This must be the favorite sentence uttered by entrepreneurs. But who can really lay claim to this statement being true? Could someone truly have no competitors?

Usually what happens is, after the pitch I go back to our research team and after their digging, we find a mass of competitors. How could that be?

In thinking about competitors, I find there is generally a difference of opinion between me and the entrepreneur that is driven by the different types of competition, and whether the type of competitors that exist matter to us investing or not. Then add to that how market forces shape competition and this all gets pretty complex.

The Different Types of Competition

What are the different types of competitors? Looking out on the Net, I found these categories of competition:

Direct/Existing Competitors – usually the easiest to find, these are companies with products who are the same are very similar to yours, and attempt to serve the same need.

Entrenched direct/existing competitors are those who have been around for a while and have grabbed a lot of market share before you showed up.

Indirect or Mindshare/Category Competitors – these are companies who provide alternatives to the need your product solves or the resources that your using your product would occupy, but it may not be obvious that they are taking away share from you.

“Just because your offering is unique, doesn’t mean it is unique in the mind of your prospects. To a prospective customer a marketing strategist, web designer, direct mail specialist, graphic designer, video producers, and print shops may all provide “marketing”.”

[sources: 4 Types of Competitors, Different Types of Competitors by Peter Halim]

Potential Competitors – these are companies who have the capability and the will to enter into the marketplace with a product and become a direct or indirect competitor to you.

Replacement Competitors

“A replacement competitor is something someone could do instead of choose your product, but they’re using the same resources they could have committed to your product.”

Budget Competitors

“Even if your products and services are truly unique, you still have to compete for the same budget dollars that other service providers are vying for.”

This also applies to the regular consumers. How hard is it to get customers to part with their money, if there are other choices possible? How many subscription services can a consumer have on their credit card before they say enough is enough? Advertising agencies have set budgets per year; if it all gets spoken for, you may not get access to valuable ad dollars simply because it’s been all committed.

Doing Nothing – In the face of certain situations, it may result in a potential customer doing nothing as a way of deciding. This may result from having too many choices, or too difficult choices, or somehow being prevented from making a decision comfortable to the customer. It is worthwhile to ask, how can you eliminate this type of competition?

What Matters to Us in Investing

You’re probably thinking – Wow, Dave, that’s a big list! Isn’t that being a bit unfair to a fledging startup? Wouldn’t the world be our competitor if we lay this kind of analysis on my startup?

You’re partially right – as investors we like to look at your project from all angles and weigh the odds. What’s the probability that a competitor, or competitors, will emerge and make life difficult or impossible for a startup we’re looking at?

So taking those categories of competition above, we try to see who is there and who is not.

Direct/existing competitors are the worst. You have to come up against them and fight head to head for market share. Some of them are entrenched and thus you could have a tough time grabbing share from them. On the other hand, if they are traditional, slow moving big corporations, you may have an advantage in being a quick moving startup entering with a significantly better product. Competing against other startups – that’s sometimes much harder.

The other categories are much harder to judge. We have to make a personal call as to whether or not we think the risk is too high or low enough to give the startup a fighting chance.

Market Forces Confound the Competition Analysis

The only problem is…there are too many internet startups now. There has been an explosion of entrepreneurism which complicates the competition problem.

Previously, we talked about Mindshare/Category Competitors. This was when your competitors could come from a broader category and those could become your competitors inadvertantly. However, with the enormous number of startups out there, the Category becomes so broad to emcompass all internet, meaning the fight for customers becomes the battle for attention where everyone is your competitor.

The Last Category: Everyone is Your Competitor

While this is probably true to some degree at any time, it jumps to the forefront in times like today. That’s what is happening now; there are too many startups for both consumers and B2B customers to process quickly. If they cannot choose you fast enough, then your growth is stalled, causing you to burn through your cash before you can get to breakeven. Time is the enemy of startups – you cannot wait for people to process too many choices; you need them to use you quickly and they simply won’t. This is why we see startups needing 24-30 months to get to someplace of stability, or to get to their next funding event.

This makes the investment decision much harder to process. What’s an investor to do?

We could wait for times to change. The world moves so fast now – it is possible that within a year or two, the battle for attention may abate. Or it could get worse.

What it does mean is that for now, as we evaluate startups, the best we can do is to acknowledge the battle for attention is very real but we are being very picky now.

