[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
FIELD HEARING IN ARIZONA: SMALL BUSINESS ACCESS TO CAPITAL IN
SCOTTSDALE, ARIZONA
=======================================================================
HEARING
before the
SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
SEPTEMBER 23, 2013
__________
[GRAPHIC] [TIFF OMITTED]
Small Business Committee Document Number 113-037
Available via the GPO Website: www.fdsys.gov
U.S. GOVERNMENT PRINTING OFFICE
85-091 WASHINGTON : 2013
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. David Schweikert............................................ 1
WITNESSES
Mr. Jim Goulka, Managing Director, Arizona Technology Investors
Forum, Mesa, AZ................................................ 3
Mr. Nima Jacob Nojoumi, Co-founder & CEO, itsWorth, LLC, Tempe,
AZ............................................................. 4
Mr. Thomas H. Curzon, Senior Partner, Osborn Maledon, Phoneix, AZ 6
APPENDIX
Prepared Statements:
Mr. Jim Goulka, Managing Director, Arizona Technology
Investors Forum, Mesa, AZ.................................. 23
Mr. Nima Jacob Nojoumi, Co-founder & CEO, itsWorth, LLC,
Tempe, AZ.................................................. 28
Mr. Thomas H. Curzon, Senior Partner, Osborn Maledon,
Phoenix, AZ................................................ 30
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
SMALL BUSINESS ACCESS TO CAPITAL IN SCOTTSDALE, ARIZONA
----------
MONDAY, SEPTEMBER 23, 2013
House of Representatives,
Committee on Small Business,
Subcommittee on Investigations, Oversight and
Regulations,
Washington, DC.
The Subcommittee met, pursuant to call, at 1:00 p.m., in
Enterprise Room, Skysong Innovation Center, Arizona State
University, 1475 North Scottsdale Road, Scottsdale, Arizona,
Hon. David Schweikert [chairman of the Subcommittee] presiding.
Present: Representative Schweikert.
Also Present: Representative Gosar.
Chairman Schweikert. Before we actually start getting on
some of the traditional opening script, I want to share with
you. The Committee and Subcommittee staff have actually been
very kind to those of us who are members as we are also trying
to build a record, as we often refer to it, from hearings all
over the country of what is actually going on, what is
happening in different regions, what is working, what isn't
working, because we often find different parts of the country
have very different views.
So with that, thank you for all being here. I would like to
first start today's hearing by thanking our witnesses for being
here.
I would also like to thank the staff of Skysong. Is the
actual title really ``Skysong Innovation Center''? Okay. And is
Kubion around? He didn't come? You know he is my cousin. Yes, I
just thought I would share that.
Thank you to Arizona State University for assisting my
office and arranging the room and this hearing.
In Washington, part of my role as a Subcommittee Chair on
the House Small Business Committee is to hold Congressional
hearings on topics that are important to small business. There
is a two-part mission to these hearings. First, the testimony
that we receive helps educate members of Congress on relevant
issues that help us better represent the needs of small
businesses throughout the country.
So far this year, as Chairman I have held hearings on the
Securities and Exchange Commission and their accountability for
missing deadlines and the great frustration we have on the JOBS
Act in regards to what the Securities and Exchange Commission
has just blown through all their deadlines, which is one of the
few bipartisan pieces of legislation we have had through
Congress in the last couple of years, and we can't get the
regulatory bodies to finish their work sets.
We have also held hearings on the Regulatory Flexibility
Act and its goal of reducing overall burdens of Federal
regulations on small business.
Congressional hearings can also serve as educational tools
for the community, also for small business and those who are
trying to understand that relationship.
As chairmen, we receive testimony on innovative ways small
businesses are raising capital by hearing from crowd-funding
websites. We had a great hearing earlier this year with
Indiegogo, Fundrise, Rock the Post, as well as, believe it or
not, Samuel Adams brewery, whose leadership have set up--it is
not technically a micro-funding platform, but they are putting
money into small, growing businesses around the country. A very
innovative thing for a company to do is to take part of its
capital and engage in such lending.
Today we want to bring that same opportunity to Scottsdale
to examine the current environment for small business trying to
raise capital. Our goal is to talk about the resources
available here that small business can access to grow their
business and create jobs.
To that end, we will hear from our witnesses who are either
investing in, creating, or advising local small businesses, to
see what is available in this marketplace.
Again, I thank you all for being here.
And with that, let me also just explain--do we have the
lighting system? The running joke is everyone gets 5 minutes.
When you are down to 4, the yellow light goes on. Yellow means
talk faster. And at red, we are supposed to be done with the
time. I am not going to be particularly persnickety because we
are all not running off to floor votes, but trying to keep it
fairly crisp gives the opportunity to have some dialogue back
and forth because, I promise you, somewhere you are going to
say something that sets off questions from both Congressman
Gosar and myself, and staff, and maybe each other.
With that, I was actually going to let Congressman Gosar do
an opening statement, and then I was going to come and give one
last bit.
Mr. Gosar. I am going to keep mine short.
Chairman Schweikert. What happen when--Congressmen not
getting their microphones on--Our first witness today is Jim
Goulka. Did I get it right?
Mr. Goulka. Good enough. Thank you.
Chairman Schweikert. What would be perfect?
Mr. Goulka. Goulka.
Chairman Schweikert. Isn't that what I said?
Mr. Goulka. I thought you said Goulka.
Chairman Schweikert. All right. Managing Director of the
Arizona Technology Investors Forum, a group of angel investors.
Jim is also CEO of Jumpstart Solutions, an early-stage business
intelligence software company, and has been involved in several
other technology companies throughout his career. Jim, I know,
had some interesting things to share with us.
Jim, you have 5 minutes.
STATEMENTS OF JIM GOULKA, MANAGING DIRECTOR, ARIZONA TECHNOLOGY
INVESTORS FORUM, MESA, ARIZONA; NIMA JACOB NOJOUMI, CO-FOUNDER
AND CEO, ITSWORTH, LLC, TEMPE, ARIZONA; THOMAS H. CURZON,
SENIOR PARTNER, OSBORN MALEDON, PHOENIX, ARIZONA
STATEMENT OF JIM GOULKA
Mr. Goulka. Thank you, Chairman Schweikert. Thank you.
Thank you, Congressman Gosar, for inviting me. I will try to be
as brief and as concise as I can.
Starting a business, which is really the part of small
businesses that I am particularly interested in, is a life-
changing event for entrepreneurs. So you think about how they
start their businesses. A few people have some ideas. There is
nothing there. It is an idea. And then they have to turn that
idea into a real, actual business.
So they need some money for that. So they put some of their
own money into the business. Then they go to their friends and
family, and sooner or later they are going to run out of that
kind of money.
So where do they go after that? There are, obviously, grant
programs around from the Federal Government and from the state.
But even those are difficult to come by, and so they start to
think about other people with cash, cash to invest.
The first thought, of course, is to go to a bank. But if
you are a young person in particular, if you have an idea and
no assets and you are using your savings to go into the
business, you are essentially unbankable, and most of the banks
know that, and most people understand that.
So young entrepreneurs or old entrepreneurs have to find
other sources of capital, people who are able to understand
that a new business is a risky business. The new risky business
might be changing the world. It might be changing behavior. It
may work or it may not. So who do they go to to find this kind
of money?
Well, there are angels and there are venture capitalists,
the usual two crowds of people. Venture capitalists generally
understand the important characteristic for real small
businesses is that they are not interested in doing
transactions of less than $2 million. So if you are a small
business and you are looking for a half-a-million dollars or a
million dollars, there aren't very many VCs that will do that
kind of funding, and there are certainly no VCs in Arizona
doing that kind of funding.
So that naturally drives entrepreneurs to angels. And who
are angels? We are, according to the SEC, accredited investors.
We meet their test to do that. We are individuals who are
willing to risk our own money on an uncertain venture in the
hopes of achieving a superior economic return.
What does that mean? It means that we are prepared to take
a loss of 100 percent of our money. It means we understand
that. It means that we have the ability to absorb that kind of
a risk, that kind of a loss, and we think that we can deal with
that by being very careful about what we do, collaborating with
other people of like mind, maybe not the same attitude but like
mind to evaluate opportunities and select those that we think
are really good investments.
That is pretty sophisticated stuff. We learn to do this by
doing it. We do transactions. We learn from each other. Arizona
Technology Investor Forum is a group of people that does this
together, and part of the benefit of it is that we learn from
each other. And as a result, we can do better transactions.
But here we are in Arizona. There are 170 or so angels in
the organized angel groups of ATF and Desert Angels. We know
that there are many more people here who could invest in these
kinds of transactions. Part of our responsibility is to become
acquainted with those people and show them how to do it, show
them the kinds of risks, show them how we mitigate risk, show
them how they can make a judgment on their own to participate
in a transaction, and then give them the opportunity to do
that.
So we are interested in finding and building the angel
population in Arizona. Angels here are investing in early-stage
or start-up businesses that are not investing specifically in
real estate but in these other things where you can lose all of
your money. So now we look at how can we do that better.
