Green Is Good, but Cap and Trade Is a Nightmare
Congressional legislation that would cap greenhouse gas emissions and allow trading for emission rights would further damage the nation’s economic climate. It also raises the specter of massive climate fraud.
In fact, some lawmakers suggest that sealed documents in a multi-million dollar California climate-fraud case hold secrets showing vulnerabilities in potential cap-and-trade scams.
But I’ll have more on the potential for Bernie Madoff-type fraud later.
On its surface, the premise to reduce greenhouse-causing carbon dioxide emissions looks like a promising idea. It has passed the House and is mired in the Senate. Admittedly, America consumes about 21 billion barrels of oil daily – more than half is purchased from abroad – many of the nations are not considered loyal allies. Therefore, the environment would benefit from our using renewable, cleaner energy, which means it is a desirable idea.
However, it’s clear that a cap-and-trade system would increase prices to American businesses and the end user – consumers already suffering to the brink by the downturn. The cost to business would be astronomical.
Power companies would be forced to generate and market electricity from renewable sources. Businesses would be commanded to trim down their carbon dioxide emissions or buy credits – pollution permits – if they need to surpass the limits set by Congress. A business could sell or trade unused allowances to other companies.
Progress – energy efficiency
Undoubtedly, this debate warrants examining America’s progress in energy efficiency.
In Oct. 2009, the American Council for an Energy-Efficient Economy (ACEEE) released a study of what it calls a scorecard of how the states are faring in energy policies, practices and programs. That includes utility-sector and public benefits programs and policies; transportation policies; building energy codes; combined heat and power; state government initiatives; and appliance-efficiency standards.
In saluting frontrunners in energy efficiency, the ACEEE study names 10 states:
- California
- Massachusetts
- Connecticut
- Oregon
- New York
- Vermont
- Washington
- Minnesota
- Rhode Island
- Maine
ACEEE gives five states and the District of Columbia high marks for showing the most improvement; they include:
- Maine
- Colorado
- Delaware
- District of Columbia
- South Dakota
- Tennessee
ACEEE is also lauding manufacturers, energy efficiency groups and California’s Pacific Gas & Electric Company for agreeing to new efficiency standards for outdoor lights. They hope Congress will pass a law that will lower energy use by lights up to 42 billion kilowatt hours a year. ACEEE estimates it would affect at least 3.6 million households.
So progress is being made in energy efficiency.
Businesspeople and consumers have a right to be concerned about such legislation. It would impose more government regulation and heavy mandated costs. Not to mention some of the world’s major players are not in the game.
In July, 2009, Environmental Protection Agency Administrator Lisa Jackson admitted to Congress that America’s efforts to reduce greenhouse gas emissions will not make a difference unless China, India and third-world countries implement such green policies.
China has vowed to cut “carbon intensity” by 40 to 45 percent in 10 years, but critics say the promise is inadequate.
Three coalitions – comprised of 23 states with 50 percent of the U.S. population and responsible for more than a third of gas emissions – are working in the cap-and-trade arena. Each state would be autonomous but only one coalition shows any progress, at all.
The coalitions were formed after former President George Bush opposed such controls.
A group in the Northeast, the Northeast Regional Greenhouse Gas Coalition, has commenced its efforts affecting electric utilities, but has not been able to benchmark success.
A second group, the Midwest Greenhouse Gas Accord, reportedly cannot even design its program.
The third group, the Western Climate Initiative, comprised of seven Western states and four Canadian provinces has worked since 2007. But it is still is in a quandary over whether to proceed ahead of the federal government.
One of ACEEE’s highly ranked energy-efficient states, Washington, considered a cap-and-trade proposal supported by Gov. Chris Gregoire but it died under heavy criticism in the 2009 legislative session. There were concerns over the burdens on energy-intensive companies. They complained they would suffer from high costs. They also warned that prices for pollution permits would not be transparent and could be manipulated.
Only California and the Canadian provinces have passed legislation in the Western coalition.
So many consumers and businesses see a cap-and-trade system as terrible for the economic climate. They are too stressed over cash flow, layoffs, credit issues and foreclosures.
Climate fraud case
Meantime, two members of Congress are demanding that sealed documents in a California multi-million dollar climate fraud case be opened. They say the documents are evidence that would affect the cap-and-trade legislation because a new trillion-dollar commodities market would evolve as a result of the carbon dioxide emissions credits.
The lawmakers suggest the climate-change legislation might create an environment for more Wall Street deception – this time, in trading cap-and-trade pollution rights.
