Gone Phishin’?

The Internet can be a scary place. And that is not just the Luddite in me talking. And no matter how hard we try to stop them, the bad guys seem to keep one step ahead of us. Take for example phishing. Phishing is a variety of tactics to fool people into giving up personal information that allows the bad guys to steal our money and/or our identity. If often starts with a fake e-mail from a bank or from eBay. At first, these attempts were rather clumsy. But because they worked enough of the time, the bad guys improved their techniques to fool even more unsuspecting folks. Remember, if this stuff does not work, they wouldn’t keep trying.
The accounting firm Kraft CPAs offers some assistance in sorting this all out. If you have received e-mails that really look like they are from your bank or eBay they offer advice on how to protect yourself and your small business:

Spoofed emails are a method used by scammers and hackers in an effort to obtain personal information from unsuspecting individuals and is commonly known as “phishing.” The scam artist crafts an email that appears to originate from a popular and legitimate company to entice the end user to reveal information such as passwords, credit card numbers, social security numbers or other types of personal data.
Even though the example email above appears to originate from member@eBay.com, it actually did not originate from eBay. The sending address can be modified, or spoofed, easily by the sender. Also, the link the scammer wants you to click is embedded in the “Respond Now” button and leads to a website that appears to be eBay, but is actually a site intended to gather your eBay logon information. Just as the sender’s email address, the links embedded in the email are easily spoofed, too.
So how do I recognize a spoofed email?
An email stating the company is updating customers’ account information is a common ploy. Always be suspicious of emails soliciting personal information. Reputable companies such as eBay will not request personal information from their customers by asking the user to click a link in an email. Your best bet is to ignore them altogether. If you believe the email may be legitimate, make a phone call to the vendor (using a number you know to be genuine) and ask for verification of the validity of the email.
How do I protect myself?
As mentioned previously, ignoring emails requesting personal information is best practice. Other measures you can take to protect yourself and your computer system are:
– Never email personal or financial information.
– Install anti-virus and anti-spyware software, keep them up-to-date, and perform regular scans.
– Install a personal firewall.
– If an email claiming to be from a financial institution is requesting personal information, report it to the financial institution.
– Always err on the side of caution. If a company needs any information from you for a legitimate purpose, they will find you.
– Utilize an email filtering system.

Kraft also recommends these sites as sources for useful information email protection.
www.us-cert.gov
www.antiphishing.org
www.nist.org
www.trendmicro.com/en/security/phishing
(The information from Kraft CPAs was used with permission).

Valuation of High Growth Start-ups

A graduate student from Norway e-mailed me about how high-potential businesses are valued during seed financing, since there is nothing really to base a valuation on — no sales and no cash flow. He suggested that any valuation seemed like holding a wet finger up to measure wind speed. The truth is, valuing a business during seed round is more like assessing wind speed by holding up dry finger in the air!
They answer to his question is this: they don’t really even try to value the business.
The most common approach these days for seed financing is to use a convertible promissory note. It really delays any need to value the business until there is clearer information to use for valuation. It is convertible at the time that Series A money comes in, usually from VCs, at some multiple over the share value at the time Series A money is secured. Series A round financing usually occurs when sales have begun, or at least a clearer picture of market potential is evident.
For example, let’s assume a start-up needs $1 million in seed funding. The investors issue a convertible promissory note with a 10% interest and with a 1.25 conversion multiple. So in effect, they give them a loan that can be converted to stock. At the time of the Series A round investment, which in this simple example is a $5 million VC investment one year later, the conversion occurs and they get shares that were equivalent to the $1 million seed money they originally put in the business times 1.25 plus accrued interest. So a year later the seed investors get shares that would be the same as if they invested $1,000,000 * 1.25 * 1.10 = $1,375,000. The logic is that by the time they are ready for Series A investment (in this case another $5 million) there is a clearer basis for valuation. They have begun to sell product, or they have a better idea on the size and scope of the market, they have time lines to product sale, etc. etc.
Seed money is most likely going to come from angel investors, angel networks, or small, boutique VC firms. The big boy VC firms will join in at the point of Series A or even Series B funding.

