Notes from Silver & Gold Venture Capital Conference and Investor Dinner…Investors Hungry for Deals
Last night was the welcoming reception for the Silver Gold Venture Capital Conference. My oh my! What a difference two years makes in investor confidence! The conference is packed and full of energy. It’s BACK ON BABY! 
Right up front here’s the statistic that matters: Northern Nevada has 13 companies on the roster of 30 presenting companies.
That’s up from 5 last year and almost 50% of the field. This is very very good news.
Presenting companies like Rudi Wiedemann’s Biodiesel Solutions and Arthur Neumann’s Free Water are not only killer concepts, but up-and-operating, clean, renewable energy-oriented businesses that will have global impact. I wish I was on the Board for these businesses!
Chuck Alvey of EDAWN did a wonderful job of kicking off the event by highlighting how well northern Nevada is performing in diversifying our economy…and yet not glossing over the challenges we face to continue that growth. The Target 2010 study they’ve released with Angelou Economics DEAD ON.(Of special note: Susan Voyles’ article in today’s RGJ on median-income buyers in the Reno area being priced out of the market is one of the better articles to grace the front page in weeks.)
Bob Goff of the Sierra Angels and the founder/former Chairman of Nevada’s Center for Entrepreneurship & Technology kicked off a private investor dinner later on in the evening in which I was lucky to attend. 
The “keynote” presentation was from Susan Preston of Seraph Capital Forum, and Entrepreneur-in-Residence, Kauffman Foundation for Entrepreneurial Leadership on new proposed Federal tax legislation for private equity investing.
Susan talked about her work on the The Access to Capital for Entrepreneurs (ACE) Act of 2006 (HR 5198) which she was the main architect. The ACE Act fills a TREMENDOUS gap in current equity funding between venture capitalists and angel investors. This bill addresses that gap by encouraging accredited investors to increase equity investments in certain qualified small businesses through the creation of a 25% tax credit for accredited investors and certain partnerships (including angel investment pools if all are accredited investors) that invest cash or cash equivalents at an arm’s length in a qualified small business (as defined by the Small Business Act).
Please write to our Senators (particularly Harry Reid and John Ensign) and support this Act. 
What does it mean to local entrepreneurs? It means that all these wealthy Californians that relocate to Nevada for our tax benefits are incentives to take a chance on us entrepreneurs instead of sticking it in stocks and mutual funds. (Sorry to be blunt, but that’s what counts.)
That means more small businesses get funded in this state through experienced private equity, and that’s a VERY GOOD THING. Banks, despite their prolific full-page ads of their CEOs smiling and touting how “small business friendly” they are actually SUCK when it comes to start-up capital. Credit cards are better sources of start-up capital than you local bank. Angels are better, but they need an incentive like this.
The Dinner Panel topic was Venture Capital Fund-of-Funds: Insights for Emerging Fund Managers.
While I thought I was in for a real snoozer, it was actually a fairly insightful discussion of how well California’s pension fund managers are performing and their secrets to success. (Note: CalPERS and CalSTRS are in good hands.) Panelists included Jesus Arguelles, Investment Officer II, CalPERS Solange Brooks, Investment Officer, CalSTRS Guillermo Borda, Managing Director, Banc of America Capital Access Funds Charles Merritt, Parish Capital Jeff Mills, Probitas Partners Amit Tiwari, INVESCO.
Perhaps the strongest message I heard repeated was that “fund managers invest in people“. While everyone wants to methodologize the formula of success in to track records, years of experience, business plans, etc., PEOPLE trusting and investing in PEOPLE was the consensus. So what does that mean for any entrepreneur out there: focus on your poeple skills.
You can have a better technology, a better education, a better business plan, a better business plan and still lose to the guy who can work a room.
Technorati : ACE, ACE Act of 2006, Biodiesel, Bob Goff, EDAWN, HR 5198, Target 2010, angel, angel investing, entrepreneurs, investors, nevada, reno, vc, venture capital
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By Mazarin on October 4th, 2006 at 5:46 pm
Below is the text of the ACE Act:
H.R.5198
Access to Capital for Entrepreneurs Act of 2006 (Introduced in House)
HR 5198 IH
109th CONGRESS
2d Session
H. R. 5198
To amend the Internal Revenue Code of 1986 to allow a credit against income tax for qualified equity investments in certain small businesses.