Part of what we do at our angel group is to have education
programs. We have our Sidecar Fund is what we call it. It is a
fund to enable people to learn how to do what we do, and most
importantly, we have the 71 individuals who are mentors to each
other, showing each other what is going on. Unfortunately, the
new changes that the SEC is proposing in 506(c) start to
curtail the ability for current angels to continue to do our
angel investing and make it much more difficult for new angels
to enter the fray because they have to disclose information
that they have never, ever had to disclose before, which means
they are not going to do a deal. And more than anything else,
this is an impediment to doing more transactions here.
Thank you.
Chairman Schweikert. Thank you, Jim. Actually, I would love
to talk to you some more about the accredited investor rules
that may be coming out of the SEC.
Our second witness is Jacob Nojoumi.
Mr. Nojoumi. Nojoumi.
Chairman Schweikert. Close enough. Co-Founder of
itsWorth.com, a website that is looking to be the resource for
finding the value of everything in the world, which is actually
a concept I have a fascination on because one of the things our
office has worked on for years is shouldn't everything of value
have a platform it could be traded on.
Prior to starting itsWorth.com, Jacob worked in various
roles for the local company named GoDaddy.
Jacob, 5 minutes. Share with us.
STATEMENT OF NIMA JACOB NOJOUMI
Mr. Nojoumi. Congressman Gosar and Chairman Schweikert, I
appreciate the opportunity to speak today. My name is Nima
Jacob Nojoumi and I come from a long lineage of entrepreneurs.
I am the Co-Founder and CEO of itsWorth.com. I recall when Shad
Nojoumi initially approached me with the concept for our big
data startup. He said, ``Nima, I want to valuate the world.''
That statement put a huge smile on my face. After doing
thorough research, I came to the realization that with today's
technologies, there is no reason why we couldn't create the
world's first valuation engine. The concept is both simple and
powerful, an engine that provides users with up-to-date, real-
world financial values.
itsWorth.com is the Google of values. We are on a mission
to provide an unbiased valuation of the world people can
contribute to and feel empowered by to make informed buying and
selling decisions.
My three best friends and I, who at one point were
colleagues at GoDaddy, decided to pool our life savings
together and take a chance, to live the American Dream. Today,
we have 8.4 million products in our database and are six weeks
from releasing our Software-as-a-Service platform. We are
extremely grateful for local experts like Tyler Rives of
Silicon Valley Bank in Tempe and Evan Gilbert of Polsinelli Law
Firm for helping position us for success.
However, I have traveled to California 10 times this year
alone to gain access to advisers and talent, to build
relationships with angel investment groups and with the venture
capital community. It has been a long and hard journey. I am
here to say entrepreneurs in Arizona should not have to leave
the state to gain access to human or financial capital. The
time is right. Arizona has an emerging startup community. It
needs to develop, it needs to mature and grow up fast. That is
the problem and the opportunity.
Fortunately for us, there are celebrated experts that have
outlined the structures, systems and processes, and the social
architecture to develop an ecosystem. I cite Dr. Barry Stein's
1974 MIT dissertation: ``Human resources are the wealth of
nations; each nation has the responsibility as well as the need
to develop and conserve them. But human resources are not the
simple equivalent of physical persons, as mere existence does
not automatically create human beings. Rather, they develop
through participation in social life.''
Mr. Mark Tomizawa, a strategist and entrepreneur, invested
the past five years of his life developing social architecture
to deploy in real time, and I quote him: ``As for the
ecosystem, we need freedom, support and know-how, as
individuals at work, in school and in life, to do the right
thing. That means more humans supporting each other, live and
in real time. That means passing knowledge, mindfully, from
generation to generation. That is part of how a healthy society
is defined.''
I am here to say that as a state, we are leaving money and
opportunity on the table. We can and we must do better. We must
coordinate better and connect the dots more strategically. The
stand-alone organizations must join forces to create an
ecosystem of opportunity, an ecosystem of human capital, and an
ecosystem of local job creation. We can and we must become
known as a great state where great ideas come to life.
To cross the chasm from communities to ecosystem, we need
to leverage existing resources, thought leaders like Dr. Stein
and Mr. Tomizawa, and bridges that work on an integrative
level. Tyler Rives, Evan Gilbert and I are examples of bridges.
We naturally connect people to resources and initiatives.
I believe conversations like these are essential and will
serve as a catalyst for change and growth. I am not here to ask
the Small Business Committee for solutions. I am asking that
you leverage and organize existing capital, whether it is human
or financial, to provide entrepreneurs with the opportunities
they need to meet today's evolving market conditions and to
remain loyal residents of the great State of Arizona.
Chairman Schweikert. Thank you, Jacob.
I would like now to introduce our next witness, Tom Curzon,
Senior Partner for the law firm of Osborn Maledon, where he
represents emerging growth-oriented companies. Thomas has also
been involved in Invest Southwest, a local fundraising event
which helps small business access more than $250 million since
1992.
Thomas, 5 minutes. Share with us.
STATEMENT OF THOMAS H. CURZON
Mr. Curzon. Thank you, Mr. Chairman and Mr. Gosar. As the
note said, I have been practicing law here for over 33 years,
more than 30 of that representing startups or investors in
startups. I have been involved in all kinds of organizations in
our ecosystem, one of which is Invest Southwest that you
referred to, which is basically the venture capital conference
that has been in Arizona since 1992.
It has evolved with the markets and through three
recessions, and it basically serves as an annual--you can think
about it as a forum where we invite investors, both venture and
angel investors, all accredited historically, to attend the
several-day event, and then we invite companies seeking growth
capital, not small doughnut shops and pizza parlors but
companies that aspire to be the next big company.
They apply. We will typically get 50 to 100 applicant
companies. They go through a rigorous selection process, and
then we pick 10 to 12 of those companies who will do a pitch, a
10-minute pitch to the audience, and then by that we hopefully
will expose them to potential investors so that they can then
begin a journey that we hope will lead to them being funded by
somebody at the conference or perhaps in the chain of
networking events that we all know happens. They will end up
getting funded because they surfaced.
The event has been the premiere capital conference in
Arizona for a very long time. We are continuing to offer it,
and in light of the changing capital circumstances, we are
restructuring it again, and we will hopefully be serving it up
next March.
It is an important part of our ecosystem here, and one of
the things I want to accomplish is answering questions that you
may have about it so that you better understand how events like
it work.
One of the things that we are struggling with right now in
the leadership--and I am on the board of directors of it and am
helping in that planning--is what do we do in light of the new
rules that become effective today, and in light of the proposed
rules, the comment period that ended today under Regulation D.
Our dilemma is that we would like to have it be as all-
inclusive as possible. It has typically been accredited-only
invitees. We can keep it that way, but because of the new
general solicitation and advertising rules, there is now a
question whether a demo day type of event or an event like what
we are doing will be now deemed to be general solicitation,
when before we didn't think it was.
It has never been bright-line clear, but the way the
ecosystem has worked here and in Silicon Valley and Boston and
everywhere else is that that kind of event, you are not
committing a sin if you hold the event and you have companies
pitch and so forth, and if they happen to do deals, it worked
out.
Now we don't know, and we can't get advice out of the SEC.
We know it is not in Congress' hands. It is in the SEC's hands.
But it is a dilemma. If you see Tech Crunch, if you see any of
the publications right now, it is a question that everybody is
asking in our ecosystem, how can we keep doing these events
that are immensely important.
The thing I want to pass along for the Committee's
understanding to help understand, in the world of the
principally high-tech capital raising, capital formation, the
angel venture world, what has happened over the last several
decades is the evolution of an ecosystem where people have
figured out how to do the deals relatively efficiently without
driving up a lot of legal cost. The paperwork the deals are
done on is pretty standardized now, not because of any rules
but because of the efficient marketplace, and because it has
been in the context of this accredited-only regulatory regime.
That is part of the secret sauce, is being able to keep the
cost down, keep as much of the legal work out as you can, and
have the market function smoothly, and it has worked pretty
well.
The observation I would make about the recent crowd-funding
changes on the public side, as well as in the accredited-only
side, is it is injecting a whole new level of cost, and by that
I mean principally legal fees. I think that jeopardizes the
public side of it, the public crowd funding, because of the
needs of those small businesses now to spend money on lawyers
to do the paperwork the SEC wants, or seems to want, and it is
going to be a challenge because of that to it actually working,
and that is the point I think I want to emphasize, the
practical side of what they are doing.
With that, I would be happy to, at the right time, take
questions.
Chairman Schweikert. Thank you.
I may actually go because you actually started with a
couple of lines that I would love to dig into.
First off, with the reinterpretation, the lifting of the
ban to general solicitation, how is that helping, how is that
hurting? And you see that now also in conflict with some of the
mechanics and the definition of qualified investor?
Mr. Curzon. Well, the way we work the conference is we want
to have as big an attendance as we can for the event to expose
potential investors to these companies, right? Now, typically
what we have done is we have required accredited-only investors
to register, and they have self-certified. So they show up----
Chairman Schweikert. But now you can broadcast the message
to a much larger audience, but your concern now is the
certification?