And for the Little Guy….

Clearly, the owner of a small business must take a different route to financing than the high potential, high growth entrepreneur. The myth is that they finance it all by credit card. While this may be true for many start-ups, USNews reports on a survey by Visa and SCORE that finds that only 21% of small businesses use business credit cards. The truth is that credit cards have not always been very convenient for small businesses. Traditionally the business cards issued to small businesses are really not very different from consumer cards.

Small-business owners don’t use their cards as consumers do, but they also don’t have access to capital as larger companies do. They may need credit, but many suppliers don’t accept cards, forcing business owners to pay with checks.

Credit card companies are finally beginning to understand the needs of small business and are responding by issuing cards that better meet their needs for access to working capital. I guess the 23 million small businesses finally got their attention.

Entrepreneurial Myths for “Geeks”

I love to collect entrepreneurial myths that those of us who work in the world of new ventures have observed over the years. On of my former students (Chip Hayner) passed along this list of myths from the world of technology start-ups from Rondom Ramblings. It is both humorous and very much on target for many would-be entrepreneurs in any industry.
Here is a sample:

Myth #4: What you think matters.
Reality: It matters not one whit that you and all your buddies think that your idea is the greatest thing since sliced pizza (unless, of course, your buddies are rich enough to be the customer base for your business). What matters is what your customers think. It is natural to assume that if you and your buddies think your idea is cool that millions of other people out there will think it’s cool too, and sometimes it works out that way, but usually not. The reason is that if you are smart enough to have a brilliant idea then you (and most likely your buddies) are different from everyone else. I don’t mean to sound condescending here, but the sad fact of the matter is that compared to you, most people are pretty dumb (look at how many people vote Republican 😉 and they care about dumb things. (I just heard about a new clothing store in Pasadena that has lines around the block. A clothing store!) If you cater only to people who care about the things that you care about then your customer base will be pretty small.

Choosing the Right Technology

The latest collection of articles and how-to’s from eVenturing is one that sends a slight chill down my spine. As can be seen by this quote from a previous post, I am a bit of a Luddite:

I used to get teased by my managers, bankers, lawyers, and CPAs about how long I would drag my feet on new technologies. They complained that we were among the last businesses to buy a fax machine (OK, I am dating myself a bit here) and PC work stations. Everybody else had voice mail and e-mail long before we did, so they claimed.

Quite honestly, I was as much concerned about throwing money at new technology that did not deliver or would become obsolete before we even got it fully implemented as I was fearful of new technologies. For small business, cash is tight and we cannot afford to make bad decisions on expensive technology. It really needs to pay for itself through improved performance and/or efficiency. This collection from eVenturing offers some useful information to avoid making costly technology choices that just don’t deliver a return on investment.

There is No Place Like Home

Self-employment is now a major part of our entrepreneurial economy, now approaching almost 20 million Americans. Many of the self-employed are choosing to work from home due to family considerations. For example, self-employment allows more flexibility for parents with young children.
Homestead Technologies commissioned a study on home-based businesses and found the following as their list of “hot” opportunities that can be run from home:

E-Learning: With advances in new web application tools such as podcasts and video blogs, development costs will decrease.
E-Bay Aftermarket: Helping companies conduct market research, pricing strategies, shipping, and competitive analysis is a great niche business.
Children Arts Education: There is a major market for teachers of right-brained education who are thought to help foster the development of future innovators.
Garage Organizers: Just as organizing closets was the next big thing in the 80’s, the messy garage is the final space to clean up.
Background Checks: Small businesses with limited resources are turning to background check companies to handle investigation and due diligence.
Pet Sitting: An ideal home-based business where you get paid to walk and enjoy the companionship of pets.
Specialized Coaching: The coaching market has boomed in the recent years including specialized areas such as life, spiritual, corporate, relationship and business.
Home-based Debt Collection: Debt has become a way of life for many Americans. Operating a low overhead home-based collection service can serve the niche sections of this market.
Specialized Outsourcing: The small business market has limited resources and a focus on core competencies. Specialized outsourcing from home to small business will have a solid position market position for years to come.
Scrap Booking: In today’s easy to save and store digital age, opportunities abound for the home-based scrapbook artist, workshop teacher, or a direct sales rep.

