I know some really smart people who refuse to get on LinkedIn, Facebook, and Twitter. Sometimes, they cite paranoid-sounding privacy concerns. Other times, they say “social media is a passing fad,” or that social media somehow isn’t relevant to them, or that social media is a waste of time. I don’t think they realize that, almost overnight, social media has become as mainstream as cell phones and horseless carriages. These Luddites need to open their eyes and take stock of the new tools at their disposal. Maybe this video will open some eyes.

Do economic cycles of boom and bust affect the number of start-ups? Most analysts have linked entrepreneurial activity to economic growth as though it was a given … and conversely, believed that when recession struck, start-up activity slowed substantially. A recent study by the Ewing Marion Kaufman Foundation concludes that both theories are pure bunk. And as though that bombshell was not enough, the Kaufman study goes on to explode several other theories about what factors stimulate new business formation.

Do start-ups increase in proportion to the availability of venture capital? Nope. Kaufman Foundation researchers Dane Stanler and Paul Kedrosky dispel that myth as well. The authors note that the doubling of start-ups from the period 1960-1978 to the decades since may indeed have been due to the advent of the personal computer and the expansion of the venture capital sector. (One wonders if the baby-boomers coming of age may not have contributed to this step-change as well.) However, the constancy of recent start-up data belies the influence of venture funding. Start-up activity fluctuated by only 3% to 6% each year between 1977 and 2005; but the data shows that venture investment varied by as much as 500% during the same period.

Do tax or bankruptcy law changes, technological advances or entrepreneurship education affect the number of new ventures? No again! The report, Exploring Firm Formation: Why is the Number of New Firms Constant?, also finds no correlation between start-up activity and tax policy or any of these other factors; so much for the theories of our most vocal politicians. Instead it documents the same steady half-million start-ups per year, give or take a 3 to 6 percent. The authors discuss a few possible explanations for the unexpected constancy, some rather arcane, but they do not seem to buy into any of them.

Common sense suggests that certain of the factors discussed in the Kaufman report must have at least some influence on the number of start-ups, even if they do not affect substantially the total for a given year. For example, limited amounts of available venture investment must surely delay some particular start-up decisions. I have been involved in a few such decisions. Similarly, high interest rates and tight credit must also have an effect on many decisions, especially those involving sole proprietorships and mom-and-pop operations. So perhaps a study with greater granularity would reveal that while the total number remains relatively constant, the mix of start-up types changes, maybe even substantially. Perhaps in recessions when venture funding declines, a fall in interest rates turns entrepreneurs toward credit sources. It could also be that more innovation-based entrepreneurs test their business innovations when the economy is booming, and that more laid-off workers start enterprises when unemployment is high during recessions. I suspect that the “mix” of different kinds of start-ups changes a great deal even though the total number may not change much.

The Stangler and Kedrosky study does not encompass the current Great Recession, of course, it is too soon. Yet surely this anomalous economic epoch will surely add some telling figures. The investment portfolios of the wealthy individuals and institutions that comprise the limited partners of venture firms declined substantially since 2007 and venture investment has fallen by 40% or so since then. At the same time, credit tightened historically and unemployment soared into double figures. Will start-up totals for this period continue the constancy that Kaufman reports? And if not, how will it vary? Will the limitations on available capital drive start-up numbers down, or will necessity and cheap assets power them up? Or will past constancy persist despite alterations in the mix? Only a study based on more granular data could reveal that. I doubt that such data is available or could be economically derived, though that information could prove useful to an economy so reliant on small businesses to create jobs.

The MoneyTree report of U.S. venture capital activity for the third quarter was just released by PriceWaterhouseCoopers and the National Venture Capital Association.

The $4.8 billion invested in Q3 is a significant jump from the $4.1 billion in Q2 and $3.3 billion in Q1, but still well off of the $7.1 billion invested during Q3 of last year. The number of deals has remained in the 600 to 700 range each quarter this year, compared to 900 to 1,100 per quarter last year. Clean Tech experienced an 89% increase in Q3 over Q2. As in previous quarters, the four strongest sectors remained biotechnology, industrial/energy (including green tech), software, and medical devices. Very little money – only $633 million – flowed to companies raising venture capital for the first time, down from over $1.5 billion during Q3 of last year.

