Tuesday, March 31, 2009
A scientist's place in the sun
Nikolaus Meyer quit academia to launch a thin-film solar technology company, ... http://link.gs/txT1
Accidental entrepreneurs
Some have found success after never imagining they would start a business, ... http://link.gs/VhAE
Senators Call For More TARP Funds For Small Business
There’s more noise from Washington as politicians continue to respond to small businesses’ plea for looser credit.
This time, two senators - Mary Landrieu, D-La., and Olympia J. Snowe, R-Maine - are asking the Treasury to use bailout funds to guarantee bank lines of credit for small businesses.
In a letter to Treasury Secretary Tim Geithner, the two senators, who are members of the Committee on Small Business and Entrepreneurship, call the proposal a “common-sense solution,” saying it wouldn’t require Congressional approval and would give banks assurance that their loans will be repaid.
“Most critically,” the letter says, the proposal “will enable small businesses to obtain the capital they need to keep their doors open and employees on the job.”
Under the plan, in exchange for that government guarantee banks would be required to temporarily modify loans for “distressed but otherwise viable” small companies. The senators didn’t specify how much money this plan might require. The government has already said it will use $15 billion in TARP funds to stand behind SBA loans.
This isn’t the first suggestion from members of the Senate’s small business committee. Last week, Senators Landrieu and Snowe, together with New York’s Chuck Schumer, called for a specially appointed representative to help small companies export their goods and services.
Meanwhile, we continue to hear from small businesses that helping banks lend isn’t the way to help small-business owners. Many business owners don’t have the collateral or the cash-flow history to qualify for a bank loan. Entrepreneurs have historically relied on angel capital, venture money, personal credit and friends and family - none of which is easy to come by these days.
Readers, what do you think of the senators’ new suggestion? Would it do anything to help? Or is the government focused on the wrong things?
CFO leaving Facebook
Palo Alto-based Facebook confirmed today it is looking for a new chief financial officer with 'public company experience.' It's the latest sign that the site may be looking to go public in the not-so-distant future., ... http://link.gs/Gitr
What should Microsoft do with mothballed Encarta content?
There's a growing consensus among Wikipedia fans, and others, that Microsoft should donate the contents of the soon-to-be-defunct Encarta encyclopedia to the collaborative online repository that contributed to its demise. But Microsoft may have other plans -- even if doesn't yet know what they are.
In answering my initial set of questions about Encarta's planned closure yesterday, the company made it clear that it's trying to figure out whether it could offer some other product better-suited to the market.
"The decision to exit the Encarta business is one piece of a broader strategy to continue to evolve our product offerings to address the next wave of people’s search and research needs," a Microsoft representative said in an email. "We will continue to evaluate online reference business opportunities and will consider how Encarta and key learnings acquired over the past nearly 20 years of developing it can inform and strengthen our future educational solutions."
Particularly in the area of Internet search, the Encarta content has always seemed like an underutlized asset. Microsoft has offered free access to Encarta via its search engine, but the company has never quite figured out how to leverage Encarta into a big competitive differentiation against Google and Yahoo.
Could the closure of Encarta let Microsoft do something truly innovative with the content on its own? It's not clear, but given the possibility, it might be difficult to persuade the company to loosen its grip on the material, let alone donate it wholesale.
But it's worth a try. As he noted in the comments on our earlier post, Mathias Schindler of Wikimedia Germany has contacted Microsoft about the possibility, and others have been making similar efforts.
Wikipedia isn't the only option. Larry Sanger, a co-founder of Wikipedia now leading the alternative Citizendium.org, said via phone this morning that his group is also interested in talking to Microsoft about a donation of Encarta content. Alternatively, the group may also be able to arrange the funds for a purchase, he said.
Citizendium recently surpassed 10,000 articles, and Sanger predicted that an infusion of Encarta content would get even more people involved in the site.
For companies such as Microsoft, one challenge with encyclopedias is that they rapidly become worthless, from a business perspective, if people aren't updating them, Sanger noted.
"A lot of work went into creating those encyclopedias, and it’s just a huge shame if people can’t benefit from it," he said.
Microsoft hasn't yet responded directly to my follow-up question about whether it would consider any donation of Encarta content. I'll update this post depending on the response.
In the meantime, Tom Corddry of the original Encarta team offers his thoughts on the encyclopedia's demise in this illuminating comment on the New York Times' Bits blog.
"We expected from the beginning that Encarta would eventually be superceded by online information-seeking," he writes. "As brilliant as Wikipedia is, I don’t think that Wikipedia by itself killed Encarta. I think the Web as a whole made Encarta obsolete."
Update, 9 a.m.: It appears that Microsoft is, in fact, looking to make further use of the Encarta content on its own. Here's what the company said in response to my question about the possibility of donating the material to Wikipedia:
Microsoft’s vision is that everyone around the world will have access to quality education, and we believe that we can use the learnings and assets we’ve accrued with offerings like Encarta to develop future technology solutions that will help us realize that vision. As we shift our investments away from content creation, we are able to place an even greater focus on the future innovations that will allow consumers to do more in the way of accessing, creating and sharing content.
That said, we are looking at ways to utilize what we’ve learned to inform and deliver on those innovations. While Encarta will no longer be available as we know it after October 2009, you will see the essence of the offering come through in future innovations. Stay tuned.
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High-tech workers remain well paid in Washington, report finds
High-tech workers in Washington state earned an average wage of $95,900, the third highest in the nation, according to the annual CyberStates report from TechAmerica.
In the past, the state has ranked first in high-tech wages in part because of the wealth created by Microsoft. The annual report, which ranks wages, employment, research dollars and other factors for every state, also found that Washington has the largest number of people working in the software publishing business. (47,600)
The employment numbers aren't quite as valuable since TechAmerica relies on state data from 2007, but even so it shows that a health ecosystem has grown around Washington's tech community. According to the report, 11,300 jobs were added in the tech sector in 2007, bringing total employment in the state to 174,100.
That made the state one of the biggest gainers, behind Texas (14,700 new jobs) and Georgia (13,100 new jobs).
Other findings:
--174,100 high-tech workers in 2007 (12th ranked cyberstate)
--High-tech firms employed 72 of every 1,000 private sector workers in 2007, ranked 7th nationwide
--High-tech workers earned an average wage of $95,900 (3rd ranked), or 115 percent more than Washington's average private sector wage
--A high-tech payroll of $16.7 billion in 2007, ranked 8th nationwide
--7,700 high-tech establishments in 2007, ranked 16th nationwide
-- 1st in software publishers employment with 47,600 jobs
--8th in electromedical equipment manufacturing with 3,600 jobs
--13th in R&D and testing labs employment with 20,100 jobs
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Counting down to Conficker
The computer security world is in suspense as the clock ticks down toward the April 1 climax of the potentially nefarious Conficker worm. The worm targets a vulnerability that Microsoft patched last October, but it has continued to spread to unpatched machines, which are set to use peer-to-peer technology to "get further instructions."
Security researchers aren't sure what will happen. In the meantime, one good resource is USA Today reporter Byron Acohido's Last Watchdog blog, which has been tracking the worm and offering tips to see if your machine is infected. See Microsoft's security page for more.
