Jumpstart Strategies

"It is business that generates the jobs, income and taxes that keep a country going."
 ---Mark Skousen (American economist)
 
If you keep up with current events, I'm sure you're aware that the Republican-controlled Congress passed a sweeping tax reform bill last week.  We’re not going to address the full minutia of the 2017 Tax Cuts and Jobs Act in this article. However, here are a few of the salient highlights for American businesses:

• The new Tax Act lowers the corporate income tax rate permanently to 21%, starting in 2018
• The new Tax Act establishes a 20 percent deduction of qualified business income from certain pass-through businesses. Specific service industries, such as health, law, and professional services are excluded. However, joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries.
• The new Tax Act allows full and immediate expensing of short-lived capital investments for five years. It also Increases the section 179 expensing cap from $500,000 to $1 million.  

The substantial cut in U.S. corporate tax rates is undoubtedly the single greatest change in our federal tax laws in the last 30 years. It also seems to be the most controversial portion of the new legislation.  Indeed, left-wing politicians and left-leaning media outlets have been quick to condemn the new Tax Act as a gift to the wealthy at the expense of the middle-class.

Before and after the House and Senate votes were taken last week, the pollical hyperbole was in full effect.  According to Senate minority leader Chuck Schumer (D, NY), the tax bill seemed to “stuff even more money into the pockets of the wealthy and the biggest corporations while raising taxes on millions in the middle class.”  House Minority leader Nancy Pelosi (D, CA) went even further stating, “This GOP tax scam is simply theft, monumental, brazen theft from the American middle class and from every person who aspires to reach it. The GOP tax scam is not a vote for an investment in growth or jobs.”

It’s interesting to note that the final votes in both the House and Senate fell squarely along partisan lines.  While a handful of Republicans opposed the bill in the House, not one single Democrat representative voted in favor of the legislation. The same was true in the Senate where all but one Republican (Bob Corker (R, TN)) voted yea and the entire Democrat Senate voted nay.

We'd be remiss if we didn't mention that an estimated 40-45% of all Americans pay no federal income taxes whatsoever today.  There are many factors behind this astounding figure. However, an economic stimulus package of this magnitude will most certainly reduce welfare and unemployment figures in the years to come. In addition, the average American worker who pays taxes is expected to realize a sizable tax reduction under the new plan.

More important to our nation's future, American industry will once again have competitive advantages in the global arena. The truth of the matter is that our nation benefits wholly when job creators have more capital available to create, execute and innovate.  Unleash the financial handcuffs from the John Galts of American enterprise and the free market will flourish.  The positive effects will certainly ripple though society much as Mr. Conerly stated in his recent Forbes column.
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In closing, a sad truth was revealed in the final Tax Cuts and Jobs Act debates and voting tallies last week. The leadership of the Democrat Party, as a whole, has now moved as far to the left on the political spectrum as the self-proclaimed “Democratic Socialist” Bernie Sanders (I, VT). They seem to have completely abandoned the virtuous, free market principles that have guided our Constitutional Republic for the last 241 years. Their "progressive" label appears to be a thinly veiled euphemism for neo-Marxist ideology. If John F. Kennedy were alive today, I imagine that he'd be aghast at what's become of his Democrat party.

​"Those who cannot remember the past are condemned to repeat it."
---George Santayana (1906)

Earlier today, President Trump held a press conference in New York City announcing his new infrastructure plan. One of the key tenants of the plan is an emphasis on leveraging private sector capital and expertise to rebuild our nation's crumbling buildings, roads, transportation and waste disposal systems. In his prepared remarks, President Trump asserted that the trillion dollar public / private spending plan will efficiently stimulate the economy - leading to at least one million news jobs, wage growth, and new business opportunities in a number of key industries.