Meanwhile, several weeks ago, the Center for Venture Research released their analysis of the angel investor market for the first half of 2009. The CVR reported that 24,500 ventures raised capital during this period from 140,200 individual investors. Although the dollars raised fell relative to the first half of 2008, the total number of investments increased slightly.

Combining this data with anecdotal evidence from elsewhere, it’s clear that great opportunities are still finding investors. It’s obviously harder to raise capital than it was before, but I think we all knew that. The keys to funding success haven’t changed much: create a great opportunity with a lot of growth potential, develop as much traction as possible before trying to raise capital, and package the venture in the most compelling way you can when you take it to the investor community. We can help you with that last part.

Eco-conscious product suppliers and their prospective customers descended en masse this week on Phoenix for the annual Greenbuild convention. It is quite an event with over 1,800 exhibitors, several full days of educational conferences, and headline ‘bring on the crowd’ brand names offering inspiration and entertainment. To wit, last night’s marquee event was held at Chase Field, home of the Arizona Diamondbacks and included a speech from Al Gore, and a concert by Sheryl Crow!

Beyond the headliners I was really impressed with the level of entrepreneurship on display at Greenbuild. I think a good way to measure entrepreneurship in a sector is by the amount of small sized booths at an event. Entrepreneurs typically can’t pay much, so they buy the smallest space available and go pitch their tent. The bottom line … lots of small booths at Greenbuild.

Among the areas where it seems Entrepreneurs are diving into the green space are:

1. Green Roofs, which are essentially a container of live plants and a drainage system that can be snapped together on a rooftop. Once installed, the systems dramatically reduce the heat absorption of the rooftop and thus reduce energy costs. There were at least 20 companies present at the show from various regions of the country marketing differentiated products and business models in this category.
2. Energy Efficiency Analysis and Improvement Service Providers offer a relatively low-cost capital efficient way for entrepreneurs to enter the green space. Residential and commercial energy efficiency plans employ a myriad of techniques from lighting and HVAC system improvement to insulation and window improvement to reduce energy expense in a structure. Given the multiple tools available, it’s not surprising that entrepreneurs have rushed to develop services and business models to help building owner get the most energy efficiency improvement per dollar spent … and prove the savings through software and reporting tools.
3. Geothermal Heat Pumps rely on temperature differential between ground and below ground levels. Certainly more capital intense than the first two items, this category represents an area where entrepreneurs with a mechanical focus are probing.

I believe next year’s show will be in Chicago, and if it’s anything like this year’s, it won’t be one to miss.

Entrepreneurship. It conjures images of twenty-something graduate students hacking code in a Silicon Valley dorm room, fueled by a steady supply of Red Bull and Ramen. Starting a tech company requires youthful vigor, endurance, freedom from obligations like mortgages, imagination, and an intimate understanding of what’s trendy and hip. Right?

To be sure, a number of tech titans started more-or-less this way: Facebook, Google, Microsoft, Yahoo, and Hewlett-Packard, to name a few.

However, a new study published last week by the Ewing Marion Kauffman Foundation – the group devoted to fostering entrepreneurship around the world – suggests that the age distribution among company founders is much broader than we might have imagined.

The study offers several findings:

• Technology company founders born in the U.S. had an average age of 39 when they started their companies.
• Among a sample of companies started in 2004, two-thirds of founders were in the 35-54 age bracket.
• The 55-64 age bracket exhibited the highest rate of entrepreneurial activity from 1996 to 2007, while the 20-34 bracket actually had the lowest rate.

However, these findings don’t come as much of a surprise to us here at Cayenne Consulting. We’ve spoken with thousands of entrepreneurs, and although we don’t ask people their ages, we do witness the experience they bring to a new venture. Those who succeed at generating interest from investors tend to have decades of business and technical experience.

The study’s author argues that the shifting age distribution in the U.S., coupled with a continued decline in job security, will put more middle-aged people in this entrepreneurial sweet-spot. As a result, “we may be about to enter a highly entrepreneurial period.” I hope she is right, because entrepreneurship will clearly play an important role in our return to economic prosperity.

But perhaps the most encouraging insight for those who’ve ever thought “I’m too old to start a company” is simply this: No, you’re not!