A "60 Minutes" report Sunday night stirred up additional concerns about the worm, but the Wall Street Journal's Ben Worthen, for one, cautions that it's possible that people are overreacting to efforts by security companies to drum up business.
"No one knows who controls Conficker, so it could be controlled by terrorists," he writes. "It could also be controlled by the kid who played Urkel on 'Family Matters.' "
Microsoft last month formed an alliance to fight the worm, and offered a $250,000 reward in an attempt to find the people who started it.
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Rekindle those risk-taking animal spirits
The spontaneous urge to action that stimulates any recovery will be triggered if entrepreneurs are unshackled by the lawmakers, writes Luke Johnson, ... http://link.gs/rqrf
Climate for Angel Investing Continues to Look Bleak
With bank financing so tight, many entrepreneurs hope to find angel investors to provide them some seed money. But there’s new evidence that even angel investors are scaling way back – and will continue to.
The Center for Venture Research at the University of New Hampshire yesterday released its year-end report of angel investing in 2008, showing that angel investing dollars fell 26.2% over 2007, to $19.2 billion. The total number of angel deals fell only 2.9%, to 55,480.
What this means: Interest among affluent individual investors to invest in small growing companies hasn’t abated much – but those investors are willing to devote fewer dollars to each deal. “They are committing less dollars resulting from lower valuations and a cautious approach to investing,” said Jeffrey Sohl, the Center’s director, in a news release.
The real drop-off in angel investing appears to have started in the second half of 2008, since a mid-year report by the Center found only very slight changes in angel investing up to that point compared with 2007.
The question moving forward is whether angel investing will rebound or continue to get worse.
Scott Shane, an entrepreneurship professor at Case Western Reserve University, predicts that the number of accredited angel investors – who tend to be angels who join organized angel-investing networks and invest in high-growth start-ups that go on to win venture capital – will drop off quite significantly. Prof. Shane points to a Wall Street Journal article showing that the number of U.S. households with net worths of at least $1 million and those with at least $1 million with assets available to invest have shrunk considerably in recent months, reaching 2003 to 2004 levels.
This only spells bad news for angel investing, since it’s these wealthy Americans who tend to join angel investing groups, he writes on USNews.com.
“Recent indicators suggest a significant decline in accredited angel investment activity in the near future, if we haven’t seen that decline already,” Mr. Shane says.
Have you ever tried for or received an angel investment? Do you expect the climate for angel investing will get better or worse in coming months?
Study: Enforcement spurs rise in Web sex arrests
More people have been arrested in recent years for sexually soliciting youths online, but the sharp increase comes from better enforcement, and the Internet remains a relatively safe social environment, researchers said in a new study.
In a report to be released Tuesday, the researchers saw a nearly fivefold jump in arrests for soliciting undercover investigators who posed as juveniles '” to 3,100 in 2006, from 644 in 2000, the last time the study was conducted., ... http://link.gs/dqTD
In a report to be released Tuesday, the researchers saw a nearly fivefold jump in arrests for soliciting undercover investigators who posed as juveniles '” to 3,100 in 2006, from 644 in 2000, the last time the study was conducted., ... http://link.gs/dqTD
Facebook, Netflix, EA among new wave of Windows Mobile apps
Microsoft, trying to build new momentum for its Windows Mobile platform, tonight named some of the initial companies expected to release apps for the Windows Marketplace for Mobile store after it debuts later this year. The Redmond company is trying to counter the momentum Apple has seen with its popular iPhone apps.
Here's the list issued by the company in a news release this evening.
AccuWeather.com., The Associated Press, CNBC, Developer One Mobile Software, EA Mobile, Facebook, Gameloft, Glu Mobile, Handmark, Ilium Software Inc., Jeyo Inc., Kinoma, LiteScape, Magmic Games, Melodis Corp., MySpace, Namco Networks, Netflix, Pandora, PhatWare Corp., Resco s.r.o., ShoZu Inc., Sling Media, Inc., SBSH Mobile Software, Spb Software, Web Information Solutions Inc. and Zagat Survey.
In addition, Microsoft gave more details about Windows Marketplace for Mobile, saying that people will be able to pay for apps either by credit card or by having charges appear on their phone bills. The company announced a 24-hour return policy for apps, letting people get refunds within a day of purchase. And Microsoft said wireless mobile operators will be able to have branded sections within the Marketplace to be able to offer apps and services of their own.
Lastly, Microsoft said it will be working with top designers, starting with Isaac Mizrahi, to create exclusive themes for customizing Windows phones.
The company released the list in a preview of its news at the CTIA Wireless convention in Las Vegas this week. Microsoft is expected to show the new Windows Marketplace for Mobile at the event. Robbie Bach, president of Microsoft's Entertainment & Devices Division, is slated to give a keynote address Thursday morning.
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Microsoft adds another Yahoo exec, this time in data center unit
This is starting to get almost funny. Microsoft today confirmed that it has added hired yet another Yahoo executive, operations vice president Dayne Sampson -- the latest in a series of Yahoo engineers and executives to make the switch to Microsoft following its unsuccessful bid to acquire Yahoo last year.
Sampson is joining Microsoft's Global Foundation Services team, which is responsible for its data centers and related infrastructure.
Microsoft's statement: "We're very excited to have Dayne Sampson join the team, reporting to Debra Chrapaty, corporate vice president, Global Foundation Services (GFS). Operations and foundation services are key to delivering the Microsoft Software plus Services vision, and Dayne's extensive operations and industry experience will be a strong asset for GFS and the company."
AllThingsD reported the news this afternoon. Last week, paidcontent.org reported that Jan Pedersen, formerly of Yahoo, had joined Microsoft as its Live Search chief scientist.
At Microsoft they join Yahoo alumni including Live Labs head Gary Flake, MSN executive producer Scott Moore, search veteran Larry Heck, search engineer Sean Suchter and Qi Lu, the new president of Microsoft's Online Services Business.
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Internet advertising holds up in '08 while newspapers sink
Internet advertising is not growing as fast as it once did, but it is still outpacing some of the more traditional advertising channels like newspapers and television. Advertisers spent $23.4 billion online last year, up 10.6 percent over 2007, according to the 2008 year-end report from the Interactive Advertising Bureau. [PDF-19 pages] That compares to the entire advertising sector, which Nielsen said was down 2.6 percent last year.
Meanwhile, the battered newspaper industry saw its print advertising drop by 17.7 and online advertising revenue dip by 1.8 percent last year, according to a report by TechCrunch based on numbers from the Newspaper Association of America.
“We are seeing an ongoing secular shift from traditional to online media as marketers recognize that ad dollars invested in interactive media are effective at influencing consumers and delivering measurable results,” said IAB president and CEO Randall Rothenberg in a release.
Online advertising has a big impact on a number of Seattle area companies, from powerhouses like Microsoft to small startup companies.
Search advertising held the biggest share of the $6.1 billion invested during the fourth quarter, accounting for 46 percent. That was followed by banners ads (21 percent) and classifieds (13 percent). Here's a more in-depth breakdown from the IAB:
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Report: NY Times and Amazon talked partnership in the '90s
A new article by Vanity Fair reveals an interesting tidbit about a '90s flirtation between the New York Times and Amazon.com. In a piece titled "The Inheritance," writer Mark Bowden chronicles NYT publisher Arthur Ochs Sulzberger Jr.'s efforts to keep the storied newspaper alive in today's rapidly changing media environment. Bowden talks to former Times CFO Diane Baker, who said she forged a major deal with Amazon.com, only to see it shot down.
