Importance of Corporate Governance

As we get closer to SEC's final ruling on equity crowdfunding, I think it is important to have some sort of corporate governance in place whenever a startup seeks funding from investors. It is more important than limiting an individual's contribution on capital. VC backed firms have it in their term sheets on how the startup will be governed such as who will sit on the board, how the funds will be used, and how the progress of the project will be tracked.

Since a large sum of money is at stake here, the backer and the founders meet frequently and the budget gets tweaked quite often as the funding need changes over time. The more real time and transparent the monitoring becomes, the more certainty there is that the business is not misusing the funds.

My concern with the direction of where the SEC is going with equity crowdfunding regulation is that they are missing the mark on where the regulation should be. I have not seen any language referencing corporate governance on their proposed ruling.

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Equity Crowd-Funding

As an investor, I come across several people seeking to get funding for their ideas or business.  Some of them have already sought funding through crowd-funding portals such as Kickstarter or Indiegogo without having to give up equity in the company but are still in need of additional funds.  Others have grown organically and are generating revenue but are also in need of additional funding in order to take their business to the next level.  

However, not all of these great ideas and/or business concepts will get funded through traditional means of investing such as venture capital or an angel investor.  The reason being is simple.   Investors in startups acknowledges the risk involved and the low probability of success.  In order to mitigate the risk, the investor has to mitigate it in two ways.  First, diversify the investment portfolio by planting the seed in several different kinds of startups.  There is no way of knowing for sure which ones will flop, which ones will get sold to Google, and which ones will become the next Google.  

Second, make sure that there are enough influx of cash to capture market share and/or to keep the traction alive.  To the second point, it is the difference between an indie film and a Hollywood film.  Certainly one is not necessarily better than the other, but the films made in Hollywood have the marketing dollars to reach out to the vast majority of audiences.  This same principle applies to startups.  

Also given the high degree of risk, the investments has to yield a high degree of reward.  Sure, there are businesses that never breaks above a $100K in revenue but still manages to survive for a long periods of time. However, where would the return on investment be when hundreds of millions of dollars has been invested in a portfolio of successes and failures.  For venture capitalists and angel investors alike the successful company has to yield enough return to cover the losses of the failed ones.  So, where can these businesses with a decent idea that may not generate astronomical returns go for funding? The answer to this conundrum can be found through equity crowd-funding.  

Equity Crowd-Funding portals can be both a blessing and disruption to VCs and angel investors.  There are ideas out there that are too far fetched and possibly born way before its time that gets easily passed up.  These ideas gets passed up because there are no relative comparable to assess the risk of the enterprise.  There are other ideas where the management team is too inexperienced and untested to just write a check.   The risk here is that they may present an idea that looks good on paper but may not be able to fulfill on the promise of making it possible.  For example, a great medical technology that promises to replace the harmful radiation of x-rays.  

What equity crowdfunding can do for VCs and Angels, me included is to screen out the bad from the good.  It also allows an unproven entrepreneur to showcase his or her capabilities to bigger investors.  For the equity crowdfunders, the loss from investing in such enterprise will not be so bad due to the small amounts of money that an individual is investing.  The best outcome for crowdfunders should be to limit the total pot of money to the amount they feel comfortable donating without getting anything in return.  Otherwise, it would be no different than playing the odds at Vegas.  

Personally, I am for crowdfunding and crowdfunding for the little guys who can only invest a couple of grand.  I also understand the opportunity cost this will cause for a traditional investor of this space, especially if the very successful enterprise gets enough money through crowd source and does not need it from us.  But overall, entrepreneurship is the new revolution and how big or small the enterprise, they all need a fighting chance.   

 

Innovation Through Studying Abroad

This was post that I posted on my mother's site as a guest post.  

You can visit her site at atozuhak.com

You can also visit her personal blog on uhakmom.com.  Warning, it is mostly written in Korean. 

The mantra in the business world is now, “Innovate or Die!”

The same goes for individuals as well.  We must all constantly innovate by improving ourselves and everything around us.  We must keep pace with the ever-changing global economy.  We are now living in the forefront of a technological revolution.  Although technology is making it easier for us to become more efficient and achieve more than we could have ever imagined, the technological revolution also means disruption to our traditional ways of thinking.  

We can no longer be confined to the comfort of the our own self-made circumstances.  The traditional ways of achievement to success is no longer a viable option for us to get ahead in this world.  This also means that the traditional educational route that everyone else is taking is actually hindering their full potential for creativity, problem-solving skills, and inspiration (the formula that leads towards innovation).  


To solve this conundrum, we need to break out of the mold that restricts us from reaching our fullest potential.  This means taking the necessary risks to explore the worlds unfamiliar to us.  My Alma Mater, NYU, has encouraged global education. From the first year to the last, they encourage their students to study abroad.  They have set up several study abroad locations such as NYU in London, NYU in Shanghai, and most recently, NYU in Abu Dhabi just name a few.  My experience in NYU in Shanghai was the most memorable.  Shanghai is at the forefront of becoming a major city, if it has not already.  It is a city sought after by several global enterprises.  A section of Shanghai, known as Pu-dong, is dominated with multi ethnic people and culture that spurs creativity.  I also had the privilege to work for one of Shanghai’s prestigious venture capital firm specializing in mobile technology, which even enhanced the experience.     

Interestingly enough, for the students living and studying in Shanghai, their spark of creativity are formed by studying in the United States as a foreign student or as an exchange student.  The current phenomena for the Chinese is to study in the United States and take creativity and inspiration back to their country.  Just as Shanghai was an eye opening revelation for me, the United States was also an eye opening revelation for them.  In the end, what eventually sparked creativity, problem-solving skills, and inspiration was in exploring the unknown and breaking out of their current normal.