When the President concluded his short speech, he opened the floor for questions from the press. Immediately, the line of questions turned to the violent events that occurred in Charlottesville, VA over the weekend. We watched the live press conference and only counted one legitimate question related to the President's infrastructure proposal.  The rest of the questions the President fielded from the press pertained to race relations and placing culpability on the individuals and groups behind the violent incidents in Charlottesville. Needless to say, we were disappointed that the questions strayed away from economics.


Why the New Infrastructure Plan Isn't Today's Top Story
The fact that most of the mainstream news media outlets aren't focusing their spotlights on the new administration's policy initiative roll-out isn't at all surprising.  Let's face it, they're in the ratings game. Sensationalism and emotionalism outdraw straight reporting. Couple that with the fact that more and more people are turning to online sources for their news (9 out 10 people according to Pew Research), and you begin to understand why partisan story lines are now superseding objective journalism en masse. News consumption is at an all-time high, attention spans are low and competition within the market has exploded exponentially.

Partisanship isn't a new phenomenon in American journalism. As James L. Baughman noted in a 2011 article, partisan reporting was a standard operating practice for newspapers in the years preceding the Civil War.  He sites, "Editors... unabashedly shaped the news and their editorial comment to partisan purposes.  They sought to convert the doubters, recover the wavering, and hold the committed."

So what has the renewed trend toward hyper-partisanship meant for entrepreneurs in recent years? While the financial viability of new news media startups remains in question, the shift has presented a number of opportunities for quick buck artists to reach niche markets online through targeted digital advertising. That said, news media hyper-partisanship should ring alarm bells for any entrepreneur with a long term  vision in most any industry category. Free market venture capitalists should be concerned as well.  Here's why:


News Media Partisanship Feeds Social Unrest
As we mentioned earlier, President Trump spent a good deal of his time during today's Q&A session fielding questions about the extremists behind the violence in Charlottesville. He defended his original statements that fringe elements on "both sides" [sic] shared blame for the inflaming the incident.  The media picked this up and ran with it.  
We have an AP news feed in our office.  The very first AP news report we received relating to the infrastructure announcement made little mention of the plan.  The headline spoke only to the President's comments on the weekend's events in Charlottesville.  The article was, in our opinion, a pseudo op-ed designed to further fuel a specific partisan political narrative.

Let's be clear here.  The President didn't handle the onslaught of questions very well. That said, his defense was truthful. Multiple fringe groups were indeed in attendance at the rally in Charlottesville this past weekend.  They included several white supremacist groups such as the KKK, Nationalist Front, and Rebel Yell.  They also included a loose collective of leftists he termed the "Alt-Left" [sic]: presumably referring to Antifa members, Black Lives Matter, and others that stood in opposition of the rally organizers and participated in the violence.

If you're relatively familiar with 20th century European history, the scene that played out in the streets of Charlottesville were eerily reminiscent of events in Germany in the early 1930s. Take a look at raw film footage captured by independent journalists covering the event during the melees. You'll see armed, similarly clad combatants engaging in a battle over ideologies. There were indeed two fringe camps fueling violence at the rally on Saturday.  However, we'd argue that they both represent the same side of the political spectrum: the far far left. Let us explain:


The Risk of History Repeating Itself
Fringe groups with disparate agendas but common core principles did indeed engage in battle on the streets of Chalottesville this past Saturday. Like most Americans, he fell into a trap and placed the fringe into two separate political camps labeled "left" and "right." By failing to point their similarities, we believe that President Trump missed a clear opportunity to rally consensus support for his message and unify the the nation.

If you visit the websites of the radical fringe groups that encouraged member participation at Saturday's rally, you'll find remarkable commonalities in their platforms.  Better yet, follow their blogs and read their social media postings ("left" and "right") and you'll realize a similarity in their end objectives.  They're both interested in dismantling many (if not all) of our founding principles including freedom of religion, speech, press, assembly, and markets — as well as limited government.