IN THE HOUSE OF REPRESENTATIVES
April 26, 2006
Mr. MANZULLO (for himself and Mr. POMEROY) introduced the following bill; which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to allow a credit against income tax for qualified equity investments in certain small businesses.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the `Access to Capital for Entrepreneurs Act of 2006′.
SEC. 2. EQUITY INVESTMENT IN SMALL BUSINESS TAX CREDIT.
(a) In General- Subpart D of part IV of subchapter A of chapter 1 (relating to business related credits) is amended by adding at the end the following new section:
`SEC. 45N. EQUITY INVESTMENT IN SMALL BUSINESS TAX CREDIT.
`(a) General Rule- For purposes of section 38, in the case of a qualified investor, the equity investment in small business tax credit determined under this section for the taxable year is an amount equal to 25 percent of the amount of each qualified equity investment made by the qualified investor during the taxable year.
`(b) Credit Amount- For purposes of determining the small business tax credit under subsection (a)–
`(1) LIMITATION PER QUALIFIED INVESTOR- The amount of qualified equity investments made by the qualified investor during the taxable year shall not exceed $500,000.
`(2) LIMITATION PER QUALIFIED SMALL BUSINESS- The amount of qualified equity investments made by the qualified investor in a qualified small business during the taxable year shall not exceed $250,000.
`(c) Definitions- For purposes of this section–
`(1) QUALIFIED INVESTOR- The term `qualified investor’ means–
`(A) an individual who qualifies as an accredited investor under rules and regulations prescribed by the Commissioner of the Securities and Exchange Commission, or
`(B) a partnership with respect to which all of the partners are individuals who qualify as accredited investors under rules and regulations prescribed by the Commissioner of the Securities and Exchange Commission.
`(2) QUALIFIED EQUITY INVESTMENT- The term `qualified equity investment’ means the transfer of cash or cash equivalents in exchange for stock or capital interest in a qualified small business.
`(3) QUALIFIED SMALL BUSINESS- The term `qualified small business’ means a private small business concern (within the meaning of section 3 of the Small Business Act)–
`(A) that meets the applicable size standard (as in effect on January 1, 2005) established by the Administrator of the Small Business Administration pursuant to subsection (a)(2) of such section, and
`(B) has its principal place of business in the United States.
For purposes of this section, all members of the same controlled group of corporations (within the meaning of section 267(f)) and all persons under common control (within the meaning of section 52(b)) shall be treated as 1 qualified small business.
`(d) Active Business Requirement-
`(1) IN GENERAL- Holding stock in a qualified small business shall not be treated as a qualified equity investment unless, during substantially all of the qualified investor’s holding period for such stock, such qualified small business meets the active business requirements of paragraph (2).
`(2) REQUIREMENTS-
`(A) IN GENERAL- For purposes of paragraph (1), the requirements of this paragraph are met by a qualified small business for any period if during such period at least 80 percent (by value) of the assets of such qualified small business are used by such qualified small business in the active conduct of 1 or more qualified trades or businesses.
`(B) SPECIAL RULE FOR CERTAIN ACTIVITIES- For purposes of subparagraph (A), if, in connection with any future qualified trade or business, a qualified small business is engaged in–
`(i) start-up activities described in section 195(c)(1)(A),
`(ii) activities resulting in the payment or incurring of expenditures which may be treated as research and experimental expenditures under section 174, or
`(iii) activities with respect to in-house research expenses described in section 41(b)(4),
assets used in such activities shall be treated as used in the active conduct of a qualified trade or business. Any determination under this subparagraph shall be made without regard to whether a qualified small business has any gross income from such activities at the time of the determination.
`(C) QUALIFIED TRADE OR BUSINESS- For purposes of this paragraph, the term `qualified trade or business’ is as defined in section 1202(e)(3).
`(D) STOCK IN OTHER ENTITIES-
`(i) LOOK-THRU IN CASE OF SUBSIDIARIES- For purposes of this subsection, stock and debt in any subsidiary entity shall be disregarded and the parent qualified small business shall be deemed to own its ratable share of the subsidiary’s assets, and to conduct its ratable share of the subsidiary’s activities.