Mr. Curzon. Well, we have to be--we are put to a choice. If
we do it the same way we have done it before, we would limit
the conference attendees to accredited investors and ask them
to self-certify, and we would be telling the companies who are
attending that we are relying on the old rules, right? And it
would be that audience.
If we don't do that and we broadcast more broadly, then the
risk is it would be deemed to be a general solicitation, and
under the rules that apply to that, the way the SEC is talking
under the proposed rules about the Form D filings, you could
have a footfall. They could violate those inadvertently, or
they could put themselves, by participating, into the now
506(c). Get it?
Chairman Schweikert. Okay, I am tracking with you. But that
still isn't completely called out in the rule sets yet, is it?
Mr. Curzon. No, it is not. So now it is a big, fat
question. Our event is in March.
Chairman Schweikert. You hit one of my fixations on the
cost of future equity crowd-funding, if we ever finally get the
full sets of rules there.
Mr. Curzon. Right.
Chairman Schweikert. How about something like the
conference you do, actually controlling creating a crowd-
funding platform? So you would become not only--trying to
create the love connections at that type of conference, but
also maybe even some of your smaller players to actually be a
crowd-funding hub.
Mr. Curzon. This is my personal opinion. This is not
something that we talked about. My guess is we would say that
is somebody else's expertise. There are a bunch of companies
out there exploring the ins and outs of becoming platforms.
Chairman Schweikert. I just have a great concern that we
find a way to template much of the mechanics of it, therefore
to drive down the cost.
Mr. Curzon. Right.
Chairman Schweikert. Obviously, the first handful of
players carry much of the regulatory presentation, graphing,
cost burden.
Mr. Curzon. Right, right. The other thing to know--I mean,
my take on it is that the kinds of companies that will use the
public crowd-funding mechanisms that are being discussed are
not likely to be appealing to the growth investors, the angels
and the venture capitalists who are seeking big company plays
because of the dollar limits, the algorithm of the dollar
limits and the number of investors that would be required, and
the amount of money that would be required to build those
companies.
Chairman Schweikert. This is probably a different
conversation. I have always thought it would be a great test,
testing the waters, for proof of concept of an idea.
Mr. Curzon. Maybe, maybe.
Chairman Schweikert. But, we will see.
Jacob, on your current venture, I have a dozen questions
for you, and probably some of them are more appropriate
offline. What talent sets have you had the greatest difficulty
finding here in Arizona?
Mr. Nojoumi. Without a doubt, engineering.
Chairman Schweikert. Okay. Now, is that engineering to give
you a value on things you are trying to--I mean, is it the
platform underneath? What type of engineering?
Mr. Nojoumi. We are working with financial quants that help
us with the algorithms for the depreciation. But the
engineering we are looking for is PHP/MySQL engineers, how to
work with hadoop and large database systems. That has been a
real challenge for us here locally. I had to source talent from
California, from Florida, all around the nation, but nothing
locally. I visited with local groups like Gang Plank and was
unsuccessful.
Chairman Schweikert. Okay. So this is your system. You are
building an SQL----
Mr. Nojoumi. PHP/MySQL.
Chairman Schweikert. Okay. All right. I keep forgetting I
am a decade out of date from everyone.
Mr. Nojoumi. No worries.
Chairman Schweikert. From when I used to write script.
Second, the model of your business--and this is just sort
of an aside--are you going to be using transactional data,
something like the second markets of the world that are trying
to find a way to take sort of everything that is out there in
life and put it in some way where you can create a
transactional connection? I mean, how do you do your valuation?
Mr. Nojoumi. Valuation consists of actual historical sales
data, and we have recruited engineers who had a work history at
Google to help us write SPDRs and APHRs and crawlers to crawl
the Web, very much like Google does, extract data on
valuations, and also a consumer contribution is another factor,
and then financial quants are coming in to help us with the
rates of depreciation for sectors and individual products. So,
the combination.
Chairman Schweikert. Have you ever met the folks at Second
Market?
Mr. Nojoumi. I have not.
Chairman Schweikert. Let me get an introduction there,
because they are working very hard in trying to actually create
a platform to actually do transactions on things you typically
would not think are tradable.
Mr. Nojoumi. That is interesting.
Chairman Schweikert. Next question. You are telling me you
have had great difficulty in finding the engineering talent to
build your database. How about the talent, like the gentleman
sitting to your right, on being able to finance and potentially
take your organization and set it up to go public one day, or
however you choose to finance it?
Mr. Nojoumi. Well, I have traveled to California for that
very purpose, to build relationships with these venture
capitalists and with angel investors.
Chairman Schweikert. You didn't find any of those types of
venture capitalists here in Arizona?
Mr. Nojoumi. Unfortunately not, no. What I am aware of is
there is a limited number of these. I have done some research
on a few of them and, unfortunately, one of them had a
competing interest where Google Ventures was an investor,
basically like online consignment, which isn't a direct threat
to us but it is in competition, so we chose not to go with
them. That is why I have been to California and back so many
times, is to build those relationships, and it is unfortunate
that California is known as that hub and that ecosystem, and
that Arizona is not.
Chairman Schweikert. Have there been any particular
regulatory hubs either from our state or Federal that have also
caused you angst?
Mr. Nojoumi. Haven't really worked on any Federal level as
of yet, no. We bootstrap the company ourselves, the founders,
and actually generate revenue before we get capital.
Chairman Schweikert. Right.
Tom, tell Jacob why he is wrong and why he could have found
the VC here.
Mr. Goulka. I am Jim.
Chairman Schweikert. I am so sorry.
Mr. Goulka. I don't know the answer, because we haven't
talked. One of the characteristics in any market like this is
that--in our example, because it is a good one, we look at 125
to 150 companies a year, and we will fund five of them, which
is typical of angel groups around the country, which is typical
of VC groups. So that means that if there are 150 companies and
we fund five, there are 145 disappointed companies which, by
definition, can't find capital here. So there is always going
to be a degree of discontent because it is a competitive
environment and there are winners and losers, and there are a
lot more losers than winners even within the context of capital
that is available.
The bigger issue, the more systemic issue that we have is
that we are only 71 people. We have only been around for five
years, six years in Phoenix, and our counterparts in Tucson are
a little larger and a little older. But we are a very small
subset of the total potential angel population in the state.
Chairman Schweikert. Jim, and we sort of started to touch
on this even before the hearing. Mechanically, you are mostly
in the angel space, whether it be VC or private equity. How
much talent do you find even beyond the money, accounting
talent, legal talent, compliance talent? I mean, do we have a
robust enough infrastructure underneath the money?
Mr. Goulka. In all those areas of expertise, we have a
plethora of competence. In marketing, in sales, in go-to-market
strategizing, in accounting, in legal, in IP, all of those
activities we have lots and lots of very fine, very competent,
highly qualified people to do that work. So we are not short of
that.
What we are missing is there is an issue about engineers in
Arizona, and the issue ultimately is an engineer may work for a
company for a year, working in a startup. You don't know
whether the company is going to be around for three or four
years or five years or longer. So if you are a young engineer
and you are looking at taking a job in a company that may only
be there for 18 months, you have to look at where am I going to
go from that job to the next one. You may have a hard time
discerning the opportunities, the plethora of opportunities
here for re-employment, and that becomes the beacon that
Silicon Valley shines out into the world. They say you have
lots of opportunities here. If the first one doesn't work, we
have the second and the third and the fourth.
So the development of entrepreneurial businesses like his
is an issue. We have to find ways of incentivising young people
to stay here, and the way you do that is really the second
part, which is that they are not very well connected to each
other.
I have lived in 10 states, and this is the most
disconnected community I have ever lived in. I could get
anything done in New York in three phone calls, or in
Washington, or in Chicago, or in Dallas, or in Minneapolis. I
can't do that here because I don't know who to call, and I have
been here for a few years.
Chairman Schweikert. All right. Before I hand it to
Congressman Gosar, I have to follow up.
Tom, do you agree?
Mr. Curzon. Yes. I would add the note that the engineering
problem is actually a national problem. It is hard to find
engineers everywhere, and their cost has gone through the roof.
But, yes, we have a very fragmented in the sense of
dispersed kind of ecosystem, lots of individuals in the
rowboats rowing in circles.
Chairman Schweikert. Okay. When we do our second round, I
am going to come back to all of you and just say give me an
idea, because I know we have a dozen different Chamber groups,
industry groups, congressional offices that have been trying to
find some way to create that sort of portal where we drive our
people and our information through. Why are we failing?
Congressman Gosar?
Mr. Gosar. Thank you.
Jim, I want to come back to do you see only engineers as
being the focal point of being what is inadequate about our
system here in Arizona?
I mean Tom. Sorry.
Mr. Curzon. Yes. I wouldn't even point to the lack of
engineers. I think that is just a supply issue. A lot of my
clients are solving the problem using virtual teams from all
over the country and just using it over the Internet.
