photo credit: armandoalves

In our investment banking business we are often contacted by business start-ups asking for our help in raising money. I am sure that we were not the first organization that was contacted and that these hopeful entrepreneurs had been searching for months for funding. I try to be helpful and spend time on the phone with these people asking what I consider to be basic Business 101 questions. What is your product or service? What unmet need is it designed to fill? Who else is in your space? How does their product or service compare to your product or service? What is the size of the potential market? Why would a customer switch to your company? How do you plan on selling your product?

Often I am amazed that the entrepreneur has focused inwardly on his hobby or invention or software and has given very little thought to the potential market. Why build a business to sell to a small market segment? Every once in a while, an entrepreneur contacts me and the product or service really hits me as a winner. That is what happened when I was contacted by Russ Notestine, an inventor with a unique product. He had many of the elements mentioned above going in his favor but was still struggling because he had little experience in actually marketing a product. One of the reasons I got interested was that Russ had created a product designed to help back pain sufferers.

Well, that was me, so I was all ears. I had tweaked my back in an athletic event, still approaching the competition with the zeal of a college athlete but trapped in a 50 year old’s body. I was in significant pain and took the usual over the counter pain killers that only reduced the pain by 10%. The next day I could hardly get out of bed my lower back pain was so intense. I called the local chiropractor and began a treatment routine that involved 3 visits per week, heat, electric stimulation and adjustments. I bought my kneeling chair so I could actually work. I even bought the inversion boots so I could hang upside down in an attempt to provide some kind of relief.

My chiropractor got me to the point where I was at least able to be productive at work, but I continued treatments for almost a year. The medical bills were expensive, totaling about $6,000. The really expensive part was the one and one half hours I took out of my work day 2 and 3 days a week. If any of you run your own company, that expense dwarfed my medical expense. Nothing was working for me and I was ready to eat spiders if I thought it could make this problem go away.

Well, Russ tells me that I am not unusual and that 50 million Americans will suffer from at least one bout of serious back pain in their lives. He had passed test number one. There is a huge market for this product. He is explaining how his Vacupractor works and I am thinking (having seen or heard it all from start up companies), oh come on. He says he has this molded plastic shell that is about the size of your back. He tells me that you spray the device with water and then lay down on it. You then pick up your legs and slowly lower them and this creates a vacuum suction as the air is expelled. The device sticks to your back almost like a hard contact lens sticks to your eye. He explained that the suction stretches your back muscles and gently aligns your spine. Given that I was ready to eat spiders, I asked him to send me the Vacupractor.

My back had been OK for a few months so the thing sat in the box for a couple of weeks with little attention from me. I then strained my back again in my next event and I was feeling the beginning of another bout of back pain. I got home and got out the device and sprayed it with water and followed the instructions to expel the air and create the vacuum. I laid on it for about 15 minutes and could feel my back muscles relax. When I got off it, the pain was not completely gone but was considerably reduced. The next morning I got on it again and as I worked that afternoon I suddenly realized that I was not thinking about my back because the pain was totally gone and the start of a potentially long and painful lower back pain bout had been avoided. I couldn’t believe it. I called Russ to tell him about my experience and he said that is pretty much what he hears from other users.
photo credit: Marco Gomes

I was so grateful that I told Russ that I would try to help him with his marketing and sales. We still do not have that solved, but in terms of the other elements for a start up succeeding our entrepreneur has several things going for him:

Huge potential market

Totally unique solution to a painful problem

Cost competitive – the device costs less than 1 chiropractor visit

The potential for a big word of mouth viral marketing boost

Good product gross margins

I don’t think Russ consciously thought about the Business 101 issues when he started. He was a back pain sufferer and an inventor and he had an unmet need because none of the existing products solved his problem. He set out to create a lower back pain remedy for himself and when he got the solution, he thought, wow, I really have something here and there must be a huge market for it. I think he is right. Now if he can figure out how to generate meaningful sales with a limited marketing budget, he has a chance to turn a great product into a great business.

Here is an examples of a business idea that did not pass the Business 101 start up test. I was contacted by a software company that had built the best system for managing the sourcing of clothing to overseas contract manufacturers. They spent $1.5 million in development before doing any research on the competitive landscape. It turns out that for them to be reasonably profitable, they would have to sell the software license for a minimum of $50,000 per company license. The competitive systems in the industry, although not as robust as this one, had 85% of the functionality. They charged a monthly license fee of $300 per month. Our guys were priced way out of the market and literally shut this division down.