At this point, we try only to pick startups that have really no direct competitors, or have only old, traditional entrenched competitors. The world of internet startups has reached to almost every corner of every major industry; however, we are still finding some unturned stones, businesses and markets that have not been touched by internet startups yet. This is where we are finding the last remaining internet startup opportunities that literally have no direct competitors, or at best, competitors that are old, traditional companies which we are betting cannot move as fast, nor have the expertise or innnovative spirit of a startup.

In the old days, investors picked startups who had no competitors. The internet wasn’t around back then and competition was different in other industries. With the internet, competition pops up with great ease and speed. We now look for those rare, few startups that have still no direct competitors and advise them to stay stealth, just like in the old days, to avoid other internet entrepreneurs from creating competitors literally out of thin air.


A few weeks back I met with an entrepreneur who had recently closed a round with a large VC. We got to talking about what it was like to work with that VC, and he mentioned that it was a little strange because the VC was pushing for these really bizarre terms. After he described them to me, I too agreed they were bizarre, but then I said I’m pretty sure I knew why he was pushing for them, which was I bet he had gotten burned on them in the past. The entrepreneur’s eyes lit up and said that was right! Eventually, the VC admitted this to him, talked it through, and they came to agreement on terms.

I can sympathize with that VC. Since 2006 when I started investing in startups, I’ve gotten caught by a lot of unexpected traps and rookie mistakes. These have definitely driven my current thinking on how I like to pick startups and their teams, finance them, and what terms are important to me. I would definitely admit that this was the most expensive education in any subject I’ve ever learned. Where else can you piss away 10s, if not 100s of thousands of dollars on situations that you may have avoided through better experience or forethought? Or maybe lady luck just decided to slap you down this time out of nowhere?

It was one of the reasons why I wrote this post a few years back: More Reasons Not to Invest in Notes. In the notes that I’ve done, I’ve seen many unexpected things happen. And this is why my boilerplate note has grown to include many things beyond the vanilla convertible note that someone might use.

But then, there are investors I’ve met out there who have never had anything bad or weird happen to them. This fact still amazes me that there are those out there like this. Still, it is my belief that the more you invest, the more likely something bad will eventually happen. You can’t avoid everything bad that can happen to you; you can only do so much to protect yourself.

In our attempts to protect ourselves, the entrepreneurs we meet often suffer from our past. We argue for certain agreements and terms, some of which seem downright strange and we can be pretty adamant about those terms. We may even get emotional about them and refuse to back down on them as negotiable items.

Sorry about that. The more we invest, the more we are scarred. The best thing you can do is to be like a good therapist; sit and listen to us rant and rave. Nod with sympathy in your eyes. Let us know you understand. Pat us on the back. And when we calm down, we may actually give…or not. Like traditional therapy, some things can be cured and others…well…probably never…

The word “uncertainty” tends to dominate economic news these days. Political uncertainty regarding the “fiscal cliff”, Washington’s self-imposed deadline that results in automatic tax increases and the repeal of the Bush tax cuts, turmoil in Europe, and a general slowdown in demand across Asia and the Eurozone have kept U.S. corporations on the sidelines in regards to hiring and new investment. An unclear picture on taxes, healthcare and a general lack of faith in Congress to get anything done has lead to companies hoarding cash despite posting record corporate earnings over the last few years. According to Thompson Reuters, the companies that make up the S&P 1500 index had over $1 trillion in cash or cash equivalents on their books at the end of Q2 2012. To put that in perspective U.S. GDP was $15 trillion last year.

In addition to all the news about the fiscal cliff and chaos in Europe, earnings per share growth (or lack thereof) is another data point we should be paying attention to. As of September 30, S&P 500 estimates that Q3 2012 EPS growth will be -3.1% [UPDATE: As more companies have reported earnings this quarter, EPS growth has been revised to -0.1%.] This is significant because a negative turn in EPS growth typically indicates a recession. Of the last four times EPS went negative, three (1989, 2001, and 2007) pointed toward massive economic slowdowns and one in 1998 was a single quarter blip.

EPS growth expected to go negative in Q3 2012, but analysts expect a bounce back in Q4 and 2013.

So is Q3 an outlier or the start of a slowdown? While analysts don’t believe we’ll see back-to-back negative EPS, they’ve begun revising their estimates downward. Since the end of the third quarter (September 30), analysts have reduced earnings growth expectations for Q4 2012 (to 5.6% from 9.3%), Q1 2013 (to 3.4% from 5.3%), and Q2 2013 (to 8.0% from 9.3%). A few trends might point to a more negative outlook.