I just spent an hour-and-a-half this morning brainstorming
this issue with somebody, and our takeaway in part is that
there is a lack of momentum of successes. Part of the getting
people together and one success leads to another success, the
kind of serial entrepreneur. A company has a big success, and
then 10 people from that company go out and become angels and
they invest in the next company, and then you just have this
big ripple effect.
We haven't had a ripple effect since the late `90s, except
occasionally, and as soon as we get one of those, I think we
will see some really great things happen. One of the things in
my notes you will see, or in my testimony that bears on this is
the Arizona Commerce Authority's Arizona Innovation Challenge
Business Plan Competition is a big deal. In my opinion, it is a
really big deal. And the reason it is a big deal, it is a semi-
annual business plan competition, $1.5 million each time to
typically six companies. It is not the winners that are the
most important thing. It is that we have had 810 applications
in the last three years, which brings visibility to companies,
most of those we never heard of. And now they are exposed to
our mentoring systems and to investors to see and that kind of
stuff.
That is, I think--I think we are going to look back and it
is going to be one of the most important things that will have
happened, and it is a momentum issue, right? It is getting the
light of day on these so the investors will take their dough
and put it out, and the winners.
Mr. Gosar. Part of that also comes back to big government
dictating winners and losers. I mean, government is supposed to
be fostering an environment to allow that to sort out. I mean,
you made the comment that you have sorted out the streamlined
process. It is not what government has been doing. It is what
you have been doing on a solid business scale, and we have
tipped that scale. Would you agree?
Mr. Curzon. If government gets into the business of making
those kinds of decisions, yes, that is not optimal. I think
when you have--the way Invest Southwest works, the way actually
the Arizona Innovation Challenge works, with a judging panel of
investors where they are picking those--it is not a government
picking them--I think it works best.
Mr. Gosar. Jim, do you like that?
Mr. Goulka. I do, actually. I have been part of the
Innovation Challenge. I see how it works. The opportunity to
get many companies that come out of--it seems like they come
out of the woodwork. I mean, I have spent a large amount of my
day, every day, seeking out companies as candidates for
investment because our doors are open. We are looking for
places to put our dollars. And the Innovation Challenge found
many, many, many companies I had never heard of before, some of
which have subsequently gotten funding from us.
So it does work. That is an instance of utility here,
because it was the big government enabling a bunch of investors
to make the choices for the state capital to be deployed. So
there was some risk involved there.
To my mind, the issues really are staying out of the way,
first and foremost. We don't need a lot of rules to do what we
do. To find opportunities for companies to grow, and
particularly to attract other investors, the way that there can
be good incentives coming from government are through capital
gains tax credits of one sort or another. They do exist at the
Federal level and do exist with the Arizona Angel Tax Credit in
the state because those add an element of potential return to
investors for taking the risks that they are taking. It doesn't
obviate the risk, but it says if the risk is successful, that
there is a gain. So in that weighing of opportunity, of gain or
risk, it tilts it properly and enables the person to take a
better risk, and that will be attractive to people who have
never done this sort of thing before.
Mr. Gosar. Is our economy and the composition of our
business in the State of Arizona compared to others, does it
preclude certain industries over other industries?
Mr. Goulka. Well, we were talking a little earlier about
the importance that serving the needs of the population that
has moved into the state over the years--a nicer way to say it
than just real estate. But, in fact, we have seen enormous
population growth for the last 60 years. It doesn't take a
genius to figure out that you can make money serving all those
needs, whether you are building houses, building roads,
building schools, becoming a teacher in a school, working in a
restaurant or any of those things, serving the ordinary needs
of a massive influx of human beings.
What that has done is it has made it so easy to make money
in that fashion over most of the years that the more risky
kinds of things such as startups, where you are creating
something altogether new, like his business--it is altogether
new; before he thought of it, there wasn't that--that is a
riskier thing. So that says to a person of means, I can take a
high risk, and I can take a lower risk. Which should I do? Then
it is about the kinds of returns for those risks.
So, yes, I think we have had a skewed economy, but that
doesn't mean that it has been so completely skewed that nothing
else exists. We have successes in technology. We have life
science companies that are successful. We have software
companies that are successful. We have GoDaddy, one of the most
extraordinary stories around, that is right here, and it stays
here.
So we are not devoid of it. We haven't developed it as well
as we could. I call us adolescents in that. We have to work at
developing them into a full-fledged ecosystem, and that is
dealing with what I call the disconnectedness.
Mr. Gosar. By utilizing some of the spinoffs that we have
seen out of TGen and ASU, do you think there is a better
relationship that we should have with our major university
partners in regards to looking at investment into spinoffs and
new technology?
Mr. Goulka. I think the universities are working very hard
at becoming good at a very difficult thing. Tech transfer is
very difficult to do, even under the best of circumstances. If
you look at Stanford and Cal Tech and MIT, and even Columbia,
it is still a difficult thing to accomplish. How do you bring
scientists and engineers and business people together? And in a
university setting, particularly one that wants to find
alternative sources of income, this looks like a good one. But
the hurdles that we have in this are serious.
The first is if I as a licensor require from you, a
licensee, a large amount of money for a license on the front
end, only the wealthy can afford that. If, on the other hand,
that cost is lower, it makes it easier for small businesses to
do this, and I can speak to this from personal experience. My
software company is the result of two people, my partner and I,
acquiring a license from NASA Ames of some software they built
over a five-year period, and it was very easy to work with
NASA, much easier to work with NASA than it is to work with ASU
or the University of Arizona. So there is learning to be done
in that tech transfer activity.
The second part is the connections between scientists,
engineers, and business people. Many people choose to be
researchers in the university setting because they are not
interested in business. So working on methodologies
intramurally about this is a good thing to take your idea and
commercialize it, it is not just about greed and all that, it
is about taking your ideas and bringing it to a larger
population and serving them, that needs to be done, and we are
not very far along in that.
Chairman Schweikert. Well, thank you. And I need to follow
up on that one. It is because of the residual model, or is it
the up-front cash----
Mr. Goulka. It is absolutely the up-front cash. That is the
issue.
Chairman Schweikert. Okay. So, let's hunker down. So when
you are going to do that licensing transfer, it is just the
amount of capital up-front, and when you did your agreement
with the NASA-developed software, that model was different?
Mr. Goulka. It was a very small up-front fee.
Chairman Schweikert. And did they take a residual?
Mr. Goulka. Absolutely. We pay them every year for it, and
that is fine because it is based on our revenues. So the more
we grow, the better off they are, and that is the way
successful licenses work. If we would have had to pay a quarter
of a million dollars to acquire our license, we would not have
acquired it. That meant the technology would be sitting on a
shelf today, and there are businesses that have generated
billions of dollars for their institutions, and it wasn't from
a billion-dollar up-front fee. It was from the success of the
business made by entrepreneurs with some scientific new idea.
Chairman Schweikert. It is interesting. I think REA and I,
we had some meetings with ASU and U-of-A on this very similar
subject. So it is going to be real high on the checklist.
From your view of the world, and you touched on this in
your opening statement, but I want to sort of bounce through
them, 506(c) and some of the improvements, changes, the
solicitation rules--and you know I am not happy with what they
have been doing on the credit investor mechanics and possibly
now having to have a third party certification--where are you
hitting your greatest concern, and would you believe for our
angel investor community here in Arizona, where do you see your
greatest legal liability right now when you are trying to put
something together?
Mr. Goulka. The issue ultimately is how hard is it to do a
transaction. And as Tom mentioned earlier, there are now
additional costs. Some of those will be dollar costs, but some
of it is simply the new disclosures of information that has
never been disclosed before to third parties, whether it is an
intermediary or an entrepreneur.
So we have done transactions, private transactions. Self-
declaration works. And when you think about this, when we do a
transaction, first off, to become a member of our group, you
have to self-declare as an accredited investor. Secondly, all
the documents that I have ever seen for the closing of a
private securities transaction require you to re-declare that
you are an accredited investor, and there are legends in the
documents that say you understand this is a high-risk
investment and all that. That is easy.
The problem is with the general side, you have to do more
than that. The simple language for it is, well, if you want to
do that, you have to provide your tax return or some simulacrum
to somebody else. Initially, it is the entrepreneur.
So I would just put it this way: Would you want to give
your tax return to me, somebody you met an hour ago, and you
kind of like my idea?
Chairman Schweikert. You have seen some of the articles I
have written. I am enraged about what the SEC is doing in
regards to this whole category. How would you fix it?
Mr. Goulka. I would say that it turns on two pieces. Piece
one is, is an accredited investor simply somebody who has to
provide a financial statement to somebody else, or is an
accredited investor really a sophisticated investor? And you
can define that differently.
Chairman Schweikert. And that, I know, is sort of the fight
that is going on, let's call it discussion. The discussion that
is going on out there is are you an accredited investor because
you have this much cash in the bank or this much net worth, or
are you an accredited investor because you have this much
expertise in what you intend to invest in? Just because you may
have had a great real estate deal doesn't make you a brilliant
engineer. You may be a brilliant engineer, but you don't have
$1.2 million in the bank. And we go around and around on this
one now for almost two-and-a-half years.
