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hey everyone welcome to reporters roundtable I am Rafe Needleman in San Francisco hey listen this is an important show that Jobs Act is about to rewrite the rules of Silicon Valley notoriously small businesses have always had challenges getting access to capital and even more so in this economy but raising money is going to get a lot easier if the jumpstart our business startups or Jobs Act becomes law there are two main fundamentals of the JOBS Act first of all it will let small businesses raise money from individuals that previously couldn't invest in companies because they didn't make enough money they work and credited investors and secondly it will let these businesses advertise to raise money which has been illegal so far and although the bill hasn't been signed by the president yet entrepreneurs are cheering this Act would fundamentally change access to capital for small small startups in the United States I guess the biggest probably the biggest deal in decades but there are still a lot of concerns about the bill if you're somebody who is not too familiar with investing and you see an opportunity to invest in the small company that's doing this cool thing you think that sounds pretty cool and you read some article somewhere and says this is a great investment sale I'll put my money and it sounds like a short thing well it's not a sure thing most small businesses fail the SEC along with other investor protection groups have added to the criticism the North American securities administrators Association released this statement the JOBS Act sacrifices essential investor protections without offering any prospects for meaningful sustainable job growth but experts say ultimately the JOBS Act may not change the way most tech startups get funding most of them will continue to raise money through angel investors through venture funds or self-fund to raise money this way means to deal with a large number of investors you don't know and who you may not trust for cnet news com I'm Sumi das alright we recorded that a few days ago since that we recorded that intro video a lot has happened of course we recorded that after the JOBS Act sailed through the house of representatives have passed with flying colors and then went to the Senate where was debated for a few days but ultimately passed with a couple of interesting and important modifications so just to reiterate what the JOBS Act is about is again it stands for jumpstart our business startups although it has very little to do with actual jobs and the way the president talks about it will go back to the house for approval and probably be approved and then certainly be signed by the president and it will mean that crowdfunding becomes the law of the land that you and I can invest in startups a very small amount of money it also means that these startups can advertise to you and me for investing which right now they're prohibited from doing there's another big part of it which is how companies go public IPOs companies that want to go public will be able to do so with reduced regulations they're rolling back some of the sarbanes-oxley restrictions that make it expensive for companies to go public or if they want to delay going public and acquire more private investors they will also be able to do that so it becomes much companies have much more flexibility in how they decide to go public to talk about these issues today which are unbelievably important for technology entrepreneurship and startups in the whole Silicon Valley economy we've got three great guests first George Zachary who's a venture capitalist for charles river ventures I've got a short pre-recorded interview with him we recorded that yesterday and then here in the studio I've got chance Barnett of the crowdfunding portal crowdfunder chance thank you and via Skype from Boston timro who's a CEO of the cambridge innovation center Tim thanks for joining us we will be right back with you guys but first let's hear what George had to say from the heart of Silicon Valley his office down a mental park alright so first up on reporters roundtable today we're going to talk with George Zachary who is a partner at the venture capital firm charles river ventures which is a fairly large influential firm in boston and san francisco George has made some interesting and investments and small little companies who may have heard of like Twitter and Yammer and also he was the co-founder of shutterfly which is now a public company George thanks for making the time thank you thank you very much so we've talked a bit about the JOBS Act which is shortly to become law we all believe and I need to ask you just a couple of questions from your perspective as a venture capitalist as somebody who is in the business of investing money in startups is the JOBS Act a good thing or a bad thing for technology entrepreneurship for the valley I think it's a great thing for technology founders and technology entrepreneurship it's another source of capital and having multiple options as a founder is a great thing to do now how about for you though because doesn't this increase competition for deals and drive up the amount of funds that you will need to put into a company to get in yeah it does it does increase the competition for every one increases competition for angel investors seed investors micro vc's early stage venture capitalist like myself late stage investors it sure does it's another form of competition but if we're all about making the world better an increasing change it's the right thing to do and we might as well get on with it and adapt to change sooner versus later with regards to the crowdfunding provision what would you advise the entrepreneurs