[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE STARTUP MOVEMENT
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
NOVEMBER 20, 2013
__________
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Small Business Committee Document Number 113-043
Available via the GPO Website: www.fdsys.gov
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Sam Graves.................................................. 1
Hon. Nydia Velazquez............................................. 2
WITNESSES
Adam Arredondo, Co-Leader, Kansas City Startup Village, Kansas
City, KS....................................................... 3
Allison Lami Sawyer, CEO and Founder, Rebellion Photonics,
Houston, TX.................................................... 5
Jeff Reid, Founding Director of the Georgetown Entrepreneurship
Initiative, McDonough School of Business, Georgetown
University, Washington, DC..................................... 6
Anton Gelman, CEO, Cont3nt, Dulles, VA........................... 8
APPENDIX
Prepared Statements:
Adam Arredondo, Co-Leader, Kansas City Startup Village,
Kansas City, KS............................................ 29
Allison Lami Sawyer, CEO and Founder, Rebellion Photonics,
Houston, TX................................................ 36
Jeff Reid, Founding Director of the Georgetown
Entrepreneurship Initiative, McDonough School of Business,
Georgetown University, Washington, DC...................... 40
Anton Gelman, CEO, Cont3nt, Dulles, VA....................... 42
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
THE STARTUP MOVEMENT
----------
WEDNESDAY, NOVEMBER 20, 2013
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 1:00 p.m., in Room
2360, Rayburn House Office Building. Hon. Sam Graves [chairman
of the Committee] presiding.
Present: Representatives Graves, Luetkemeyer, Hanna,
Schweikert, Collins, Velazquez, Clarke, Schrader, Payne and
Barber.
Chairman GRAVES. Good morning, everybody. I want to thank
all of our witnesses for being here today.
Today's hearing, we will examine a growing trend across
America, which is the rise of startups and what that means for
the United States. The term ``startup'' is often synonymous
with high growth and innovation. While certain areas such as
Austin or Boston, New York, and the Silicon Valley
traditionally have been hubs for startup firms, in the past few
years we are seeing the startup trend expand to much less
obvious communities, such as Kansas City, which is obviously my
backyard.
On this Committee, we frequently highlight the benefits of
small businesses to the American economy, and we know that
small firms create the bulk of net new jobs in this country,
but interestingly enough, research has shown that, in fact, it
is a particular subset of small firms which are startups that
are actually leading the way in terms of job creation. Further,
a report by the Pacific Research Institute estimates that in a
given year each net job created by startup firms increases a
state's gross product by almost $1.2 million, shedding light on
the significant benefits growing startups can have on our local
economy.
The terms startup and small businesses are sometimes used
interchangeably. However, startups frequently have unique
characteristics that distinguish them from the vast majority of
traditional small businesses. Given this, the Committee is
going to examine how startups operate and whether the
differences between startups and small firms are, in fact,
substantial enough to necessitate different policies.
Today, we are fortunate enough to have a panel of witnesses
from all across the country, including areas traditionally not
viewed as startup hotbeds where the trend is rapidly expanding.
I want to thank all of our witnesses again for taking the time
away from your jobs and making the trip here to Washington for
this very important hearing, and I very much look forward to
your testimony.
Now, I will turn to Ranking Member Velazquez.
Ms. VELAZQUEZ. Thank you, Chairman Graves. Please bear with
me. I am recovering from a bad cold.
When we think of a startup business, the early days of
Apple or Google usually come to mind. The stories are familiar.
Hard-working entrepreneurs who took extraordinary risks to beat
the odds. Like these companies, most successful startups have
three things in common--a new product or service, extreme risk-
taking due to uncertainty of the marketplace, and leadership
that can navigate the complexities of today's economy. Getting
these three factors to align is the hardest part. On average,
only one in three startups makes it to the tenth year, but when
they do, high growth firms create new markets, increased
competition, and attract other enterprises to provide support.
As a result, startups have a disproportionate positive impact
on job creation. According to the Census Bureau, they create
jobs at nearly twice the rate of the nation's annual net job
growth rate. By starting new endeavors and developing cutting
edge products, entire industries, as well as the overall
economy, are renewed and energized.