Mr. Goulka. The second part of it is, when we make our
investments, we are writing a check, cash, for 100 percent of
the asset that we are buying. We are not financing this. This
isn't like getting a mortgage for a building. This is buying a
pen. I may be paying $25,000 for this pen, but I am writing
this check now. So who is at risk?
Chairman Schweikert. Okay. Forgive me for going off on a
lark. What I have learned is, in D.C. particularly, there is a
cultural split on the value of risk-taking. Much of what has
made this country amazingly successful is a culture of risk-
taking and the benefits that come from that. There is a
fixation by many in Congress and in the bureaucracy that we
need to create a risk-free society, and you see that if you
have ever had to sit through a Financial Services Committee.
Paul knows, because we talk about this all the time.
If you create a big enough bureaucracy, you make it risk-
free because there will be no transactions. You just stop them.
Of course, there will also be no rate of return, no multiplier
in the economy, and we flat-line. But there really is this sort
of terrible fear of you take a risk, what if he loses money?
And the same arrogance sort of works its way down into the
accredited investor rules.
A simple example I have is I have a very good friend, a
brilliant engineer. He has a couple of friends who started a
business that he actually sort of helped give them the idea. He
is not allowed to invest in it because he is not accredited.
They have already filled up the other. But he could walk in,
and if they were listed as a mutual fund or other type of
investment, or a certain private equity fund, he could invest.
We have an absurd system right now.
Paul, do you have any other questions? Because then I have
some other more technical things.
Mr. Gosar. I have one more thing for Tom. It seems like
what we see is a Federal Government ratcheting down the
biosphere in which you function. Would you agree with that? And
if you were to make a pitch to the Federal Government in
regards to rules, regulations, what would you do in regards to
that to make this a better application so that instead of an
equal outcome, we just had equal opportunity?
Mr. Curzon. Personally, I think one of the reasons that
immediately preceding accredited-only mechanisms work so well,
setting aside the definition of who is accredited--that is its
own fight--is that if, in fact, you had only accredited
investors, it cured almost all sins. So you could put together
that deal and you were pretty sure it was going to be fine
because you had accredited investors.
Now, an example of where we are now making it more
difficult is under the new 506(c), even if you had sold only to
accredited investors, if it turns out the government says, the
SEC says that you didn't conduct a reasonable diligence into
those, you have violated the statute and you have a year ban on
being able to fix it. That is just dumb.
Chairman Schweikert. Paul, can I leap in on you just to
that point?
Mr. Gosar. Sure, go ahead.
Chairman Schweikert. So it is that liability tree that
exists there. And as our official lawyer on the panel----
Mr. Curzon. It is not the liability that is bothersome. It
is the uncertainty that causes people like Jim and me not to
invest. What will happen is there will be more companies that
won't get investors because there are questions about that.
Chairman Schweikert. If I can get that rule locked down and
a crisp definition there, does that make a difference?
Mr. Curzon. Make a huge difference. If entrepreneurs and
those wanting to invest in those companies can have
predictability about whether those target companies are clean
or not, then you have eliminated an obstacle. Today, because of
these changes, there are new questions about that company. So
we are going to say, eh, I am going to pass on that one because
I am not sure. They may have generally solicited and advertised
in a way that there could be a problem, and we are not signing
up for that.
Chairman Schweikert. Okay. Paul, thank you for letting me
step on you. But this is something we have been hearing. We
have done some of these in other places, and this has become a
focus we hear over and over and over.
Mr. Curzon. That predictability is really big.
Mr. Gosar. When you hear these two gentlemen speak, coming
from your perspective of looking towards the capital formation
to start up a new idea, do you have any new thoughts listening
to them?
Mr. Nojoumi. I believe it boils down to conversations and
communication, talking about what is so important, and it is
not just from a financial perspective or an engineering
perspective. It is education, education from an institutional
standpoint like ASU or high schools, but also grassroots, from
the bottom up. So in corporations like GoDaddy that are
established, I spent six years there, and Bob Parsons really
grew this amazing company, a workforce that looked up to him
and aspired to the American Dream of entrepreneurship.
I know 2,000 people there right now who are dying to get
into entrepreneurship. They just don't know--they don't have a
road map. They don't know what steps to take. They don't know
what resources are available.
Mr. Gosar. You saw what Tom was talking about in which they
have that kind of expo. Shouldn't that be something that is
highlighted amongst the entrepreneurial community?
Mr. Nojoumi. Absolutely it should be, and I think we need
to take it one step further. I am not sure how often that expo
takes place, but it would be good to have weekly workshops
where entrepreneurs--industry calls them wonktrepreneurs. I am
not a fan of that. But they can actually go to these, attend,
and get a seminar or some sort of introduction to growth
hacking or recruiting, which is huge for startups. It is a
massive challenge. Or advice on institutional investors and how
to raise capital, and how to form your company, the structure.
Mr. Gosar. Do you reach out? I mean, you are a pretty smart
guy. Have you reached out to either of these two gentlemen?
Mr. Nojoumi. Unfortunately, I haven't. I wasn't aware and
hadn't had the pleasure of meeting either one of them. In terms
of raising capital, fundamentally what we believe is our
problems are our problems, right? So if we can't solve our
problems with the money that we bootstrapped with, I am not
going to raise money to figure out how to go and solve my
problems. So step one is to figure out my problems, find
solutions, raise capital from an individual or entity that has
expertise. And the deal flow is so limited here in Arizona,
they don't have the same expertise, unfortunately.
Mr. Gosar. But it seems like communication here is what is
lacking.
Mr. Nojoumi. Yes.
Mr. Gosar. But it is a two-way street. It is not just from
the top down. It is from the bottom up.
Mr. Nojoumi. That is correct.
Mr. Gosar. What kind of investigation did you do into those
groups?
Mr. Nojoumi. I looked into--I did some Google searches. I
reached out to some contacts of mine. I found 1,200 capital
firms in Arizona. The largest one I believe was Great Hawk. I
looked at their investments and their portfolio, and really
what we are looking for is specific expertise along with the
capital, and we couldn't find that in Arizona.
Mr. Gosar. Did you approach them into an opportunity, or
did you just review them on the Web?
Mr. Nojoumi. I reviewed them on the Web, I researched them
online.
Mr. Gosar. Why wouldn't you directly try to contact them to
have some type of conversation? I mean, I understand
diversified portfolios. So just because somebody does something
over and over again doesn't mean they are not receptive to new
ideas.
Mr. Nojoumi. Right, that is very true. I didn't reach out
to them because we just weren't actually ready to raise capital
yet, and I thought if I was going to raise capital, I should
probably target someone more informed in that sector.
Mr. Gosar. Jim, one last question. Tom made an aspect in
regards to where we can go with this, between the state trying
to grow this. Do you have any other ideas in regards to that?
Mr. Goulka. Specific to Arizona?
Mr. Gosar. I mean, somehow we are lacking here, and it
sounds to me from your initial statements that we have this
fixed group, and it doesn't seem like it is growing very much.
Am I quantifying that quite right?
Mr. Goulka. Yes. We have as a challenge to reach out to
other like-minded people that we are not in contact with
already. That is one of our jobs. And I would not say that
government is supposed to do my job for me.
On the other hand, in New Mexico, part of the deals that
went back to the vetting of the contracts for Sandia and Los
Alamos required some effort on the part of the contractors to
participate in early-stage technology development. I think TVC
is the consequence of that. Years ago I met with people from
there who had University of New Mexico people, Sandia people,
Los Alamos people, and the venture community all participating
together to try to identify the needs of the local
entrepreneurial community, recognizing that most of the
entrepreneurial activity was going to come from Sandia, Los
Alamos, the University of New Mexico, and New Mexico State.
So it was, if you will, government focused, because that is
the nature of the state, but there is a page out of that book
that we can take. We have major contractors here, and one of
the characteristics of our community is that the major
contractors in technology have a very, very limited interaction
with the early-stage community here. You don't find, like you
do in California, in both Southern California and in Northern
California, the big company, the big oak tree with all these
acorns sprouting into new oak trees all around them, and a
little incentive for that is part of the contract. To let them
work out with the eagles I think would be a very valuable
thing. It wouldn't cost anybody any money.
Mr. Gosar. Would that be--in biotechnology, I see ESU over
there, and I am just kind of interested along these lines
because it seems like with biotechnology, being a dentist for
25 years, and the only difference between me and young folks is
the price of my toys. But the whole future of medicine I think
goes a lot through Arizona. Does that mean that there has got
to be a better communication or a structure that is established
with institutions like ASU?
Mr. Goulka. There is work going on in that that is pretty
serious, Biodesign being the best example of that. BioInspire
is here, BioExcel. We have a variety of entities that are
participating in figuring out how to do that at the earliest
stages, and it is now starting to work.
The illustration I will give to you is that BioExcel funded
six companies to a modest degree. Two of those companies made
it through our screening process. Two of them presented to our
membership for the next round of funding on the 12th of
September, and both of those are in due diligence right now,
one with a very large number of people. You are particularly
interested in this, Congressman Gosar, given your background.