that you talk to or the ones that you don't know about how to use it so far I have had very few questions from founders about it there you know most founders are just really focused on one end to build business and product and so they try to get as much capital in as few meetings as possible the only issue with the JOBS Act is that you know collecting 10 and 20 and 50 K from individuals it could be hundreds of meetings for a founder to raise that from an individual so my take is I don't think it's plant angel investing seed and testing an early stage venture I think it's going to be an additional pool of capital to fill out rounds so it I actually it's going to be more complementary than competitive or early on it might be more competitive or angel investors but usually when founders are showing up at my door I want to talk to me yeah they usually are trying to basically raised two to six million dollars and having one person to deal with to get the capital from makes it easier and we've seen this before about ten years ago bill hambrick who is the founder Pam Birkin quest tried to democratize IPOs by offering kind of reverse auctions and increasing the amount that went to retail investors but the business never really changed started the startups going public still went to mutual funds first because they cuz through a few meetings you could raise a big volume of cash so I think that's going to remain true so I see it much more as complimentary okay sorry i rambled on there too long no it's great and fro great info now what about for investors who want to get in on this I mean there's got to be a lot of individuals a lot of people on smaller incomes who finally feel they can take part in the technology rocketship of our the financial rocketship of technology what is your advice to all these people think they can now play in and get in on the next Facebook well it's a fantastic opportunity but they should realize that 8 out of 4,000 angel and venture funded companies drive around eighty percent of the game this comes to us from one of our limited partners historically named hoarsely bridge which is a big limited partner and we've heard that data from other people so people that need to realize that every company can't be the Facebook and that this is much higher risk than investing in the public stock market it's so in risk it somewhere between investing the public market and the lottery where I mean that's a pretty broad swath here yeah it is which which side do you think it's on more lottery more a general motor runs almost as bad example a bad battery bank america is a bad example to wait a minute we come up with a good example oh dear oh mills okay go ahead it matters how you build the portfolio so I would advise individuals to build a portfolio not of one or two five or ten k investments but probably of 50 and you want to basically invest more thematically along a sector this is what mutual funds do is they they look for companies that are going that are going to go public and do they fit into a theme or a sector and then they try to basically diversify the risk they try to decrease the risk by diversifying their investments into lots of different companies so I think there will be you'll need to develop good sources as to which startups are the right ones to invest in you'll have to think through do I want to buy a bundle of these do I want to come in through some aggregator there's there are lots of issues what then they'll be the whole issue about newsletters right now if you're an individual you can subscribe to any one of thousands of financial newsletters which tell you how to invest in the best way for the public market so my guess is we'll see the rise of of that kind of reporting if we'll put it that way I struggle to call it journalism because it's not it probably won't be be slightly propagating propaganda Sh you'll want to get these research reports on what on the hot private company ISM and you're going to have to be armed with information and knowledge they'll probably be people trying to commit fraud and raise money for completely dubious things so it's going to require more work on the part of individuals on that part so the probably new service providers to help individuals figure this out sounds like Wild West is coming when it comes to small company stock advice that's that's right and we have a little bit of this Wild West ten years ago you know now that people have kind of forgotten the bust of 99 2000 and some of the fraud associated with that and people are now starting to forget the state crisis there looking for the next big thing of the what I call the Rolling Thunder bubble which is it tends to move from one sector to another and right now it's really about technology once Facebook goes public I think it's going to be a net scape moment in the sense that will generate a lot of excitement on the part of individual investors about public market technology companies as well as private ones okay so I think it's really exciting it's a great thing that's happening but it's new there'll be people say it's bad because there's fraud and other reasons but they needs to be probably need to be more disclosure there probably need to meet new research services to kind of fit these investors okay George any final advice for people on either side of this equation either the entrepreneurs or the investors it's a new world so think carefully about what you're going to get by tapping into the new opportunities on every side investor psychic underside small investor side do your homework it's called diligence we do it as venture investors and just get armed with as much facts and data but remember great investment decisions are always usually made by intuition first with