During today's hearing, we will have an opportunity to
examine the unique role that entrepreneurs and startups have
played in the current economic recovery. One of the biggest
obstacles facing startups is the lack of financing. According
to the most recent Wells Fargo Gallup Small Business Index, 30
percent of small business owners still feel credit is difficult
to obtain. Capital is the life blood of small businesses, but
particularly for startups and high growth businesses that do
not yet have positive cash flow. Traditional bank lending via
loans is ill-suited to the high-risk nature of startups.
Fortunately, there are still a multitude of funding sources for
new firms to choose from, including the SBA's SBIC program,
angel investors, private equity, venture capital, and
crowdfunding.
Another area critical to the success of a business is
technical assistance. SBA programs assist entrepreneurs by
providing tailored education on everything from marketing to
procurement to international trade. For a startup, this
expertise can often make the difference between failure and
long-term growth. These initiatives, like the Small Business
Development Centers, have proven to be effective in delivering
counseling and assistance to millions of entrepreneurs across
the country. While the SBDC network is the SBA's largest
entrepreneurial assistance program, it nevertheless faces
challenges. With lower budgets and increased levels of demand,
it is between a rock and a hard place. The burden of further
budget cuts should not be placed on the backs of job creators
who rely on these resources to succeed. Bringing new products
to unproven markets is inherently risky. As a result, startups
face a number of unique challenges--obtaining financing,
managing operational processes, and addressing human capital
issues.
Today we will hear from experts on the cutting edge of the
startup movement who can provide the best ways to support the
innovative spirit of America.
In advance of the testimony, I want to thank all the
witnesses who traveled here today for both your participation
and insight into this important topic. Again, thank you, and I
yield back.
Chairman GRAVES. Thank you very much.
We will introduce the witnesses. We are going to have a
series of votes unfortunately, probably in the neighborhood of
1:15 to 1:30, somewhere right in there, which we will recess
and then we will come back. But I apologize for that. The vote
schedule is a little bit different all the time, unfortunately.
Our first witness is Adam Arredondo. Mr. Arredondo is the
co-founder of the Kansas City Startup Village. The Kansas City
Startup Village is led by local entrepreneurs to strengthen and
invigorate growth throughout the Kansas City Startup community.
In addition to his role at the Kansas City Startup Village, Mr.
Arredondo is also the CEO and founder of Hoopla.io, which was
recognized by Turnstone as one of the ``15 Best Young Companies
to Work For.'' Thanks for being here, and I look forward to
your testimony.
STATEMENTS OF ADAM ARREDONDO, CO-LEADER, KANSAS CITY STARTUP
VILLAGE; ALLISON LAMI SAWYER, CEO AND FOUNDER, REBELLION
PHOTONICS; JEFF REID, FOUNDING DIRECTOR OF THE GEORGETOWN
ENTREPRENEURSHIP INITIATIVE, MCDONOUGH SCHOOL OF BUSINESS,
GEORGETOWN UNIVERSITY; ANTON GELMAN, CEO, CONT3NT
STATEMENT OF ADAM ARREDONDO
Mr. ARREDONDO. Thank you very much. I think it is very
fitting that this week is Global Entrepreneurship Week. So
Happy Global Entrepreneurship Week to everybody.
But, yeah, outside of running my two companies--I have two
Internet startups--I am also one of the co-leaders at Kansas
City Startup Village. Kansas City Startup Village is an
entrepreneur web effort that ended up starting September of
last year with five startups and three properties within half a
block of each other in the first neighborhood in the world to
get Google Fiber. Not planned. There is no blueprint for what
we are doing. But fast forward 14 months, and there is now 13
properties, 25 startups. We have had people visit and
investigate what is happening there from over 45 different
countries. We have also had people move there from 12 different
states, and we have created over 70 jobs. All of that with zero
outside funding.
And so there are a few takeaways that are big. One is that
it is entrepreneur-led. One of the things that is critical to
really building sustainable startup communities is that
entrepreneurs are at the forefront of it. Government
corporations and universities are absolutely critical to that
but their role is to support the entrepreneurial-led efforts.
