Thursday, February 21, 2008

Angel Investors: the Beauty Industry

A quick break from high tech today:

Finding angel investors with beauty industry domain knowledge is tricky if you're a beauty start up trying to build a line of products. Building up your launch line, including creating "comps" for pitching to major retailers, can be done relatively cheaply. If you want to work with a brand strategist, or "beauty futurologist" to increase your chances of a quick major channel partner, add another $150 - 250K to your budget. Jeanne Recckio is the one who gets the most press, and who inspires me. I am following her example and trying to become a law futurologist. So far, no takers at that price, though.)

I also tell my clients to take a look at those in their supply chain for cash. Some designers, contract manufacturers and others might be willing to invest if they believe you are likely to get early pick up by Sephora, Ulta or QVC. There also are a number of small-business loans aimed at women-owned businesses (even better if you can locate your business in a historically-underutilized business zone, or HUB).

Bottom line: you can bootstrap to get to a launch line, and there are a few other options available to increase your cushion. But beauty is a network business in many ways - who you know really can lead you to great formulators, designers and even send you "product flow" (ideas for new products) if you're lucky. If you have an idea that's big, or that needs smart money, it never hurts to look far. (Also, the more clinical your product line, the more cash you're going to need. You need to spend a bit more to be cosmeceutical.)

In Toronto, I always start by point to Inter-Act Management, an investment group started by Vic Casale, the original chemist for MAC Cosmetics. The group is very low profile, but early bets include CoverFx, a company originally focussed on makeup solutions for burn victims and others with significant scarring. Businesses like this have found a wider niche with the proliferation of HDTV, which makes everyone look hideous, even with standard tv makeup. Another great beauty story here in town, based not just on great marketing and design.

Back to our regularly scheduled programming.

Wednesday, February 13, 2008

Protecting Your Trade Secrets: Avoiding A Corporate Cavity Search

With the increased number and frequency of random searches at the US/Canada border, business travellers need to consider how they could be affected. Can a border guard demand to review your laptop and blackberry files? Does US Customs owe you a duty of confidentiality?

The notion that a random search of your blackberry could be considered reasonable seems incredible. And yet, it's happening regularly, thanks to the vigilance of Homeland Security. A Quebec man who refused recently to provide his password to border guards found his laptop impounded, and a grand jury convened to compell disclosure of the password. A judge ultimately overruled the impoundment, and there are apparently a handful of other cases which are re-considering the issue of what constitutes reasonable search and seizure in the context of national security.

Until the issue is settled, if ever, practical steps need to be considered. For example, in Toronto, a local law firm has adopted the policy of stripping its laptops and blackberries of all data prior to crossing the border.

Entrepreneurs - you know which of you I'm referring to - think of how much you keep of your business currently resides in your laptop. Think also of how many trade secrets and pre-patent items are sitting there, going with you to your meeting with Fred Wilson (although really, if you're going to see Fred, you should go to see Rick or Barry down the block first. Sometimes, they have cookies.). Are your trade secrets compromised if they are "published" to US Customs and/or the Department of Homeland Security? Are your customers compromised if their data is copied? Apparently, there is currently no law requiring either department to maintain the confidentiality of information they review as part of a random search (although I understnad that they have adopted "procedures"). I expect in time this will improve, but for the moment, consider the border as another place you need firewall protection.

Thanks to Blaney McMurtry for raising the flag.

Sunday, February 10, 2008

Did You Miss Me?

Of course you didn’t. You’ve all been off creating all kinds of value and otherwise capitalizing on the interesting times the current markets are creating. I should know; I’ve been chained to my desk since November, barreling through the landslide of transactions many of you have generated.

Here are some of the things we’re watching at my firm, and that I’ll be blogging about this quarter:

1. The New VCs. Start-ups outside of Silicon Valley have always operated on the assumption that venture capital is a funding trend, rather than an industry. And in 2008, venture capital will remain relegated to the back of your closet, much like those pinwale corduroy pants you claim you threw out in 1992. Which means that until Dolce & Gabbana brings one of them back, you need to understand your options.

A few efforts are afoot to replicate the micro-VC models espoused by Y Combinator and a few other players who loosely coined the term “crowdsourcing” venture capital. Y Combinator is a great way to sell a book and brand a startup camp, but a lousy way to make money, and it won’t replace the growth or volume venture capital can generate. While we applaud and will support all those trying to fill this role (in fact, if you need something and haven’t already asked us, just drop us a line), here’s where we’re seeing the major money for start-up funding coming from in 2008: (a) the government, (b) angels, and (c) public venture capital.

We’ve seen unprecedented growth in the number of angel deals done in the last two quarters. It’s important to note that the most active investing angels are not the noisiest. In our experience, it’s strategic corporate and individual angels who are writing the cheques, and lots of them. Circumstances also are driving local VCs to become born-again angels as well. What terms should stay in a VC angel deal, and what should wait until a later round? What degree of control is acceptable in an angel deal? How much paper and due diligence is enough? What securities law restrictions are there on the issuance of warrants to “managing” angels? More on all that later.

There is a corresponding rise in pre-angel advisors and funding schemes that also bear discussion. When is it appropriate to hire an advisor to help raise funds? What are acceptable terms for engagement letter?

2. Increased Scrutiny of Canadian Business in the US: It’s no secret that the IRS and Canada’s Revenue Agency exchange information. US advisors warn that that same information is in turn being shared by the IRS with Homeland Security, and being used by border guards to scrutinize entrants to the US. “Have you filed your US tax returns?” is a question some are warning Canadians who spend extended periods of time in the US to expect. We think there are a number of dynamics at play that may result in Canadian businesses facing this same scrutiny soon, particularly as their employees cross the border to provide post sales support. Take, for example, state retail sales taxes. Many states impose sales tax on maintenance services provided by non-residents. While many larger Canadian software companies register and remit, this is not always the case in the startup world. A growing number of state and federal initiatives also may apply to Canadian companies providing services from Canada to the US. Did you try and save data costs by using a server farm located in the US? Are you a white label provider of services for US businesses? Make sure you’ve structured your contracts and operations so that you aren’t inadvertently falling under the long arm of certain US laws. We’ll be taking some more time blogging about how to evaluate the manner in which you do business with (and expand into) the US.

3. Mainstreaming Micro-Entrepreneurialism:
We are fortunate to work with clients who are part of the international economic aid community. Using international aid money, they’ve put their technological expertise to work to help develop sustainable, competitive business clusters in other parts of the world. The result? A broad portfolio of applications that do everything from integrating the smallest SME to larger supply chains, to operating as a platform for administering community-based lending programs. In the current North American environment, where gaining incremental and niche markets is a near term imperative for many technology startups, commercializing these by-products of “competitiveness” could be an interesting trend.

4. Management Buyouts of VC-Backed Companies: The fund-raising challenges many funds face have left many VC-backed ventures in an interesting situation, particularly here in Canada. It is generally more difficult to raise growth capital when your backers have reached the limits of their financial support for you in their current fund, and/or– if your VCs include labour-sponsored funds – are facing a potentially huge redemption by unit holders of the fund in the next 1- 2 years. Over the years we have worked with a number of later stage start-ups on a buyout of the business from their current backers. We think the current market dynamics offer another window for some start-up management teams to buy back some of their investors’ stake.

Interesting times ahead. I hope you’ll stay tuned. And as Valentine’s Day approaches, remember: a Bird of Paradise isn’t a flower. It's a plant. It doesn’t count. A dozen of them will just make matters worse.