While we hear much ado about the neo-fascist "Alt Right", the media has given little or no scrutiny to the platforms of the egalitarian collective President Trump labeled the "Alt Left." The mainstream media has largely been sympathetic to the BLM and Occupy movements despite their overt hostility to core American principles. More disturbing perhaps, a handful of news outlets (including the Yahoo News and the Washington Post) have even run articles glorifying the anarchist activity of the the Antifa collective.

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​What we're witnessing today seems to be a nascent rise of Communist / Fascist ideology right here on American soil.  Historians and political scientists like Vladimir Tismaneanu are quick to point out that the ideologies often go hand in hand and feed off one another. The cancerous ideologies spread across European continent during the early 20th century, most notably in the Soviet Union and Nazi Germany "where the final destination was the deplorable Gulags and the gas chambers of Auschwitz." 

Communism and Fascism share some remarkable similarities: 

• They are both anti-democratic
• They both oppose the establishment / freedom of religion
• They both demand conformity
• They are both anti-free market

The core difference between the two ideologies is their organizational structures. Fascism is a class-based system while Communism is egalitarian. What that means is that you get a Fascist dictatorship or a Communist oligarchy - both are oppressive / conformist forms of rule.


What This All Means For Entrepreneurs and VCs 
We are definitely encouraged by the five tenants of the Trump Administration's infrastructure plan and their potential macroeconomic benefits. For entrepreneurs and free market venture capitalists there appears to be a lot of upside if this plan, or a similar plan with bi-partisan support, is passed through Congress.

As the president left the Press conference, he was asked by a reporter what it will take to begin to heal our nation's deep cultural divide? Mr. Trump offered a short response that emphasized two things lacking in this day and age: "jobs" and "wage growth."  Given recent studies showing that being healthy and having a good job are two of the most important ingredients associated with subjective well-being, he may be on to something.

The U.S. hasn't seen real wage growth since the late 1990's and our true unemployment rate remains a question. More significantly, the Millennial unemployment rate is more than double the national average. Opportunities to find gainful employment and begin to live the American Dream, would no doubt quell sympathy for the far far left agitators and the lose collective of anarchists who fuel them on.  

Conversely, a stalled plan poses serious concerns. A stagnant economy will only fuel more social unrest and further polarize our nation.  There are reports out that more rallies similar to the one in Charlottesville are being planned across the country in the upcoming months. You can be certain that leaders of both factions of the far far left (communist and fascist) see them as marketing opportunities and are actively engaging in on-line recruitment campaigns to attract new members (and sympathizers)  to their causes.

That said, there are glimmers of hope that responsible community organizers from the left and the right are starting to come together. Case in point, leaders on both sides of the Civil War statue debate held a joint press conference in Charleston S.C. today condemning violence and announcing their commitment to engage in objective discussion to reach a compromise. Although the platforms of the two group's spokespersons are well outside the mainstream, it does demonstrate that Americans with opposing views, who share our basic common values and principles, can reach agreement when they rise above  identity politics.

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Our Conclusion
We won't speculate on how future events will unfold.  We'll leave that to the talking heads in our polarized free press. That said, every American who values our basic founding principles ought to take stock of our mainstream news outlets and begin to hold them to account. Journalistic standards are dying before our very eyes.

It's important to realize we're not dealing with "Fake News" in a true sense. Rather, we're flooded with agenda-driven partisan propaganda (left and right) that threatens the very fabric of our Constitutional Republic. Obviously, free market capitalists around the globe have reasons to be concerned.

​We were on a call today discussing the changing landscape in social media and web media in general. Suffice it to say, it was a pretty interesting discussion. If you're not aware, the major social media networks have been criticized in recent months for censorship of conservative voices. Other web media giants, like Google, have also been accused of similar practices in content prioritization recently.  The basic assertion by those affected is that the politics of the these web media giants is trumping free speech, free expression and free dialog.  

