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Saturday, April 9, 2011

The Best Exits Start Early

Perhaps one of the least well understood parts of being an entrepreneur is how to incorporate an exit strategy. With all the demands start-ups face, exits often appear low on the "to do" list with the result that CEO's and their Boards sometimes miss the optimum window. That window often opens before rather than after a company hits its peak because after the peak, the company's market value may begin to slip. At least that's the way investors see it.

One pro in the exit arena is Jim Estill, who until 2009 was CEO of Canrock Ventures, a technology investment fund where he remains a partner. Out of 100 angel investments, Jim has been an active participant in about 20 exits. Jim's advice is to "put exit on the agenda" as soon as you join a board, or start a company. He believes it's important to start building relationships with potential buyers by courting them at trade shows, for example, and then staying in touch. "Identifying acquirers early," Jim advises, "provides input for strategic planning to align the company's activities or descriptive materials with potential buyers' markets." He also advises gathering materials to build a selling document periodically by adding anything "helpful to the sale, " such as financial statements, patent information, legal documents; he also includes links to articles on industry news or sales which provide potentially useful competitive data.

In several of the exits in which he has taken an active role, Jim positions himself as "Exit Chair or even Co-CEO." The Exit CEO does not operate the company, but spends a month or two conducting due diligence as a preamble to setting up and leading exit meetings with prospects. His rationale for the title is that "exits are very intense times and demand long hours outside of the operating demands on the CEO." Plus most CEO's have never sold a company, so it's useful to have an exit specialist drawn either from the Board or from company investors. It's also a good deal for a company, Jim says, "because it adds a lot of value and doesn't cost very much, since compensation is success-based. Besides, bankers love Exit CEO's who share the considerable workload of preparing documents for mergers or acquisitions."

In some cases, an exit strategy, especially for many women, is never to sell because they see their companies as lifestyle enterprises. But even in cases where the entrepreneur is not actively looking, buyers may come calling. In 2006 Laney Whitcanack, founded Big Tent, an online company that connects women with communities they care about, making it easy for groups to organize and communicate. The group choices are many, in such areas as arts, crafts and hobbies, health, sports, and parenting, often concentrated in an area, such as Moms of Multiples of Indy (Indianapolis). While Big Tent offers it services free to groups, it generates revenues through connecting marketers to the million women currently in Big Tent groups.

In a world divided between missionaries and mercenaries, Big Tent founder Laney Whitcanack counted herself among the missionaries because "I had a big vision and was driven by the idea which I wanted to see through." The relationship with Federated Media, a next generation media and publishing company that connects web conversations with brand markets, developed casually and "evolved over a year before the offer came." In 2010 about 11 members of her team moved with Laney to Federated Media where she is now Chief Community Officer, working on strategies for more consumer interaction as the "web grows increasingly group- based. "

The former CEO of Big Tent, Donna Novitsky, chose to leave when the exit came. "For me," she says, "it was like my baby going off to college. We had built something meaningful that needed a bigger stage, but Federated didn't need another CEO! I don't think you can't plan for exit but you can build the biggest, most successful company you can envision and eventually someone will make you an offer you can't refuse." One way to get a little closer to finding that partner, Donna suggests, "is to create partnerships with companies that are potential acquirers. For one thing it will help you understand your company from another point of view--ideally that of the customers."

Founder-Executive Publisher Joanna Track of, a Toronto-based website that alerts savvy shoppers to the latest trends in clothes, restaurants, shops, never went looking either. But in 2006 she was "discovered" by Rogers Media, which owns 70 magazines and 54 radio stations, and was interested in a minority stake as well as foothold in digital media. Joanna compared the process to a dating relationship in which you get to know each other and have to look for the dirty laundry too. "I did a lot of research," Joanna notes, "to be sure I was getting a fair deal and that they would stick to their word because I had had two prior painful experiences." Of course the corporate sweep of Rogers added considerable exposure to Sweetspot, tripling subscribers in the year following their first investment.

By 2010, Rogers bought out Joanna's entire remaining stake and within months she was preparing to launch another start-up. "Day to day operations, especially within a corporate bureaucracy, are not my thing. I never wanted to work for a big company. My nature is to build and develop and move on." Her new venture, to be launched later this spring, is Dealuxe to provide designer fashions and accessories to Canadian shoppers online, removing the frustrations of purchasing from US and other international retailers.

Exit coach Basil Peters, author of Early Exits often says that exiting can be "the most fun part of being an entrepreneur." But ask Joanna Track what she likes best. While she talks with enormous pride about Sweetspot and its new future, she positively lights up as she describes her plans for Dealuxe, her next "creation."

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Venture Capitalists Aren't Investing In Black Entrepreneurs

It's a simple formula: Investing in high-growth companies creates jobs while generating more wealth for investors. The formula has worked for America's private venture capital investment community for 65 years.

Unfortunately, no such active community exists in Black America.

This week, the National Venture Capital Association and the Angel Capital Association meets in Boston for the ACA Summit (April 4-6, 2011) and NVCA Annual Meeting (April 6-8). Together, these organizations are comprised of more than 500 groups of private equity investors who make up a large portion of the reason why the 21st century Innovation Economy races along at breakneck speed and offers solutions to the problems of high rates of unemployment and diminishing levels of wealth.

There are no such comparable gatherings in Black America.

Producing Jobs and Wealth

Between 1980 and 2005, all net job growth in America was produced by companies less than five years old. That doesn't happen without angel and venture capital investing in high-growth entrepreneurship.

During the same time period, venture capital experienced its largest boon since it was first introduced in the '50s.