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, ... http://link.gs/Utj8
Here's an excerpt:
Her biggest disappointment came when she crafted a potentially lucrative partnership with Amazon.com, already the biggest bookseller on the Internet. The Times would link all the titles reviewed in the paper’s prestigious Sunday Book Review section, ordinarily a money drain, to the online bookseller and receive a percentage on every book sold. “We could have made the Book Review into a big source of revenue,” she recalls. Baker knew that Amazon.com planned to eventually sell everything under the sun, to become the first digital supermarket. Not only would the deal have produced revenue from book sales, it would also have cemented a partnership with a tremendous future. She envisioned the newspaper as a virtual merchandising machine. Instead of the old carpet-bombing model of advertising, it would in effect target ads to readers of specific stories. “You know what they said?,” Baker recalls. “They said, We can’t do it, because Barnes & Noble is a big advertiser.”
It certainly would have made for an interesting linkup.
[Via GalleyCat]
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The back story on Entellium's failure to complete audits
With the dust finally starting to settle in the debacle known as Entellium, one question still remains. How did the fraudulent activities of Parrish Jones and Paul Johnston -- who were sentenced to prison Friday after inflating revenue -- go undetected for four years?
Shortly after the fraud came to light last October, we reported that audits were never completed at the Seattle software startup. Experts at the time said that a simple review would have uncovered the fraud, causing a debate about the role of the company's primary venture backer: Ignition Partners.
At the sentencing hearing Friday afternoon, some interesting details emerged about the audits, the responsibility of the board and why it is important to blow the whistle.
Assistant U.S. Attorney Carl Blackstone argued that Jones and Johnston repeatedly "stonewalled" requests for audits and actually torpedoed a $100 million buyout offer from Intuit out of fear that the illegal activities would come to light.
As the chief financial officer and gatekeeper of the financial records, Jones routinely stood in front of the board and provided false figures, said Blackstone. It started in early 2005 after Entellium missed revenue goals. Johnston purportedly asked Jones to manipulate sales for one of the company's products, with the inflated figures incorporated into investor presentations.
"When they've got the CFO in their board room telling them these are the revenues of the company, do you really think the company needs to say: 'Well, maybe the CFO is lying to me?' Of course, not," said Blackstone. "They trusted him, they relied on him and he abused that trust."
Defense attorneys for Jones painted a different picture, arguing that the 35-year-old executive actually was taking steps to stop the fraud as early as May 2008. Depressed and unable to sleep, Jones arranged for a full audit of the company's books in mid-2008, knowing that it would reveal the false revenue numbers, according to court documents filed by the defense. On August 5, Jones led an effort to hire the accounting firm of Moss Adams to conduct an audit, defense documents say.
Just a few days before the audit was to be completed, the board books were discovered by an Entellium employee showing the false revenue figures. On October 7, Jones and Johnston were arrested.
Attorneys for Jones wrote that it was "oddly one of the happiest days of his life" since he no longer had to keep the secret of the accounting irregularities. They also argued that the CFO didn't abuse his position of trust with the venture investors, placing some of the blame on the shoulders of the company's largest venture backer: Ignition.
Jones' attorneys wrote in court documents filed last week [PDF-31 PAGES]:
All of the investors had the ability to call for an inspection of Entellium’s books. All of the venture capital investors had the ability to request an audit of the books. One of the investing venture capital firms, called Ignition, had two seats on the Entellium Board of Directors, one of whom was a former investment banker. If any of the investors had even glanced at Entellium’s financial statements, much less completed an audit, the misrepresentations would have been immediately exposed.
But Judge Richard Jones disagreed, saying that the very title of CFO indicated his important role in the company. And the judge noted that shareholders were prevented from making informed investment decisions because of Jones' actions.
"The test is not whether investors have the ability to call for inspection or the option of requesting the audit of Entellium's books. The real issue is that persons holding positions as CFOs have a duty to provide reliable and accurate information, and certainly not fraudulent or misleading information," said Judge Jones. "When you look at just the title itself, it speaks loudly and clearly: Chief Financial Officer."
Blackstone discounted characterizations by Parrish Jones' attorneys that the former CFO was guilt-ridden over the fraud and tried to set the wheels in motion to stop it.
A letter submitted by Ignition on the day of the sentencing hearing indicated that they had asked for audits dating back to 2006 and were always met with excuses by the executives. Jones did not try to stop the fraud, with Blackstone arguing that the CFO could have easily contacted the board if he wanted to shed light on the situation.
"He did what he was told for four long years and he did not blow the whistle," said Blackstone, adding that Jones didn't have the "guts to do what was right."
If he had simply shown the courage to step forward early on, Blackstone said Entellium may have survived.
"What is so very tragic about what Mr. Jones did, is he had the ability to stop this thing from the get go," said Blackstone. "All he had to do was say: 'Mr. Johnston, we can't do this.' Had he done that, this company would probably still be alive today."
Jones, who has five children, was sentenced to two years in prison. Johnston, a citizen of the United Kingdom with two children, was sentenced to three years.
Entellium was backed with more than $50 million in venture funding.
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Monday, March 30, 2009
Should Taxpayer Money Be Used to Fund Local Chambers?
Local governments’ subsidies for area Chambers of Commerce, which help small businesses with various services, are getting more scrutiny from local officials, with some cutting them back, according to a report over the weekend by the Salt Lake Tribune.
The article asks whether Chambers of Commerce deserve taxpayer money, and what role should public entities play in supporting organizations whose purpose is to advance private-business interests.
In Utah, many are expressing frustration with the cushy deals Chambers of Commerce are getting from cities. The South Salt Lake Chamber, for example, receives $50,000 a year from the city, plus free office space. “Obscene is the word for it,” says former Mayor Wes Losser, who points out that entrepreneurs, not taxpayers, should support the business association. In his role, he penciled in a zero in his budget for the Chamber every year. Other cities in Utah also are getting 35,000 to $60,000 per year in funding.
Chamber supporters say that these government payments help support economic development and sustain area businesses in a tight economy. Chamber initiatives encompass such efforts as supplying training for small businesses, publishing business directories, sponsoring community events and serving as the welcome mat for new businesses. “If we’re able to help the businesses become stronger and stay here and be profitable, it will ultimately mean more revenue to the city,” Stacey Liddiard, president and chief executive of the South Salt Lake Chamber, told the Tribune.
Other Chambers are being responsive about taxpayer funding. In South Jordan, Utah, the chamber said that it will no longer seek a city subsidy; instead, the group is offering a fee-for-service contract to help local businesses. Before the change, taxpayers provided 44% of the chamber’s budget. “We don’t want a subsidy,” says Paul Pugmire, acting president of the South Jordan chamber, told the Tribune, as part of the chamber’s plan to be self-sustaining.
Should cities be supporting local Chambers of Commerce? Or are there better ways to support local businesses?
