Private Equity Archives

Weekly Roundup on Entrepreneurship 4/7

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:

The Carried Interest Debate

Tay Jacobe and Jake Silberman, Research Assistants, McNair Center for Entrepreneurship and Innovation

McNair’s Jacobe and Silberman analyze the ongoing discussion surrounding carried interest. A complicated concept in the financial sector, carried interest refers to the profits earned on a private investment fund that are paid to fund managers. Private investment funds include VC, PE and hedge funds.

Debate arises from carried interest’s subjection to the capital gains tax rate. The capital gains tax rate caps taxes on carried interest at 20 percent. Critics of the so-called carried interest “loophole” argue that the government should tax carried interest at the standard federal income tax rate of 39.6 percent. Supporters of maintaining the capital gains tax rate for carried interest claim that it acts as a performance incentive for fund managers.

During the 2016 presidential campaign, Trump criticized the massive profits that investment fund managers earned from carried interest. Since taking office, President Trump has not commented on his administration’s plans for taxation on carried interest. The House Republican’s 2016 Tax Reform Proposal proposes a “reduced but progressive” capital gains tax on carried interest. As Jacobe and Silberman note, such a plan would likely cause fund managers’ net incomes to go up.

Looking Forward: Why the VC Industry Needs More Female Investors

Dana Olsen, Reporter, PitchBook

PitchBook’s Olsen analyzes the need for promoting gender diversity in VC firms. Despite modest gains in diversification at many VC firms, most firms are yet to make substantial change. In 2016, only 17 percent of global VC deals involved companies with female founders, while only 9 percent were female-led at the time of backing. Admittedly, these statistics reveal improvements from 2007, when these numbers stood at 7 and 6.8 percent, respectively.

According to Olsen, “the most efficient way to increase the number of female-founded companies that receive VC funding is to have more female venture capitalists.” Aileen Lee, prominent venture capitalist and founder of Cowboy Ventures, believes that “women who have more numbers on the investment team invest in more women.” Another obvious way to increase rates of female entrepreneurship is to introduce educational programs that spark girls’ interest in STEM-related fields at an early age.

A Dearth of I.P.O.s, but It’s Not the Fault of Red Tape

Steven Davidoff Solomon, Contributor, The New York Times

University of California, Berkeley School of Law’s Professor Davidoff Solomon writes for the New York Times on the recent decline in IPOs in the U.S. Many politicians point to over-regulation of the private market as an explanation, evidenced by the line of interrogation at the confirmation hearing of President Trump’s nominee to head the SEC, Jay Clayton. Since 1996, the number of publicly listed firms on the NYSE has been cut by nearly half. Furthermore, the number of IPOs has decreased from 706 in 1996 to only 105 in 2016.

Professor Davidoff Solomon proposes a number of theories for explaining the dropoff in deal-making activity – none of which involve government regulation. Firstly, Davidoff Solomon suggests that “structural changes in the market ecosystem” might be encouraging increased mergers and acquisitions in public and private markets, respectively. Alternatively, the dropoff in IPOs could potentially be caused by a decline in attractiveness of small offerings as the public. In 1996, 54 percent of new offerings were considered large, compared to only 4 percent in 2016. According to Davidoff Solomon, the “market for new issues has moved toward liquidity and bigger stocks.”

And in the Startup News…

New Clerky Tools Help Startups Hire and Raise Funds without Running into Legal Problems

Lora Kolodny, Contributor, TechCrunch

Founded in 2011, Clerky is a San Francisco-based startup that builds software to assist startups and their attorneys with legal paperwork. The startup, founded by former attorneys, focuses almost exclusively on providing legal templates and software for high-growth startups. Originally, Clerky’s services centered around helping startups incorporate their company online. Now, Clerky is looking to expand its services beyond business formation, with its latest two online tools Hiring and Fundraising.

By using Clerky, startups can spend their cash on higher level services and advice, rather than costly legal paperwork. For example, many startups spend thousands of dollars on attorney’s fees for handling seed rounds finances. With Clerky, however, companies can pay $99 in return for six months of unlimited issuances of SAFEs and convertible notes. Many of Y Combinator’s co-founders have used Clerky’s Formation tool to launch their business. Now, they can also rely on the firm’s software throughout their various growth stages and funding rounds.

Dropbox Secures $600M Credit Line with IPO on Horizon

PitchBook News & Analysis

Last week, the Weekly Roundup series covered a PitchBook article on a relatively recent trend in startup financing: debt. Debt financing is not uncommon for startups that are looking to go public. IPO are costly, and opening up lines of credit gives a company some cash without “diluting equity stakeholders.” However, many startups without IPOs in their near future are increasingly accumulating debt; according to PitchBook News and Analysis, funding rounds that were at least partially debt brought in $14 billion in deal value in 2016.

Dropbox, the latest tech unicorn to announce debt financing ahead of an upcoming IPO, is a well-known startup that provides users with cloud-based storage services. Dropbox reportedly secured the $600 million line of credit ahead of a possible offering in 2017.

With Mulesoft’s successful IPO in March, 2017 could deliver a good year for tech enterprise. Cloud-based identity management firm Otka is another enterprise tech firm set to go public within a few weeks.

Entrepreneurship Weekly Roundup: 2/17/17

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:

The International Entrepreneur Rule: The US Startup Visa

Ramee Saleh, Research Assistant, McNair Center for Entrepreneurship

During the last days of the Obama Administration, the United States Citizenship and Immigration Services (USCIS) passed the International Entrepreneur Rule. The legislation intends to attract international entrepreneurs to the U.S. by granting them “discretionary parole.”