data that supports a second good advice George thank you very much for your time and we'll see right now you're going to be out here in you know in a couple of days for a live event here at seen it right that's right I'm very excited for that event with Paul Sloan all right good we'll see you then thanks a lot thank you thanks for inviting me alright we're back that was a George Zachary of the venture firm charles river ventures we've got two great live guests now I've got chance Burnett here in the studio and timro dialing it from Boston and tim i want to start with you you run the cambridge innovation center if I got that correct yay okay uh what do you make of all this should people jump in to these crowd funding opportunities right away or would it make more sense for them to sit and wait and see how things a level out after this bill because bill becomes law which is almost certain going to it was certainly going to happen well so first of all they won't be able to do it right away because the bill gives the SEC a little bit of time to do real making I think it's 270 days so a little hot a little bit of time to get ready for this you know hearing George's comments I have a slightly different perspective on how this is going to play out overall I think by the way you and George have captured you know X in a great way you know the potential here it's huge one of the things that I see is that the crowdfunding is going to be used much more for people to raise money from friends and family and the next level of acquaintances beyond that for businesses that may never see venture capital uh you know tiny can't you have that already I mean people have all been raising friends and family for startups forever so what makes the jobs act different about that so if what you can't do right now or two things you can't invest in a company if you are at an accredited investor or in a very small number of investors under 35 investors under current laws so if you want to be able to go out and say post this on you know Facebook let your friends you went to high school with went to college with or people in your church group or whatever let them know that you're starting up say I knew a new plumbing business or a new catering business and you want to raise a hundred thousand dollars to get the equipment to get going that wasn't something that you could do before and so there's you know the idea one notion is that the you know almost ninety seven percent of businesses i think that that never see venture capital or angel capital may see this as a way that for them to get financed very different thing than the kind of the Wild West picture this is more hey you know soon Susan starting a company let's all put in 500 bucks to help her out what is the mood of the entrepreneurs of your work with that the Cambridge Innovation Center what are what are their thoughts are they thinking of this isn't for us or this is a great opportunity for us to raise money so we don't to deal with those pesky angels and VCs I think it's more the ladder announced this yesterday there were cheering crowds of people whoops of joy this was this has been long awaited uh I you know I could tell you stories of companies recently that raise money on Kickstarter and love it and people see this as you know Kickstarter on steroids now just for the record just so everybody who's watching the show knows Kickstarter's a fundamentally different model in that model you invest in a project it's kind of a donation and you get the work product you don't ever own a piece of the company exact day it's a fundamental difference that's right yeah and so people but people actually don't see it is that different what Kickstarter does is gets thousands of people to support you in your project right and this way now they can actually get equity and put more money in there's data there's there is one crowdfunding company out there now that's got some traction it's in the UK it's called crowdcube they've invested it's new its its last year and what they found is that most of the investments that they get most of the dollars in these investments are over a thousand dollars whereas Kickstarter is more like 50 bucks or a hundred bucks so it really ups the ante in terms of how much money you can raise with this this approach chance Barnett is the CEO of crowd funder which is one of these crowdfunding portals and chance your your business is based on the passage of the JOBS Act is it not absolutely so this means a lot to you you're out on the circuit but the JOBS Act changed as it went through the house originally the bill said if you make up to a hundred thousand dollars you can vest up to ten percent of your income in startups and the Senate version of the bill which has to go back to the house now has a tiered a sliding scale of caps talk about that about what they are and why that is so important share a great question so one of the things that's gonna be happening with the bill that was the Senate Senate amended version the Senate got it two hands would had been the original bill and said we want to try and and really push for what we see is important investor protections and one of the ways of doing that is putting a maximum cap on how much money any non accreditor individual person like you and I could invest someone's mom could invest in their sons company and and I think that's one way of going about trying to protect investors and I think that's a reasonable start but what I think is important here is to keep the whole pie in mind and not just piece it apart and and to take a more holistic systems approach to thinking about this in any system generally you see the 8020 principle of play if not something more dramatic you'll see eighty percent of