Rep. Joe Barton (R-TX) is the ranking member of the Energy and Commerce Committee. Rep. Greg Walden, (R-OR) is ranking member of an oversight and investigations panel. They are represented by the House Office of General Counsel in asking a California federal district court to release sealed records in the fraud conviction of Anne Masters Sholtz, a former economist at California Institute of Technology.
The 2005 Sholtz case entailed a climate trading system called Reclaim. She participated in the design of Reclaim and was convicted of fraud in selling phony emission allowances to the tune of $12 million. It is believed the sealed documents would show how climate fraud could remain under the radar screen and lead to another multi-billion dollar Bernie Madoff-type scandal.
Such schemes make it difficult to connect the dots in massive financial losses.
You might recall those Wall Street firms that received bailouts, in part, after the commodity and housing markets collapsed in the current financial disaster. Well, some reportedly have been already involved in the Northeastern coalition’s cap-and-trade system. They include Barclays, Goldman Sachs, JP Morgan, Merrill Lynch (now a subsidiary of Bank of America) and Morgan Stanley.
In conclusion, here are two questions: do dubious cap-and-trade benefits outweigh the financial risk to businesses and consumers? Is the likely pain from more Wall Street chicanery worth the risk?
The answer to both questions is a resounding no. When will we learn our lessons? With great difficulty we recovered from Enronitis nearly a decade ago, and it is not clear we will soon succeed over the Wall Street chicanery and the Great Recession.
How to Attract an Angel Investor
Now that a University of New Hampshire study indicates early stage financing by angel investors is more advantageous than venture capital money, what now? How do you get the angel funds?
Noted angel investor John B. Dimmer offers seven tips.
The 2009 study – “Initial Public Offerings and Pre-IPO Shareholders: Angels Versus Venture Capitalists” – shows evidence of under-pricing by venture-supported IPO groups in initial public offerings vis-à-vis angel investors. The study was conducted by Professors William C. Johnson and Jeffrey E. Sohl.
So what does it take to land an angel investment? Noted angel investor John B. Dimmer offers seven tips.
Acknowledging the difficulties of entrepreneurship, the successful angel investor in Tacoma, WA, who likes technology, says he looks for tenacity: “I want people with the moral integrity and intestinal fortitude to make the difficult journey through the Valley of the Shadow of Death and come out the other side,” says Mr. Dimmer. “It’s fun to greet them on the other side, hand them a margarita, and toast the success of their achievements.”
In the third installment of my profile of Mr. Dimmer’s insights, he graciously explains his comprehensive approach in how he selects investments:
Q: What mistakes do new companies make in applying for funding?
A: As I indicated, people are the single most important element in making an investment. As such, I generally don’t see business plans unless I know the people who are involved, or I know someone who knows the people involved. I think that to a large extent, most venture investors share this philosophy.
The business plan always comes first. I want to see a compelling market opportunity, and I want to know how the company intends to capture a meaningful share of that market. Mistakes I often see in this segment of the presentation almost always center around unrealistic sales assumptions. Overly aggressive projections relative to the percentage of market share the company will capture is one common mistake. Another mistake is a fundamental lack of understanding of the sales cycle, and the organizational structure required to produce the target revenues.
Q: Preference on projections?
A: Three years worth of financial projections is adequate, but five years is preferred. I would like to see the first year broken down into some detail, but future years can be prepared on a condensed basis. Having been involved with a myriad of start-up companies, I know that the financial projections will not be accurate; however, the forecasts provide valuable insight into the thought process of the people involved.
The most common mistake companies make in this area is a failure to understand and exhibit the financial metrics of their particular business. For example, software companies should normally generate 90 percent gross margins. If you are coming to me with a software investment, and your forecasts show a 55 percent gross margin, unless you have a very good answer as to why you deviate from the norm and how you are going to make money, I will assume that your business will fail because you don’t understand the financial metrics. Likewise, if you present me with an opportunity in the professional services space, which normally generates 50 percent gross margins, and you tell me that you are going to generate an 85 percent gross margin, I will assume you don’t know your financial metrics and pass on the opportunity.
Q: Structuring the deal?
A: Angel investing is risky business, with many of the portfolio companies ultimately failing. Accordingly, angel investors need to see an opportunity for substantial returns in order to offset the losses on bad deals and generate a reasonable return on the entire portfolio. What kind of a return is required? Well, a lot of that depends upon the timeline between the initial investment and exit, but traditional metrics suggest angels are targeting five to ten times their money back from a successful deal. It should be a given that any company approaching me for funding will have established the asking price for my initial investment.
Q: Exit strategy in proposals?