From 2008 to 2011 corporate profits soared $578B, growing from a low point of $1.2T in 2008 to $1.8T in 2011. This was widely regarded as a jobless recovery as companies cut jobs and compensation, experienced low unit labor costs and significantly increased productivity per worker. Corporations also experienced relatively low commodity and material costs over this time period as shown in the graphs below:



But as you can see those trends have changed and corporations are experiencing increased material and labor costs, which provides one explanation a decrease in EPS. It makes sense that corporate earnings growth would slow during a recovery as companies spend excess cash (hiring new people, investing in R&D, etc.) to meet increased demand. But where will the demand come from this time around?

The consensus is that U.S. GDP growth will be relatively flat over the next few years, hovering around 2% to 3% growth for 2013 and 2014. For the rest of the world, the Eurozone is in turmoil and growth in China has slowed significantly. From 2008 to 2011, China’s GDP was growing at a double-digit rate, creating the demand necessary to offset recessions in the U.S. and Europe:




But with the U.S. economy stuck in a rut and demand in China and Europe waning, who will create the demand necessary to continue to fuel record earnings? If you look a little further back to earnings data from 2006, it paints a clearer picture of how important foreign demand has been to the earnings increase:

“Looking from 2006 – 2011 corporate profits grew by about $219 Billion. However, most of this growth came from outside of the U.S., around $182 Billion. U.S. domestic industries grew by only $36.6 Billion … While the U.S. growth figure is positive, the figure of $36.6 Billion includes a positive contribution of 42.1 Billion from “Federal Reserve banks”. This was over 17.5% annualized growth. All other domestic U.S. industries when aggregated together had a slight negative growth in profits from 2006 to 2011.

This means over the time period from 2006 to 2011, corporate earnings derived from the U.S. were actually negative if not for the federal stimulus! It looks more apparent that the U.S. cannot drive corporate profits alone.

There is evidence that the slowdown around the world has started to hurt topline revenue for S&P 500 companies. While 70% of companies reported EPS above the mean estimate in Q3, 60% are reporting a revenue miss. Guidance doesn’t look good either.  For Q4 2012, 72% of companies in the S&P 500 are reporting negative guidance, well above the long-term average of 61%. According to a survey by CEB, a membership based advisory firm, a little over half of managers expect production levels to increase in the next 12 months, down from 63% a year ago. Only 34% expect to hire in the coming year.


With all of the current risks in the market, you would think that the market would be cheap. There should be a correlation between negative guidance and stock prices (as there was until 2010), but the actual results have been the exact opposite:


It should be pointed out that sectors that are heavily tied to commodity prices (energy, materials, utilities, and industrials) make up the laggards of the group and commodity prices could be the culprit. There also might be some short-term fallout from insurance companies due to Hurricane Sandy, but this could be offset by increased production and investment in the rebuilding effort.

So is this past quarter a blip in the radar or the bearer of bad news? Is there a fundamental issue with the U.S. economy or a few sectors hurting earnings? Will there be a harsh correction in the market?

Uncertainty is most certainly driving corporate decisions and we’ve reached what Clayton Christiansen calls “The Capitalist Dilemma”. Christiansen explains this dilemma as the notion that executives and investors will fund three types of innovations: empowering, sustaining, and efficiency. Empowering innovations “transform complicated and costly products available to few, into cheaper products available to many”. By empowering innovations, companies spend money by creating jobs, increasing capacity to meet demand for new products (i.e. Model T, personal computers, etc). Sustaining innovations that simply replace old models with new ones (new HDTV to replace your old TV). This has a neutral effect on the economy because you’re eliminating your old product with a new one. Lastly, the efficiency innovations “reduce the cost of making and distributing existing goods and services”.  Replacing 100 workers with machines in an auto plant would fall into the efficiency innovation category.

According to Christiansen:

“Ideally, the three innovations operate in a recurring circle. Empowering innovations are essential for growth because they create new consumption. As long as empowering innovations create more jobs than efficiency innovations eliminate, and as long as the capital that efficiency innovations liberate is invested back into empowering innovations, we keep recessions at bay. The dials on these three innovations are sensitive. But when they are set correctly, the economy is a magnificent machine.”