What an expensive lesson that should have been avoided before the start. If you are thinking of creating a company, make sure the economics are in your favor before you start. Are your margins going to be high enough to make the company viable? Another huge oversight by these very optimistic entrepreneurs is they figure like in Field of Dreams, if you build it they will come. Save that one for the field of fiction. In business, if you sell it they will come. Even the best ideas and the best products will die if you are not able to achieve meaningful distribution in a cost effective fashion. Go through this little exercise before you start. Who is in my space? How do they sell their product? Is it through a direct sales channel? What does it cost for a salesman to sell the product? What volume can a salesman reasonably expect to sell in a year? What revenues and profits are generated by a salesman at 100% of quota? What is the company’s cost for a salesman at 100% of quota? Does it make economic sense?

The Internet has been a game changer for start-ups with very few barriers to entry. These companies are very easy to start, but almost impossible to scale without some big funding. The sad truth is that the guys that are starting these businesses and getting the funding are guys that have done it before. A great article was recently published in Fortune Magazine about the original founders of Pay-Pal. Well these folks have made investors a lot of money before and the odds are very good that if they did it once, then they can do it again. That theory has been validated with these wizards founding Digg, LinkedIn, Slide, Mozilla, Technorati, and having a significant investment in Facebook.

The VC’s line up to give these guys money. For others it is a painful process of endless meetings and presentations and no money. As a start up company, you have many things going against you. Make sure you are not blinded by your great idea. Think about the market demand, your competition, your margins, your sales and marketing, and getting your company to break even. Do not get distracted trying to attract VC financing at this point. If you can generate enough sales to fund your operations through bootstrapping, you have passed a big test of market validation. If you now need financing to take the company to the next level, then the professional investors will start to listen.

Dave Kauppi is the editor of The Exit Strategist Newsletter, a Merger and Acquisition Advisor and President of MidMarket Capital, representing owners in the sale of privately held businesses. We provide Wall Street style investment banking services to lower mid market companies at a size appropriate fee structure.

photo credit: Lori Greig

Green investing is growing up. Previously the province of a small number of investors who chased an even smaller number of companies, the market for environmental technology has expanded dramatically in recent years. And it has captured investors’ wallet share along the way. Inflows into green funds totaled $766 million for the year ending May 31, according to Morningstar, compared with $37 million in net outflows from religious funds over same time period. (Morningstar tracks these two subcategories under the umbrella of socially responsible investing, or SRI, funds). “The interest has turned from ‘maybe I’ll dabble in this’ to ‘this is an asset class I should include in my portfolio,’” says Jerry Moskowitz, president of FTSE Americas.

Surging fuel prices have helped make green technology one of the biggest equity growth areas in the U.S., says John Quealy, a green tech analyst at Canaccord Adams, an independent financial services firm in Boston. New products are keeping pace. Mutual funds represent the largest share of socially and environmentally screened funds, with $171.7 billion in total net assets invested across 173 different funds, according to the Social Investment Forum’s 2007 Report on Socially Responsible Investing Trends in the United States. Exchange-traded funds accounted for only 1% of the total assets of all socially and environmentally screened funds at the beginning of 2007, but their ranks are growing daily.

The source of investors’ fascination is, of course, the need to find alternatives to oil and other fossil fuels in today’s environment of scarcity and climate change. We’ve reached a point where environmental technologies have moved way beyond good wishes for Mother Earth, and are starting to make economic sense. Alternative energy has finally captured businesses’ and investors’ imaginations and the gold rush is on-and so are nascent fears of a bubble.

Oil prices of $140 or more per barrel highlight the scarcity-or at least, the fears of scarcity-of this hot commodity. Global demand for oil will only increase over the short term, even if record gas prices finally cause Americans to curb their consumption.

China and India are expected to more than double their energy use by 2030, according to the International Energy Agency. Increasing demand for fossil fuels pushes their prices up, which in turn spurs technological advances across all alternative energies. The world will continue developing better ways to power cars (the next iteration of the Toyota Prius, the ragingly popular gas sipper, will come with solar cells that help run its air conditioning), as well as alternatives to coal and other greenhouse gas emitters. Industry experts say that oil would have to drop back down to $50 per barrel for alternatives like solar, wind and geothermal energies to lose their economic viability.