Will you get rich with any of these ideas? Probably not. But, that is not the point for most who choose to run a home-based business. It is to earn income while enjoying the flexibility and freedom of running a small business from home.

Competitiveness?

Academics and other researchers sure can do some funny things sometimes. In a new report on “global competitiveness” the World Economic Forum uses a definition of economic competitiveness that includes several measures of socialistic public policy. They then go on to marvel at how the still socialistic leaning Scandinavians are so “competitive.”
That is why we must always read the details of any ranking or study like this. Sadly, the media will just grab the headlines and run with it ignoring these critical details.

There Still is Money Out There

A new study released by the University of New Hampshire reports that total angel funded deals are up 15% in the first half of 2006 when compared to the same period from 2005 even though the economy seems to be slowing down a bit. This is because the slowdown is thought to be short-lived. Angel investors look three to five years out, and in this time frame they see a strong economy returning.
Here are a few details from the study:
– Although there are more deals being made this year, they are making smaller investments. This could be a slight hedging of their investments using diversification due to the current soft conditions.
– If you are not in healthcare services/medical devices/equipment (27% of investments), software (18%), biotech (10%), retail (10%), media (10%), or IT services (10%), you are facing tough odds on finding angel investors. Those six sectors soaked up about 75% of all investment dollars so far in 2006. Although this is a much broader list than has been seen in the past, which is also a good sign for the future.
– Angels are not as early into the dance as they used to be with only 40% of their money going to seed or start-up financing. This percentage used to be much higher. What we don’t know is if this is a true shift to later stage funding or simply more money being invested and some of it going into later stage deals. Anecdotal evidence suggests that they have shifted at least somewhat out of seed investing.
(via National Dialogue on Entrepreneurship)
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New Data on Small Business

The most recent data from the SBA shows that small business is still driving the economy, employing 50.6% of the entire US workforce. The SBA also has a web page that allows you to really dig into the small business statistics from varying sources, looking at industry sectors, number of firms by size (revenues and employment), birth and death rates of small business, and so forth. It also has data by state and metro areas. If you are into data, this is a fascinating site.

Intellectual Property Waisting Away?

Universities are giant R&D departments dreaming up the “next big thing.” The problem is, they are not very good at making the transition from ideas to market applications.
Many academics have no experience in the business world. They do not understand the difference between an interesting new idea and a real market opportunity. But, don’t try to tell them that. Rather than truly partnering with the private sector to mine the wealth of new product applications, they set up rules and stipulations that keep many good opportunities locked away in their labs, and push many applications that are not ready or not truly viable into the market. They do this through their technology transfer policies and tight control by administrative and faculty committees.
Alfred Mann, inventor of the first insulin pump, wants to give hundreds of millions of dollars to universities with one simple condition. He wanted to the right to pick which ideas get funding based on the experience that he and his staff has had in launching new medical devices, rather than allow a committee of faculty and administrators to decide which should get funding with the money he donates to the university. So far, he has found no takers.
From Forbes.com:

Mann is puzzled by the rejections. As he sees it, universities should welcome his guidance since they typically do a bad job in commercializing their professors’ inventions. Professors, he says, don’t know how to turn their ideas into products. University patent offices have trouble finding industrial partners. He cites statistics showing that billion in government and industry sponsored university research each year leads to only billion in commercial licensing revenue, a paltry 2.7% return.
But universities say Mann wants too much control for too little money. Experts in technology transfer tend to agree. Robert Lowe, a professor of entrepreneurship at Carnegie Mellon University, who studies the topic, says that universities don’t want a single entity to have first-look rights to option its inventions because it can interfere with academic freedom and amount to a giveaway.

If technology transfer is to be part of the engine that drives our emerging entrepreneurial economy, universities need to stop being arrogant and understand that those with market experience can help the common good by accelerating new products coming out of their ivory towers.
(Thanks to Jim Stefansic for passing this along).