetsch proposes offering the formerly incarcerated opportunities to earn rehabilitation or restoration certificates, thereby preventing inmates from automatic disqualification for consideration of occupational licenses solely on the basis of their arrest. Lastly, Fetsch contemplates disposing of occupational licensing requirements altogether, expressing skepticism for the regulation’s effects in promoting public safety and health.

An Incubator for (Former) Drug Dealers

Maura Ewing, Reporter, Bloomberg

“Amid calls for more job training, less automatic background searching and other changes that would make it easier for ex-felons to become employees” Bloomberg’s Ewing reports on an alternative perspective solution on the fight to curb recidivism and unemployment  among the formerly incarcerated: encouraging them to start their own businesses.

The public and private sphere should continue to push programs that support formerly incarcerated individuals, as well as tackle the structural problems that face these prisoners as they re-enter society. However, Ewing asserts that more emphasis should be placed on the potential returns on fostering entrepreneurship among this commonly dismissed population.

Defy Ventures, a nonprofit incubator based in New York, certainly achieved success in this regard by transforming ex-convicts into entrepreneurs. Over the past six years, Defy Ventures has trained upwards of 500 released felons and successfully incubated over 150 companies. What’s more, the recidivism rate among the incubator’s alumni within five years post release is an astonishing 3 percent, compared to the national average of 76 percent. Defy Venture’s efficacy in curbing recidivism rates suggests that future initiatives to support released prisoners should be focused on entrepreneurship.

Ewing’s article tells the story of another incubator underway in Hartford. The incubator, TRAP House, focuses on supporting former drug dealers as they start new, legal companies. The incubator’s name makes a clever reference to slang for drug-stash locations and is “short for transforming, reinvesting and prospering.”

Happy Holidays from the McNair Center for Entrepreneurship and Innovation. The Entrepreneurship Weekly Roundup will return in January.

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McNair Center Weekly Roundup

Entrepreneurship Weekly Roundup: 11/11/2016

Weekly Roundup is a McNair Center series compiling and summarizing the week’s most important Innovation and Entrepreneurship news.

Here is what you need to know about entrepreneurship this week:

Small Businesses Can Expect Policy Changes Under Trump

The Associated Press

Entrepreneurs might expect policy shifts under a Trump presidency. Trump has released his plan for his first 100 days in office. However, much uncertainty over his policies and objectives remains. The battle over health care and immigration reform, taxes, regulation, the federal minimum wage, trade deals and federal contracts will be fought in a Republican-led congress that has not always agreed with the President-elect’s proposals.

David Levin, CEO of the American Sustainable Business Council, expressed the concern of many small business owners in the US: “What we don’t know is whether or not there is a sincere interest in supporting small and medium-size enterprises in this country — rebuilding Main Street, rebuilding manufacturing.”

With Election Over, Small Firms Look to Hire, Invest

Ruth Simon, Author, Wall Street Journal

With the uncertainty of the election partly resolved, some small business owners have said that they are ready to begin investing and hiring. According to a recent Vistage Worldwide poll of 380 small business owners, 49 percent of respondents said that the election of the outcome had improved their outlook for the economy. Nearly 20 percent stated that the election results encouraged them to increase their hiring or capital investment. Many point to the prospect of lower taxes and healthcare costs as sources for their optimism.

Not all business owners surveyed viewed the election’s outcome positively. 35 percent responded that their outlook for the economy had worsened. Roughly 20 percent planned on decreasing hiring and investment. Many are wary of Trump’s tough position on immigration, which could make the search for high-skilled workers more costly.

Black-Owned Businesses Face Credit Gap

Ruth Simon and Paul Overberg, Authors, The Wall Street Journal

According to data from the U.S. Census Bureau’s 2014 Survey of Entrepreneurs, black entrepreneurs are less likely to ask for capital when they need it. When they do ask, black entrepreneurs are not as likely to receive the full amount that they requested.

Black entrepreneurs in 2014 were three times more likely than white entrepreneurs to say that they were in need of additional financing but opted not to apply for it. Compared with 74 percent of white entrepreneurs, only 46 percent of black entrepreneurs received the full amount of funding that they had requested.

Simon cites challenges in access to capital and funding as obstacles for black entrepreneurs who are trying to grow their businesses. According to Alicia Robb, a senior fellow from the Ewing Marion Kauffman Foundation, “Across the board, blacks have higher denial rates, even after controlling for credit and wealth.”

How Lucrative Startups Can Avoid Disruption as They Grow

Jason Albanese, Contributor, Inc.

Jason Albanese, CEO and founder of Centric Digital, offers advice to startups looking to be the next Google or Facebook by redefining their industry. Revolutionary startups are often some of the most lucrative and successful in their field.

Market-shaking startups frequently fail to maximize their potential because market and operational disruptions often go hand in hand. Disruptive startups need to take time to grow at their own pace. Entrepreneurs cannot afford to rush the incubation period.

Most market ecosystems eventually find a new equilibrium; Airbnb and Uber recently experienced this within their industries. Albanese recommends that market-shifters foster and embrace change within company culture. Adaptivity, creativity and agility are instrumental in introducing and surviving a market disruption.

6 Strategic Business Practices For Freelance Entrepreneurs

Sam Cohen, Contributor, Huffington Post

The life of a freelance entrepreneur is uncertain and irregular. For example, daily operations lack the typical structure and comfort level that most industry jobs offer. On the other hand, self-employed entrepreneurs get to set their own work schedules and define the rules and best practices for their companies.

Despite the obvious discrepancy between freelance entrepreneurship and corporate culture, Sam Cohen recommends that entrepreneurs borrow business practices, such as building up cash reserves and establishing a performance review process, from bigger industry players.