Here’s a closer a look at the opportunities, and some potential risks, in green investing.

Clean and Green

Investors considering environmental tech should start by defining their terms. For example, some use “clean tech” and “green tech” interchangeably, while others make a clear distinction. Jack Robinson falls into the latter group. The manager of the $410 million Winslow Green Growth Fund-whose three-, five- and 10-year performance has bested the Russell 2000 Growth Index-defines green companies as those involved in a bona fide, sustainable solution to global warming or other environmental ills; clean companies, in his parlance, are environmentally neutral. One clean company that Winslow holds in Green Growth is Bankrate, a North Palm Beach, Fla.-based online consumer banking and personal finance network. A green company he owns is Green Mountain Coffee Roasters, a Waterbury, Vt.-based purveyor of fair trade organic coffee that is carbon-neutral and donates 5% of its earnings to earth-friendly causes.

Investors must also decide for themselves what constitutes a green company. Quealy identifies four subcategories within the green sector: energy and power technology, which includes fuel cells; water technology; recycling technology; and bioresource technology, which includes ethanol. However, many so-called green companies don’t draw 100% of their revenues from green activities. Purely returns-driven investors may not care to know the full scope of a company’s endeavors, but those who see themselves as socially responsible will. “If you’re large enough, you’re going to be doing things some people don’t like,” says Peter Kinder, president of KLD Research & Analytics, a Boston-based social research and index firm.

Robinson won’t hold companies that are at all “dirty.” For example, he won’t own BP, even though the British oil company is also developing alternative energies. Don Rogers, executive director of Virginia United Methodist Pensions, won’t invest in conglomerates with more than 10% of their income from any combination of alcohol, firearms and gambling. Green investors also line up on different sides of the nuclear power divide, with some embracing the technology as an attractive alternative to fossil fuels and others shunning it as expensive, a cause of toxic waste and prone to accidents or terrorist attacks.

The growth of green tech investment vehicles mirrors the increase in individual companies in the space. When Robinson first began investing in the category 15 years ago, he had only a handful of stocks to choose from. These days, he says, “the universe has expanded dramatically and a lot of the small caps have become mid-caps or even large caps.” One stock that graduated from small cap to mid-cap on Robinson’s watch is Itron, a Liberty Lake, Wash.-based company that produces electricity, gas, water and heat meters. When Robinson first invested in the company in early 2006, its market cap was under $1 billion, and today it’s about $3 billion.

The Al Gore Effect

photo credit: World Economic Forum

Many credit Al Gore and his 2006 Oscar-winning movie, An Inconvenient Truth, for the uptick in consumers’ desire to go green. “He’s had a major impact on educating the public,” Robinson says. And today, more consumers are gaining access to green mutual funds through their 401(k) plans, he notes.

Christopher Manning, a financial advisor in Houston who focuses on SRI, says alternative energy investments are the most popular SRI category among his new clients this year. He uses Green Century mutual funds with his clients, as well as two PowerShares ETFs, Global Water and WilderHill Clean Energy.

Before he launched his own SRI-focused firm in 2005, Manning worried about how it would play deep in oil country. While he hasn’t encountered any outright hostility toward his mission, he says, he has found plenty of educational opportunities among potential clients. He’s also found himself quite a niche. “In this area, I’m the only game in town” for clients interested in SRI, Manning says.

Justin Harris, a financial advisor in Seattle, says few of his clients come in with specific requests about green investing. Most request a general negative screen that weeds out tobacco, gambling and alcohol stocks. While many advisors adopt SRI vehicles at their clients’ request, Harris went the opposite route: About seven years ago he set a mandate that all assets his clients invested with him would be in socially responsible investments. “I saw I wasn’t gaining anything by divorcing my money from my values,” he says. Harris didn’t lose any clients as a result of the mandate, and clients embraced the cause. “I find that people really want to be fully engaged,” he says. “They want to walk their talk.”

Policy Watch

As with so many issues in this election year, market watchers wonder how the new occupant of the White House will affect green technology next year and beyond. Both the presumptive Republican and Democratic nominees, John McCain and Barack Obama, respectively, support a cap-and-trade system for carbon emissions, so it’s likely this initiative will move forward regardless of the election’s outcome. A system adopted by the European Union several years ago, a cap-and-trade system creates market incentives for reducing carbon emissions. Companies are allotted a certain number of permits to release carbon gases, and if they can figure out a way to reduce their emissions, they can sell their excess permits for cash.