And the other a smaller number.
But we have serious interests now, and that was
technologies that were--one technology actually came from
another university. The other was originated at the University
of Arizona. People are here being incubated in an incubator,
advised by BioExcel, and now we are looking at it. So the steps
are working right, but it is still very new.
Mr. Gosar. And the last question. You just brought up these
incubators. NAU has got one, Flagstaff has got one, ASU has got
one. Are those the kind of a bridge that you are looking at as
being fundamentally the thing that you are looking at for the
future?
Mr. Goulka. There is a degree of fashion in that right now.
There are lots of them growing up, and we will see the
marketplace will prevail, and some will succeed and some won't.
But those that are doing a good job do a very good job. We see
a regular flow of opportunity from them. We actually get
members from our group as a consequence of NASA. So they can be
very helpful. They are the kinds of places where entrepreneurs
can go for a lot of the training.
The third company that presented out of the three that we
had on the 12th was at an incubator here. So all three of our
companies that were selected to present to our membership out
of the 25 were incubated.
Mr. Gosar. Thank you.
Chairman Schweikert. Thank you, Paul.
Something miraculous, we are actually exactly on time.
The fact of the matter is, we are sitting in Skysong right
now. I mean, this was the community and ASU's venture to try to
actually create a physical structure for what we are almost
talking about.
My last question is the one that always gets me in trouble.
Tom, I am going to start with you. Well, you know, he is always
picking the lawyer.
From our offices, new members of Congress. From the
institution that ASU is and being a very innovative--I mean, it
is my alma mater. I believe in maroon and gold. So also what we
have in the community.
What do we do? What do we do to make it better? Is it
something as simplistic as dramatically expanding the events
where we bring people into the same room? Is it a much better
registry of information? Is it just understanding it is going
to work on many levels? If you were a policymaker, how do you
make the access to capital for growth in this community work?
And can I beg of you to pull the mic slightly closer to
you?
Mr. Curzon. Personally, I don't think there is any silver
bullet. I think a rising economy will make a world of
difference. I think when people feel like they have money that
they can invest and don't have to be putting it away in a
scared mode, they will be more inclined to invest. I think that
is a piece of the puzzle.
I think we should recognize that Phoenix and Arizona has
made, in my opinion, enormous strides over the last three
decades. The amount of infrastructure here, the amount of
activity--we now have more than two dozen incubators. We have
universities working very hard at this stuff. It is really hard
stuff to do, and as you guys know, entrepreneurialism is all
about failure. It is the pioneers with the arrows in their
asses, not the settlers who came after. So that is the part
that we are talking about.
But if you have the rising tide, I think that provides the
context for the successes that lead to the serial
entrepreneurs. I think making it easier, not harder, to invest
the capital--it is around the rules that we talked about
earlier in the discussion. If we can make the rules clearer,
and less paternalistic would be a nice thing, but at least
clear to be able to work around, I would do that.
Chairman Schweikert. Okay.
Jacob, almost the same question. From your experience of
being one of those entrepreneurs, what would you change? What
would you hope to see? What do you need, do you think, for us
to grow in this marketplace?
Mr. Nojoumi. Let's say, first and foremost, you identify
and organize thought leaders that have followings, easier to
reach. Instead of reaching 6 million people individually, you
have six individuals who have a million persons following,
right? A rough example. But you identify those leaders in the
community first on a government basis level, and also in
educational systems like ASU, and also in the entrepreneurial
and private sector, and you align their focus, an initiative
for an ecosystem for Arizona. So it starts with a conversation,
align the vision.
Secondly, we learn from other ecosystems that have proven
to work--Boston, even Santa Monica right now. They are calling
it Silicon Beach. Boston and Texas. So we learn what
initiatives we have there, what support groups.
I am working with a team called the House of Genius. They
have 14 locations across the world, and I was on their panel in
Santa Monica and I thought what a great opportunity for
Arizona. It is a safe environment for entrepreneurs to come
pitch, and it is to an esteemed panel without the pressure of a
make-or-break scenario.
Working with them to bring them to Arizona, that is one
example. I think it is a multi-faceted approach, and I don't
think it is the government's responsibility to do it. I think
it is their responsibility to organize and leverage the
resources.
Chairman Schweikert. Jim, sort of that same question. I
know we have some great talent here, but I always have this
fear that somehow we are all not ending up in the same room.
What would you change?
Mr. Goulka. When people talk about Silicon Valley, they
say, well, you get lots done there, everything happens there,
and there is this vision of all you need to do is go to Sand
Hill Road and say you are looking for money, and the VCs come
out of their offices with their bags, ``How much do you need?''
And, in fact, VCs in Silicon Valley and the angel groups in
Silicon Valley are just like we are. It is 5 percent get
funded.
There, they understand competition. Here, we have still an
attitude of, well, I am doing this, so you should be giving me
things. I hear that a lot.
So what we need to have is an attitude like we are going to
get in the big leagues, which means it is competition. There
are winners and there are losers, and if you are a loser, as
Tom said, failure is an important part of being an
entrepreneur. You learn from being a failure. You don't learn
from your successes.
So it is okay to fail, and it is even better to win, and we
should extoll our big-time winners, which we don't. So I am
saying, at the same time, raise our standards. The last thing
you want to be is the batting champion in Triple-A, not make it
to the bigs. They don't extoll themselves. Nobody is going to
walk around saying, ``Look what I did last year, I was the best
minor leaguer around.'' We want to be in the bigs, so we have
to focus on helping the best get noticed and celebrated as our
lions and say, yes, we compete, and we are going to compete
with the best.
Chairman Schweikert. Paul had one other thing.
Mr. Gosar. I only have one more question.
Mr. Curzon. I think we have--of the competing companies?
Mr. Gosar. Mmm-hmm.
Mr. Curzon. Sure. We ask them about their experience and
their comments and suggestions.
Mr. Gosar. I am just real interested because a lot of times
what you do to expand your universe other than raising the bar
is by finding out from the applicant pool how did you find out
about us, how did you find the process, what would you add
additionally. It helps to attend where like minds gather.
Mr. Curzon. A lot of times, if you are asking the 10 who
presented, we try and follow up with them and see about their
experience. If they were able to raise capital afterwards, they
are happy. If they weren't able to raise capital, you know,
they are not happy.
Probably the criticism we have had, in fairness,
particularly in more recent years, is that our audience has not
had enough investors in it, that we haven't been able to
attract the investors, and there are a couple of reasons for
that, one of which is the number of investors nationally who
are interested in early-stage investing, which is what we have
mainly is early-stage stuff, has gone away. There are very few
professional funds that actually invest in early-stage anymore
because they either went up-market or disappeared.
So, I mean, Congressman, we are actually in the middle of a
pivot with the conference right now to try and address that
very issue. We are working on it to make it more interesting
and broader and bigger to bring in more companies, to have the
benefit of the exposure and hopefully more investors because of
responding to the kinds of inputs and our own observations,
frankly, sitting at the conference, is trying to do something
new and different.
Chairman Schweikert. Thank you, Paul. That is actually
where we need to go.
We are going to wrap up the formal portion of this, and
then I am going to ask if you would be willing to engage in
something a little quirky.
I also need to thank Skysong. Thank you for letting us
invade your space. It is appreciated.
I also need to thank our witnesses.
On a personal level, I have a personal fixation on--I mean,
in our office, we have actually been trying to create lists of
people that do compliance accounting. We have had some great
success with drawing some big REITs here, some more folks who
are managing private equity out of this community. Now I need
this community to start knowing each other and see if there is
a level of--what is the term?--cross-pollination there,
building, as you used the term, ecosystems.
One of my other frustrations is we had a great success with
the JOBS Act. We proved we can do bipartisan legislation all
the way through the process. And then I have my brothers and
sisters on both sides of the aisle absolutely flabbergasted we
are heading to two years of rule sets coming from the very
bureaucracy that talks about helping us, and we are supposed to
be creating job growth. Who would have ever thought we would
lose the momentum in the bureaucracy? And that is why many of
us have played with the idea of what do you have to draft in a
JOBS Act 2.0--I was told I would get in trouble for using that
title--to either clean up the definitions, fix the tree of
liability and things like crowd funding, and also take away the
SEC's ability to take two years to do something that should be
simple in rule sets.
Maybe we have to be much more definitive in saying it will
be in this fashion. I think that is actually the future of
where the legislation is going to go as we sit and work on the
details of that.
And with that, I ask unanimous consent--and considering it
is only you and I, you had better not argue with me--that any
submitted or supporting materials be made a part of the record.
Without objection?
One day he is going to go, ``No.''
Also, to our witnesses, be prepared over the next couple of
weeks, there is a very good chance we may send you a couple of
other questions to sort of fill in where either the question
didn't get us where we needed, some bits of information, or
something else has come up.
And with that, the hearing is closed.
[Whereupon, at 2:14 p.m., the Subcommittee was adjourned.]