any activity or let's say in this case investment coming from twenty percent of the participants or the people on a platform so what this cap can potentially do is while it provides some some roof to how much money someone might lose an investment it also limits the amount to which the market can really start to fund effectively and so I think we want to be careful in making sure that this act doesn't too much push down that that limit for a variety of people well those limits actually are by the way just since you asked that yeah right question the bill points out that they want to limit people with forty thousand dollars or under income to two percent of their annual income and then people over a hundred thousand dollars or more can invest around ten percent of their annual income so that has been the constant as the bill you know bubbled up in in media buzz that became kind of the rallying point of all the content was the the concept of fraud and of course people who run the public markets I say this advisedly as a journalist for more than 20 years are obviously against this because this this takes some of the control and the power and the money flow off of their plate so of course they're going to fight this and it's just reality of the way money people who control money want to keep that control but the the rallying cry around fraud I think is relevant and this and that has been the push and pull how much do you make this a free market and at how much do you protect people who don't know any better now you as running a crowdfunder calm which is a place where investor or entrepreneurs can go and say this is our company you can come invest in us now you have a lot of competition there are at least five companies that I know of that compete directly with you and they've all pitched me so very smart of you to be here today uh there uh you your business though it's not you can't buy stocks and then resell can you do a job Zack mutual fund is that your business mean how do you guys make any money not all so there's this this important role that crowdfunding platforms like us at crowdfunder com need to play which is to remain very much hands off of any representation of what's good or not while providing really important safety checks for that deals are legitimate and that the founders of these companies are legitimate so this is where I think the rallying cry of some of the opponents of the bill there their argument doesn't hold water because they want to just claim that hey there's going to be a rampant fraud here even as the bill is suggest now there's regulatory framework and so some of the requirements going to look like background work background check requirements for principles of companies anyone who's ten percent or over owner and a company that's looking to raise money they'll also be probably standardized disclosures about the company that might include use of funds that might include a your existing cap table things like that how much money is in a bank account of the company and then what I think is interesting or two other really interesting points to say what's the quality or some qualitative measure of what this person as it or what this company might look like which are some level transparency around identity and I think the web has done an interesting job and come a long way in the last five six years about making that easier for everyday people to do and so the simple ways that I can speak to that is connecting your facebook account connecting a linkedin account to your profile as an entrepreneur raising money hmm those things have some social checks and they're not as powerful and is important as a background check but that's a really good signal if you're a potential investor can you go and look and meet really see someone's job history check them out on linkedin and make sure they're legitimate that's a nice check to have and then the other thing that I think is interesting will be data so right now the investing world particularly the early-stage vesting world is very opaque meaning if you wanted to try and get and understand how much should a company at a certain stage and a certain industry be worth it's really hard to get a fixed number on that and there's good and bad reasons why that's true why the industry is opaque what I think crowdfund investing is really going to do that's interesting is start to open that up and create a lot of transparency around the data and the funding of these companies and help investors from that side to not have a bad experience in investing in a company it Tim from Cambridge animation center do you think that entrepreneurs are ready to open the kimono this much in order to get you know five hundred or thousand two thousand dollars from investors here there oh absolutely and I think we're seeing it right now I think we're seeing using the existing models crew in the United States there's crowd lending sites like prosper com that are up and running right now also in in Europe people are very happy to go out there share their information raise money from the crowd there's a company called Gotham bicycle defense here at Cambridge innovation center that recently you know went out on Kickstarter they needed 18 thousand dollars they shared their whole story videos of what what they're doing etc got sixty thousand dollars and you know they're the heroes right that this is people saying this is the way to do it I think I think this concern about fraud is overplayed there are two reasons why I think that one is that if you look at all of the sites now that allow people to raise money online like the crowd lending sites like the existing crowdfunding sites angel list which is a credited investor only crowd funding site right now they