Photo: Associated Press
Next up for Microsoft's 'real life' Windows star: 7-Eleven ads
After setting the tech world abuzz with her criticism of Apple's Mac prices, the star of Microsoft's latest Windows ad will be featured next in promotional videos for 7-Eleven, according to a public Web site where she chronicles her burgeoning acting career.
Lauren's transition from Windows to Slurpees won't exactly bolster Microsoft's assertion that its ad was a true-to-life account of her search for a new computer. Nor will her extensive acting experience, which so far encompasses more than 20 roles in television, theater, Internet videos, and film -- including a turn as a certified terror-movie "hottie."
However, her site does at least stick to Microsoft's background story, saying she was hired for a "market and research" job involving laptops and found out only later that it was for a commercial.
"Lauren" turns out to be Lauren De Long, a Los Angeles-based actress. We contacted her via phone to ask what she actually thinks about her HP laptop -- which one critic describes as "the epitome of what people dislike about PCs."
She declined to comment, saying she had signed a confidentiality agreement and wanted to check first to see if she was allowed to speak to the press.
Microsoft had declined to make her available last week amid questions over the company's claims about the authenticity of the ad. Anne-Marie Taylor, the wife of former Seattle P-I investigative reporter Daniel Lathrop, did some creative digging to find De Long's public Web site (which makes no secret about her identity or her role in the Windows ad) and passed the link along.
Real or not, the account of De Long's computer purchase has succeeded in highlighting the price differences between Macs and Windows PCs -- simultaneously reigniting the debate over the differences in quality between the two types of machines.
The real winner in all of this may be De Long, whose acting resume is bound to grow. According to her site, the 7-Eleven videos are for a new ad campaign to appear on flat-panel screens inside the convenience stores, promoting its products.
"This is the perfect shoot for me," she says on the site, "because I LOVE junk food."
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TomTom will remove some Linux features in Microsoft settlement
Microsoft and portable-navigation company TomTom have settled the dueling patent-infringement lawsuits that stirred up a big controversy over Linux in recent weeks, according to a news release issued this morning.
Specific financial terms of the settlement weren't disclosed, but the news release says TomTom "will remove from its products the functionality related to two file management system patents." Those patents were previously reported to relate to TomTom's implementation of the Linux kernel.
"TomTom will remove this functionality within two years, and the agreement provides for coverage directly to TomTom’s end customers under these patents during that time," the news release says.
Microsoft had accused TomTom of infringing eight of its patents. The suit drew widespread attention because three of the alleged violations involved TomTom's implementation of the Linux kernel, although Microsoft said at the time that it didn't intend for Linux to be the focal point of the case. TomTom later filed its own suit alleging that Microsoft's Streets & Trips software violated its patents.
Peter Spours, Director of IP Strategy and Transactions at TomTom N.V., is quoted in the news release: “This agreement puts an end to the litigation between our two companies. It is drafted in a way that ensures TomTom’s full compliance with its obligations under the GPLv2, and thus reaffirms our commitment to the open source community.”
Still, the open-source community will no doubt be sorting out the potential implications as it assesses the public outline of the settlement. The provision for TomTom's customers is similar to a patent protection extended in Microsoft's controversial agreement with Linux vendor Novell.
Microsoft has long claimed that Linux and other open-source programs violate its patents, but the TomTom case was the first time the Redmond company went to court over the issue. Microsoft said previously that it did so only as a last resort, after it was unable to reach a licensing agreement with TomTom over the eight patents.
According to the news release, the five-year agreement calls for TomTom to pay an undisclosed sum for coverage under the eight patents that Microsoft cited in its suits. However, Microsoft isn't required to pay TomTom for coverage under the four patents cited in the navigation company's countersuit.
TomTom spokesman Kevin Carter confirmed the settlement via phone but declined to comment further.
Microsoft's lawsuits were filed Feb. 25 in U.S. District Court in Seattle and the International Trade Commission. TomTom's countersuit was filed March 16 in the U.S. District Court for the Eastern District of Virginia.
[Post updated at 9:45 a.m. with more details and background.]
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Ignition sets up offices in Seattle
Four partners from the Bellevue venture capital powerhouse Ignition Partners have set up offices in downtown Seattle, operating under the name of Ignition Capital. The partners -- Jon Anderson, Robert Headley, John Zagula and Rich Tong -- will continue to focus on later-stage investments while the remaining team at Ignition Partners invests in early-stage deals.
Ignition Partners' Brad Silverberg said that Ignition Capital is not new, with the growth fund established in 2007 with $275 million as part of the firm's larger fundraising efforts. The office was established several months ago, in part to reduce the commute times for some of the partners, said Silverberg.
The partners continue to work a few days each week from Bellevue, where they participate in investor meetings and other functions.
"I don't think we see any less of them than we did before," said Silverberg, who downplayed the significance of the news reported today by Xconomy. Citing an unnamed source, Xconomy reported that the new office is part of a larger reorganization at the firm.
Silverberg said the four partners in the downtown Seattle office -- all of whom are still listed on Ignition Partners' Web site -- continue to work together on investments with other partners in the firm. "It is all complementary stuff," said Silverberg. "I don't think of it as a split."
There is one overall management company, with each fund administering investments, he said.
Ignition Capital's office and Web site does create more definition between the firm's various entities, which include the traditional early-stage venture capital funds, the growth fund for later-stage deals and a Chinese fund known as Qiming Venture Partners.
"It is one firm -- three funds," said Silverberg. He said there's a 90 percent overlap in limited partners between Ignition Capital and Ignition Partners.
Ignition Capital's portfolio includes later-stage companies such as Mercer Island-based Liberty Dialysis and Miramar, Florida-based SeaMobile, as well as Chinese companies like eHi Car Rental and Oriental Cambridge.
Tong, Zagula and Headley all have spent time in China as part of Ignition's efforts there. Zagula and Tong could not comment immediately when reached today on their cell phones, with Zagula involved in a meeting and Tong boarding a plane.
A source familiar with Ignition said that Tong and Zagula have not been involved with early-stage companies for some time. In addition to the partners, the team at Ignition Capital includes Shawn Bohnert, Rennie Coit and Ty Graham. According to the Web site, Bohnert is involved in the creation of a new Australian energy investment business called Ignition Energy. Coit is involved in health care sector, while Graham focuses on telecommunications.
Having a separate fund to manage different types of portfolio companies is not unusual. Large Silicon Valley firms such as Sequoia, Kleiner Perkins and Draper Fisher Jurvetson operate various funds for different geographic regions and styles of investment.
Ignition, which has encountered a rough patch in the past six months after dealing with the Entellium fraud case and layoffs at portfolio companies such as Jobster, manages $2.5 billion.
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Visible Technologies departs Pioneer Square for Factoria
Visible Technologies has outgrown its Pioneer Square office space and plans to move to Bellevue's Factoria neighborhood next month. The 82-person company, which helps corporations track discussions on social networking sites and blogs, plans to take about 15,000 square feet of space at 3535 Factoria Blvd. That's office space formally held by F5 Networks.
Visible -- backed by Ignition Partners, WPP and others -- has raised a total of $15.5 million. The move follows the appointment of technology veteran Dan Vetras as CEO, who joined the company in December.