And me being here today is a perfect example of that. I could
not afford the travel as an entrepreneur and my company could
not either, so I reached out to some of the supporters in the
community, and actually, the Wyandotte County Economic
Development Council helped me get here so we could tell our
story. And that is a small example, but an example of how all
these pieces need to work together.
Another key part of what we have built in the village is
what we call startup density. And we talk about serendipitous
collisions all the time. So many good ideas and collaborations
come from entrepreneurs, like-minded, innovative people being
close together in physical proximity leads to more of those
collisions, and those have played a huge part of the success of
the village.
And one other thing about the village is that although
Google Fiber is something that is unique to Kansas City--it is
the only city in the world with it--it is the community that we
have built that keeps people there. A good example of that is a
22-year-old entrepreneur that moved from Boston actually to
Kansas City, he came because he wanted Google Fiber and there
was a program there that offered him three months of free rent.
And he was coming to mooch a little Google Fiber and leave, but
he decided to stay because he said it is such an awesome
community and he wanted to be a part of it.
So like I said, we have had a lot of people come from
around the world to see what we are doing, and we get asked the
question all the time about small businesses versus startups.
And one of the key things, and I am sure you have heard it, is
a startup does not desire and does not look to become a small
business. They want to become a large scaling company, an
innovative company, a game changing company. And so that is one
of the differences. And with that come different needs. And so
one of the big needs as everyone knows is financing, and all of
the traditional loans and SBA loans are all asset-based. As of
yet, patents, mobile apps, algorithms cannot be converted for a
loan. So honestly, I do not even spend any time trying to get
any of those because I do not qualify.
But I have been lucky to find a couple of grants through
local organizations that we have been able to take advantage
of. One was an H-1B grant through Workforce Partnership in the
state of Kansas. We have a relationship with them, and it is
for IT on-the-job training. And we have been able to use that
to hire six employees. The Village has used it to hire 23.
Another one is an i6 grant that UMKC got. And through a program
called Digital Sandbox, they have been able to fund over 20
different startups. Again, the key takeaway here is that I
engage with the local organizations focused on
entrepreneurships and they have relationships with us and know
what we need. All of these different communities are different
around the country. And so what I would recommend to you guys
is to focus how do you get more resources into the hands of the
organizations that interact with us on a daily basis so they
can find the most appropriate ways to allocate and distribute
that funding.
So thank you very much for listening, and I look forward to
questions.
Chairman GRAVES. Thank you very much.
Our next witness is Allison Lami Sawyer. Ms. Lami Sawyer is
the founder and CEO of Rebellion Photonics located in Houston,
Texas. Rebellion Photonics looks to promote safety by building
cameras that can spot poisonous and explosive gas leaks on oil
rigs and refineries. And in 2012, Mrs. Sawyer was named by INC
Magazine as one of the 30 Under 30 and most recently, just a
couple of weeks ago, as a matter of fact, Rebellion Photonics
won the first annual Wall Street Journal ``Startup of the
Year'' competition.
So welcome to the Committee. Thank you for being here.
STATEMENT OF ALLISON LAMI SAWYER
Mrs. SAWYER. Thank you for having me.
So again, I am Allison Lami Sawyer, CEO and cofounder of
Rebellion Photonics. We are an optics startup spun out of Rice
University in Houston, Texas. And what we do is solve some of
the world's largest problems using optics. And how I would
differentiate startups versus small businesses and really
compared to all other businesses is startups are truly the
powerhouses for engineering innovation. Once upon a time, most
innovation happened in the labs of IBM, GE, the Halliburtons.
That is not how it is anymore. Now, most large companies have
moved their R&D budget and made it an M&A budget, mergers and
acquisitions, especially in hardware. So your heavy industry or
oil and gas safety, like us. So hardware startups like us or
heavy tech like us, we are truly the ones pushing forward
engineering and innovation in some of these really difficult
problems the world faces.
So Rebellion Photonics, our main product right now is for
oil and gas safety. It is called the Gas Cloud Imaging camera.
And what we are trying to solve is imaging explosive gas leaks
on oil leaks, like Macondo, or refineries before they explode.
Current technology is abysmal. It is point detectors that alarm
up to 10 times a day. That is why they are ignored. For
example, Macondo, they muted the alarms for two days. To be
fair, if you got 10 alarms a day you would mute it, too.