In the current state of the U.S. economy the balance is off. Investments in efficiency have liberated capital, but have only lead to investments in more efficiency thus decreasing the number of jobs. Executives running Fortune 500 companies have been taught to do (and are doing) what’s right for their own companies and shareholders. Investing in efficiency innovations are what lead to record corporate profits and sky-high stock prices over the last few years. And there in lies the paradox. Uncertainty in the market has disrupted the balance between empowering innovation and investing in efficiency. We currently have a glut of cash and a lack of qualified workers, yet companies are refusing to spend money on training new employees (companies also blame the education system and want reform, i.e. the Government to pay for it, but that’s a whole different blog post). Until the fiscal cliff is resolved and there’s stability in Europe, companies are going to continue to do what’s right for them and that means keeping balance sheets flush with cash. Until companies have the incentives to invest in innovation, the U.S. economy will continue to be stagnate and unemployment will remain high.

Cutting costs and investing in efficiency can only go so far. Without an uptick in demand from the U.S. and slowing growth abroad, we may see earnings take a hit in the near future. All of this coupled with Congress’ “stellar” track record on determining economic policy, I would tend be a bit more pessimistic in 2013.

Back in 2009, shortly after the 2008 crash, I wrote The Importance of Revenue at Early Stage, Now More Than Ever. Up to that time, we had been on a roll – startup investing was growing well and we had bought into building traffic which allowed us to get to our next funding event. Then, the crash killed all that. Money was hard to come by, and investing in “momentum” or traffic only startups without much revenue was nearly dead. Only revenue generating startups were attractive to investors and a boatload of non-revenue startups died simply because they had none.

Then the startup funding environment came roaring back, we had our Instagram moment, and investing on momentum was in vogue again.

But times have shifted again. What has changed?

1. Tracking M&A values, they hang slightly above $20M . This is pretty low in general, and pretty unattractive from an investors’ standpoint when…

2. …Valuations for startups still hang around $6-10M cap or pre-money at early stage for the hotter deals, sometimes even higher. Remember that if you are to exit at the median, you must be doing pretty darn good and be above average. If you are not gaining traction, acquihires are happening at much, much lower values, definitely well below $10M.

Now to be perfectly clear, there are those out there investing on strategies that take into account 2-5X return on money. But our economics don’t allow us to do that – we need much more return.

3. Customers, whether consumers or B2B, are deluged by the exponential growth of startups and growth is harder to come by. In the near past, we used to tell startups that they needed 12-18 months to get to decent traction metrics; that quickly moved to 18-24 months, and now we think it’s 24-30 months. Wow! 24-30 months – this is a direct result of our observations on how startups are growing in the competitive marketplace, the battle for customers’ attention. When we saw them funded with runways of ~18 months or so, many needed more runway and so went to look for bridges, if they could not get series A – so we’re now at 24-30 months!

However, practically NO startup I know raises for 24-30 months at the seed stage – well, practically none. If you go to Techcrunch and other online publications that follow startups, you’ll see a ton of early stage raises at $1.5M-2.0M – what happened? This is smart. These founders, and their investors, have realized that they need more runway and have funded them for that. Startups who raise less than 24 months runway have a higher probabiility, now more than ever, that they will need additional runway to extend them to 24-30 months within a year.

But if you aren’t one of the startup darlings to get $1.5-2.0M at seed, what then?

4. Last, we’ve been in contact with some prominent financial guys who follow the economy like hawks. They process every bit of information that is out there, stuff we all can get and a ton of stuff that we can’t. (If there is anything I’ve learned about the financial industry, it’s this – there are those with the information and those without – those without basically include everybody else including you and me – and yes, the world will continue to have unfair information advantage no matter what we do with regulations). They are fearful that another 2008 is coming. We’ve been digging into this and have found evidence in a potential earnings cliff, and we are concerned as well.

All this means that we think the importance of revenue at early stage is back – one could argue that it never left, but what I mean is that it has risen to the top of the stack.

The world isn’t looking optimal for internet startup investing. That doesn’t mean there aren’t opportunities out there that can fit within the world we see right now – generating revenue is one of those key characteristics that can ensure some longevity even when the world is so uncertain. Once again, we look for that to bolster a startup’s chance for survival and give them maximal runway to achieve their next funding event.

Lately, I’ve been doing meetings with young startups in recent accelerator batches and meeting them for the first time. It’s been great to hear that they’ve bought into the iterative method of customer development and most of them have found their Minimum Viable Product or MVP, or they are well on their way to finding MVP.