When investing in individual securities, investors can analyze how well companies are preparing themselves for these coming regulations, says Todd Larsen, spokesman for the Social Investment Forum, a trade association of the U.S. social investment industry. Companies will incur greater costs as a result of cap-and-trade regulations, and they will pass these costs along to their customers. For example, a one-cent increase in the cap-and-trade cost per ton of carbon translates into a 33% increase in the end consumer’s electricity costs, Robinson says. Investors interested in carbon as a commodity also have expanding options: In June, Barclays launched the first exchange-traded note offering investors pure exposure to the global price of carbon.

Many assume that a Democratic administration will be friendlier toward SRI principles. For example, conventional wisdom holds that Obama would be more likely than McCain to increase incentives for environmentally friendly corporate behavior. But in some ways, among individual investors the opposite may hold true. “SRI is demand-driven, and there’s nothing like a Republican president to drive demand,” says one prominent industry participant who requested anonymity for fear of being perceived as cynical. Indeed, frustration at President George W. Bush’s dismal environmental record has contributed to the popularity of alternative energy investments in recent years.

Investors or Believers

While the next occupant of the White House may affect certain environmental policies, SRI and green investing has enough momentum that it should make progress no matter who wins this November. “There has been a sea change at work,” says Calvert CEO Barbara Krumsiek. Corporations have embraced positive change on environment, social and governance issues (also known as “ESG”), she notes. Large institutions like public pension funds have taken up SRI investing, including shareholder advocacy, and investors are expressing unprecedented interest in SRI, Krumsiek continues.

Calvert doesn’t track how many of its investors are purely returns driven, as opposed to those who invest according their beliefs, but Krumsiek believes that both groups are well represented among her shareholders. The venerable SRI fund family ventured into the green tech space last year with the launch of the Calvert Global Alternative Energy Fund. The fund was down 12.1 % as of June 30, negative 0.2 points below Standard & Poor’s 500 results for the same period, according to Morningstar. Calvert plans to launch a Global Water Fund in the third quarter.

Bill Crager, president of Envestnet, a Chicago-based provider of investment management products and services, envisions a day when information on companies’ environmental, social and governance track records will become more readily available. One day, he predicts, clients might receive, along with their quarterly returns statement, a statement of their holdings’ sustainability efforts. This could take the form of a report on individual companies and how they help or hurt the planet during that time frame, by opening up a water filtration plant, say, or by polluting a local river, Crager says. Envestnet’s products include Veris Sustainable Strategies, mutual fund portfolios for socially conscious investors.

Potential SRI investors will invariably ask whether investing with their hearts-and their attention on ESG reports rather than earnings reports-will damage their wallets in the form of lower returns. “My experience is all investors are returns driven,” says Dan Porter, founder and vice president of marketing for IW Financial, a Portland, Maine-based provider of environmental, social and governance research, consulting and portfolio management solutions. “When I want to incorporate my values, the question is, can I do that at an acceptable level of cost?” The answer will vary from client to client.

Ready to Boil?

Only a handful of green mutual funds and ETFs tracked by Morningstar have even a five-year track record. “The jury is still out about performance of SRI funds in general,” says Stephen Horan, head of private wealth and investor education at the CFA Institute. “Both sides can cite studies to support their case.” Not surprisingly, of those that do, some have underperformed and others have outperformed the broader market. Those in the latter category include Winslow Green Growth, with 11.2% five-year returns as of June 26, compared with 7.4% for the Standard & Poor’s 500; and the New Alternatives Fund, which invests in alternative energy and boasts an 18.1% five-year return as of June 26, according to Morningstar.

Outsize returns like those may prompt the question of whether alternative energy is entering bubble territory. It’s never an easy question to answer. “If it pops, we’ll know,” says Johann Klaassen, vice president of managed account programs for First Affirmative Financial Network, an independent investment advisory firm in Colorado Springs, Colo., that designs green investment portfolios. That said, Klaassen believes alternative energy is still in “the opportunity phase.”

Robinson says solar companies got “priced to perfection” recently but have since receded from their highs. It would be wrong to avoid the category altogether, he says: “Long-term, solar is a part of the solution.” Oil prices will not likely make a big retreat, he believes, and demand for alternative energy sources will only grow.