So seven guys and myself down in Houston, this is the
problem we are facing and that we are trying to solve. And we
were successful. So we started launching our first full scale
installations January of this year. BP was our first customer.
We have also signed on Chevron, and we are looking to get all
Big 5 oil companies. For seven people, Houston, Texas, tiny,
barely cash flow positive. We are doing a $10 million raise
right now hoping to close soon, but this just gives you an idea
that it is really not the big companies of the world that are
changing these massive problems. It is the small startups all
across the country. So that is how I would define startup.
Two things I would like to add are one way you could help
us is with IP, and then there is Bill 3309 in your Judiciary
Committee today, actually. Great bill, but there is a Section
18 in the bill that really waters it down. So I am always
afraid larger companies or patent trolls are going to sue me,
even if they know they will lose, and they know they will lose
because our IP is very strong. But they will sue me just to put
me out of business so they can get a cheaper acquisition price.
It happens all the time. So that is where I am coming from. It
literally keeps me up at night. Even though we have worked so
hard, it could all be taken away from me because of a lousy
trick like that.
And then a second thing is procurement. So we are focused
on oil and gas. We do do a little with defense, mainly Air
Force. So our cameras could also be used in drones. We could
make an amazing drone camera. So our cameras do not just see
colors; they actually see chemicals. Basically, they know what
they are looking at. Bad guy gets into a 1957 Chevy. I can
track him forever. So fewer mistakes with the drone attacks, et
cetera. So this could really affect world affairs on a minor
level, but we are not going to be doing that product, even
though it could be such a special product because defense
procurement is so complex and the infrastructure that I would
require to do that product is not worth it.
So when you are thinking of definitions and why you are
changing a definition, especially if you are going to overhaul
procurement or do anything with procurement, keep in mind we
have so much to offer, especially defense, and we could do it
faster, better, cheaper, but right now with procurement I
cannot give you that product. And I want to. So it is something
to keep in mind.
Anyway, thank you for your time.
Ms. VELAZQUEZ. Yes. It is my great pleasure to introduce
Jeff Reid. He is an adjunct professor of Entrepreneurship at
Georgetown University. Mr. Reid is an expert in the arenas of
entrepreneurship, venture capital, startups, technology, and
economic development. In 2009, Mr. Reid launched the Georgetown
Entrepreneurship Initiative to capitalize on entrepreneurial
thinking and launch new companies. Mr. Reid previously held
leadership roles at the University of North Carolina at Chapel
Hill, where he grew the Entrepreneurship Initiative to a number
one national ranking and was chosen by his peers as one of the
top directors in the United States. Mr. Reid earned a Bachelor
of Science in Business Administration from Appalachian State
University and an MBA from the University of North Carolina at
Chapel Hill. Welcome.
STATEMENT OF JEFF REID
Mr. REID. Thank you very much for inviting me here. I am
excited to be here because I am passionate about helping
entrepreneurs. It is what I get up in the morning just raring
to go every day, and I am also to say Happy Global
Entrepreneurship Week. This week around the world there are
tens of thousands of events in over 140 countries to celebrate
entrepreneurship. So it is great to be here, particularly
during this week.
I do feel like I have the best job in the world. I get to
work with students at Georgetown University, these young people
who want to change the world through entrepreneurial pursuits.
And I also get to work with experienced entrepreneurs who have
already been there and done that and who want to help out our
students.
The first main point I would like to make today is that we
all are and can be entrepreneurs. I had the great pleasure of
hosting Professor Muhammad Yunnus, Nobel Prize winner, at
Georgetown University, and one of the things he is famous for
saying is that all humans are entrepreneurs. The point he is
making is that going back in human history, if you were not
entrepreneurial, you just did not survive. It is only in recent
centuries that society has grown in ways that suppressed that
entrepreneurial nature that is within all of us.
Now, the wonderful thing is in recent years the world is
changing in ways that make it so much easier for that
entrepreneurial spirit to come out, and so we are seeing that
across the United States and around the world, more and more
startups, more and more entrepreneurs are doing the things that
they are great at doing. And that is awesome because
entrepreneurs and the startups they crate are among the most
powerful drivers of positive change in our society.