Blake Cahill, senior vice president of marketing at Visible, said that the company had been looking for space before Vetras' arrival.
Pioneer Square, with its quirky old brick buildings, has long been a hotbed for technology startups in the Seattle area. Earlier this month, TechFlash reported that Cray moved from its longtime offices in the historic neighborhood to new space downtown.
As the economy sours and vacancy rates rise, more companies may decide to seek new office space. We'll be watching, so let us know if you hear of any other companies that are on the move.
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Wikipedia kills Encarta -- and Microsoft pronounces it dead
Microsoft will discontinue publication of its MSN Encarta online reference site and related software products later this year, according to a notice quietly posted on the site, as spotted by Emil Protalinksi of Ars Technica. The decision comes after years of competition with Wikipedia, the popular online encyclopedia that relies on the contributions of experts and other users for its material.
"Encarta has been a popular product around the world for many years," the official notice says. "However, the category of traditional encyclopedias and reference material has changed. People today seek and consume information in considerably different ways than in years past. As part of Microsoft’s goal to deliver the most effective and engaging resources for today’s consumer, it has made the decision to exit the Encarta business."
The decision takes effect Oct. 31 for most Encarta sites around the world, and on Dec. 31 in Japan. The company says it will stop selling Encarta software products in June. I've asked Microsoft how many jobs will be affected, among other details, and I'll update this post depending on the response.
For a story about Encarta five years ago, I spoke with Wikipedia founder Jimmy Wales. "Clearly it's difficult to sell something in a shrink-wrapped box if something far superior is available for free on the Web," he said at the time. He also predicted -- presciently, as it turns out -- that it would become "harder and harder" for Encarta to find an audience.
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Spaltudaq now Theraclone, announces HIV findings
Spaltudaq -- which may have had the hardest name to pronounce in the history of Seattle startups -- has changed its name to Theraclone Sciences. More importantly, the biotech company announced today new research that could be used to "reverse engineer" a vaccine for HIV.
Theraclone is looking to use the neutralizing effects of monoclonal antibodies from patients who have a slow progression of the disease. "Sera from such patient samples often have the ability to neutralize a broad range of HIV viruses, suggesting the possibility of antibodies capable of controlling HIV infection and progression," the company wrote in a release.
A product of the Seattle biotech incubator Accelerator, Theraclone raised $29 million in venture funding in 2007. Its backers include ARCH Venture Partners, Canaan Partners and Healthcare Ventures.
When the company started, it was looking at developing therapeutic antibodies for cancer.
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Confirmation Hearing for SBA Appointee to Be Wednesday
The confirmation hearing for Karen Gordon Mills, President Obama’s choice to lead the Small Business Administration, is set for Wednesday in the Senate’s Small Business and Entrepreneurship Committee.
Some in the small-business community wondered when her confirmation hearing would begin, considering the agency has received much attention in recent weeks. The Obama administration unveiled a new program recently to spend up to $15 billion buying up SBA-backed loans on the secondary market along with providing stimulus money to reduce SBA loan fees and other program initiatives. The agency has also come under scrutiny, with a new Government Accountability Office report showing the agency’s HUBZone program, which helps provide federal contracts to businesses in low-income communities, is rife with fraud.
It’s not that unusual, however, for a newly appointed SBA chief to not be confirmed until the April after Inauguration Day.
Some small-business advocates criticized Ms. Mills’ appointment, given her background as a venture capitalist (read more about her experience here). They would rather see someone with experience running a small business, rather than experience mostly working with high-growth firms. Others believe Ms. Mills’ background in funding high-growth firms might allow her to help the agency assist those businesses better.
Darryl K. Hairston, SBA’s acting administrator, said in an interview with The Wall Street Journal last week that he isn’t sure what his role will be once the new administrator is confirmed.
Readers, do you think Ms. Mills seems a good fit to lead the SBA, given her experience?
Anger over refusal to scrap levy
Entrepreneurs this week expressed anger and disappointment at the government's 'insensitive' refusal to scrap the 5% business rates increase, ... http://link.gs/WrLq
Don't fear deflation 'bogeyman', says retailer
Concerns over deflation are overblown as a drop in prices could lead to better deals and provide a much-needed boost to small and medium-sized enterprises, entrepreneurs have claimed, ... http://link.gs/WBKy
Make the most of 7-year cycle
I often provide mentoring for early stage entrepreneurs and it is always fun to discuss new business ideas with enthusiastic people, ... http://link.gs/8x8r
Can stress counselling be compulsory?
Due to the pressures of running a business during the economic downturn and the fear of losing their jobs, some senior members of my staff are becoming stressed, ... http://link.gs/On9o
Community approach to create a dream farm enterprise
What appears to be a rural idyll is entrepreneur Tim Waygood's unique community-based, sustainable and welfare-based project, ... http://link.gs/3rwX
This week's tech events
What's happening this week in Seattle tech? Danielle Morrill offers a look at some of the events around town. For more details, check out the Seattle 2.0 and TechFlash events calendars.
Seattle 2.0 Tech Events Rundown - Week of 3/30/09 from Seattle20 on Vimeo.
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Startup attorneys discuss how to navigate the economic morass
"RIFs." "Cram Downs." "The Zone of Insolvency."
Those are some of the buzzwords associated with today's harsh economic climate, all of which were addressed at last Thursday's very timely panel at the law firm of Fenwick & West. The 90-minute discussion -- titled "Operating and Financing a Venture-Backed Company in a Down Market" -- offered advice on how entrepreneurs, investors and directors can navigate the tricky morass known as the U.S. economy.
Just how bad is it out there? Fenwick employment attorney Daniel McCoy said his wife has taken to calling him the "grim reaper" because of the large number of layoffs he's been dealing with recently.
But maybe things are changing. "It's Thursday at 9 a.m. and I haven't done one layoff this week for a client, so that is a great sign," McCoy said. "Hopefully, I get through the end of the day tomorrow and I can say that this is the first week in a long time that I haven't done one or helped a client with one."
It's certainly ugly out there, but corporate attorney Michael Piraino offered some hope for the two dozen or so people in the room.
"Those companies that figure out how to adapt to this environment and really understand how to focus appropriately, I really think on the other side of this, those companies that survive are going to be in a fairly enviable position," he said.
Getting to that point is the key. And the four presenting attorneys offered ideas on the best way to achieve that in today's climate. And for those who don't, Piraino said they at least wanted to make sure those companies have a "soft landing" when they wind down.
Since venture-backed companies require capital to survive, Piraino said one of the key things they must first do is determine where their angel investors or venture capital investors stand. And that goes beyond what might be discussed in the board room, he said.
Too often, entrepreneurs are "surprised" when financial backers -- who once talked a "big game" -- don't have the capital to support the venture, he said.
Entrepreneurs also can underestimate the time commitment in the current fundraising environment, with Fenwick's Bill Bromfield saying it is taking about six months to close an early-stage deal.
"Be prepared for a long haul," he said. "This is not like the early days when people were giving you term sheets, and basically saying: 'hey can we be first on the list? There are a lot of question marks in the environment right now, so just be prepared."
One of the big issues facing venture-backed companies is how to handle "inside rounds," a venture deal where existing investors set new terms. Oftentimes, these involve lower valuations that can wash out the founders' holdings, said Bromfield. Those deals can be "very, very ugly," he said.