After all, it’s not as if the world will stop using energy. FTSE’s Moskowitz says green tech companies are reporting solid earnings that are reflected in FTSE’s environmental indexes, the FTSE ET50 and the FTSE Environmental Opportunities All-Share Index. “They don’t look wild,” Moskowitz says of his indexes’ components.

Even so, green tech investors must have a strong stomach to weather the sector’s volatility. Some of that volatility comes from the fact that most green tech stocks are small-cap growth companies, which are among the most mercurial. In addition, Quealy says, “We live in an unbelievable bull market for commodities, where geopolitical discussions swing the price of oil two to three bucks daily.” This adds another layer of volatility to green tech stocks that other sectors don’t share, he notes.

Quealy still thinks green tech companies rank among the best secular growth opportunities for the next five to 10 years. Stock pickers would do well to study the management, market and marketable technology of the companies they’re considering, instead of blindly investing in the sector as a hot growth prospect, he advises. “The passive investment approach is likely to be a risky one as Wall Street decides who the winners and the losers are,” Quealy says.

Jan Bryan, a planner specializing in SRI out of Prescott, Ariz., reports that while her clients expect competitive returns from their investments, these long-term investors also understand and accept cycles of underperformance. For example, when defense and big oil are doing particularly well, portfolios that eschew them will miss out on those gains. Her clients have found other kinds of rewards in SRI and green investing. “Clients absolutely love it when you ask them their views on social issues,” she says. “They feel respected and heard, and these are the most loyal clients.” Klaassen also notes the phenomenon of “sticky clients” in the space: “They get invested in us, as well as with us.” First Affirmative does get some returns-driven investors, but they generally don’t stick around for long. “Hot money flows in and flows out,” Klaassen notes.

Elizabeth O’Brien is an author with Financial Planning magazine. For more information, please visit http://www.financial-planning.com

photo credit: Theodore Scott

Many say that now may not be the best time to deal with the Spanish market. Property, once one of the most intriguing aspects of Spain, has now become overcrowded and overpriced. But on the other hand, investing in businesses there has started to let its potential shine.

There are thousands of new businesses, entrepreneurs, and small businesses looking to expand in Spain. They can now use networks such as the Angel Investment Network to connect to investors in Spain, around Europe and in some cases globally. Over the past few years, several local networks of business angels have also cropped up, such as CIDEM/XIP.

Having become one of the top ten economies in the world, Spain has begun to attract significant amounts of investment from foreigners. The growth has remained steady over the past ten to fifteen years, convincing investors that new businesses here have the potential for a very profitable turnover. However, when angel investors invest in new businesses, they want to make sure they cover a variety of market and industry sectors, as opposed to the real estate market where certain aspects have become oversaturated, causing the property bubble to burst.

Many Spanish companies have expanded internationally over the past ten to twenty years, and new businesses are looking across borders for potential capital investment. This also works the other way around, with many foreigners moving to Spain to start a new business.

Contrary to some other parts of Europe, most business angels in Spain do not get too involved with the overall running of the business, making it less of an overall partnership, but there are still many intangibles such people can provide. However, most investors will have the benefit of experience of the market sector, solid knowledge of how start-ups are structured, and possibly access to contacts around the world.

To help connect both parties, the Angel Investment Network has set up a branch in Spain. With this, both entrepreneurs and investors can find the right kind of partnership online. The Spanish website already has thousands of registered entrepreneurs listing their products and business ideas, along with business angels from all over the world who are interested in making an investment in the Spanish market, with experience in all sorts of industries.

Mike Lebus works with entrepreneurs seeking investments, via the Investment Network in Spain, which is part of a worldwide network of websites that help angel investors connect to entrepreneurs around the worl

photo credit: SuperFantastic

During the 1970s in a number of countries around the world, a push began to install solar energy panels on private residences. Many experts contended that solar energy, including solar energy incorporated into residential property, was to be the proverbial wave of the future. In reality, the early movement towards solar energy somewhat sputtered during the latter part of the decade and into the 1980s. A primary concern associated with solar homes centered on the fact that many consumers ended up finding that the installation and utilization of solar power systems into their homes was not proving particularly cost effective.

Since the advent of the 21st century, there has been a significantly profound renewed interest in solar energy generally and in solar homes specifically. The “rebirth” of the trend towards the construction of more solar homes and towards the retrofitting of existing residential properties with solar systems has occurred for two primary and essential reasons.