they all report that they are not experiencing fraud Angeles prosper Crowdcube circle lending these guys are i'm sleepy funding circle these guys have all gone pop you know going on record saying they have have zero cases of reported fraud at this point so i think that that's probably less of a real issue than it appears to be although obviously we will have to wait see how this unfolds you know I want to transition from that statement which i think is very telling to the even bigger picture economically which is the new rules that the JOBS Act puts on place for the public markets which is when and how a company goes public now as I understand it and I'm new to understanding the way public markets the history of public markets the SEC was created in response to the 1929 stock market crash which was a bubble which happened because a lot of people invested in very bad investments and then we had sarbanes-oxley which happened after in 2002 somewhat after then tooth out the dot-com crash and the JOBS Act rolls back many restrictions on how companies go public they can stay private longer or they can go public more easily are there what are the real advantage are there first of all let's talk about the going public without the sarbanes-oxley restrictions do you think that is going to be good for technology businesses overall I mean obviously they'll be able to go public but is that a good thing to have more less regulated public technology companies Tim want to go to you first on that one through there's no question that that would be a good thing first of all there are two ways that investor two reasons that investors invest in companies in the first place they either can sell the company get it acquired or they can go public between the two of them they make much more money if the company goes public so you got to understand that making it it feasible to go public is really driver for investors to invest in these startups in the first place if you don't make it easy to go public there aren't going to be people investing in startups second the you know the argument is not we are going to relieve these companies of dealing with sarbanes-oxley for all time it's just saying that for the first five years or even less than that if the companies grow quickly the the restrictions are going to be somewhat more limited than they are today so they're what they're doing is they're scaling or graduating in those new rules slowly to let companies learn how to deal with all of the reporting and so forth that's required the professionals in the industry that that that I talked with I've talked with a lot of lawyers about this I've talked with a lot of venture capitalists about this and people who work in public markets is that we really went just a bit too far with sarbanes-oxley particularly in the sense that it was hard to get out the first place to go public because the rules were so tough that a new company just couldn't comply with all them from the get-go now another part of the JOBS Act is the companies if they want to stay private longer on the total flip side can do that chance have you studied that alone is there an advantage to staying private longer well there certainly is you know one of the things that's most interesting is when you become a public company there's suddenly a shift in the focus of what you think your business is about and you know there was a great article written a while back that I saw which was management to stockholder value this is not ideally what creates long-term value when a company is trying to meet expectations on a continual basis on a quarterly basis for earnings reports it might in the short term help your stock price long-term that's not always the best way to manage your company and think about your product or your customer value and so I think it's important for companies to think really hard if the barrier the cost and the time it takes to go public suddenly there's a new capital market for you to raise money that's really expansive and it's important but you really want to balance that with what are the core values of my company who am i seeking to serve am i seeking to serve my company best and my customers or am i seeking to seek the market and there's a balance to be played there so I think it's on a case-by-case basis that company needs to consider that but I don't think anyone is really rushing out and saying I want to go public right now it's a very big consideration I know no one is allowed to take lightly because of these regulations but that would be the big thing that that I would look at as a founder and entrepreneur looking to take a company public as a really huge consideration because there's cultural and there's business considerations about how you allowed to act you know they're there are extraordinarily innovative public companies I mean it I guess to your point is probably more difficult to keep the fire alive in a public company the fire of innovation of excitement that startup mentality but it's not impossible so if maybe this just makes for you know these restrictions make for better management I mean I maybe I don't know yes no I'm gonna say that I really think it's really what's of key importance and Tim already touched on it is this is a source of revenue or capital market that companies can access and you know there's two ways to have a big success with a company to have an exit which is you're getting acquired and it taking public and taking a public is certainly by leaps and bounds oftentimes much more lucrative provides more constant long-term stream of capital firm yeah I want to ask you both this question for again into the last topic as we've been discussing the potential here is that a smaller investors lower income