Interesting Experience Yesterday Morning

Interesting Experience Yesterday Morning

One of my readers invited me along to a meeting of the Boise Keiretsu Forum, which is part of an angel investor network. The Keiretsu Forum is a way for people with significant money to jointly evaluate business opportunities and decide whether to invest. When I say, "significant money," I mean that I am sure that I was by far the poorest person in the room.

This exclusivity isn't because Keiretsu Forum wants to keep the proletariat out. It is a legal requirement. What many people don't realize is that the Securities Act of 1933 created a minimum bar for being a capitalist. To be an "Accredited Investor" means that (with a couple of exceptions that don't really change the story much) you have to have a net worth of one million dollars (which was a lot more money in 1933 than it is today).

The net effect is that it makes it illegal for ordinary people to invest in companies that are not yet publicly traded, unless you are an employee who gets to participate through an Incentive Stock Option or a Non-Qualified Stock Option. (I've been through both at two mildly successful startups; the ISO is definitely for the employees.) I rather suspect that someone in 1933 thought--or at least claimed--that they were protecting "little people" from being taken advantage of by unscrupulous charlatans. The net effect is to keep the little people from participating in one of the most profitable phases of capitalism.

The sequence by which this works is that someone puts in seed money (a few hundred thousand dollars) to get a company off the ground. Then, once the company has reached the point where they have gone from concept to a working product (perhaps even one that is actually selling), they go to the Keiretsu Forum to raise additional funding (typically a few million dollars). This level of funding is supposed to give them enough capital to reach the "exit strategy"--where you either sell the company to someone larger, or more rarely, have an Initial Public Offering of stock.

I won't go into the details of the four companies that made presentations. Three of them had what I considered persuasive business models and enough actual sales to show that it wasn't delusionary--one was downright impressive. If I were rich enough to be an "Accredited Investor," I would be very interested in being on the due diligence committee that was going to look into it, and report back. (The fourth company looked like a so-so idea that wasn't flying, and wasn't likely to fly.)

Anyway, it was useful to see how this part of the process works. I've been an early employee in three startups (number 17 in one company, number 23 in another), but I was never a principle in any of these operations--just a hired hand. I'm learning the ropes on this because the double secret project may be the opportunity to take this path.