First, an increasing segment of the media has become concerned with the impact that carbon based energy sources are having on the environment, on the planet. As a consequence, there are an ever growing number of people who are making a concerted effort to make their living spaces far more environmentally friendly. From recycling to the use of alternative energy resources such as solar power, more men and women all of the time are becoming committed to establishing and maintaining homes that are more environmentally friendly.

Second, the costs associated with petroleum, coal and natural gas as primary sources of power have increased dramatically over the course of the past several years. The net result of this tremendous cost increases has been to make alternative energy resources – including solar power – far, far more cost effective. Therefore, many people are now turning (or returning, as the case may be) to solar homes because these types of residences have become cost effective in the current marketplace.

While many people are hoping that the costs associated with petroleum, coal and natural gas will drop sooner rather than later, most industry experts and financial analysis predict that this probably won’t be the case. Therefore, research and development is becoming more intense when it does come to alternative energy resources such as solar homes. Moreover, consumer demand for alternative energy resources, including residential property that relies on solar power, is increasing markedly. These are companion long-term trends that are expected to continue into the future.

With this in mind and understood, many financial experts and analysts are suggesting with increasing regularity that making investments in such alternative energy resources such as solar homes is a wise course to take. These analysts maintain that the days are long gone when an investment in solar home technology was considered speculative at best. Rather, investments in such alternative energy resources such as solar homes is considered to be a sound course which will allow for the realization of significant profits in both the short and the long term.

Copyright (c) 2008 R Douglas Allen

R. Douglas Allen is general partner of Blue Lion Capital Management, a private equity company specializing in clean technology and alternative energy.

You can learn more about Blue Lion Capital Management and Mr. Allen by visiting this site:

http://www.bluelioncapitalmanagement.com

photo credit: oneVillage Initiative

If you are an entrepreneur with a small technology based company looking to take it to the next level, this article should be of particular interest to you. Your natural inclination may be to seek venture capital or private equity to fund your growth. According to Jim Casparie, founder and CEO of the Venture Alliance, the odds of getting Venture funding remain below 3%. Given those odds, the six to nine month process, the heavy, often punishing valuations, the expense of the process, this might not be the best path for you to take. We have created a hybrid M&A model designed to bring the appropriate capital resources to you entrepreneurs. It allows the entrepreneur to bring in smart money and to maintain control. We have taken the experiences of several technology entrepreneurs and combined that with our traditional investment banker Merger and Acquisition approach and crafted a model that both large industry players and the high tech business owners are embracing.

Our experiences in the technology space led us to the conclusion that new product introductions were most efficiently and cost effectively the purview of the smaller, nimble, low overhead companies and not the technology giants. Most of the recent blockbuster products have been the result of an entrepreneurial effort from an early stage company bootstrapping its growth in a very cost conscious lean environment. The big companies, with all their seeming advantages experienced a high failure rate in new product introductions and the losses resulting from this art of capturing the next hot technology were substantial. Don’t get us wrong. There were hundreds of failures from the start-ups as well. However, the failure for the edgy little start-up resulted in losses in the $1 – $5 million range. The same result from an industry giant was often in the $100 million to $250 million range.

For every Google, Ebay, or Salesforce.com, there are literally hundreds of companies that either flame out or never reach a critical mass beyond a loyal early adapter market. It seems like the mentality of these smaller business owners is, using the example of the popular TV show, Deal or No Deal, to hold out for the $1 million briefcase. What about that logical contestant that objectively weighs the facts and the odds and cashes out for $280,000?

As we discussed the dynamics of this market, we were drawn to a merger and acquisition model commonly used by technology bell weather, Cisco Systems, that we felt could also be applied to a broad cross section of companies in the high tech niche. Cisco Systems is a serial acquirer of companies. They do a tremendous amount of R&D and organic product development. They recognize, however, that they cannot possibly capture all the new developments in this rapidly changing field through internal development alone.

Cisco seeks out investments in promising, small, technology companies and this approach has been a key element in their market dominance. They bring what we refer to as smart money to the high tech entrepreneur. They purchase a minority stake in the early stage company with a call option on acquiring the remainder at a later date with an agreed-upon valuation multiple. This structure is a brilliantly elegant method to dramatically enhance the risk reward profile of new product introduction. Here is why:

For the Entrepreneur: (Just substitute in your technology industry giant’s name that is in your category for Cisco below)

1. The involvement of Cisco – resources, market presence, brand, distribution capability is a self fulfilling prophecy to your product’s success.