A P P E N D I X
Testimony
Of
James Goulka
Managing Director
Arizona Technology Investor Forum
To the
Subcommittee on Investigations, Oversight and Regulations
Committee on Small Business
U.S. House of Representatives
Scottsdale, Arizona
September 23, 2013
Chairman Schweikert, Members of the Subcommittee on
Investigations, Oversight and Regulations, staff, ladies and
gentlemen, my name is James Goulka. I reside at 2525 W. Lompoc
Avenue in Mesa, Arizona. I am the Managing Director of the
Arizona Technology Investor Forum, a 501(c)6 entity comprised
of 71 accredited investors who collaborate on finding,
evaluating, and investing in early stage technology companies.
In the 6 years of its existence, we have invested over $7.25
million of our own money in 29 companies, 24 of which are based
in Arizona. Together with our counterpart, Desert Angels in
Tucson, we are by far the most active investors in early stage
companies in the state. It is an honor to be here to offer my
testimony to the Subcommittee. I will be brief.
Most people acknowledge that small businesses drive
American job creation and innovation. Whether providing a new
cancer diagnostic or a mobile phone app, opening a taqueria or
doing contract manufacturing, small businesses hire people,
lease space, buy services, and pay taxes.
I want to focus my comments today on a subset of American
small business: startups. These are the creation of one, two,
or three individuals, who take the exceptional risk of taking
something that doesn't exist--an idea--and making it into a
reality that solves a problem in a new way, causes new ways of
behaving, or, simply, makes life better.
These businesses start out by the investment of time and
energy from the founders--so called ``sweat equity''--and the
capital they can contribute to their new enterprises. Few
founders are wealthy: most are middle class; many are young.
They use hard-earned savings to start their businesses and live
frugally. As they need capital to buy equipment, lease space,
pay other people providing them services, they tap their
friends and family members who may not know their business
idea, but they do know the founders.
Occasionally, a startup can grow sufficiently to generate
sales and profits with no additional capital. Such businesses
usually serve a gaping need of a customer group for a pre-
existing service. These quick successes strengthen our economy
and are the bedrock of our local communities.
Others, though, are more uncertain: they may disrupt
current practices, they may propose solutions that have never
existed before, or they may be creating new market niches.
These are the engines of innovation. Think Facebook, Amgen, or,
more locally, GoDaddy, Infusionsoft, or Medicis.
These startups, with high potential but equally high risk,
soon run out of capital from their friends and families and
have to turn to outside investors. In some situations grants,
such as SBIR funding from federal agencies or Innovation
Challenge Grants from the Arizona Commerce Authority provide
important early capital to these businesses.
For capital beyond these sources, founders and other
entrepreneurs turn to outside investors, people and
institutions with capital resources they intend to invest to
achieve economic returns.
The most obvious sources of funding for businesses are
banks. But, for more than simple transactional offerings like
checking accounts, startups are not attractive to banks because
they do not meet the banks' fundamental credit criteria.
Startups, by definition, have no history, and are completely
unpredictable. Most have no profits or collateral. Most
entrepreneurs have little personal history with a bank, many
have no previous experience as founders, and few are willing or
able to provide personal guaranties on loans to their
companies. Startups are, in reality, unbankable. And American
taxpayers, having experienced the financial meltdown of the
past several years, are not enthusiastic about banks taking on
this kind of risky business.
We do have investors who are interested in providing
capital to this segment: individuals, generally referred to as
angels, and institutions, generally called venture capital
firms. These are sophisticated individuals and firms who are
have the capability to assess the risks of new enterprises,
make judgments about them, and accept what they hope are
reasonable risks in return for acceptable returns. Importantly,
they understand and accept that the risk of total loss of an
investment in any private startup is high.
In late 2013 venture capital firms tend to manage funds
sufficiently large that they rarely invest in funding rounds of
less than $2 million. Angels, whether investing by themselves
or in groups, are the principal source of funding for
entrepreneurs seeking their first rounds of outside capital in
lesser amounts. The Center for Venture Research estimated that
angels invested $19 billion in 35,000 US companies in 2008. And
that was the year when the financial crisis hit.
A major intent of the JOBS Act of 2012 was to increase the
opportunity of American startups to raise capital by enabling
more people to invest in them. This meant addressing two
issues: (a) redefining who could invest in the securities
issued by startups; in other words, redefining an angel
investor; and (b) changing the rules on how startups--the
potential issuers of private securities--communicate with those
potential investors.
Solicitations--Private and General
Rule 506 of Regulation D that governs the issuance of
private securities had come to be seen by some as a constraint
on the ability of issuers to reach potential accredited
investors whom they do not know in advance. To address this,
the SEC recently subdivided Rule 506 into two sections: 506(b)
deals with purely private transactions, and the new Rule
506(c), which relaxes the constraint and enables issuers to
publicly advertise their issues--do a general solicitation--in
the hope of attracting those unknown investors. In exchange for
the freedom to advertise, the issuer must now meet an array of
requirements and take the ``reasonable steps'' to assure itself
that the investors are accredited.
Definition of Accredited Investor
Regarding the definition of angel, most angels fit the SEC
definition of ``accredited investor,'' which means meeting a
net worth test (of $1 million not including a residence) or an
income test (of $200,000 in each of the previous two years for
a single person. That number increases to $300,000 for married
persons). The intent of the Securities Act of 1933, was to
protect the general public from unscrupulous promoters who
might cajol unsophisticated individuals into making investments
in spurious companies. The concomitant though was that a
sophisticated investor could fend for himself, which he or she
would do by careful evaluation of opportunities, collaborating
with likeminded investors, and understanding the risks
involved. He also has the ability to absorb loss.
Over the past 80 years, the practice arose among angel
investors of self-declaration of accredited investor status.
This usually takes the form of a document wherein an investor
identifies how he/she qualifies as accredited. I have attached
the form that the Arizona Technology Investor Forum requires of
all members. Most organized angel groups such as ours use a
form substantially identical to this. Furthermore, the
documents relating to every privately issued security that I
have seen includes a substantially similar statement by each
investor. This means that at every investment action, each
investor restates his/her status as an accredited investor. And
further yet, the securities documents of a private issue
contain legends clearly stating the riskiness of an investment
in those securities. Combined, these make compelling arguments
that angels, especially within organized angel groups, but also
experienced independent investors, know what they are doing,
understand the risks, and meet the intent of the words
``accredited investor.''
One would think, then, that the sheer scale of tens of
billions of dollars invested by angels each year and current
accredited investor practices prove that the system works and
would form the baseline for any expansion of the definition of
an investor who could invest in privately issued securities.
Presumably, that is the case for purely private solicitations
under Rule 506(b).
However, the effect of the new rules issued by the SEC in
Section 506(c) of Regulation D that go into effect today create
serious impediments for the same angels to invest in new issues
by private companies if the means of communicating the
opportunity is different, i.e. by general solicitation:
(a) If accredited investors consider investing in a
private security which meet the test of a general
solicitation, they may be required to provide to the
issuer of, potentially, a third party private, highly
confidential information in order to buy something for
which they are paying 100% cash at the time of
purchase.
This contains the absurd notion of an investor
disclosing his/her tax return to a relatively unknown
person in advance of a transaction that may or may not
close. Alternatively, if an intermediary is used, new
costs are added to a transaction. These could be
substantial, especially given the uncertain requirement
for periodic updates. And that does not obviate the
potential lost privacy or harmful subsequent
disclosure. Many angels polled on the subject state
that they will refuse to provide the kind of
information required. Thus the rules needlessly shrink
the pool of existing investors.
(b) The onus on collecting that information is placed
on the issuer of the securities, with serious sanctions
on the issuer if it does not fully comply with these
requirements. This includes the potential prevention of
fundraising for a year, which would effectively destroy
the issuer.
When considering a general solicitation, an issuer now has
to weigh the potential benefits of attracting new investors
against the costs, most importantly the improbability of
reasonably satisfying itself and the SEC that every one of its
investors is accredited. In my view, if investors are required
to provide the personal information, they will not invest in a
deal that is generally solicited. The purpose of relaxing the
prohibition on general solicitation will have been defeated.
Fortunately, the SEC included in its rule-making the
provision for verification through a ``Principles-Based
Approach'' which contextualizes the investors by their
experience, previous knowledge of the person(s), the minimum
scale of an investment, and other elements. Ambiguous now, I
recommend that this section be more thoroughly defined. There
is, in my view, an opportunity to define accredited investor by
the traditional self-declared method, supplemented by
observations of actual experience, such as previous investing
in private transactions and by education in high risk
investing. For both of these, organized angel groups such as
the Arizona Technology Investor Forum, provide structured and
thorough opportunities and programs. Illustrative of this are
our multi-step screening process in which nine experienced
investors vet all candidates to select the few that members are
shown; our Sidecar Funds, which enable new investors to learn
by following others, and by our education programs, such as the
Valuation Workshop created by the Marion W. Kauffmann
Foundation which we are bringing to the membership in October.