This is awesome but in today’s world, you can’t raise money on achieving an MVP. Investors demand more than that.

As Steve Blank likes to say:

A Startup Is a Temporary Organization Designed to Search
for A Repeatable and Scalable Business Model

The unfortunate reality is – an MVP is not the above! Yet most of the newly minted entrepreneurs I’ve met think their job is nearly done when they’ve found MVP – they think they can go build a pitch off their early MVP and raise money!

A startup does require MVP but it is much more than just MVP. The problem is that MVP means early adoption of product and its features, maybe even some who will pay. But it doesn’t tell you how many people will do it in the long term and whether this can support the company (the people and operations within) that is behind it.

So startups are much more than MVP and requires thinking beyond just the product. This is where I’d like to coin a new acronym, which is Minimum Viable Company or MVC.

What is a MVC?

First, I would say MVCs only apply to early stage startups – you can’t really talk about achieving MVC status for a company that’s been around for a longer period of time. To be minimally viable as a company, I would say:

1. It has achieved breakeven or profitability, or has a believable and achievable plan to get there.


2. It has achieved enough metrics to reach its next funding event. This includes the first funding event.

Or ideally both.

The Fundable MVC

An MVC must have achieved some sort of MVP, but having MVP doesn’t mean you have achieved MVC automatically. Nor does it mean you’ve achieved the next level of MVC which is a FMVC or Fundable MVC.

Remember that many MVCs can generate cash, but how much exactly? If you reach small or medium business status, that is great; it takes no little effort to make $500K, $1M, or several tens of millions of dollars per year. It is a notable achievement to employ a building full of workers, insuring them pay and livelihood, and providing or shipping product and services to customers. This is a win by many measures.

However, many companies like these, while there is every reason in the world for them to exist, unfortunately are not attractive to investors. This is because while they are doing great work, the likelihood of investors getting their money back and then some is very low or zero. This is the difference between an MVC and a FMVC.

We have not, as an startup/investor community, figured out how to invest in those companies whose trajectory is heading towards small or medium business status. Right now, all startups are being funded as if they are going to exit like any high growth startup. Anybody on a lesser trajectory simply won’t attract the funding it needs unless more effort is done with other funding sources or structures.

Therefore, it is the FMVC that every startup needs to achieve. What are the characteristics of a FMVC? Everything that a seasoned, high growth investor looks for: big market, big vision, lots of revenue potential, world domination plan, etc. This is what will increase the likelihood of funding, not presenting your MVP at a demo day, or even a plan for a MVC, but your plan for a FMVC.

How do you turn your MVP into a FMVC?

First, you must realize that not all MVPs yield a FMVC. MVPs could yield a MVC but not FMVC. Many MVPs have potential to attract some customers, but not enough to create a company and an opportunity large and tasty enough for investors to want to put money in. This is also dependent on the market in general, meaning that 5+ years ago when there weren’t so many startups sprouting up all over the place, you could have achieved an FMVC with your project; however, in today’s crowded startup world, you cannot.

While every project is different, I point you to some suggestions on examining what you are doing now in hopes of turning it into a FMVC:

1. Iterating on MVCs is a good thing to do; keep trying out business models and plans until a FMVC shows up. It may mean giving up on your current MVP and looking for another one. Do not be afraid of going back to the drawing board if you find your MVP does not yield a satisfactory FMVC!

However, your time limit is your bank account. Never forget that. So working rapidly and lean is key.

2. Do you have a World Domination Plan? Is it believable? If you can envision a world where your MVP dominates whatever market and customers it is pursuing, is that big enough?

3. Are you too focused on the solution and not on the problem? Becoming too myopic about their product and forgetting about how this turns into a big company is something that I find happens with many entrepreneurs. They get caught up in the success of finding a MVP, but don’t realize that they not only need a MVP but need to achieve MVC and hopefully FMVC.

4. Following on 3., it would probably be a good idea to pick up some MBA skills and start running models and scenarios to see where a given MVP can become a MVC, or potentially a FMVC.

5. A good measuring stick I use with startups is to ask what the $100M/year revenue scenario looks like. Generating $100M in business per year is no small feat – you get there and you’re well on your way to becoming a big business. So can we imagine a world where your startup is making that much and believe it?