`(ii) PORTFOLIO STOCK OR SECURITIES- A qualified small business shall be treated as failing to meet the requirements of subparagraph (A) for any period during which more than 10 percent of the value of its assets (in excess of liabilities) consists of stock or securities in other entities which are not subsidiaries of such qualified small business other than assets described in subparagraph (E)).
`(iii) SUBSIDIARY- For purposes of this subparagraph, an entity shall be considered a subsidiary if the parent owns more than 50 percent of the combined voting power of all classes of stock entitled to vote, or more than 50 percent in value of all outstanding stock, of such entity.
`(E) WORKING CAPITAL- For purposes of subparagraph (A), any assets which–
`(i) are held as a part of the reasonably required working capital needs of a qualified trade or business of the qualified small business, or
`(ii) are held for investment and are reasonably expected to be used within 2 years to finance research and experimentation in a qualified trade or business or increases in working capital needs of a qualified trade or business,
shall be treated as used in the active conduct of a qualified trade or business. For periods after the qualified small business has been in existence for at least 2 years, in no event may more than 50 percent of the assets of the qualified small business qualify as used in the active conduct of a qualified trade or business by reason of this subparagraph.
`(F) MAXIMUM REAL ESTATE HOLDINGS- A qualified small business shall not be treated as meeting the requirements of subparagraph (A) for any period during which more than 10 percent of the total value of its assets consists of real property which is not used in the active conduct of a qualified trade or business. For purposes of the preceding sentence, the ownership of, dealing in, or renting of real property shall not be treated as the active conduct of a qualified trade or business.
`(G) COMPUTER SOFTWARE ROYALTIES- For purposes of subparagraph (A), rights to computer software which produces active business computer software royalties (within the meaning of section 543(d)(1)) shall be treated as an asset used in the active conduct of a trade or business.
`(e) Certain Purchases by Qualified Investor of Its Own Stock-
`(1) REDEMPTIONS FROM QUALIFIED INVESTOR OR RELATED PERSON- Stock acquired by the qualified investor shall not be treated as a qualified equity investment if, at any time during the 4-year period beginning on the date 2 years before the issuance of such stock, the qualified small business issuing such stock purchased (directly or indirectly) any of its stock from the qualified investor or from a person related (within the meaning of section 267(b) or 707(b)) to the qualified investor.
`(2) SIGNIFICANT REDEMPTIONS- Stock issued by a qualified small business to a qualified investor shall not be treated as a qualified equity investment if, during the 2-year period beginning on the date 1 year before the issuance of such stock, such qualified small business made 1 or more purchases of its stock with an aggregate value (as of the time of the respective purchases) exceeding 5 percent of the aggregate value of all of its stock as of the beginning of such 2-year period.
`(3) TREATMENT OF CERTAIN TRANSACTIONS- If any transaction is treated under section 304(a) as a distribution in redemption of the stock of any qualified small business, for purposes of subparagraphs (A) and (B), such qualified small business shall be treated as purchasing an amount of its stock equal to the amount treated as such a distribution under section 304(a).
`(f) Special Rule for Related Parties-
`(1) IN GENERAL- No credit shall be allowed under subsection (a) with respect to a qualified equity investment made by a qualified investor in a qualified small business that is a related party to the qualified investor.
`(2) RELATED PARTY- For purposes of paragraph (1), a person is a related party with respect to another person if such person bears a relationship to such other person described in section 267(b) or 707(b), or if such persons are engaged in trades or businesses under common control (within the meaning of subsections (a) and (b) of section 52).
`(g) Recapture of Credit in Certain Cases-
`(1) IN GENERAL- If, at any time during the 3-year period beginning on the date that the qualified equity investment is made by the qualified investor, there is a recapture event with respect to such investment, then the tax imposed by this chapter for the taxable year in which such event occurs shall be increased by the credit recapture amount.
`(2) CREDIT RECAPTURE AMOUNT- For purposes of paragraph (1), the credit recapture amount is an amount equal to the sum of–
`(A) the aggregate decrease in the credits allowed to the taxpayer under section 38 for all prior taxable years which would have resulted if no credit had been determined under this section with respect to such investment, plus
`(B) interest at the underpayment rate established under section 6621 on the amount determined under subparagraph (A) for each prior taxable year for the period beginning on the due date for filing the return for the prior taxable year involved.