The Center for Venture Research has published their 2008 report of angel investor activity in the U.S. The report contains both good news and bad news.

• The Good News:  The number of active angel investors in 2008 and the number of deals they invested in remained comparable to 2007. In 2008, a total of 55,480 ventures received angel investment, down only 2.9% from the previous year. The number of active individual angel investors remained steady at 260,500.

• The Bad News:  The total dollars invested in 2008 fell 26.2% to $19.2 billion. This indicates a contraction in average deal size, presumably due to lower valuations.

The six sectors receiving the most angel investment are as follows:

• Healthcare: 16%
• Software: 13%
• Retail: 12%
• Biotech: 11%
• Industrial/Energy: 8%
• Media: 7%

In 2008, 45% of angel investments occurred at the seed or start-up stage. Only 10% of the deals brought to the attention of angel investors succeeded in obtaining an investment.

Note that the study only includes accredited or “sophisticated” angel investors who invest through angel investing groups; the study excludes investment activity by informal “friends and family” investors.

In the current economic storm, it’s easy to lose sight of the bigger picture.  Even the biggest storm will eventually pass.  We will emerge from our shelters, pick up the pieces, rebuild, and move on.

When this storm blows over, all of the world’s problems — and attendant opportunities — will still be there.  Except this time, the landscape will look a little different.

On January 20, 2009, a new administration took office.  In his inaugural address, Obama expressed strong support for entrepreneurs, saying:

“…it has been the risk-takers, the doers, the makers of things – some celebrated but more often men and women obscure in their labor, who have carried us up the long, rugged path towards prosperity and freedom.”

The incoming administration is a strong proponent of innovation in science, technology, healthcare, and the environment.  On the agenda: a long-term plan for U.S. leadership in five critical areas, supported by heavy investment.

Here’s what the administration has to say on whitehouse.gov:

21st-century technology and telecommunications have flattened communications and labor markets and have contributed to a period of unprecedented innovation, making us more productive, connected global citizens. By maximizing the power of technology, we can strengthen the quality and affordability of our health care, advance climate-friendly energy development and deployment, improve education throughout the country, and ensure that America remains the world’s leader in technology. Barack Obama and Joe Biden will:

• Lower Health Care Costs by Investing in Electronic Information Technology Systems: Use health information technology to lower the cost of health care. Invest $10 billion a year over the next five years to move the U.S. health care system to broad adoption of standards-based electronic health information systems, including electronic health records.
• Invest in Climate-Friendly Energy Development and Deployment: Invest $150 billion over the next ten years to enable American engineers, scientists and entrepreneurs to advance the next generation of biofuels and fuel infrastructure, accelerate the commercialization of plug-in hybrids, promote development of commercial-scale renewable energy, and begin the transition to a new digital electricity grid. This investment will transform the economy and create 5 million new jobs.
• Modernize Public Safety Networks: Spur the development and deployment of new technologies to promote interoperability, broadband access, and more effective communications among first responders and emergency response systems.
• Advance the Biomedical Research Field: Support investments in biomedical research, as well as medical education and training in health-related fields. Fund biomedical research, and make it more efficient by improving coordination both within government and across government/private/non-profit partnerships.
• Advance Stem Cell Research: Support increased stem cell research. Allow greater federal government funding on a wider array of stem cell lines.

The proposed $800+ billion stimulus package goes several steps further.  In his first weekly video address, President Obama stated:

“This is not just a short-term program to boost employment. It’s one that will invest in our most important priorities like energy and education, health care and a new infrastructure that are necessary to keep us strong and competitive in the 21st century.”

The stimulus bill also includes hundreds of millions for SBA loan guarantees and direct lending to entrepreneurs.  Furthermore, the administration proposes added funding to incubate new ventures. The National Business Incubator Association says:

In today’s economic climate, there’s a new focus at both the state and national level on entrepreneurship and entrepreneur support. In the U.S., there’s talk at the federal level about increased support for and possible development of new business incubation programs to help those who have lost employment. A portion of President-elect Obama’s Small Business Emergency Rescue Plan is focused specifically on “creating a national network of public-private business incubators” and states that his administration “will invest $250 million per year to increase the number and size of incubators in disadvantaged communities throughout the country.”