The Angel Capital Association has provided input to the SEC on
how organized angel groups such as the Arizona Technology
Investor Forum work and suggest formalizing membership in an
organized angel group as sufficient verification of accredited
investor status.
Until the rules clear further, the Arizona Technology
Investor Forum will limit consideration to private
solicitations only, thus ensuring that our members do not find
themselves accidentially in situations where they do not wish
to be.
These issues are particularly important for Arizona. In our
state, we have few venture capital resources, so angels,
especially organized angel groups such as Arizona Technology
Investor Forum and Desert Angels, are a critical part of the
state's technology ecosystem. Together, we are about 170
investors. Arizona needs, if anything, more angels investing
here, so the rules should help attract new investors, not
dissuade them from participating.
Thank you for your time and willingness to listen to my
testimony.
Building an Ecosystem; Access to Human Capital
Good afternoon Congressman Schweikert, Chairman Graves, and
the esteemed members of the Small Business Committee. My name
is Nima Jacob Nojoumi and I come from a long lineage of
entrepreneurs. I am the Co-Founder and CEO of itsWorth.com. I
recall when Shad Nojoumi initially approached me with the
concept for our big data startup: He said, ``Nima, I want to
valuate the world.'' That statement put a smile on my face.
After doing thorough research I came to the realization that
there is no reason why, with the technologies available today,
we couldn't create the world's first valuation engine. The
concept both simple and powerful: An engine that provides users
with up to date, real world, financial values of virtually
anything and everything. itsWorth.com is the ``Goggle'' of
values. We're on a mission to provide an unbiased valuation of
the world where people can contribute and feel empowered to
make informed buying and selling decisions.
My three best friends and I, who at one point were all
colleagues at GoDaddy, decided to pool our life savings and
take the chance--to live the American Dream. Today we have 8.4
million products in our database and are six weeks from
releasing our Software-as-a-Service platform. We are grateful
for generous local experts like Tyler Rives from Silicon Valley
Bank in Tempe and Evan Gilbert at Polsinelli Law Firm in
Phoenix that have positioned us for success. I have traveled to
California ten times this year to gain access to advisers and
talent, and to build relationships with angel investment groups
and with the venture capital community. It has been a long and
hard journey. I am here to say entrepreneurs in Arizona should
not have to leave the state to gain access to human capital.
The time is right. Arizona has an emerging startup community.
It needs to develop, mature, and grow up fast. That is the
problem and the opportunity.
Fortunately for us there are celebrated experts that have
outlined structures, systems, processes and the social
architecture to build an ecosystem. I cite Dr. Barry Stein's
1974 MIT dissertation: ``Human resources are the wealth of
nations; each nation has the responsibility as well as the need
to develop and conserve them. But human resources are not the
simple equivalent of physical persons, as mere existence does
not automatically create human beings. Rather they develop
through participation in social life.''
Mr. Mark Tomizawa, a strategist and entrepreneur has
invested the past 5 years developing social architecture to
deploy in real time. And I quote him, ``As for the ecosystem,
we need freedom, support and know-how as individuals at work,
in school and in life to do the right thing. That means more
humans supporting each other, live and in real time. That means
passing knowledge, mindfully, from generation to generation.
That is part of how a healthy society is defined.''
I am here to say that as a state we are leaving money and
opportunity on the table. We can and we must do better. We must
coordinate better and connect the dots more strategically. The
standalone organizations must join forces to create an
ecosystem of opportunity, an ecosystem of human and financial
capital, an ecosystem of local job creation. We can and must
become know as a great state where great ideas come to life. To
cross the chasm from communities to ecosystem we need to
leverage existing resources, like thought leaders such as Dr.
Stein & Mr. Tomizawa and bridges to work on an integrative
level. Tyler Rives, Evan Gilbert and I are examples of bridges.
We naturally connect people to resources and initiatives. I
believe conversations like these are essential and will serve
as a catalyst for change and growth. I am not asking the Small
Business Committee to create solutions; I am asking that you
leverage and organize existing capital, whether it is human or
financial, to give entrepreneurs the opportunities they need to
meet today's evolving market conditions and to remain loyal
residents of the great state of Arizona.
Thank you to the esteemed members of the U.S. House of
Representatives Small Business Committee, Congressman
Schweikert and Chairman Graves for the honor to speak today.
Testimony of Thomas H. Curzon
Before the House Committee on Small Business
September 23, 2013
SkySong Innovation Center
Scottsdale, Arizona
Thank you, Mr. Chairman and Members of the Committee.
I am pleased to appear before the Committee today on behalf
of Invest Southwest to tell you about The Invest Southwest
Capital Conference (Invest Southwest) and its place and role in
the Arizona entrepreneurial ecosystem. By way of background, I
am a senior partner with Osborn Maledon, a 50-lawyer Phoenix
law firm dedicated exclusively to the Arizona marketplace. Our
corporate practice focuses on representing entrepreneurs and
growth companies, anywhere from zero revenues to over $200
million in annual revenues, and anywhere in their life cycles,
and we have special expertise with start-ups. So we've assisted
companies in angel financings, venture financings, buying and
selling companies, IPOs and exit transactions and everything in
between. And as part of our commitment to Arizona, we have been
deeply involved in the Arizona entrepreneurial ecosystem, and I
personally have been for about 33 years.
To that end, our firm was one of the founding firms of
Invest Southwest in 1992, which was then known as the Arizona
Venture Capital Conference, and I have personally been involved
in it since the mid-1990's, including serving as Chairman of
the Conference for 2006-07, and currently I am on its Board of
Directors. The Conference itself is a nonprofit corporation,
and is the principal early stage investor conference in
Arizona. It is organized and run by volunteer service providers
and entrepreneurs who are keenly interested in having a
flourishing entrepreneurial ecosystem.
The Conference was originally founded in 1992 as a
conference focused exclusively on attracting venture
capitalists to Arizona to potentially invest in our start-ups.
Historically, the typical structure of the Conference has
included using a selection committee made up predominately by
venture capital investors to select from a pool of applicant
start-ups ten to 12 companies who then were groomed to present
10 minute pitches to the investor audience at the Conference.
In 2004, after the Dot Com Bust, and the resulting dramatic
fall off in venture capital investing throughout the US, we
restructured the Conference for 3 years to focus on presenting
to angel investors rather than venture capitalists, and then
when the venture capital industry began reviving, in 2006 and
07 we restructured again into what is now known as Invest
Southwest and began focusing on connecting the region's most
promising startups and emerging growth companies with an
audience of angel investors, venture investors, entrepreneurs
and service professionals. In other words, we were focused on
the stage of company development of most of the companies then
prevalent in Arizona (being relatively early stages) and the
investors who were interested in that company stage, which was
a mix of angels and venture investors. To date, we believe
presenting companies of Invest Southwest have received more
than a quarter billion in investment dollars since the
inception in 1992.
The Great Recession has, of course, dramatically affected
the entrepreneurial ecosystem in Arizona and, just as following
the Dot Com Bust, early stage venture capital has become much
more scarce. Happily, this time around, though, the angel
investment community has been actively filling the gap,
particularly under the leadership of two leading angel groups,
Arizona Technology Investors Forum (ATIF) in Phoenix and Desert
Angels in Tucson. In addition, in the most exciting development
in a number of years in our space, Arizona is now the home of
the largest (by aggregate grant award amount) business plan
competition in the United States. This program, known as the
Arizona Innovation Challenge, is put forward by the Arizona
Commerce Authority (ACA), and takes the form of two
competitions annually, each awarding up to $1.5 million in
total grants (typically in the form of 6 grants of $250,000
each). Prior to the current cohort, there have been more than
800 applications to participate in the competitions. The
judging process is accomplished by a pool of more than 50
volunteer entrepreneurs, investors, executives and other
experts from our ecosystem who are giving back to foster
capital formation and employment growth in Arizona. The fifth
cohort of the Challenge is now in process.
In my opinion, the importance of the AIC competition cannot
be underemphasized. Certainly the cash awards are significant
to the winners. But it is equally significant that the
competition is bringing public attention to hundreds of new
companies and helping to connect them with resources available
in the ecosystem, including programs such as ACA's Venture
Ready, which are designed to help groom promising companies in
the competition for future successes of all kinds.
Because of this significant flow of companies, Invest
Southwest and the ACA are partnering together for the upcoming
Invest Southwest conference and will be launching an innovative
new event format designed to help Arizona better address
current market conditions and continue the growth of its
ecosystem. We have noted the recent Kaufman Foundation report
showing that in 1990, Phoenix did not show up in the top 20
metropolitan areas for high tech start-up density and by 2010
we have found our way to 13th largest on that list. We at
Invest Southwest believe that through the continued efforts of
the Conference, ACA, the Arizona Technology Council, the
numerous incubators and accelerators we now have, as well as
the contributions of ASU, UofA and Thunderbird, and others,
Arizona will continue to make important gains as a place where
businesses will continue to be created and thrive at an
increasing pace.
I will be pleased to answer questions and discuss the above
matters with you, or relating more generally to start-up
activity and financing in Arizona.