No deduction shall be allowed under this chapter for interest described in subparagraph (B).
`(3) RECAPTURE EVENT- For purposes of paragraph (1), there is a recapture event with respect to a qualified equity investment if such investment is sold, transferred, or exchanged by the qualified investor, but only to the extent that such sale, transfer, or exchange is not the direct result of a complete or partial liquidation of the qualified small business in which such qualified equity investment is made.
`(4) SPECIAL RULES-
`(A) TAX BENEFIT RULE- The tax for the taxable year shall be increased under paragraph (1) only with respect to credits allowed by reason of this section which were used to reduce tax liability. In the case of credits not so used to reduce tax liability, the carryforwards and carrybacks under section 39 shall be appropriately adjusted.
`(B) NO CREDITS AGAINST TAX- Any increase in tax under this subsection shall not be treated as a tax imposed by this chapter for purposes of determining the amount of any credit under this chapter or for purposes of section 55.
`(h) Basis Reduction- The basis of any qualified equity investment shall be reduced by the amount of any credit determined under this section with respect to such investment.
`(i) Regulations-
`(1) IN GENERAL- The Secretary shall prescribe such regulations as necessary to carry out the provisions of this section.
`(2) CERTIFICATION OF QUALIFIED EQUITY INVESTMENT- Such regulations shall require that a qualified investor–
`(A) certify that the small business in which the equity investment is made meets the requirements described in subsection (c)(3), and
`(B) include the name, address, and taxpayer identification number of such small business on the return claiming the credit under subsection (a).
`(j) Termination- This section shall not apply to qualified equity investments made in taxable years beginning after December 31, 2011.’.
(b) Credit Made Part of General Business Credit- Subsection (b) of section 38 is amended by striking `and’ at the end of paragraph (25), by striking the period at the end of paragraph (26) and inserting `, and’, and by adding at the end the following new paragraph:
`(27) in the case of a taxpayer, the equity investment in small business tax credit determined under section 45N(a).’.
(c) Clerical Amendment- The table of sections for subpart D of part IV of subchapter A of chapter 1 of such Code is amended by adding at the end the following new item:
`Sec. 45N. Equity investment in small business tax credit.’.
(d) Effective Date- The amendments made by this section shall apply to qualified equity investments made after December 31, 2006, in taxable years beginning after such date.
By Mazarin on October 4th, 2006 at 6:12 pm
The increasing number of northern Nevada companies represented at the Silver and Gold Venture Capital Conference is a great development and bodes well for the region.
One of the challenges Nevada faces, however, is stiff competition from other states with respect to creating a nurturing environment for emerging companies. While many states have both marketing and incentive programs administered by a state-economic-development agency, Nevada does comparatively less. Nevada has strong regional-development agencies that focus on marketing, but there does not appear to be a coordinated plan at the state level to attract or organically grow certain sectors in the state. The regional agencies can only do so much — to be taken seriously by young firms poised for growth, Nevada as a state must make it known that it wants those companies and has a plan to get them here.
I mention this today as the governor’s election is only weeks away. Are Nevada electors going to ask tough questions of the candidates about how they will position Nevada for the future?
By Dave Archer on October 5th, 2006 at 6:24 pm
Mazarin makes a good point about needing a state-level plan to attract or organically grow certain sectors in the state. TheNevada Commission on Economic Development, in partnership with the private sector, helped create and now supports NCET,
Nevada’s Center for Entrepreneurship and Technology. NCET’s activities are focused on creating an environment throughout Nevada in which high-growth companies can flourish.Beside co-presenting events such as the Silver & Gold Conference, NCET sponsors frequent Tech Summits such as the
October 18th event featuring Safra Katz, President and CFO of Oracle. These Tech Summits help both to expose Nevada to corporate leaders, and to expose Nevada’s entrepreneurs to new ideas.
NCET also conducts the annual Donald W. Reynolds Collegiate Business Plan Competition; open to all Nevada college students and offering a cash prize pool in excess of $100,000!NCET also hold monthly mixers in Reno that showcase new technologies and provides a forum in which entrepreneurs, investors, and other professional can meet and exchange ideas.Nevada’s future depends on the organic growth of businesses within Nevada, and that growth needs the support of all of us.