Entrepreneurs working to solve fundamental problems in fields such as healthcare, green energy, education, and telecommunications will see unprecedented financial support and opportunities for bringing their innovations to market.  The biggest winners will be those who start now, while others wait for the recession to pass.

These are turbulent times, to be sure, but just over the horizon is a sea of opportunity awaiting those who stick it out.

The World Economic Forum in Davos, Switzerland kicked off on Wednesday. World leaders gathered to discuss and seek solutions to our global economic challenges.

Maria Bartiromo of CNBC just interviewed Duncan Niederauer, CEO of NYSE Euronext. Niederauer shared a few observations:

• NYSE company CEOs seem to see “a turn for the positive” in 2009. “People are starting to be more constructive.”
• “The [IPO] pipeline is very strong and it’s all over the world” but it might be another quarter or two before a lot of companies come to market.
• IPO strength will initially be in Asia, emerging markets in general, and some technology and biotech companies.
• Growth rates in places like China and India will be a bit lower, but latent domestic demand in those markets will keep those economies moving forward.

It’s nice to hear a tiny glimmer of optimism in these difficult times.

There’s no denying it: we’re in the midst of a very difficult economy. As credit markets seized up and the IPO and M&A markets slowed to a crawl, sources of entrepreneur financing such as SBA lenders, angel investors, and venture capital funds slowed just as dramatically.

Credit is tight – unless you have nearly perfect credit, are willing to personally guarantee payment, and can offer 100% collateral, you can probably forget about getting that loan.

This doesn’t mean that financing has dried up completely.

The good news: equity financing is still available for good opportunities. Equity investors – angels and VCs – make their money upon an exit event such as an IPO or acquisition. These events usually take place five or more years after they make their investments. The fact that we have a difficult market today certainly doesn’t mean that we’ll have a bad market in five years. While many skittish investors are sitting on the sidelines, more rational ones appreciate that the value of their investments will improve with the economy and are on the lookout for good opportunities that are being passed over.

The keys to obtaining financing in today’s environment are the same as they have always been – you just need to execute even better than ever before:

1. Have a compelling opportunity. This means you need to demonstrate all of the traits that investors have always wanted to see: an innovative solution to a painful problem in a large and growing market, with demonstrated demand, with sustainable competitive advantages, great financial potential, backed by a committed management team who’s been there and done that. If all you have is an idea, then forget it – stick with your day job.
2. Tell your story in a clear, compelling way that that stands head-and-shoulders above the crowd. A downturn is generally a good time to start a business, but that means there will be a lot of entrepreneurs competing for a shrinking pool of capital. To succeed, you need to put a lot of time and effort into perfecting your investor communications, including your elevator pitch, presentation, executive summary, business plan, financial forecast, and website.
3. Persevere. Even in the best of times, raising money isn’t easy. A process that once took three to six months might now take as long as a year. For some entrepreneurs, it might make more sense to spend this time seeking customers rather than investors.

We’ve been through tough times before, and there will be others in the future. If you keep a level head and stay abreast of the big picture, chances are, you’ll land on your feet.

The Business Journal reported some cheerful news for entrepreneurs:

In the second quarter of 2006 alone, fifty venture capital funds raised a total of $11.2 billion — the highest level in five years, Heesen says. Venture capital firms invested $6.3 billion in 856 deals during the past quarter, representing the highest dollar amount invested by VC funds and the most deals signed since the first quarter of 2002.

“The U.S. venture capital industry is in its best period than at any other time in the past 15 years,” Heesen says. “It’s a very stable environment. Funds are not over-investing and there’s not just one hot technology that everyone is running after.”

Perhaps it is true that no single technology is garnering excessive attention. However, “clean-tech,” consisting of businesses in fields like “water purification, solar power, biofuels, materials based on nanotechnology and clean-coal technology,” is starting to break out by raising over a half billion in just one quarter:

Clean-tech businesses received a record $513 million in venture capital in the first quarter, according to the latest figures available from the Cleantech Venture Network. The first quarter saw 67 companies getting financial backing, down from 73 in the fourth quarter of 2005 but up from 49 in the first quarter of 2005.

Furthermore, the National Venture Capital Association reported an increase in seed and early-stage deals, making this a great time for experienced entrepreneurs to get a new venture launched. Let’s see how long this window of opportunity stays open.