While concerns over censorship began with the far right, mainstream conservatives have also expressed frustration and dissatisfaction with the policies and practices of the major web media companies as of late.  Surprisingly, even voices on the left, like Bruce A. Dixon, are starting to express concern that specific political narratives are driving what people see in their Facebook / Twitter feeds and  Google / Bing / YouTube search results. 

As a result of the growing backlash, a number of promising social media startups have cropped up recently. They aren't necessarily catering to conservatives. Rather, they're building platforms that are firmly rooted on 1st Amendment principles. It seems the free market also favors our basic freedoms. They're starting to get attention in from venture capital world too.  

Gab, a direct competitor to Twitter, launched in August of 2016. It recently raised nearly $500,000 through the crowdfunding platform StartEngine. Reports suggest that Gab's membership base is ramping up fast. Consequently, VC's are starting to look for other promising startups in the in the web media arena. 

​In late August of this year, a new social media platform called InfinitySN will launch. Their business model is designed to attack Facebook with a vengeance. As one InfinitySN insider stated today, their aim is "to turn Facebook into the modern day MySpace" by 2020.  One of their founders had an interesting (and historically accurate) perspective on their chances of success. To paraphrase, "It doesn't necessarily pay to be first to market. Others learn from your mistakes, build a better product, and push you out of the category."

Athough there has been a little buzz on social media discussing InfinitySN and what their promising to deliver, it appears the startup is waiting until launch to hype the product through traditional PR channels.  They're currently flying under the radar screen and seem to be banking on the fact that growing dissatisfaction with the social media behemoths by  the general public, combined with positive word of mouth, will fuel interest in the platform.

InfinitySN started as a social media platform for the Colorado community. They saw an opportunity to expand their market, retooled and will launch globally August 29th. It'll be interesting to see if InfinitySN will live up to the hype we heard on the call. That said, we left the call scratching our heads and wondering why it's taken so long for a serious competitor to enter this market?

You can read an old press release from InfintySN relating to their Colorado launch here.

Time and time again, we've been approached for assistance from budding entrepreneurs that have significant shortcomings ingrained in their business plans.  In many cases, Chi Rho Consulting has been able to help these clients address their shortcomings and strengthen their capital formation strategies. Unfortunately, this was not the case with this particular client.
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Investors look to minimize risk by selecting ventures that offer rapid growth potential, a high rate of return and strong management teams. We’ll examine each of these criteria in this article and explain how our client missed the mark on each of these criteria:
 
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1) Your Business Model Must Scale!

As Investopedia explains, a scalable company is “one that can maintain or improve profit margins while sales volume increases.” In other words, a business cannot afford to lose revenue traction in order to produce more goods or services unless it has a well thought out strategy to secure a second round of funding.

Angel investors take a huge risk when they invest in a startup. Consequently, they generally seek a return of 10x or more on every investment.  They also want to recoup their investment in a relatively short time period. To receive serious consideration from Angel Investors your ROI should be 30-40% minimum. Also, the payback and dividend period should be no more than five to seven years out.

When we examined the business plan of this green energy startup, they appeared to meet this criterion at first glance.  However, when we dug into the financials, we realized that their cash flow assumptions were seriously flawed. Their revenue forecast assumed payment in full for their power plant facilities from municipalities before they planned to break ground. Furthermore, their plan assumed revenue at full capacity the very first day their plants were to begin producing power! When we remodeled their financials, it was evident that they would burn through their anticipated investment well before the first plant could be completed.  Obviously, this was a serious flaw in their capital formation strategy.

Tip: Take the time to model out your financial assumptions in fine detail before you distribute your pitch deck or business plan.  A P&L spreadsheet that lays out your revenue and expenses month by month is most beneficial. 
 

2) Your Valuation Must Be Reasonable!

As we explained with criterion one, investing in startups is an extremely risky venture. In fact, its estimated that 47% all of angel investments produce zero return for the investor. Therefore, you will be expected to pay out huge returns to your Angel investor when and if your business begins to generate a positive ROI.  Serious investors will definitely scrutinize most every financial assumption you’ve made when you formulated your business plan before they place their bet.