A: This should include the type of exit transaction, which may be a merger, an IPO, or something else, the timing associated with the exit, and the valuation metrics at exit. The mistakes I see here fall into one of two categories, those being an initial valuation that is set too high, or an unrealistic assumption about the exit timing and valuations. As the exit strategy is simply a forecast of a future event, my solution to either of these problems would be to try and negotiate a lower initial valuation.
As an example, I recently looked at a company that had their financing pulled out from under them. They had a big business opportunity ready to go, and needed capital to execute. While I liked their business plan, I felt their valuation was exceptionally high. I compared their valuation metrics with those of similar publicly-traded companies, and found that I could own these public companies for about 20 percent of the price they were asking. I ultimately went back to them with a proposal, but slashed their valuations. They weren’t too happy and so went looking for money elsewhere, presumably under different deal terms.
Q: Legal controls?
A: I believe that items such as voting rights or preference provisions should be allocated and enjoyed equally between all the parties involved with a company. Periodically I see instances where the founders have preferential rights to voting or liquidation. I’d like to think that we are all on the same team, which means if one person wins, we all win. Preferences then make it possible for one party to win, and another to lose, cause the creation of multiple agendas and ultimately lead to failure.
Q: What are the components of a successful presentation?
A: It’s pretty simple: brevity, clarity, honesty. A quality opportunity should be somewhat self-evident. I might need a little help starting down the path, but if I don’t pick up on it pretty quickly, I’m never going to buy into the deal. So, don’t be too long, don’t get overly complicated, and don’t try to pull a fast one on me.
The other thing I am going to look for in a presentation is the ability of the entrepreneur to think on their feet. If you really know your stuff, this shouldn’t be too hard. I periodically like to ask questions where I already know the answer just to see if the entrepreneur knows what they are talking about. Likewise, I sometimes like to ask questions that are outside the box just to see how the entrepreneur handles obtuse ideas. If you know your stuff, you can digest the inquiry and quickly formulate a meaningful response. If you stumble, you don’t know your stuff, and if you don’t know your stuff, I don’t want to give you any of my money.
Q: What trends would you care to predict?
A: I do not consider myself a visionary, but I’ve certainly worked with visionaries. My strengths come in the form of listening and then determining if there is a realistic opportunity for the vision to be commercially implemented within a reasonable time period. The only prediction I will make is that as our world advances, each advancement creates more opportunities…More opportunities for services, products, and technologies to be developed and delivered to consumers. The world of the entrepreneur is expanding at an ever-increasing rate, and I don’t see this changing any time soon.
The other columns in which Mr. Dimmer shares his expert opinions:
- “Investor: Tips for Increasing Cash Flow, Profits”
- “How Investor Has Fun in Business and Technology”
From the Coach’s Corner, to see the University of New Hampshire study, visit: http://www.unh.edu/news/cj_nr/2009/july/lw22cvr.cfm
Also, here are some Pacific Northwest angel-investment resources:
Boise: www.boiseangelalliance.com
Portland: www.oef.org/home/
Seattle: www.allianceofangels.com/
Spokane: www.connectnw.org/
Vancouver, WA: www.vef.org/angels/
WA statewide: www.watechcenter.org/
Investor: Tips for Increasing Cash Flow, Profits
For a growing business, cash flow is crucial for profitability. That’s also true for the biggest companies and sectors traded on Wall Street – airlines, cars, financial services, oil or technology.
Every company is concerned about cash flow; but in 2008, 128 of the Fortune 500 companies in the nation had red ink. They include General Motors, Citigroup, Motorola, AIG, Merrill Lynch, ConocoPhillips, and Time Warner.
Cash flow enables you to make productive decisions to navigate and grow in the competitive marketplace.
No one knows that better than angel investor John B. Dimmer, the managing member in FIRS Management LLC, a private investment firm based in Tacoma, WA. He is also a director at three companies and has extensive management experience.
Here is a sample of his cash-flow solutions:
Q: How do you recommend predicting a cash-flow crunch in time to do something about it?
A: You need monthly income and expense forecasts that are established at the beginning of the business year. These must be realistic numbers that all of the management staff has agreed are reasonable. The second things you need are timely and accurate financial statements.
It is very much like planning a road trip in the car. You are trying to get from point A to point B, so you plot a route. You know that there are landmarks along the way. Every now and then you need to stop and check for these landmarks. If they show up where you expect them, you know you are on the right track. If not, you need to evaluate how far off course you are, and take corrective action.
Q: What strategic process do you recommend to evaluate the causes of cash deficits? What are the most promising solutions?
A: Getting back to our roadmap analogy, if you don’t see a landmark that should be there, or you find a new landmark that wasn’t on the original plan, you need a process for getting back on track. You need to take the time to evaluate where you are, where you should be, and what went wrong.