(BTW, Another great part of the Silver & Gold Conference was the Tuesday AM keynote by Dr. Milton Glick, the new president of the University of Nevada, Reno. Dr. Glick noted that – going forward — UNR will increase the number and quality of student who graduating, will increase the amount of research, and increase and improve the efforts to commercialize the results of that research.)
By Mazarin on October 6th, 2006 at 7:42 am
See interesting piece from WSJ below. Northern Nevada does not need to be a replica of Silicon Valley, but it’s good to be located nearby.
New Hot Spot
For Tech Firms
Is the Old One
By PUI-WING TAM
October 5, 2006; Page B1
Matt Sanchez was just the kind of entrepreneur that the new wave of the Web boom was supposed to spawn: one untethered by geography, able to locate his company anywhere there was broadband Internet connection and a good idea.
But two years after the Yale University electrical-engineering graduate and two friends formed VideoEgg Inc., Mr. Sanchez found that he was spending more days in Silicon Valley than at the company’s New Haven, Conn., headquarters. So, in December, he and four employees packed up a 12-foot U-Haul van with their servers, whiteboards and desktop computers and moved West. Since settling into an airy office in San Francisco, the Web-video-technology company has snagged some venture funding, hired an additional 22 people and signed deals with Time Warner Inc.’s AOL unit and Internet firms such as Bebo Inc.
“There’s a unique set of resources in Silicon Valley that don’t exist in other places,” says Mr. Sanchez, 25 years old. “So if you’re going to build a tech company, this is the place to do it.”
From early in the Web boom, there have been predictions that the Internet eventually would erode Silicon Valley’s pre-eminence in nurturing start-ups as entrepreneurs found it more attractive — and much cheaper — to do business online from other regions. Instead, companies like VideoEgg are now migrating to Silicon Valley and environs. The trend shows how the San Francisco Bay Area continues to possess a unique mix of venture-capital money and skilled workers that tech firms — especially those that get to a point where they want to grow quickly — can’t afford to pass up.
Of course, pockets of tech remain active elsewhere in the country, notably around Microsoft Corp.’s home base near Seattle and also in Boston. But many companies — typically tech start-ups headed by entrepreneurs in their 20s, often with staffs of less than five people — are still heading to Silicon Valley. Mobius Microsystems Inc., a maker of technology that regulates timing pulses in microchips, relocated from Detroit to Sunnyvale, Calif., in March. LicketyShip Inc., an Internet firm that facilitates local deliveries, moved from New Haven to San Francisco last September. Meetro Inc., a maker of mobile social-networking software, transferred from Chicago to Palo Alto, Calif., in January, while Box.net Inc., an online file-storage-and-sharing site, jumped from Seattle to Silicon Valley that same month. Other companies are moving from overseas: Internet video company Metacafe Inc. is currently shifting its main office to Palo Alto from Tel Aviv.
“We tried to do some fund raising when we were based in Seattle, but Silicon Valley [venture] firms are just more receptive to younger entrepreneurs,” says Aaron Levie, 21, chief executive of Box.net, which is now based in Berkeley, Calif., and will move to Palo Alto next week. While Box.net got some funds from Seattle investors, it recently netted a heftier $1.5 million in a round led by venture firm Draper Fisher Jurvetson in Menlo Park, Calif., according to a Thomson Financial publication.
The start-up influx is helping to revitalize Silicon Valley. Many of the new companies are moving into offices that had been left empty by the tech bust of 2000. They are also ramping up their hiring and creating jobs. Mobius, for instance, now employs 14 people in its Sunnyvale headquarters, up from one a year ago. Overall, 278 companies in the San Francisco Bay Area got either first-round or seed financing in 2005, up from 250 in 2004 and 216 in 2003, according to research firm VentureOne. The start-ups have also fired up the tech social scene — Meetro founder Paul Bragiel recently helped to launch a bowling league for start-up executives, for example — that helped to incubate so many companies and contacts during the 1990s dot-com explosion.
Metacafe Chief Executive Arik Czerniak says his Internet video site, which he co-founded in 2003, is smaller than market leader YouTube Inc., but has 20 million users watching 450 million video streams a month. Even with those hefty numbers, it attracted little notice until the company jumped from Israel to Silicon Valley.
