Finding money for new companies
Published: Sunday, January 22, 2012 at 4:15 a.m.
Last Modified: Sunday, January 22, 2012 at 8:42 a.m.
Sonoma County startups soon may find it easier to raise cash, as Congress considers ending some of the restrictions on small investors.
It's good news for Healdsburg biotech entrepreneur Howard Leonhardt, who's trying to set up an alternative stock market for early-stage companies.
His California Stock Exchange would use the Internet to link small-time investors with promising startups.
“These are people who don't like Wall Street and don't like big companies,” said Leonhardt, who invented medical technology now marketed by Medtronic Inc. “We're going to emphasize local investing.”
Millions of jobs could be created if small businesses had better access to investment capital, he said.
“Our clear goal is to create 23 million new jobs over the next decade — jobs that people love,” Leonhardt said.
Startups have had trouble raising money during the recession, with banks tightening their lending rules. Angel and venture funding also has sputtered.
Meanwhile, state and federal securities regulations are prohibitively expensive for many startups, making it nearly impossible for them to sell shares directly to the public.
Leonhardt, for example, raised $6.5 million for his biotech startup during an initial public stock offering, but regulatory and financing costs ate up $4.8 million.
“The largest part of that was legal fees,” he said.
Some entrepreneurs have turned to crowdfunding, which lets them raise small amounts of money directly from a large number of people using websites such as Kickstarter and IndieGoGo.
One of those startups is Language Truck, a Santa Rosa business launched by Bridget Hayes, a longtime teacher of English as a second language. There's a need for her services at remote locations, including businesses, events, churches, neighborhood centers and home schools, she said.
Hayes is outfitting a bus as a mobile language and computer skills lab for up to 10 students.
“I'll bring it to where it's needed,” she said.
Using Kickstarter, she listed her project online and raised $8,451 from 88 investors to get it off the ground.
But crowdfunding has its limits. Startups can provide perks to investors, but they can't give shares or revenue from the business without registering with securities regulators, which can be a costly process.
The financial backers for Language Truck are getting class time, decals, t-shirts, ride-alongs, gourmet lunches and other perks.
The crowdfunding model is good, but it's not attracting many serious investors, Leonhardt said.
“It's more of a donation,” he said. “Right now, crowdfunding isn't working.”
That's why he's backing two bills in Congress that would make it easier for small investors to fund startups. The House version, the Entrepreneur Access to Capital Act, provides an exemption from federal securities regulations for small companies selling up to $2 million in shares online.
“Crowdfunding can help give them the means to create jobs,” said Rep. Patrick McHenry, a North Carolina Republican who authored the bill.
A similar version in the Senate would let early-stage businesses sell up to $1 million in equity in $1,000 increments. The change would be good for startups like Language Truck, Hayes said.
“It could definitely help us as the business grows,” she said. Language Truck could raise money for more buses or a franchise program, she said.
“That would be great,” Hayes said.
The two bills have strong support from entrepreneurs, but there's opposition from the securities industry, which said lack of regulation could open the door to fraud.
The concerns are overblown, said Leonhardt. California Stock Exchange would only accept startups that showed experienced leadership and adequate self-funding, he said.
Investors could find local startups and meet the entrepreneurs in person. Companies must demonstrate they serve a social good, he said.
Leonhardt launched the alternative stock exchange's website several years ago, but it's only informational, with links to crowdfunding sites and other financial services for investors and startups.
He's trying to raise $30 million in venture capital to to set up a real stock exchange when the crowdfunding changes become law, Leonhardt said. It would be headquartered in San Francisco or Los Angeles.
Leonhardt is a serial entrepreneur with businesses from Florida to Sonoma County. He invented the Talent stent graft system, a technology for repairing life-threatening aortic aneurysms. Now owned by Medtronic's Santa Rosa vascular division, the Talent platform generates millions of dollars in sales each year.
He also founded Bioheart, a Florida biotech startup that originally had facilities in Santa Rosa.
In 2010, Leonhardt launched a technology incubator at the University of Northern California, a small private institute in Santa Rosa that focuses on biomedical engineering.
He owns a winery in Dry Creek Valley and started Wine Country Baseball, an independent league with teams in Sonoma and Napa counties.
His idea for a startup stock market grew out of his own frustrations with raising capital, Leonhardt said.
“Others shared my frustrations, and we decided to channel our energy into something positive,” he said.
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