Our green energy client envisioned that they would build their first plants in developing nations. As a result, they anticipated that many communities would have access to electric energy for the very first time. These markets,  they  assumed, offered exponential growth!

Our strategy consulting firm did the necessary due diligence to validate our client’s market assumptions. In a sense, our client was right In their assumptions; the demand for energy in developing nations, particularly in sub-Saharan Africa, is incredibly high at present. That said, our client's financial models were built using American energy consumption assumptions and their revenue calculations were based upon American economic indicators.  They assumed that they would receive over $50 in monthly income from their average customers in nations where the equivalent American annual household income hovers around $1,000 or less!

It was clear from our review that our client had failed to provide realistic valuation assumptions in their business plan. They over anticipated their initial market size and also failed to account for the real life economic conditions in their target markets. These mistakes were certain to raise red flags with investors. Worse still, they would most certainly call into question the client's overall business acumen.

Tips: Vet your financial assumptions with an experienced market / industry analyst before you distribute your pitch deck or business plan to potential investors.  Also, be prepared to justify and defended your assumptions in detail when you present your plan.  


3) You Must Have the Capacity and Ability to Execute!

Thirdly, and from our experience most importantly, the quality and experience of your management team are critical in the eyes of investors. As an investor acquaintance of ours once said, "I pass on great ideas all the time. I invest in great people."

The types of people who get potential investors excited include:

• Geeks with deep technical backgrounds
• Entrepreneurs who have sold companies
• Recognized experts in their field or sector
• Sales/Marketing rainmakers
• Teams that have worked together before and shown real success

During our initial interview with the green energy startup, our strategy consulting firm made a critical error in judgement. Our client explained that he was the principal owner of a small commercial engineering firm.  We therefore assumed that the firm’s management team and lead engineers would be involved with the project. 

When we received the business plan, we were prepared to conduct thorough due diligence on the management team and assess their overall strengths and weaknesses. We were surprised to read that the founder/ patent developer was the sole person involved with the startup despite the idea being nearly two years old! Furthermore, our client had had no professional experience in the power industry nor had he ever been involved in a large scale construction project. When we inquired as to why no one else was yet involved with the company, he explained that he planned to hire a management team after he secured the funding to begin his project.

 Given his lack of experience in the sector,, we strongly encouraged our client to immediately begin searching for junior managers with complementary skillsets and power industry experience to join his team. We stressed that people are the core component of any business plan urged him to retain commitments before he began courting potential investors. We also suggested that he consider seeking out a cofounder to handle the company's CEO responsibilities while he focused on the day to day operations on the company.

Unfortunately, he was unwilling  to consider offering up a sweat equity plan to potential new hires. He also balked at the thought of a onboarding a cofounder who could shore up his shortcomings.  As a result, Chi Rho Consulting decided to part ways with this startup despite the compelling patent technology. We wished the founder best of luck in his effort to raise investment capital to begin operations but left the door open in case he had a change of heart.

While this particular example is an extreme case, it does demonstrate why these three criteria are absolutely critical if you wish to gain traction within the investment community. To review: your business plan must demonstrate a degree of scalability, your valuation assumptions must pass the smell test, and the quality of your management team must excite potential investors in order to warrant serious attention.'

 If your startup requires investment capital, consider  having Chi Rho Consulting evaluate your business plan before you present your business case to potential investors. For a small fee, we’ll help you leverage you competitive advantages.  We'll also provide you with practical recommendations that address any shortcomings in your operating plan.  Doing so will definitely shorten the time it'll take you to find a suitable investor for your startup. It will also strengthen your position when you negotiate the terms of the investment.

Tips: If you're a patent inventor or idea originator, seriously consider on-boarding co-founders who can address your business shortcomings before you distribute your business plan. Also, consider securing soft commitments from experienced professionals for other key positions before you discuss your plan with potential investors.