Entrepreneurs solve problems, they create jobs, they provide
value for their customers, they create wealth, and they lift up
the communities around them. And I know that is why we are here
to celebrate and learn more about entrepreneurs.
But as has already been mentioned, people have a wrong
impression of entrepreneurs. You know, when you ask, and I do
this on the first day of my class, I say what do you think of
when you think of entrepreneurs? And the common answer is just
what you would expect. It is Bill Gates, Steve Jobs, it is
these tech businesses, these folks that have become
billionaires. But entrepreneurs are not just the techies in
Silicon Valley. You have seen some good examples here already
today, and there are so many more all around our country. They
come in all shapes and sizes. They are in every one of your
districts. And we need more of them.
So being an entrepreneur is just as much about a mindset,
in my opinion, as it is a career choice. You can work in a
startup that somebody else founded and be entrepreneurial. You
can work in a large company and be entrepreneurial. You can
work in a nonprofit, maybe even for the government, and be
entrepreneurial. But what does that mean? If you are not the
founder of a startup, how do you be entrepreneurial? What it
means is embracing change, understanding risk, living with
ambiguity, evaluating and seizing opportunities, solving
problems, finding creative solutions, and being relentless in
the pursuit of your goals. Those are all qualities that anyone
can bring to their life and career. And it turns out those are
skills and mindsets that can be taught.
And that leads me to my next major point, is that
entrepreneurship can be taught. Education matters. It is not
true that every entrepreneur just wakes up in the morning and
is struck by lightning, has a brilliant idea, and the next
thing you know they become a millionaire and raise money and
all that is good. It turns out there are so many things that
you can learn in a university or other educational environment
about how to be a great entrepreneur. And colleges and
universities like Georgetown and so many others across this
great country have been doing this for a long time and are
getting better and better at it. And it is of critical
importance because our education system has traditionally
taught people how to be part of a large organization. And that
is one of the things that we should really look at is are we
teaching people how to be entrepreneurial or are we teaching
them how to be just a small cog in a big hierarchical machine?
So what can Congress do to help? First and foremost, help
us celebrate entrepreneurships. Let us celebrate startups. Let
us recognize as we have started to do here today, that startups
are not the same as small businesses. There are huge
differences. And the ways they just consider themselves are so
different. We would love to invite you to elevate the stories
about entrepreneurs in your own districts, attend a startup
weekend, just really get to know these folks. Immerse yourself
in the process. Support the educational efforts in your
communities around entrepreneurship. If you do not know who in
your community is leading entrepreneurial education efforts, I
will help you find them. And be relentless in finding the
solutions to the problems you face. Be entrepreneurial
yourselves. It is an amazing thing that we have this
entrepreneurial revolution in a country that is really known as
one of the best--as the best in the world for entrepreneurship.
Let us keep growing that. And thank you very much.
Chairman GRAVES. With that we are going to have to recess
for a short time. I apologize, Mr. Gelman. We are going to have
to recess for a series of votes. It is going to be a little bit
longer than normal but we will immediately reconvene. And my
staff will be here to answer any questions if you are curious
about when we will be back or where the bathrooms are and that
sort of thing.
But with that, we will recess until after this vote series.
[Recess]
Mr. LUETKEMEYER. Let us gavel this back in order. I
apologize for the delay, Mr. Gelman.
Our final witness, Mr. Gelman, is the CEO of Cont3nt
located in Dulles, Virginia. Cont3nt is a real-time market for
photo and video journalism. Since Cont3nt's founding
approximately one year ago, Mr. Gelman's company has received
numerous honors, including winning ``Distilled Intelligence
2.0'' and Startup America's ``TechBuzz Challenge 2012.'' Most
recently, Mr. Gelman was named to Tech Biz Now, a list of 30
Under 40. Thank you for taking time to be with us, and you may
begin.
STATEMENT OF ANTON GELMAN
Mr. GELMAN. Thank you very much. It is wonderful to be here
today. Hello, Congressmen and Congresswoman.
So again, my name is Anton Gelman. I am the CEO of a
company called Cont3nt.com. We are a real-time market for
breaking news. We enable media companies and freelancers in
places like Egypt and Syria and here in the U.S. to take that
amazing photo or video that they shoot and in real-time sell it
to the likes of CBS or NBC or the local paper, get paid for it
in real-time, have it on the air in a half-hour. We are
building an eBay for breaking news. Or to put it a different
way, we are trying to create a global free market for free
press.