In the '50s and '60s Blacks were legally and institutionally barred from many facets of the American Dream. In the 70s, Americans were still consumed by widespread, overt racial disparities, some of which seeped underground during the '80s and '90s, when private equity capital enjoyed its heyday and the establishment of a firm economic investment infrastructure and high-growth entrepreneurial culture

None of that job- and wealth-creating infrastructure was built in Black America ... or any broad regions comprised primarily of any racial minority demographic groups.

Infrastructure: High-Growth Entrepreneurial Ecosystem

The culture of high risk-high return capital investment had been established by the 80's, which led to rapid growth in the technology sectors. This laid the foundation and established conditions in which high growth startups could emerge. These startups have gone on to revolutionize, if not create industries, including biotechnology (Genentech), personal computers (Microsoft, Apple) and eventually internet-based commerce including social networking sites like Google, Facebook, etc...

This type of high risk and explosive entrepreneurial culture has yet to take root in Black America, but not due to lack of an entrepreneurial, innovative or creative spirit among Black Americans. Rather, it has been the lack of understanding of the relationship between (high) risk capital, explosive entrepreneurship and economic growth that has hampered Black America's participation in the Innovation Economy.

The private equity capital investment community laid the framework for the high-growth Innovation Economy today, which has replaced the former manufacturing economy, which replaced the agrarian economy.

Today, it is private equity capital investments from high net worth individuals and SEC-qualified investors (both known as angels), along with venture capital, that ignite the fire blazing into new technology frontiers. Fueling that fire is science, technology, engineering and math (STEM) education and those pursuing professions in the various STEM fields.

Since 1995, more than 50,000 companies have received a total amount greater than $439 billion in venture capital equity investments. That's not counting angel investments, which typically enter in the equation early and exit earlier than venture capital.

Much of this activity has somehow escaped Black America. However, it is also clear that very few of those companies are led by Black entrepreneurs. In 2010, Black tech entrepreneurs received just 1% of technology based equity investments.

America's Job Creators Meet in Boston

Likely few Blacks will find their way to the ACA and NVCA events in Boston this week, where many of the people responsible for the success of high-growth entrepreneurs (who have created jobs that reduced the unemployment rate and generated more wealth for investors) will come together to network, learn, share and improve their infrastructure.

Indeed, the private equity investment infrastructure is expanding. And President Obama has recognized the private equity investment community as the leading opportunity for job creation and wealth generation in America, as well as the solution for the U.S. becoming more competitive in the global marketplace.

So, where is Black America?

Missing: Black Capital Investments

While the recent unemployment numbers brought good news for the nation as a whole, with total unemployment dropping to a two-year low, it left a sour taste in the mouths of Black Americans, who must contend with the notion that the rate of unemployment today for Black Americans remains double the rate it is overall for the nation. That point hasn't changed much since Dr. King bemoaned being left out of the American Dream when he articulated his famous "Dream" speech in August of 1963.

Moreover, a May 2010 data report by the Institute on Assets and Social Policy reveals that wealth is being generated in America at an astounding rate, yet has managed to bypass Black America. This report shows a quadrupling of the wealth gap between Blacks and Whites over the 23 years the study was conducted (1984 - 2007).

It's not a secret how wealth is created in America on a mass scale. Other minority groups have managed to figure out the formula.

Asian Americans Invest in STEM / High-Growth Entrepreneurs

For example, Asian Americans, who own nearly one million fewer businesses than Black Americans, produced $2.5T in total gross receipts compared to $137 billion by 1.9 million Black-owned businesses.

Asian Americans have an investment infrastructure. They own hundreds of companies in Silicon Valley. They also produce STEM-educated professionals and high-growth entrepreneurs at a significant rate.

Black Americans are no strangers to entrepreneurship nor innovation. Our focus, however, has been on lifestyle entrepreneurship ventures primarily rather than high-growth equity backed enterprises that produce more fast-growing employer firms.

Government Solutions?

It is no secret the focus of economic activity in Black America has targeted conducting business with the government as a prime channel of activity. Thus, major investments of time, energy and money have been made in obtaining political cache in attempts to affect public policies that open doors of access and opportunities for a tiny percentage of Black-owned small businesses.

This focus on government solutions, which proved prudent during the 20th century battles over constitutional citizenship, must be transformed to fully engage in the 21st century quest for economic equity citizenship.

Today, Black America is missing out on a vital element required for job creation and wealth generation: an innovative infrastructure that focuses on high-growth entrepreneurship fueled by a pipeline of STEM ingenuity and risk capital. Such an infrastructure would be the foundation of capital investments necessary to fund an ecosystem of high-growth entrepreneurship.

Real Economic Solutions

If Black America is to change the current paradigm of a widening wealth gap compared to White America and a rate of unemployment consistently much higher than the national average, it must recognize an immediate need to establish its own private equity investment community and establish strong ties with the current infrastructure that has decades of experience.

Perhaps a step in the right direction would be to show such a significant presence at the equity capital investor gatherings in Boston this week to a degree that simply the sheer attendance numbers alone would raise eyebrows and interest. Or perhaps there should be a convening of the minds within our community to address this important issue?

What's preventing us from establishing such a valuable infrastructure and ecosystem?

The numbers speak for themselves. While the rest of America has figured out how to create both jobs and wealth, Blacks have consistently lagged behind in both. The missing element in Black America is a viable, growing equity capital investment community that can fuel high growth entrepreneurship and Black participation in the Innovation Economy.

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Cathy Harris is an Empowerment and Motivational Speaker, Non-GMO Health and Wellness Expert, Self-Publishing and Business Coach.