Bromfield's seen companies that were valued at 50 cents a few months ago, which are now being valued at 10 cents. In some cases, he said that puts the "squeeze" on founders who can see their ownership stake decline from 10 percent to as little as one percent.
That's an incredibly tough situation for an entrepreneur who needs cash to grow his or her business. And it could create potential legal problems if the company turns out to be successful, since the board members who approved the deal may have been conflicted in setting better terms for themselves in the down round.
In those "cram down" situations -- where existing shareholders have their stakes reduced -- directors and officers need to be very careful to make sure that it is absolutely the best deal for the company. In fact, Bromfield said people should avoid using the term.
"Remember, cram down -- bad. Creative dilutive financing - good," he said.
Whatever happens, entrepreneurs should not assume that they are going to "buck the established trend" on valuations or fundraising timeframes, said Piraino.
And he said that companies can also look at alternatives to angel or venture financing, tapping customers for pre-payments. They also can renegotiate venture debt, working with bankers to make sure the company is primed for long-term survivability.
Startup companies should also be looking hard at reducing the cash burn, while at the same time making sure that key elements of the business remain intact amid the cost cutting. It's a delicate balance, but those entrepreneurs with the proper focus might be able to survive.
"It is often hard to let go of that broad vision -- that billion dollar vision -- of what you aspire to be as a company," said Piraino. "But, if the choice is between survival and maybe narrowing that vision -- I don't want to say compromising it because that implies that you are giving up on it -- but perhaps taking a more narrow focused view now so you can get to the other end. It is better to live to fight another day."
If a layoff or reduction in force (RIF) is necessary, McCoy said that companies should set up a clear documentation process in order to protect themselves against discrimination or retaliation claims. In a bad economy, it is more likely that companies will be sued, he said.
Companies also need to be careful when implementing salary cuts or deferrals where they promise that workers will return to previous compensation levels once the financing is secured.
"Once you've done that, you've put yourself in harm's way in terms of making a commitment to that person," said McCoy, calling some of the 409A deferred compensation regulations a potential "minefield."
In fact, minefield is a good word to describe the overall situation for startups, which are hard enough to run in good times. Today, any number of things could cause a blow up.
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Sunday, March 29, 2009
Could laid off Microsoft workers spark a new innovation wave?
Microsoft is accustomed to seeing people leave the company. After all, with close to 90,000 employees, workers always are on the move. But The New York Times today contrasts the Microsoft employees who are now leaving because of layoffs with those who took off before to pursue everything from venture capital to charity work to space travel.
It is an interesting read. And it does have implications for the larger technology community in the Northwest. Will these laid off workers start new companies? Will they leave the region? Do they have the entrepreneurial chops to move from a big company mentality to a startup?
Some have theorized that layoffs at Microsoft actually could spark a new wave of innovation in the region, forcing highly educated workers to come up with something new. And unlike the last batch of ex-Microsoft workers -- many of whom left on their own at the turn of the last decade and were affectionately known as "Baby Bills" -- this new group may simply be hungrier to succeed.
That's because -- as The Times story points out -- they were not as richly rewarded as the Microsofties who left before them.
There's been an ongoing debate on TechFlash about this topic, with readers asking whether ex-Microsoft workers actually make for good entrepreneurs.
"Something the Seattle startup community really needs to work on is leadership development - being a rich ex-MSFT exec doesn't make you a good leader and in fact these things appear to be negatively correlated," wrote one reader.
But a lower level employee who never hit the big stock option paydays of the 80s or 90s may be a different story. It's unlikely that Microsoft laid off any of its top developers in the announced cut of 1,400 workers, but this outflow of talent into the community still will be interesting to watch.
I've actually been thinking about this issue over the past few days. That's because I've been asked by a consulting firm to talk to a group of laid off Microsofties about the entrepreneurial and venture capital process. It should be a gauge of the mindset right now.
What advice would you give them?
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A tragedy for champions of free markets
Our banks are on the rocks because a true sense of ownership, obligation, responsibility and prudence went missing in recent years, writes Luke Johnson, ... http://link.gs/e2YJ
Barron's on Amazon: from bomb to world's best retailer
Barron's gives a glowing take on Amazon.com in a new cover story titled "The World's Best Retailer," proclaiming, "This may be an opportune time to add shares of Amazon.com to your shopping cart and proceed to checkout." It's a remarkable U-turn for Barron's, which famously labeled the online retailer "Amazon.bomb" a decade ago.
Here's more from the new Barron's cover story (subscription required):
The stock makes sense because the retailer itself makes sense to smart shoppers. They don't waste valuable gas fighting for a parking space in a massive mall parking lot; they find prices that compete with Wal-Mart's and flirt with the Web's biggest bargains; and they can easily peruse a vast array of merchandise -- ranging from gigantic TVs to Elmore Leonard novels to disposable razors. What's more, their purchases tend to get delivered as promised.
In 1999, Barron's had a decidedly different take on Amazon, saying it was "looking more and more like a traditional retailer, complete with an expensive network of warehouses loaded down with inventory," ZDNet notes.
Here's a Barron's video with details on the cover story.
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Saturday, March 28, 2009
Amazon hedging its bets with streaming video business
Amazon.com is ramping up its Video on Demand business of streaming movies and TV shows from the web, this week confirming plans to offer titles in high definition this year. Amazon primarily offers streaming video for purchase or rent. But it is also experimenting with an entirely different business model for video through its Internet Movie Database (IMDb) website. IMDb offers a select number of videos for free — and has signaled it wants to do the same with its entire library of titles.
The twin approaches show that Amazon hasn’t committed itself to a single business model when it comes to streaming video, and is hedging its bets between pay-per-view and ad-supported video. Which model Amazon eventually chooses — rent or purchase, free with ads, or a hybrid of the two — will shape how the retailer takes on its major competitors in the web video market, including Netflix, Apple’s iTunes store, and website Hulu.com.
“Amazon is being smart,” said Matt McRae, vice president of products at Vizio, a consumer electronics company that recently struck a deal to incorporate Amazon Video on Demand into a new line of high-definition TVs. By experimenting with paid and free videos, “they get to see how customers react and what kind of content they prefer,” he said.
Amazon spokesman Drew Herdener said Amazon Video on Demand and IMDb “both are building separate, unique offerings for customers.” He declined to provide additional detail, but said the company is “refining our offerings for customers based on what our customers tell us they want and what we think they will enjoy.”
Companies have embraced an array of pricing models for streaming movies and TV shows. Netflix has a subscription model, offering streaming video only to members. Apple’s iTunes store sells videos for use on iPods and other Apple devices. Hulu.com offers free TV episodes and movies, with ads.
Amazon doesn’t break out sales from its web video services. But there are signs that streaming movies and TV shows are finding an audience online. Hulu, a joint venture of NBC Universal and News Corp., is currently ranked the No. 2 top online video brand by web measurement firm Nielsen Online, with more than 308 million video streams in February.
Amazon has been actively developing both sides of its streaming video business. The company has has been incorporating its Video on Demand service, which is stocked with new movie and TV releases, into a variety of television devices, including TV set-top boxes and high-definition TVs.