6. The weird thing about some startups is, that some break into such new territory that it is very hard to model or you can’t model anything. New industries, new markets, or products and services that customers cannot imagine having or using are like that. So the FMVC you could create is purely via pitch, arrogance, confidence, etc. – whatever it takes to woo an investor to write a big enough check on what you plan whether you have product or not. In order to accomplish this kind of FMVC, your credentials must be unique: you must be well-known to the investor, you must be trusted. Ideally, you would have had an exit or more for that investor. You must show “extreme” entrepreneurial traits: be able to employ persuasive language, compelling/grand planning, superb salesmanship skills and technical skills, among others. These are the people who can get funding on a powerpoint when others flounder even with revenue.

This can be enough to win you funding and survivability.

In short:

1. An MVP is great but not enough in today’s market to win funding.

2. An MVC generally means you have MVP, but an MVP does not guarantee MVC.

3. An MVC can yield a small to medium business, or a big world dominating one. There is nothing wrong with building any of those types of businesses and the world is big enough for all kinds.

4. However, we do not know how to properly invest in small to medium businesses. Our money may not be returnable from such businesses using the current equity structure of our investing. Thus, we want to invest in FMVCs.

5. As someone who is trying to build a real high-growth startup, therefore, MVPs or MVCs are not enough. You must search for a FMVC.

So you have just closed on your $1m seed round.  You’re excited and ready to get to work.  The first thing you do is contact TechCrunch and PandoDaily to get some PR, hire a few engineers, a marketing person and begin paying yourself.  Your burn moves from $15k per month to $75k per month overnight.  You are driving traffic to your site, building product and showing early signs of execution.  You were invited to sit on a panel; you’re mentoring some young teams; all in all, you’re feeling pretty good about yourself.

But, you can’t help beginning to think that the clock has started ticking – 12months and counting to get to that elusive Series A.

So, you begin to scour the blogs, absorb everything that other successful start-ups have done and decide that with 12 months of cash on hand, its time to double down on the business model that you got funded and crack the formula for a scalable user base and show “Fab-esque” growth.  You throw out the idea of the lean model and say “fuck it” time to take control of my own destiny!

Sound familiar?

In the age of Lean Lean Lean, it never ceases to amaze me how many companies at the seed stage fall into the trap.  They mistake maniacal focus on growth for “fire in the belly”.

And, at month 10 or 11, the entrepreneur begins to complain to his investor base that despite all of these great metrics of growth, the company is falling victim to the Series A crunch.

When, in reality, the Series A crunch was a proxy for focusing on the wrong things at the seed stage…

In our portfolio, we believe that exceptional entrepreneurs tend to have very similar characteristics regardless of their customer/market/product differences.  We believe that they have a genetic make-up different then regular entrepreneurs.  I like to call the super entrepreneur gene that distinguishes the winners from the losers, “The Random Walk Gene”.

This gene is displayed by founders who, at the seed stage, realize that they are embarking on a 10000 mile foot race.  They realize that momentum early on does not dictate success. They recognize that a random walk down a lot of different avenues will ultimately help them in the long run.  They realize that learning from mistakes at the seed stage is usually more important then continuing to pile on to the early successes that they have had (think about this for a second, imagine if you knew all of the customer acquisition strategies that don’t work and why… as a nascent business, that information is incredibly powerful – maybe more powerful then knowing one strategy that does work since you don’t have enough $$ to milk that strategy to get you to scale).

The other unique characteristic of this gene is that these entrepreneurs are always ok sacrificing short-term gains in exchange for long term goals – and they NEVER lose sight of this.  If that means that they sacrifice revenue opportunities to continue to build on a more lucrative business model, then they build for the long-term.  If it means giving up a little more equity to bring on the right partners (employees, advisors and investors) then they swallow the dilution.   These entrepreneurs don’t calculate their personal net worth based on the last round of their valuation – they calculate the value that their customers get everyday from using their products.

As a result, super-gene entrepreneurs become pillars of stability in their company and in their community’s – they stay calm, consistent and emotionally stable.

I can name these entrepreneurs and examples off how the gene has displayed itself off the top of my head.  Not because I talk with these guys everyday, or brag about their success, but because I truly admire their ability to prioritize what is important.  Amazingly, and without fail, each of these companies ALWAYS figures out a way to pull off a fundraise, or convince another recruit to come on board or get multiple acquisition offers at every stage of their development.

Building a great business takes a long time.  Slow and steady at the seed stage may mean that you sacrifice the sexiness of running a hyper-growth opportunity, but in exchange, you will have a much more stable business on your hands.  Oh yeah, and the chances that you will stumble on the sexy business model of the moment is like 1 in a 100,000…so at the least, play the game where the odds are more in your favor.