Under the rule, entrepreneurs can apply for temporary five year visas, as long as they partially own a startup that has received at least $250,000 in VC funding from “established U.S. investors” or $100,000 from “government entities.” If a startup fails to meet these funding requirements, the applicant must prove that a “significant public benefit” would result from the his or her entry into the United States. Due to the strict standards, the Department of Homeland Security estimates the program to admit only 2,940 entrepreneurs annually.

Scheduled to go into effect July 17, the International Entrepreneur Rule is still subject to change by any reforms to the H-1B visa program by the Trump Administration.

With $6B in Deals in 2016, ID Management Is a Hot Sector You May Have Missed

Joanna Glasner, Contributor, TechCrunch

In 2016, startups involved in identity management collectively claimed over $6 billion in acquisitions from private equity buyers. Identity management startups also experienced successful funding rounds, raising over $200 million from VCs. These startups are responding to a growing need for improvements in health care IT and authentication. Last year,ECRI Institute, a global nonprofit focused on patient safety, listed “patient identification errors” as the second most important safety concern for health care organizations.

TechCrunch’s Glasner highlights tech unicorn Otka, an identification management and authentication platform provider, that has raised over $200 million from VCs. Otka is considering going public this year.

Lawmakers Try to Stop State-Sponsored Retirement Plans

Anne Tergese, Reporter, The Wall Street Journal

Last week, Republican Congressmen introduced measures to prevent small businesses from automatically enrolling employees in state or locally sponsored retirement plans. The bill comes as several states have enacted retirement savings programs that automatically deduct earnings from employee’s paychecks for deposit into individual retirement accounts.

These programs only affect residents who do not have access to a workplace retirement plan; AARP estimates that this number stands at 55 million people nationwide by. AARP executive vice president Nancy LeaMond has publicly stated that Congress should take steps to support, rather than end, these state savings programs.

Supporters of the bill believe that state-sponsored retirement plans “discourage small businesses from offering private-sector plans” by forcing employees “into government-run plans with fewer protections and less control over their hard-earned savings.”

Banks Are Finally Sprouting Anew in America

Rachel Witkowski, Reporter, The Wall Street Journal

In the past few months, the Federal Deposit Insurance Corporation received the greatest volume of applications for “startup banks” since the financial crisis.The increase reflects an improving economy and expectations for future deregulation of the financial sector.

Startup, or “community,” banks are traditionally viewed as banks that hold less than $1 billion in assets. According to Q3 FDIC data from last year, community banks are responsible for 43% of loans to small businesses. The Wall Street Journal’s Witkowski reports that many community bankers believe that “the decline in the number of banks has led to fewer lending options for startups and small businesses.” Supporters of deregulation believe that greater numbers of community banks spur economic growth and job creation.

Don’t Panic Labs Pioneers “Dev-for-Equity” Model to Help Startups

Christine McGuigan, Reporter, Silicon Prairie News

Don’t Panic Labs is an offshoot of the engineering arm of successful VC fund, Nebraska Global. Don’t Panic Labs adopts a “dev-for-equity” model, assisting startups and entrepreneurs with software and product development in return for company equity. The firm also provides software development services for publicly traded companies that do not require capital investment.

Despite serving established companies, Bill Udell, Integrator for Don’t Panic Labs, told Silicon Prairie News that the firm’s “DNA is in creating startup companies.” In 2016, the firm poured $396,000 of dev-for-equity investment into startups. Don’t Panic Lab focuses on product development and training for its clients’ in-house software engineers.

PitchBook Brings Company Financial Data to Its Mobile App

John Mannes, Writer, TechCrunch

MorningStar, Chicago-based investment research and management firm, acquired PitchBook in 2016. Pitchbook is an industry leader in providing investors with up-to-date coverage of VC, PE and M&A transactions. According TechCrunch’s Mannes, PitchBook, although known for its comprehensive coverage of tech firms, is also increasingly expanding its database to include coverage on non-tech companies as well.

PitchBook recently announced plans to add financial data for 226,000 private companies to its mobile app. The update will provide the database’s 7,000 active members with previously unavailable insight into the financials and revenue figures of private companies.

And in startup news…

Ford to Invest $1 Billion in Artificial Intelligence Start-Up

Mike Isac, technology reporter based in The Times’s San Francisco bureau, and Neal E. Boudette, Reporter, The New York Times

Many automakers are hoping to achieve some of the success that many Silicon Valley startups have found by investing in autonomous vehicle technology and ride-hailing services. Ford recently announced that it will invest $1B in Argo AI, startup focused on utilizing artificial intelligence to develop self-driving cars. Mark Fields, president and CEO of Ford, told reporters last week that the automaker hopes to become “part of the ecosystem of Silicon Valley.”

With the rise in popularity of “mobility services,” car ownership is growing increasingly unnecessary for consumers living in urban centers. Ford’s move suggests an industry-wide shift in strategy, as traditional automakers must adapt to shifting consumer attitudes. For instance, last year General Motors invested $500 million in ride-hailing startup, Lyft, and acquired Cruise Automation, a startup geared toward developing roadway technologies that support autonomous vehicles.

Fields explains the motives behind Ford’s investment: “If we can combine the best of a start-up and marry that with proper equity compensation, then that’s the best of both worlds.”