“Other companies out here get a lot of press simply because they’re here,” says Mr. Czerniak, 31 years old. “We have to be here; otherwise it would be very hard to compete.” While Metacafe maintains a development team in Tel Aviv, it is now recruiting marketing and sales executives for its new Palo Alto headquarters, where it expects to have 12 employees by the end of the year.
Kevin Efrusy, a general partner at venture firm Accel Partners in Palo Alto, which recently invested in Metacafe, says he now scouts around the world for potential investment opportunities, but when budding companies hit the point where they need to build a top-notch executive team and get more funding, they “can’t afford not to be in Silicon Valley,” he says. Besides Metacafe, Israel has seen several of its thriving home-grown tech companies shift to Silicon Valley in recent years, including software firm Mercury Interactive Corp., and privately held Skybox Security Inc.
Moving to Silicon Valley has its complications. The cost of doing business in the area remains steep, particularly due to high labor costs. According to a recent report from the American Electronics Association, a trade group in Washington, D.C., and Silicon Valley, high-tech workers in San Jose, Calif., made an average annual wage of $126,700 in 2004, the last year for which data are available. That compares with the national average for high-tech workers of $72,400.
Even with these higher costs, start-ups say they have little choice but to go where the most tech talent is concentrated. San Jose, the self-styled Capital of Silicon Valley, boasts 284 tech workers per 1,000 people, compared with the national average of 51 tech workers per 1,000 people, according to the electronics association report.
Mr. Efrusy says the region, home to big Internet firms such as Yahoo Inc. and eBay Inc., is also one of the few places where it’s possible to recruit seasoned Internet executives.
For growing start-ups, that can mean a difference of months in recruiting. David Sikes, CEO of Mobius Microsystems, says that after the company moved from Detroit to Sunnyvale earlier this year, it took him just four months to recruit a senior management team that had experience working at companies such as Cypress Semiconductor Corp. and Texas Instruments Inc. If he had tried to recruit a similar management team in Detroit, he figures it would have taken him a year or longer.
Mr. Sikes, who previously worked at Motorola Inc., says he himself was recruited to Mobius by its founder, 31-year-old Michael McCorquodale. Mr. Sikes says he joined partly because he knew Mr. McCorquodale was relocating Mobius to Silicon Valley. He adds that he wouldn’t have been as attracted to the job if he’d had to move for it.
VideoEgg’s Mr. Sanchez, meanwhile, says he tried for more than a year to make his company a viable enterprise in New Haven. At first, things seemed promising. In April 2005, VideoEgg snagged some funding from an ex-eBay executive who is based in Pennsylvania. Mr. Sanchez and his team used the money to hire several engineers and to build their Internet technology, which allows people to easily put video onto the Web.
But Mr. Sanchez says he soon found it difficult to hire talented developers in Connecticut. What’s more, as he began meeting potential partners and venture capitalists, he found he was flying to Silicon Valley nearly every Monday at 6 a.m. and taking the Friday night red-eye flight back to the East Coast. “Last October and November, I spent more nights in California than on the East Coast,” he says.
The move to Silicon Valley in December was stressful, however, as Mr. Sanchez and his team had to bunk out of a hotel near San Francisco’s airport for three weeks. (Cost: $52 a night for each room.) The company later leased office space in San Francisco. Soon afterward, it received some venture funding from August Capital. The amount of the investment wasn’t disclosed. Late last month, VideoEgg received a further $12 million in venture funding from investors including August, Maveron LLC and First Round Capital.
Since then, Mr. Sanchez says VideoEgg has signed on more than 70 Web sites as customers, with about 85% of those customers now located within an hour’s drive. The company has grown to 27 employees. Mr. Sanchez now sees some of the company’s venture capitalists and advisers at least once a week. He and his team also frequently grab lunch with entrepreneurs at other nearby start-ups.
“I don’t miss New Haven,” says Mr. Sanchez. “Before, in order to take a meeting, I had to schedule it two weeks in advance and had to buy a plane ticket. Now I can just meet people for coffee. It really facilitates the business.”
Write to Pui-Wing Tam at pui-wing.tam@wsj.com