When you are off plan, there are some fundamental questions that need to be asked: Was the original plan flawed? Has there been a fundamental shift in the business such that the original plan is no longer applicable? Did we make an execution error? When, where, and what was it? Can it be corrected? What are the critical variables with respect to getting back on plan?
Usually this involves one primary variable, which is money. Whatever solution you take, you need to make sure you have enough money to fund it through implementation.
Q: How do you recommend finding creative ways to keep the business alive until sales pick up?
A: One of the mistakes I often see are entrepreneurs who staff their organizations under the assumption of optimum activity. The truth is that there are cycles to business. While not all business can use contract help, I like to try and have my companies staffed to a smoothed-average that is just above the troughs and just below the peaks. In this fashion, you can quickly and effectively reduce your labor costs in times of a slowdown without causing a morale-crisis with your permanent employees. I would also use slower times to beef up on training in preparation for when the good times return.
Finally, encourage your staff to make things happen. When we hit a slowdown in the car business, we ask our sales staff to get on the phone and start calling people. This usually starts with former customers and takes the form of a friendly call simply to inquire how everything is going with their car. Often times, you discover that they love their car, and they have a friend who is interested in buying a new car. Sometimes you find that they love their car and they want to buy another. And sometimes you find that there is a problem. Problems, however, create opportunities. If you invite them to come in, and then solve their problem, they will remember that you were proactive. They will tell their friends about their experience, and their friend will come and see you for their car needs.
Q: What about negotiating with investors or other financial supporters until cash flows increase?
A: Investors hate bad surprises, especially when the surprise is accompanied by an emergency need for funds. Assuming you created the roadmap, and are tracking your progress, you should be able to see the bump in the road well before you actually hit the bump. Most investors are business people who have been down the road before and know that everything is not smooth sailing. They will appreciate the fact that you have a plan, that you are tracking your results against the plan, and that you have foreseen a problem before it hits.
Generally cash flow problems mean you need to borrow more money or raise more equity. If such is the case, have your presentation for raising new money ready to go so that you can transition from the communication stage to the pitch. Be humble, because the last thing I really want to hear as an investor is how smart you are and how great everything is going when, in fact, you are off plan and running out of money.
Part of the negotiation is an acknowledgement of the problem, a rational analysis and a well-crafted solution. You, as the owner, may need to take a bit of a hit in order to implement a solution. This might come in the form of a down round of fundraising where you are force to make up the dilution to the other shareholders out of your own holdings. Know what you are and are not willing to do. If you are forced to give up something to keep the company alive, figure out how to get it back, perhaps via options, if your revised plan was the proper call and the company comes roaring back.
Q: How do you know when it’s time to close or sell the business?
A: I always want to stay in the game, even when it is two outs in the bottom of the ninth inning, you are down by five runs, and the count is full, there is still a chance you can pull off a win. Nonetheless, I try to keep entrepreneurs from getting in so deep that if their company fails, they are wiped out. I’ve been involved with two companies where I had to tell the entrepreneur that they shouldn’t put any more money into the operation.
In one of those instances, we were able to locate a buyer for the company. The purchaser was a publicly traded entity that, since the purchase, has taken a bit of a down-turn, so the jury is still out as to whether the entrepreneur will come out whole. Nonetheless, it was a better option than closing the doors. With the other company, we have what we feel is great technology; we just can’t seem to get a revenue stream developed. We are in the process of procuring a patent, and think that it will have good commercial value once the patent is issued. Accordingly, we have put the operational aspect of the company in suspense, and are pursuing acquisition opportunities. The biggest risk on this strategy is a failure to cut a deal followed by an impotent patent.
I never advocate simply closing the doors. If you are doing proper planning, you should see the problem coming down the road. There should always be something saleable about your company, even if it is less than a full recovery.
From the Coach’s Corner, Mr. Dimmer’s other tips:
- “How to Attract an Angel Investor” – www.bizcoachinfo.com/archives/1367
- “How Investor Has Fun in Business and Technology” – www.bizcoachinfo.com/archives/1272
Why Women Receive Less Angel Funding Than Men
You’re a woman with a great business idea, but you’re short on funds. You’ve also heard that it’s tough for female entrepreneurs to get financing from an angel investor – someone who funds early-stage companies.
Ironically, female entrepreneurs receive less angel funding than men, even though they launch more businesses, according to a study co-authored by a finance professor, Dr. John Becker-Blease, at Washington State University, Vancouver, www.vancouver.wsu.edu.
The study is entitled: “Do women-owned businesses have equal access to angel capital?”