2. For the same level of dilution that an entrepreneur would get from a VC, angel investor or private equity group, the entrepreneur gets the performance leverage of “smart money.” See #1.

3. The entrepreneur gets to grow his business with Cisco’s support at a far more rapid pace than he could alone. He is more likely to establish the critical mass needed for market leadership within his industry’s brief window of opportunity.

4. He gets an exit strategy with an established valuation metric while the buyer helps him make his exit much more lucrative.

5. As an old Wharton professor used to ask, “What would you rather have, all of a grape or part of a watermelon?” That sums it up pretty well. The involvement of Cisco gives the product a much better probability of growing significantly. The entrepreneur will own a meaningful portion of a far bigger asset.

For the Large Company Investor:

1. Create access to a large funnel of developing technology and products.

2. Creates a very nimble, market sensitive, product development or R&D arm.

3. Minor resource allocation to the autonomous operator during his “skunk works” market proving development stage.

4. Diversify their product development portfolio – because this approach provides for a relatively small investment in a greater number of opportunities fueled by the entrepreneurial spirit, they greatly improve the probability of creating a winner.

5. By investing early and getting an equity position in a small company and favorable valuation metrics on the call option, they pay a fraction of the market price to what they would have to pay if they acquired the company once the product had proven successful.

Let’s use two hypothetical companies to demonstrate this model, Big Green Technologies, and Mobile CRM Systems. Big Green Technologies utilized this model successfully with their investment in Mobile CRM Systems. Big Green Technologies acquired a 25% equity stake in Mobile CRM Systems in 1999 for $4 million. While allowing this entrepreneurial firm to operate autonomously, they backed them with leverage and a modest level of capital resources. Sales exploded and Big Green Technologies exercised their call option on the remaining 75% equity in Mobile CRM Systems in 2004 for $224 million. Sales for Mobile CRM Systems were projected to hit $420 million in 2005.

Given today’s valuation metrics for a company with Mobile CRM Systems’ growth rate and profitability, their market cap is about $1.26 Billion, or 3 times trailing 12 months revenue. Big Green Technologies invested $5 million initially, gave them access to their leverage, and exercised their call option for $224 million. Their effective acquisition price totaling $229 million represents an 82% discount to Mobile CRM Systems’ 2005 market cap.

Big Green Technologies is reaping additional benefits. This acquisition was the catalyst for several additional investments in the mobile computing and content end of the tech industry. These acquisitions have transformed Big Green Technologies from a low growth legacy provider into a Wall Street standout with a growing stable of high margin, high growth brands.

Big Green Technologies’ profits have tripled in four years and the stock price has doubled since 2000, far outpacing the tech industry average. This success has triggered the aggressive introduction of new products and new markets. Not bad for a $5 million bet on a new product in 1999. Wait, let’s not forget about our entrepreneur. His total proceeds of $229 million are a fantastic 5- year result for a little company with 1999 sales of under $20 million.

MidMarket Capital has borrowed this model combining the Cisco hybrid acquisition experience with our investment banking experience to offer this unique Investment Banking service. MMC can either represent the small entrepreneurial firm looking for the “smart money” investment with the appropriate growth partner or the large industry player looking to enhance their new product strategy with this creative approach. This model has successfully served the technology industry through periods of outstanding growth and market value creation. Many of the same dynamics are present today in the high tech industry and these same transaction strutctures can be similarly employed to create value.

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, representing owners in the sale of privately held businesses. We provide Wall Street style investment banking services to lower mid market companies at a size appropriate fee structure.

photo credit: Ctrl+Alt+Canc

Tradable tax credits have historically been part of state and federal programs aimed primary for real estate development, including historic structures rehabilitation, energy, and other activities that stimulate economic growth.

With film projects, Production companies earn a transferable tax credit on the total eligible production costs, and wage expenses. That can translate to 20% – 30 % of the total production cost for a film, in the form of a tax credit issued directly to the production company. It can be used to offset state tax liability, or sold to another taxpayer.