IMDd.com's free selection includes a lot of TV shows and older movies (many of them from content partners like Hulu), but IMDb founder Col Needham told a film conference this month that the movie trivia website aims to offer a much wider array of movies and other content for free.
Amazon acquired IMDb.com in 1998 for an undisclosed sum.
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Digital Products, Analog Lives
Frank Catalano: No one should be surprised that Redmond-based photo sharing and greeting company Smilebox is trying something new with advertising and distribution in the --well -- real world.
Earlier this month, Smilebox announced that it would experiment with placing an ad on the lower right corner of the front cover of Scholastic Parent & Child. At the same time, it packaged its Web application into boxes to be sold in such bastions of cinder block as Target, Fry's and Office Max.
Long-time industry observers like me could almost imagine the smirks of the high priests of the Digiterati. It's as though the Web-bred-and-borne company risks failing some kind of secret Internet purity test: a business which was spawned and conducts its business online trying innovative marketing offline? Why waste the time and money with traditional marketing media and distribution channels?
That thinking is so last century. Because we are now in a post-Web world, where smart retailers draw on the best of the physical and the digital. The archaic all-or-nothing mindset belies a reality that more than 15 years of the browser cannot change: consumers continue to live in the analog world, and only visit the digital one.
Those who forget this are likely doomed to fail, especially in a now-challenging economy. One of the highest-profile examples of this kind of misstep was a company which was once the leader in software retailing and is now no more than a fond memory, living on as a domain name for a storefront on Amazon.com: Egghead Discount Software.
Egghead made a number of mistakes ensuring its future as a high-point-value trivia question, but at its peak around 1990 it had more than 200 stores in the U.S. and British Columbia and equal amounts of revenue from retail locations and corporate accounts.
Is venture capital rating service theFunded really shutting down?
TheFunded.com, a Web site that allows entepreneurs to rate the performance of individual venture capitalists, is apparently shutting down on April 2, according to a message on the Web site. But TechCrunch's Michael Arrington is calling it an April Fool's joke, in part because of the message placed on theFunded's Web site. (Full message below) You be the judge, though I am sure there are more than a few VCs who wouldn't mind if it turns out to be true.
Full text of theFunded's message titled "Conclusion: Investors are Great:"
"On Friday, March 27th, TheFunded, Incorporated ('TheFunded' or 'we' or 'the Company'), in conjunction with counsel has concluded that venture financing and the purchase of preferred equity, herein referred to as 'investing' or 'investment' or 'investors', is both broadly and generally good for companies worldwide.
TheFunded will officially cease reviews on April 2nd, 2009, which, from time to time, reflect negatively on the many innumerable benefits of investors or investment or investing. We encourage companies to consider seriously taking investment, and we apologize for the following statement made in haste:
"investing is predatory", "over 75% of investors are bad", "avoid banned investors."
The Company further apologizes for making any other statements and causing questions to be raised regarding the ethics and the good reputation of investors. Further updates are forthcoming Wednesday, and we encourage every Member to take an investment and then post feedback on the positive and rewarding experiences in Open Letters."
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Active Answers: Microsoft tests new interactive search results
A small feature added to Microsoft's Live Search engine this week is the first step in a new effort by the company to make its search results more interactive and useful. Typing "flight status" into the search field now brings back not only links but also a second set of search boxes that prompts users to enter an airline name and flight number to see the status of a specific flight.
Microsoft calls the concept "Active Answers." The idea isn't new. But Microsoft is breathing new life into the concept and looking to roll out additional features that make use of "Active Answers" fields.
"We’re playing with differerent ideas like this," said Irving Kwong, a Live Search product management director. He declined to go into detail on possible future applications but explained that the idea is to increase the level of interaction with the results page, and make it easier for people to get the information they need.
To be sure, this isn't exactly a Google killer. Microsoft's search market share recently hit a new low in the U.S., and the company will need to do much more if it wants to reverse that trend. But it is one example of how Microsoft is continuing to tweak its approach in an effort to differentiate Live Search results pages.
Google has also implemented interactive search results, introducing a similar feature for booking flights four years ago, for example.
There is a risk of going too far with the Active Answers concept. If the search engine misinterprets a query as appropriate for an Active Answers box, when it's really not, that risks decreasing the relevance of the results overall. As a result, Microsoft is being selective with the Active Answers features it rolls out, to avoid those types of false positives, Kwong said.
After users type "flight status," entering the airline and flight in the Active Answers boxes takes them to another results page, with up-to-date flight information in a neatly packaged module at the top. That part of the process is called "Instant Answers," and the company has been doing that for a while, with NCAA Tournament results and the Oscars, among other subjects.
With the new Live Search flight status feature, it's also possible for users to get directly to the flight status Instant Answers module -- without first bringing up the specialized Active Answers search fields -- by simply typing the airline name and flight number into the main search box. But the Active Answers step is meant to help people who don't know to do that.
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Friday, March 27, 2009
How real is 'real-life' Windows ad? Apple sidewalk scene looks fishy
Microsoft is describing the latest installment in its "I'm a PC" ad campaign as a real-world account of a recent college grad's quest for a new computer -- ending triumphantly when she picks an inexpensive Windows PC over a higher-priced Mac. But if it is completely true to life, a closer look at the scene outside the Apple store reveals something very weird.
As "Lauren" walks into the store, a man is walking past the door wearing a jacket and jeans, with a camera hanging from his shoulder. The scene then quickly cuts to Lauren walking out of the store -- supposedly after investigating the available Macs -- and the same man is still walking by the store, his hand in exactly the same position, just a few paces ahead of where he was when she went in.
Now, it's possible that this is all on the up-and-up. Maybe the man was pacing in front of the door, waiting for his wife to buy an iPod. Maybe Apple employees are just that fast at explaining the MacBook pricing structure. Or maybe there's some other explanation.
But watching that part of the video, it's hard to escape the feeling that the ad was something less than a straight-up, by-the-book account of Lauren's search for a new computer. In fact, the scene feels more like a mistake involving an extra in a movie or TV show. Normally, that would be fine in an advertisement, of course, but the positioning of this ad as real life makes it different.
The company has said Lauren is an actress and office manager who responded to a Craigslist ad to be videotaped on her hunt for a computer, but she wasn't aware until the end of the process that she would be in a Microsoft ad. Microsoft declined earlier today to make her available for an interview.
I've asked the company to provide an explanation of the mystery man in the scene, and I'll update this post depending on the response. Here's the full video again if you want to watch the scene in real time.
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Former Entellium execs sentenced to two and three years in prison
Choking back tears in front of a packed courtroom, former Entellium executives Paul Johnston and Parrish Jones were sentenced Friday afternoon to three and two years in federal prison, respectively, for misrepresenting financial figures to the board of the Seattle startup company.
The sentences, imposed by U.S. District Judge Richard Jones in Seattle, were each less than the recommendation of the government, which had asked the court to put Johnston in prison for just under four years and Jones for slightly less than three.
"There's no one else to blame but myself," said former Entellium CEO Johnston in court, before the sentence was imposed.
Jones also apologized, saying "I accept complete responsibility for my actions."