Over the past couple months the Launch Capital Research Team has been working to update our annual Megatrends predictions. Part of this process is to consider some of the more diffuse determinants of economic development: resource scarcity (both human and material), environmental conditions, geography and inevitably politics. Although the causational relationship between the economy and political policy is often debated, it should nevertheless be accounted for.

With an enormous Federal debt and a lagging economy, the 2012 election could have major market implications. Due to the cloud of uncertainty surrounding the future of the American economy, many private investors, from large institutions to individuals, anxiously wait on the sideline; with a high premium on stability and long-term holdings. Families are embracing a similarly risk averse ideology through the deleveraging of their balance sheets, exemplified by declining average household debt (with the exception of student loans).

The indecisiveness of Congress and its inability to revive the economy continues to fuel uncertainty from Wall Street to Main Street, resulting in a “wait and see” mentality in regards to investment and new hires. Understanding the economic policies of each Presidential candidate is invaluable when attempting to predict future economic attitudes.  Based on our findings below we have concluded that neither candidate offers a strategy that is likely to gain bi-partisan support or radically change the path of the nation. Without the prospect of successful or implementable policy we believe the 2012 election is unlikely to shift individual uneasiness about their economic future.




Data and excerpts from Tax Policy Center Analysis of Romney Tax Plan:

Romney Policy Summary:

The full implementation of Romney’s tax policy (expected to occur in 2015[1]) would decrease Federal revenue by 900 billion or roughly 24 percent of projected revenue. In relation to current policy baseline, assuming the extension of the Bush Era tax cuts, indexing of AMT, elimination of payroll tax cuts, and the extension of all existing temporary tax policy, Romney tax policy decrease Federal revenue by $480 billion in 2015.

Romney states that the lost tax revenue will be recovered through closing corporate and individual tax loopholes, and the broadening of the tax base. Specifically, Romney claims that all tax cuts will be revenue neutral, a feat that the TPC argues to be impossible without increasing the taxes of individuals making less than $200K.[2] More specifically, the TPC argues that Romney’s plan to reduce the marginal income tax rates, eliminate the estate tax, eliminate the ATM cannot be revenue neutral with increasing tax for some individuals making less than 200K.

Romney also has yet to specify what loopholes he would target and the extent to which loopholes would recover revenue. Romney recently hinted at one such reform, which would be the capping of the amount of deductions a taxpayer could claim.

Romney promises austerity, proposing capping federal spending at 20 percent of GDP, which we assume will be gradually phased in over fiscal 2013 through 2016.

Romney’s supports the “cut, cap and balance” strategy that has been a fixture of the Republican party.


  • Romney has stated that he will cut back on many of the regulatory measures of the Dodd Frank Act, but not abandon the act entirely.

In the most recent debate Romney suggested he would repeal and replace the Dodd Frank Act

  • Plans on declaring China a currency manipulator, and generally more aggressive in the treatment of China

Data and Excerpts from Congressional Budget Office Analysis of Obama 2013 Budget Proposal

Obama Policy Summary:

Individual Impact of Obama’s tax policy (According to TPC):

  • Relative to current law, the entire package of proposals would reduce taxes in 2013 for nearly three-quarters of all households and raise taxes for about 6 percent.
  • Individuals at either end of the economic spectrum would be less likely to see their taxes decline
    • 30 percent of both those in the bottom quintile (20 percent of tax units) and those in the top 1 percent would see their taxes go down.
    • 71 percent of those in the top 1 percent would face a tax increase, compared with just 1 percent of those in the next-to-top quintile (60th through 80th percentiles)

By CBO’s estimate, those policy changes would, on net, add about $2.9 trillion to projected deficits over the 2013–2022 period and necessitate $0.6 trillion in additional interest payments (because of increased federal borrowing). Most of the net budgetary impact would come from changes in tax policies, but changes in spending policies would also play a role.

  • In 2013, the deficit would decline to $977 billion (or 6.1 percent of GDP)
  • The deficit would decline further relative to GDP in subsequent years, reaching 2.5 percent by 2017, but then would increase again, reaching 3.0 percent of GDP in 2022.