In Illinois, a 20% tax credit based on “Illinois Production Spending” plus an additional 15% tax credit based on Illinois labor expenditures generated by the employment of residents of geographic areas of high poverty or high unemployment is available. New Jersey offers filmmakers a 20% tax credit for productions that film at least 60% in the state, as well as a 30% loan guarantee from the New Jersey Economic Development Authority.

In Connecticut, film makers can earn a tax credit worth 30% of their eligible Connecticut production costs, and in Massachusetts, productions with a minimum expenditure of $250,000 earn 20% and 25% for production expenses and labor expenses, respectively, when at least 50% is shot within the Commonwealth. Note: in MA, pending regulations propose a flat 25% combined tax credit, a minimum spend of $50,000, and removal of per-project cap.

In CT., the 4 new bills are being debated in the legislature, and the expected result in June will be a combination bill. Rhode Island offers a 25% tax credit to productions with a minimum eligible expenditure of $350,000, when 51% of the total budget is spent within the State. For more information about qualifying for each states’ tax credit, contact Tax Credits, LLC.In Pueto Rico, A tax credit is granted to the investors in a Film Project equivalent to 40% of budget items paid to Puerto Rico residents, up to 50% of the cash invested as equity in the project. 50% of the tax credit granted to the investor may be made available to the investor upon investment if a completion bond or a letter of credit is obtained, including the Puerto Rico Secretary of the Treasury as one of the beneficiaries.

Tradable tax credits allow production companies earning credits to sell their credits to companies and/or high net worth investors who have a tax liability within the state, where the credit was earned. The tax credits are sold at a discount for cash, garnering the seller cash to lower their net production expense.

Any company may take advantage of these “Financial Assistance Programs” to reduce their state tax liability. Purchased credits can typically be used for any year in which a tax return has not been filed. In general, credits may be used to offset any, or all, of the following: Individual Income Tax, Corporate Business Tax, Franchise Tax, Premium Tax, and Utility Tax (qualified taxes allowed for offset vary by State).

Large corporations and high net worth investors with a significant state tax liability can benefit from the purchase of film production tax credits, as they are able to purchase a dollar’s worth of tax credit at a discount.

NJ, RI, CT and MA film credits provide the buyer with the right to carry the tax credits forward for at least 3 years, which protects the buyer from investing significant dollars in tax credits that they cannot immediately use. In Illinois, tax credits can be carried forward for 5 years. The tradable, and thus marketable aspect of these state-issued tax credits means that tax credit investors can also retain an equity position in a film or a slate of films.

For example, lets say that a tax credit investor has $3,000,000 in tax credits he needs to purchase. While normally the final tax credit amount is calculated after a film’s production, he decides to benefit from the upside in potential profits and receive his tax credits.

So if a film has a budget of $6,000,000, 50% of the budget is equity ($3,000,000) and 25% is tax credits, an investor/tax credit buyer will receive benefits of $1,500,000 and 50% equity in the total international film profits and revenues.

But what happens to the other $1,500,000 he still needs to receive as tax credits?

Well if his or a company’s film investment was part of a film package, that amount is rolled over to another film that can be shot in a state or province where there may actually be a higher tax credit incentive which would be transferable back to him and any other investors on a pari pasu basis. For multinational firms and investors, this can also be leveraged and cross-collateralized to a multple country and territory transaction where there is a significant tax credit incentives such as Manitoba, Saskatchewan, Spain, Hungary, UK, South Africa, Australia, New Zealand, and others.

Another option would be to leverage the initial tax credit investment with a direct equity co-investment and set up several additional tranches of debt for a larger film fund.

To find out how a tax credit investment can also turn into a film investment that would hedge the risk and revenues across multiple films, please contact yuri@noci.com

Yuri Rutman is a visionary entrepreneur who has seen his lifelong passion to make movies and break into Hollywood slowly manifest itself into a reality. From his childhood days as an immigrant, he believed in the American dream through perseverance, certainty, focus, and overcoming any obstacles. After spending more than ten years cultivating industry relationships, Yuri Rutman raised money online from an Angel Investor in San Francisco whom he never physically met until after “Mr. Id was produced. On the strength of the initial business plan, the Investor wired money to finance the project a few weeks later. He currently has an innovative principal protected film fund and tax credit investment fund for accredited investors, institutions, etc. He is skilled in investor risk minimization, private equity, exit strategies, global film finance, and creative endeavors. Please visit http://www.noci.com