In remarks to the court, Entellium investor Jeffrey Esfeld called Johnston the "worst kind of con artist" because he took advantage of personal relationships.
"He's an extremely smart, sophisticated and calculated person, which makes him very dangerous," said Esfeld, who personally invested $180,000 in the maker of customer relationship management software.
In asking for the stiffer sentences, U.S. Attorney Carl Blackstone said that Johnston and Jones held the trust of the board and employees. To whom much is given, much is expected, said Blackstone.
"They should have known right from wrong," he said.
Blackstone reserved several minutes for glowing remarks for Ignition Partners, the Bellevue venture capital firm that sunk millions of dollars into the ill-fated startup company. Because Ignition stepped forward and cooperated with the government, Blackstone called Ignition the "true heroes." Blackstone said they've been criticized on blogs as a "bunch of rich guys," but they actually did the right thing.
Entellium raised more than $50 million from Ignition, Sigma Partners and others. "It was devastating to Ignition. It was liked they were kicked in the gut," said Blackstone.
Not helping matters was the revelation by Blackstone that Entellium had received a buyout offer for more than $100 million from Intuit, the software giant that ended up buying the Entellium assets for pennies on the dollar in bankruptcy proceedings earlier this year.
The initial deal was scrapped in part because executives were worried that research by Intuit would bring the fraud to light, with Blackstone saying the company may be alive today had the executives done the right thing early on. He said Johnston and Jones just didn't have "the guts to do what was right."
In fact, Johnston admitted as much in his remarks when he said decisions were driven by fear of failure. "I guess that fear grew over time," he said. Dressed in prison garb, Johnston made an attempt to spot Ignition's Jonathan Roberts in the court room in order to apologize directly. (Roberts was not present.) Johnston said that Roberts -- a board member -- supported him.
"He didn't deserve what happened," said Johnston.
Johnston also apologized to the Entellium employees, which once numbered more than 200 in the U.S. and Malaysia. "I don't think I could look them in the face," he said. "I am sick to my stomach how I allowed this situation to materialize."
By the time Johnston tried to address his family members -- some of whom were in the courtroom -- the emotions had taken their toll on the former software executive. Holding back tears, Johnston barely could utter his final remarks.
"They know how I feel," he said. "I think I will stop now if that's OK?"
In addition to the prison sentences, both men must pay restitution. Johnston is on the hook for just over $2 million, while Jones must pay $864,754.
Judge Jones also ordered that Johnston and Jones provide 80 hours of service each at a homeless shelter or soup kitchen, in part to emphasize that some of the victims in the matter may end up in that situation.
"There's an abundance of collateral damage," said Judge Jones.
Both men had already received an "enormous break" in sentencing guidelines and could have been looking at as much as 10 years in jail, the judge said. And while recognizing the lack of criminal records, the numerous letters of support from community members and their strong family and friend network, Judge Jones said the two men were, at the end of the day, motivated by greed and the allure of a "lifestyle built on false pretenses."
"They still had countless opportunities to come clean and take a step forward well before the four years," he said.
Because Johnston is a citizen of the United Kingdom, he's likely to be deported after his release. Johnston is married with two children, with his wife currently collecting food stamps in order to make ends meet. Johnston's citizenship also may have an impact on the type of federal prison where he's incarcerated, with his attorney Robert Gombiner noting that Johnston won't be going to some cushy "Club Fed."
"He's going to be looking at that blank cell wall," said Gombiner.
Dressed in a gray suit and a gold tie, Jones declined to comment when approached by this reporter after the proceedings. "I am just going to go home," he said.
More to come.
Full press release from the U.S. Attorney's Office:
Two former executives of Entellium Corporation were sentenced today for Wire Fraud in U.S. District Court in Seattle. PAUL THOMAS JOHNSTON, 40, of Mercer Island, Washington, the former CEO of Entellium, was sentenced to three years in prison, three years of supervised release and $2,056,989 in restitution. PARRISH L. JONES, 39, of Seattle, Washington, the former Chief Financial Officer (CFO) of the company, was sentenced to two years in prison, three years of supervised release and $864,754 in restitution.
In addition U.S. District Judge Richard Jones ordered both men to do 80 hours of community service in a homeless shelter or soup kitchen saying he wanted them “to have greater perspective on the ultimate devastation caused by their actions.”
Entellium was a privately held Seattle corporation which sold customer relationship management software.
According records filed in the case, JOHNSTON and JONES devised a scheme to defraud investors in the company by representing that company revenues far exceeded the actual figures. The misrepresentations were first uncovered in late September 2008, when a human resources employee was cleaning out the desk of a former Vice President of Sales for Entellium.
The human resources employee discovered “board books” which contained financial information that had been presented to the Entellium board of directors. When the company comptroller reviewed the board books she discovered that the company revenues had been grossly inflated. The board was told that in 2006 the company had revenue of nearly $4 million when in fact it was just $582,789.
The stated revenue figure for 2007 was $6.2 million, when in fact it was $1.4 million and in 2008 the stated revenue was $5.2 million when in fact it was only $1.7 million.
The Entellium legal counsel reported the matter to law enforcement. The false revenue numbers were allegedly used by JOHNSTON and JONES to attract approximately $50 million in private investment, including over $19 million from Ignition, a Bellevue Washington venture capital firm. Two Ignition partners served on the board of Entellium and told investigators that they would not have made such a significant investment had they been aware of the accurate revenue figures.
In April 2008, Ignition wired $2 million into Entellium’s bank account based on fraudulent revenue figures presented to Ignition’s partners. In addition, JOHNSTON had used the same false figures to privately sell $645,000 worth of his stock in Entellium to fourteen other private parties.
The stock sales were not disclosed to the board of Entellium. One of those people who purchased the stock spoke in court saying JOHNSTON was the “worst kind of con artist” who preys on his relationships to find his victims. Asking for prison time, Assistant United States Attorney Carl Blackstone said the defendants have only themselves to blame.
“They put their own selfish interests ahead of their employees,” he said. Mr. Blackstone asked the judge “to send a message to the community that this type of behavior will not be tolerated.” Judge Jones noted that the men’s actions cost many people their jobs noting “... the abundance of collateral damage to savings, investment and employment opportunities.... At the core there was greed and the allure of a lifestyle built on false promises and fraud.”
The case was investigated by the FBI. The case was prosecuted by Assistant United States Attorney Carl Blackstone who leads the U.S. Attorney’s Office Complex Crimes Section.
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Friday Memos
- Some ways to find business leads using Twitter. Among them: Using the advanced search function and setting up RSS to monitor other conversations. [DuctTapeMarketing.com]
- The state of black entrepreneurship in the U.S. is bleak, researchers say. [Entrepreneur.com]
- We mentioned this week how the bottled water industry is getting some flack for being environmentally hazardous. Some companies are now fighting back by introducing - ta-da - boxed water. [FastCompany]
- Treasury Secretary Timothy Geithner proposes imposing stricter rules on private-equity and venture capital firms. [WSJ]
- Who are the five most interesting entrepreneurs of the past 30 years? Carl Schramm of the Kauffman Foundation names his picks. (Hint: Think low-cost airlines and minority-owned TV networks) [Kauffman]
Readers, any other relevant or interesting small-business news we missed this week?
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