Since we launched a little bit over a year ago, we now have
24,000 journalists in our system, over 2,000 media companies,
in 25 countries. By the end of this year, we are going to be in
60 countries, and by the end of next year, if all goes well, we
will be in every country in the world.
I am responsible for creating five jobs, including my own
in the U.S., as well as an additional four jobs abroad. And we
are expanding rapidly and really kind of are in the growth
stage of startup. We are not a lifestyle business. We are a
growth company. And actually, this right here, this is three-
fifths of all of our assets, of all of the physical
infrastructure that we have. The other two fifths, the other
two laptops, are currently in use at our office. We own no
office space. We have no furniture. We lease it from the
startup accelerator where we live. All of our assets are in
intellectual property, they are online, they are in the cloud,
and they are based in the customers and the relationships that
we have built. And this is very different from the traditional
definition of a small business.
We are not a small business. We are a big business in the
making. We think, and companies like ours, think like GE, not
like the ma and pop shop across the street. Actually, I have
been on both sides of the border. I have done a number of small
businesses. My family actually immigrated here from the Soviet
Union in search of the American dream. And I have run small
businesses since I was like 12, and I have a tremendous amount
of respect for people that do it. But the startup that I run
right now is a very different thing. We act very differently,
and we think very differently, and we require very different
resources.
So basically, a startup is not a storefront. It is a rocket
ship. And I say this with complete seriousness. A startup is
defined by its growth and its pace. And the big trick is that
when a company grows from one person to 100 people in 12 months
or in two years, that is something that the pace of that has
not been met with policy or legislation that is appropriate to
how it scales.
So basically, one of the things that I would urge everyone
in Congress to think about is to find ways to address these
incredibly fast-paced companies with legislation that allows
government programs to act much faster, to be able to enable a
pace that is synonymous with what America has kind of been
known for--for its leadership and entrepreneurship. For its
leadership around the world with companies like Google and
Facebook and LinkedIn and almost every other major company
based in the U.S.
Aside from a very rare exception, like for example, SBIR,
which is at least somewhat palatable to a startup, most other
programs, like even the wonderful SBA loans, they are
impossible. I mean, this is our collateral right here. There is
no way that we have two years of track records and any kind of
credentials that we need in order to actually get those kinds
of loans. And yet, it is quite likely that we will have more
jobs in 12 months than five businesses of the same size.
With the adoption of the Jobs Act and kind of the
beginnings of crowdfunding and immigration reform, this stuff
has been hitting its stride, and I love that it is actually
coming to the forefront of policymaking. But still, it is
pretty much in its infancy right now. I love that it is being
done but we are at the very beginning of that process.
Basically, it has yet to become very truly useful to the
startup economy.
I will give you an example of some of the things that do
work, for example. Obviously, the policies in place are working
kind of--are getting there. But, for example, in D.C., just
down the street, so we work out of a startup accelerator about
seven blocks away, and it was funded by $200,000 of D.C.
government money. So $200,000, as you know, is a very, very
small amount of money. That allowed them to set the baseline to
seed that investment that they now have a $2.5 million run rate
within four or five months. Two and a half million dollars run
rate that they have collected on their own that funds his
business. They have 170 companies working out of there. Over
300 jobs have been created off of this tiny, tiny investment.
And the reason it was done was because the D.C. government went
out and acted very quickly. They allowed the minimal amount of
investment to be signed quickly and to be delivered.
And so I thank you again for being here, and I would just
offer that we move faster and we try to put in legislation that
targets this incredibly fast-growing pace of companies. Thank
you.
Mr. LUETKEMEYER. Thank you.
We will enter the question and answer phase here. Keeping
with Chairman Graves's model, I will defer to the end, and with
that I yield to Congressman Collins for the first round.
Mr. COLLINS. Thank you, Chairman. And thank you all for
coming.
