January 2015 - That's Not Market

Understanding The Startup Failure. Its not you its me, or the other way around.

I hear about people’s startup ideas all the time. Some sound great. Some leave me doubtful. Some great-sounding ones fail. Some not-so-great-sounding ones go on to great success.

Sometimes there is an idea that seems to solve a problem for a business but learns later that the cause of the problem cannot be solved by that business.

Go Dish had an interesting idea based on an identifiable problem for restaurants: there are times when the dining room is empty and they would like customers. Go Dish offers same day deals to drive customers to the restaurants when the restaurants need them.

“Unlike traditional restaurant deal services, Go Dish gives restaurants complete control over the discounts they make available throughout the day and week. Restaurants incur costs at all hours, whether they’re serving customers or not. We help them fill the restaurant with more customers, when they want them.” [emphasis added]

Makes sense, right. There are lots and lots of e-commerce coupon apps out there, so businesses and consumers must want them. Go Dish seems to fill a need. What could go wrong?

What if you identified the problem, but misdiagnosed the cause?

Go Dish released a goodbye letter and invitation to various whatevers announcing that they are closing shop. In the letter, they again recap why they thought they had a winner:

“We embarked on this adventure because we saw a win-win opportunity to send more business to restaurants at their quieter times while helping you guys save a few bucks on lunch here and there.”

It seemed to make sense at the time:

“We’ve sent our restaurant partners over 30,000 customers and received a tremendous amount of positive feedback from restaurants and customers alike … “

But the problem with “quieter times” was not about pricing and incentives for customers. It turns out people stay away from restaurants during “quieter times” because they have more important things to do based on obligations to others that cannot be overcome with 50% off of tacquito appetizers.

” … but it turns out it ain’t easy for most people to eat at off-peak hours. And everything that gets in the way of sneaking out of the office for an early or late lunch proved too high of a barrier to overcome for the Go Dish model to be sustainable long-term.”

Startup failure and success are not just issues of execution, “solving problems,” and “making the world a better place.”

In Go Dish’s case, a seemingly good idea for a seemingly logical problem missed the mark because the cause of the problem was both different and deeper than expected. As a result, their solution did not address the actual problem. I hope all of the other similar coupon companies out there take note.

M&A Broker vs. Broker-Dealer

SEC issues M&A Advisor interpretations.

Securities and Exchange Commission — SEC issues M&A Advisor interpretations.

I have written in the past about the challenges of people looking to facilitate deals without a broker-dealer license. Short answer: You probably can’t get paid.

However, there is an entire industry of business brokers and M&A advisors that seem to get close to the line. In January 2014, the SEC outlined when an M&A advisor could assist in the sale of a privately held company without registering as a broker-dealer. Its been hanging out there for a while, but I figured this was a good enough time to write about it.

First, it defined “M&A Broker” as “a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company (as defined below) through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company.”

In addition, a “privately-held company” is not an SEC filing company

The SEC provided a list of several conditions:

The M&A Broker will not have the ability to bind a party to an M&A Transaction.
An M&A Broker will not directly, or indirectly through any of its affiliates, provide financing for an M&A Transaction.
The M&A Broker may not have custody, control, or possession of or otherwise handle funds or securities issued or exchanged in connection with an M&A Transaction or other securities transaction for the account of others.
No M&A Transaction will involve a public offering.
Any offering or sale of securities will be conducted in compliance with an applicable exemption from registration under the Securities Act of 1933.
No party to any M&A Transaction may be a shell company, other than a business combination related shell company.
To the extent an M&A Broker represents both buyers and sellers, it will provide clear written disclosure as to the parties it represents and obtain written consent from both parties to the joint representation.
An M&A Broker will facilitate an M&A Transaction with a group of buyers only if the group is formed without the assistance ofthe M&A Broker.
The buyer, or group of buyers, in any M&A Transaction will, upon completion of the M&A Transaction, control and actively operate the company or the business conducted with the assets of the business.
Any securities received by the buyer or M&A Broker in an M&A Transaction will be restricted securities within the meaning of Rule 144(a)(3) under the Securities Act.

There are more details in the SEC’s letter, which we may cover in another post. It will be interesting over time to see if the SEC focuses on one or more elements of the interpretation.

Alternative Fee and Billing Arrangements – Wachtell Edition

This is why they’re Wachtell, and you’re not.

NYTimes DealBook posted the engagement letter from famed corporate law firm Wachtell, Lipton, Rosen & Katz to CVR Energy, Inc. They were engaged to help CVR defend against a takeover from Carl Icahn. They lost.

What is most interesting about the letter is the fee structure. Most attorneys bill per hour. Some litigators bill on a contingency basis and take a percentage of the judgement, if any.

Wachtell takes an initial up front fee (not a retainer). For CVR, it was $200,000. They also estimate, but do not charge (they say), fees that are typically 1% or more on smaller matters ($250 million and less) and .10 of 1% or less on matters over $25 billion. They may also get expense reimbursements.

Per the dreams of other lawyers, they do not provide long-form descriptions of services or detail hours.