The CBO develops a yearly budget baseline, “CBO’s baseline projections largely reflect the assumption that current tax and spending laws will remain unchanged, so as to provide a benchmark against which potential legislation can be measured”. In comparison, Obama’s plan is projected to add $82 billion more in debt over the baseline projections


The American Jobs Act

  • Initially proposed in September 2011 as a $447 billion package of household and business tax cuts, public investments, safety-net spending, and aid to state and local governments
  • After the release of the president’s 2013 budget, Congress enacted scaled-back versions of two major AJA proposals for the remainder of 2012: a 2 percentage-point employee-side payroll tax holiday (AJA proposed 3.1 percentage points) and a reduced extension of the emergency unemployment compensation (EUC) program.
  • The president continues to support passage of the AJA provisions that Congress has not acted

Beyond the Policies:

Due to the current polarizing nature of politics and a divided congress, the policies proposed by both candidates face a difficult future.

Despite the political gridlock, two policies are coming to a vote following the election regardless of the politics of the presidential winner.

Fiscal Cliff 

The overarching issue is the fiscal cliff, as series of spending cuts and tax increases (including the expiration Bush Tax Cuts) as outlined by the Budget Control act of 2011 if there is no consensus on reducing the deficit. Without a consensus, based on estimations J.P. Morgan economist Michael Feroli, there would be an automatic tax increase of $405 billion and automatic spending cuts totaling $98 billion.


Bush Era Tax Cuts

The Bush Era Tax Cuts have been extended to the end of 2012 at which point they either expire, be extended, or permanently adopted.

Tax Rate Changes if Congress doesn’t act

  • Long-term capital gains rate raises
  • Dividend tax rates rise to 15%-39.6%
  • Child tax credit falls to $500
  • Estate tax exemption falls to $1M
  • Payroll tax rises

The biggest tax cuts in the 2003 law applied to dividends and long-term capital gains. Dividends used to be taxed at the same rate as normal earned income. The 2003 law taxed dividends at a flat 15 percent across all tax brackets. As for income earned from selling investments stocks, bonds, investment real estate — the rate fell from 20 percent to 15 percent for those in higher tax brackets, and from 10 percent to 5 percent (and to zero by 2009) for those in the 15 percent tax bracket and below.

Romney supports the permanent adoption of the Bush Era Tax cuts.

Obama’s stance, based upon his 2013 budget and his opinion in 2010 when the cuts were initially going to expire, is to continue the cuts except for high income taxpayers.


Based on our assessment of both candidates proposed economic policies, we believe a drastic jumpstart to the economy due to policy is unlikely. Obama is focused on more of the same policy implemented during his first term, which added over a trillion dollars to the deficit without major job or GDP growth. Romney hopes to facilitate economic recovery through supply side economics, a strategy that currently and historically has been met with significant controversy. Regardless of the impact of tax cuts, Romney’s policy is unlikely to get Congressional approval.

Neither candidate provides an effective roadmap for reducing the deficit. Obama’s current 2013 budget proposal is expected to increase the deficit. Romney’s current tax policy significantly reduces federal revenue, and without a definitive (or fully explained) means of recovering that lost revenue reducing the deficit is doubtful.

The bigger piece of the puzzle, however, is how each candidate will impact the current congressional gridlock. Obama has failed to bridge the ideological divide, and in some cases further polarized congress. Romney’s policies represent a further continuation of the conservative Republican ideology. Romney plan of cutting taxes and spending is likely to further polarize congress. In addition, Romney’s signing of the tax pledge is also a symbolic gesture of a future unwillingness to compromise.

We do believe that the business community and the stock market will respond more positively to a Romney victory. Corporate optimism is likely to follow a vocal pro-business candidate. Romney’s policies also favor the private sector, with a significant focus on incentivizing private sector growth. We are unsure, however, how long this optimism will sustain itself due to the difficulty Romney’s will face passing partisan policy though a divided congress. Obama is unlikely to elicit the same optimism if he wins a second term. In addition, the perception of Obama as anti-business has fueled Wall Street’s unease, a trend likely to continue with a second term.

The 2012 election will provide greater certainty in who will be our next President, but we do not believe the election will lead to any fundamental changes will shift the risk adverse attitude of most Americans. While the election may provide temporary certainty on the immediate future of the Bush Era tax cuts or Fiscal Cliff, we contend that uncertainty regarding the long-term future of the American economy and government will remain.



[1]  2015 is chosen to allow for the time required to turn policy into law and the point at which temporary tax policy Romney does not wish to continue will expire.