Dr. Becker-Blease conducted the study with Dr. Jeffrey E. Sohl, who directs The Center for Venture Research at the University of New Hampshire, www.wsbe.unh.edu/cvr, in 2007. Dr. Becker-Blease formerly worked at the center prior to joining WSU where he researches entrepreneurship, corporate governance and women in business.
What is their study’s first insight on why women receive less angel capital? Fewer women than men actually apply for angel funds.
For those who do apply, Dr. Becker-Blease reminds us that investors aren’t interested in backing small retail-type micro-businesses.
“We found that women entrepreneurs submitted an average of nine percent of proposals received by our angel groups during the sample,” he said. “Indeed, of the proposals received, both women and men had an equal chance of receiving funding (about a 14 percent chance).”
Here is an excerpt of the interview with Dr. Becker-Blease:
Q: At what rates do women start business vs. men?
A: The rate of increase in the number of businesses in which women were at least 50 percent owners is quite a bit higher than the increase in men-owned-businesses. The National Foundation of Women Business Owners reports a 17 percent increase in the number of women-owned firms between 1997 and 2004, compared to an overall increase of only nine percent in the total number of firms.
Q: Why do fewer women seek capital than men?
A: Three possible answers. 1. Women entrepreneurs are not interested because the kinds of businesses they tend to start such as retail and service businesses are not the type that most angel investors care to fund. 2. Women entrepreneurs do not know who to ask or how to go about seeking capital. This is a by-product of their network composition. Most angel investors tend to be men (roughly 90 percent) and since women entrepreneurs are not typically part of their network, women do not know how to contact these angels. 3. There is discrimination, or perceived discrimination, in the angel capital market against women and therefore only those women with the best networks or those with the most promising business ventures will find it worth their time and effort to seek angel funding. I should note that we do not find evidence of discrimination.
Q: Why are women likely to seek funds from women angels?
A: It is not simple for the average entrepreneur to find an individual or group of individuals who are willing and able to provide two or three hundred thousand dollars worth of equity capital. Instead, angel investing appears to occur primarily within fairly closed networks.
Homophily is the tendency of individuals to interact with others who are similar to themselves, and sex-based homophily can be particularly strong. We do find strong evidence of homophily in the seeking of angel capital; men appear to seek funds from angel groups comprised disproportionately of men and women appear to seek funds from angel groups comprised disproportionately of women.
Q: How do women entrepreneurs fare compared to men in receiving funds?
A: The data suggest about the same. We have some evidence that angel groups that invest in a relatively high proportion of women-owned-businesses tend to invest more funds than other angel groups. This may be due to the kinds of businesses these groups fund, the stage of the investment, or just a quirk in the data.
Q: Why is so little known about women receiving private equity investors?
A: From the supply-side, since angel investors are not organized around a formal market, researchers have difficulty identifying them and even when we do, many angel investors are reluctant or have such heavy demands on their time that they cannot participate in academic studies. From the demand-side, identifying serious aspiring entrepreneurs, especially those in the kinds of industries that angel capitalists tend to invest in (that is, high growth) is perhaps even more challenging.
Q: What other data did you uncover?
A: As an interesting aside, in a current project that Jeff and I are working on together, we find evidence that angel groups comprised disproportionately of men accept a higher proportion of women-sponsored proposals than do angel groups comprised disproportionately of women.
Q: What questions did your research leave unanswered?
A: We need to examine much more carefully the demand-side of the market. Why are there so few women entrepreneurs who seek funding? For a given level of quality of proposal, are men and women equally likely to receive funding?
Q: What advice would you offer women entrepreneurs seeking funds?
A: There is a growing awareness that women entrepreneurs may face added challenges in acquiring early-stage equity financing. This has led to the creation of women-focused angel groups such as The Women’s Investment Network in Portland, Oregon, which is part of the Oregon Entrepreneurs Network, www.oen.org, or the Seraph Capital Forum in Seattle, www.seraphcapital.com. Make use of their resources and any forums offered.
Well put.
From the Coach’s Corner, here’s more angel-funding advice from an expert who warns that many novice women entrepreneurs underestimate the marketplace:
“Tell women entrepreneurs they’ll encounter major competition,” said Neil Delisanti, who retired as a counselor with the Small Business Development Center in Tacoma, WA, www.tacomabusinesscenter.org, and as a business professor at University of Puget Sound, www.pugetsound.edu. “Advise them to assess their strengths and weaknesses to determine their competitive advantages, and to develop operating strategies.”
Delisanti said he’s observed some women are too empathetic to customers, but are more organized than men in financial and other administrative matters.
For information on raising capital in turbulent times, visit: What No One Tells You about Raising Investment Capital
