ANALYSIS-U.S. Jobs Act could help the least flashy startups

Thu Mar 29, 2012 9:14pm BST

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By Sarah McBride

SAN FRANCISCO, March 29 (Reuters) - Much of the talk around the Jobs Act has centered on the technology sector, but the biggest impact could land on far more prosaic ventures, investors and analysts say.

The Jobs Act, a bill to make it easier for young companies to raise money, raced through Congress over the past several weeks and likely will be signed into law by President Obama next week.

The president sees the legislation as a way of giving "entrepreneurs opportunities to start creating the next Google or the next Apple or the next innovative company."

And Republicans have matched his enthusiasm.

Rep. Eric Cantor quoted Google's public-policy blog on how "the next Google, Facebook, Apple, or Amazon could be funded thanks to crowdfunding legislation," a key part of the bill that allows large numbers of people to invest small amounts in a company.

Rep. Tom Rooney wrote about entrepreneurs "with dreams to build the next Apple, Google, or Ford."

But while high-tech businesses may be widely associated with entrepreneurship, they are not the most prevalent.

“In colloquial usage, we tend to use startup in the sense of high growth, innovative business,” said Dane Stangler, director of research at the Ewing Marion Kauffman Foundation, which studies entrepreneurship. “Those are by definition the minority of new companies.”

The sectors with the most new activity are construction, professional and other services, and retail, he said.

Entrepreneurs say those are the businesses most likely to benefit from a key provision in the Jobs Act known as crowdfunding.

The technology sector is in many ways the least in need of help. Last year, software companies raised $6.71 billion, up from $4.86 billion the year before, according to the National Venture Capital Association and Thomson Reuters. Information-technology services companies raised $2.42 billion, up from $1.75 billion the year before.

“If you’re a tech business in Silicon Valley and you can’t raise money, that’s a bad sign,” said Ryan Caldbeck, chief executive of CircleUp.com, a company currently in test phase that connects young businesses with potential investors.

At Trust Exchange, a San Francisco startup that aims to tap into social-networking data to prevent credit card fraud, co-founder Wolfram Arnold sees fundraising as the least of his problems.

“The biggest hurdle to new startups is not the money,” Arnold said. “It’s the network of professionals, advisors, community. None of these will come from crowdfunding.”

But for other types of businesses, the issue is indeed the cash.

“We have gotten introductions to all relevant VCs (Venture Capitalists) in the consumer-product space and they’ve all said: ‘You’re too early,’” said Sally Jones, who started the kiddy-snack company, Giddy, two years ago.

Never mind that Giddy products are in 250 Targets, 30 Whole Foods and other retailers around the country. The potential investors wanted to see $5 million to $10 million in revenue and Giddy has not yet hit that mark.

Under the new law, it will be easier for Jones to tap individual investors who would be satisfied with steady growth rather than the promise of a huge return. In the past, only accredited investors with a high net worth were permitted to invest in private companies such as Giddy. Now, it will be open to anyone. The idea is for hundreds of people to invest small sums in a single startup.

Caldbeck believes consumer-products companies will benefit most from increased exposure to potential investors.

“Companies with $1 million-$5 million in revenue,” he said. “These are the companies that need the money to hire a vp of sales, a vp of marketing.”

Under the new law, sites that arrange crowdfunding must register with the Securities and Exchange Commission. The sites will take a cut of the investments and dozens of players are likely to jump into the game.

Some companies have already tried a variation of the crowdfunding theme, getting the public to send cash in exchange not for shares but for T-shirts, discount coupons and other perks.

Satarii, which makes an iPhone and camera dock that allows people to film themselves in motion hands-free, raised almost $25,000 that way last year on a site called Indiegogo.com after unsuccessfully approaching around 50 accredited individual investors, said co-founder Brian Lamb.

“As a seed-stage company that makes physical products,

(traditional) fundraising is nearly impossible,” Lamb said. “What crowdsourcing did was it got us a list of customers.”

But for the next stage, when he needed to raise enough cash to build the actual product, Lamb went back to the accredited investors. This time, with a list of potential customers garnered from his crowdsourcing, he raised $900,000. His first batch of docks shipped earlier this month.

Under the new law, Lamb could have sold up to $1 million in equity using crowdsourcing. But he is not sure he would have gone that route.

“If we had taken equity from crowdsourcing, we would have had thousands of funders,” he said. “It’ll be complex to implement.”

Even if the law helps certain types of companies get funding, it's hard to estimate how many jobs that might create. In 2010, businesses under a year old produced 2.5 million jobs, down from about 3.5 million in 2007, according to the Bureau of Labor Statistics.

While a handful of the new companies started each year take off and hire hundreds or thousands of people, “a good portion don’t hire anybody,” said Robert Litan, a researcher with the Kauffman Foundation.

Take Jones’ two-year-old Giddy. She has two fulltime employees — herself and her co-founder — and hires a handful of part-time consultants such as a food scientist. She believes she is helping create jobs among her manufacturing partners, but is not sure how many.

In the venture capital community, the most excitement has centered on a provision that will benefit companies that are a few years past the startup phase by making it easier to file for an initial public offering. Companies will be less limited in their communications with analysts around their IPOs, for example.

Ben Wolin, the chief executive of venture-backed online wellness company Everyday Health, filed for an IPO two years ago and then withdrew it, but said he might give it another shot under the new rules.

“You’d be establishing relationships with investors, providing information about your company, you’d start getting feedback,” he said. “That allows for a more informed decision about when and how to go public.”

The law also raises the limit on the number of shareholders a company can have before it must file financial statements with the SEC. That will enable profitable private companies such as Facebook to stay private longer if they choose.

Ironically, measures that boost technology companies could have a detrimental impact on job creation in many ways, as those companies turn out innovations that allow other businesses to become more productive with fewer people.

That is already happening.

"The number of new firms being created; the numbers of employees they were hiring has been declining for over a decade," said Litan. "Largely due to technology."

(Editing by Andre Grenon)

((sarah.mcbride@thomsonreuters.com)(415 677 2547)) Keywords: JOBSACT/SILICON

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