investors can win by playing in this market although they can also lose because these are highly volatile investments entrepreneurs win because they have more flexibility in how they raise funds and then was the company's got bigger they have more flexibility in their approach to the public markets new businesses trans like yours can win because there's a new opportunity to aggregate information incubators venture capitalist etc I believe they win because as more money enters the market the spread between the amount invested and the exits gets bigger which means there's more money to be made who loses well I think you see a trend both in the business models that you see on the web and how humans behave economically towards a more collaborative model and so if you take the the record industry's a good example there used to be only a few distribution points a few radio stations that would play so it was a hits business and there was a few people that make those business hits and and that was it and everyone else was left scrambling flash forward to today there's a mass of niches there's tons of internet radio stations so there's a lot of winners and the people who lost are the industries that were the two main radio distribution networks I got all the value from the hits and the few record labels who were able to get into those all the time so what I think we're going to see with this collaborative environment any environment that's opened up to this more distributed model which is really what the web's about you see a wider distribution I think we're going to see really interesting alignment of communities that want to take over the funding of themselves and that's essentially what crowdfunding is about humans self-organizing and and you know i think that the tech world and the startup world is already relative to most other communities very organized so i think this will have a significant packed impact in the tech industry but i think it's going to have a much broader and more revolutionary impact on small business in the states because they don't have a rallying hub they don't have Rafe Needleman who talks about them all the time they're just everyday small business heroes and this is going to be a huge part of the economy Tim yeah you know I think that saying that they're you know looking at the loot you losers is a little too narrow in the sense that this is really going to expand a pie the pie right now is the number of new businesses that get funded in the united states and i think the anticipation is that this is going to vastly increase that if there is a loser it's probably those that are competing for that same talent so perhaps it's it's bigger businesses that now we're going to see more and more people going into businesses startups I think that that mesh may shift the mix towards more smaller businesses in the United States and fewer large businesses I'm not sure that that's entirely a bad thing I think it's a healthy shift for this country interesting now which brings me to the final topic this is called the JOBS Act which is a reverse engineered acronym jumpstart our business startups but what impact will this Jobs Act have on jobs will more people be hired or are we just changing the distribution of unemployment Tim first then chance so there you may be familiar with a study that the Kauffman Foundation did recently that showed where jobs come from in the United States it was a groundbreaking new research they said that they looked over 30 years and found that companies five years old and younger created all the jobs in this country and then some for every three jobs that were created by these companies five years old and younger the older companies the six years old and older companies lost a job in collectively old companies lost jobs in almost every year in the last 30 years so we know that the jobs are coming from new businesses and it only follows that if you have more new business activity you're going to have more job-creating activity chance there's engineering stat and I like data rather than pontification oftentimes so Tim and mentioned Crowdcube which is one of the only other great references to business crowdfunding where people actually investing and this is going on in the UK and they had data about what they estimate the job impact is of the investments of the people made in the companies that were crowd funded by doing a survey and that data was roughly you know across a few of the companies in the sample that they had there was about a hundred and fifty employees in those companies the estimate that was going to be you know I think the number was around 370 employees as a result of this funding so that's yeah so that's more than a doubling of the jobs and and then you also have to imagine that hiring is just one piece of that what companies also do is spend money with other people in the business ecosystem zoom whether that's advertising whether that's partnerships whether it's web hosting there's always a vibrant community that companies are investing around and with and so those those people in the ecosystem who are also the tool providers all benefit and there's jobs there too cool well listen guys thanks very much a real interesting conversation on the JOBS Act you can find more information on this on Rafe's radar com or I've been writing about this ad nauseum chance Barnett is the CEO of crowdfunder which is crowdfunder com check it out and learn more about investing in small and emerging businesses Tim rose a CEO of the cambridge innovation center CI CTR com Tim thank you so much for the time we will see you guys all next week on another great addition of reporters roundtable thanks Stephen for producing and still then bye all right thank you you