When I went solo, part of the reason was to reduce my hourly rate. In addition, I was also offered the opportunity to take equity in some cases, and in some cases I would accept. Wachtell shows that you can creatively structure fees apart from the per hour norm.

In their case, the percentage structure also deals with one problem corporate lawyers have always faced: Investment Banker Envy.

LSAT Scores Declining For New Students And The Choice To Go To Law School

BusinessWeek reports that low test scores are not the same barrier to law school then they were previously.

The LSATs are the SATs of the law school world, and they tend to figure highly into the admissions criteria for highly ranked law schools. Just ask the US News and World Report annual rankings. And the scores for new law school students are going down.

“…since 2010, 95 percent of the 196 U.S. law schools at least partially accredited by the American Bar Association for which the NCBE had data lowered their standards for students near the bottom of the pack.”

Is it just the lower tiered schools? Nope.

“In fact, 20 of the 22 U.S. News top-20 schools—there was a three-way tie for 20th place—were enrolling students with lower test scores. Across all schools, LSAT scores for the 25th percentile dropped an average of three points.”

It isn’t too surprising considering that law school application rates have been declining. As job prospects face across-the-board declines, people normally attracted to other things will try their hand at law school. It does seem to be the default choice for people who don’t know what else to do.

BusinessWeek claims this isn’t good, but only in the context of correlation to the bar exam.

“LSAT scores matter because they tend to correlate closely with scores on one section of the bar exam, so when schools admit lower-scoring students on the former test, they risk producing more graduates who have a hard time passing the bar. “

All things being equal, yes, but bar exams also tend to weighed and curved.

However, there is another reason. If the LSAT does its job and judges aptitude for the study and practice of law (a dubious proposition, but whatever), then more people are going to law school who should be doing other things regardless of what this means on yet another test. Plus, the bar exam can be taken multiple times, so flunking out once does not kill your budding legal career.

The fact is that the practice of law can be rewarding, but it can also be hard work, long hours and very stressful.

Few people engaged in it tend to be happy. Furthermore, people going as a fallback career are entering into some of the worst job markets for new graduates. There is still a glut of unemployed and underemployed lawyers and hiring does not seem to have recovered.

People entering law school should think carefully about the three-year, unpleasant and expensive choice they are about to make.

“Solopreneur” Article Supports My Ideas About Freelance Economy

Old article shows that the Freelance Economy is not a flash in the pan; agrees with me and is therefore correct (in parts).

Several weeks ago, I saw Shane Snow give a short talk at a recent 1 Million Cups – Dallas event, where he provided some insight into how he built Contently. I looked for some more of his writing and came across this WaPo article from 2012 about “Solopreneurs,” or what I have called the “Freelance Economy.”

Snow provided one anecdote about a former (not voluntarily) news editor who succeeded as a freelancer. He provided some stats, which were helpful. If you are a freelancer, you’re not alone even if the government is not tracking you. However, this seems more like a blessing than a curse unless you believe a career unexamined by the government is not worth working.

There were a few points in the article that supports some of my views of the Freelance Economy. For example, this is not a temporary phenomena.

“The increase in freelancers isn’t a temporary phase. It’s a systemic change,” says Sara Horowitz, founder of Freelancers Union, an insurance company and advocacy group. “The recession likely sped up a shift that was happening already.”

In addition, Freelance Economy professionals value their independence.

This happens to line up with what much of the labor pool wants, too: flexibility. BLS reports that 90 percent of freelancers prefer independence to being locked in a cubicle.

There will be more in a separate post about where I disagree with the article.

More Big Tech Companies Stay Private, Or Wait Longer To Go Public

The Wall Street Journal took note that many companies with high valuations prefer to stay private these days. Mostly, it is talking about the types of tech companies that went public much earlier in their life cycle in the late nineties.

A number of Internet, software and consumer companies are raising huge sums in private deals that enable them to postpone initial public offerings for years, if not indefinitely. Moreover, they often negotiate these private placements directly with investors, bypassing banks.

The article mostly deals with how investment bankers more used to IPOs are dealing with large companies that prefer to raise money privately.

For most people, the woes of investment bankers struggling to meet changing business conditions is not particularly interesting. However, what I find interesting is the assumption that these companies would necessarily want to go public. If you don’t have to, why would you subject yourself to periodic reporting, plaintiffs’ lawyers in the securities bar, Sarbanes-Oxley, etc…?

In addition, the universe of investors for private companies is expanding.

Banks trying to woo more private-placement clients said they provide a needed service. Companies are staying private longer partly because the number of investors interested in private deals has expanded significantly, they said.

Many of these companies are also less dependent on funding from the public markets.

“What’s changed is that companies are getting so quickly from startup to real traction,” said Dan Dees, global head of technology, media and telecommunications banking at Goldman. “You can’t just wait for the IPO pitch.”

And yet, this is what critics used to complain about for IPO companies: they were too immature for the public markets.

To me, it still comes down to an essential question for the issuer: Why do you want to go public. Because ‘go’ is only a part of it. ‘Being’ public is the long-term expense and obligation.