Point of reference, I have spent my life in small business
and involved in startups, and through the Center for
Entrepreneurial Leadership at the University of Buffalo I have
mentored over 200 companies the last 20 years. And I will tell
you in true disclosure, I have spent most of my life buying
startups after they fail. So I am known as the second owner. So
after the startup overestimates sales, underestimates expenses,
overestimates margin, and underestimates the difficult of
growth, I step in as the second person and then help them go to
the next phase after basically they have had problems with the
original investors, et cetera. So really, what I have seen is
most companies do just that--overestimate sales, underestimate
expenses, overestimate margins. And really, that is what makes
them entrepreneurs, their optimism. And the optimism gets in
the way. But more than not, they are undercapitalized. They are
undercapitalized because they do not want to give up ownership.
It is their idea. They want 100 percent and they will give you
1 percent for a lot of money because it is their idea. So
typically, they run out of money. And when you are running out
of money, that is not the best place to go.
So I am really intrigued, Mrs. Sawyer. Startup company, you
raised 1.1 million, and part of what we do at hearings is to
send a message out to other small business folks. So I hope I
am not asking for anything too confidential, but to raise the
1.1, was that friends and family or was that venture? And how
much of the company did you have to give up to get the 1.1
million?
Mrs. SAWYER. You are not going to like my answer. I have
given up zero percent because it is debt. I was able to raise
convertible debt. And in my next round though, we are doing a
$10 million equity.
Mr. COLLINS. I was going to ask you about that as well.
Mrs. SAWYER. That is a proper equity round, and I cannot
disclose that. That will be a minority investor, but they are
getting a sizeable chunk with pretty normal negative covenances
in the deal. So that will be a more traditional round.
Mr. COLLINS. Well, I am intrigued. You do not consider
convertible debt dilution?
Mrs. SAWYER. We were able to buy it back. It did not
convert.
Mr. COLLINS. Oh, you had the option to buy it back?
Mrs. SAWYER. Correct.
Mr. COLLINS. They did not have a put?
Mrs. SAWYER. Yeah. I love a good contract negotiation.
Mr. COLLINS. Wow. I guess I am never going to do business
with you.
I just wonder if anyone else--now, I was also intrigued
somewhat, Mr. Reid. You were saying a startup is not a small
business, so I almost find that--I cannot reconcile that. By
definition, a startup is one person, five people. That is a
small business, and I would think a startup needs capital and
they need a business plan and they need a vision, and health
insurance, and a phone system. So could you explain why you say
they are not?
Mr. REID. Sure. Technically, by definition, yes, you can
say if you have a very small number of people, whatever, it is
a small business. But as Anton pointed out I think pretty
eloquently a few minutes ago, he, in his startup, and most of
the startups that I work with, they do not think like a small
business. And so that was the main point I was trying to make
is that there are small businesses that do important things in
our economy and they are happy to remain small businesses. But
if you are an entrepreneur who is launching a startup company,
then you are thinking more like how is your business going to
grow in scale beyond the phase where it is a small business.
Mr. COLLINS. Yeah. Now, I suppose that in what I will call
the Internet software world that is probably very true. If you
are making widgets, I do not know if it is quite that much. I
wonder, Mrs. Sawyer, do you actually make your cameras?
Mrs. SAWYER. Oh, yeah. Right in Texas near Reliant Stadium
where they have the rodeo. It is quite fun.
Mr. COLLINS. All right. So let us see. Five years out,
where are your sales going to be?
Mrs. SAWYER. Five years out, over $100 million.
Mr. COLLINS. Wow. Okay. Can I write that down and call you
in five years.
Mrs. SAWYER. Of course.
We have had over 2 million in revenue so far, so I
bootstrapped the company. So when I cofounded the company I was
25 years old in Texas with a proof of concept, so
realistically, no one was going to give me funding. So we had
to bootstrap. And one of the ways we were able to do that is
(a) we started selling product. Just whatever we had. We do
contract work. But we also did get two SBIRs that were very
helpful. So they were a huge part of our initial growth. I do
not think the SBIR system is perfect. I think it is really
great for research. When it comes to actually developing
product it is a little slow. For example, we have a contract
with the Air Force, and the way the SBIRs are structured, they
are very structured. You know, there is phase one, phase two,
phase three, then you do a joint with a large developer, eight
years minimum. It does not take me eight years to develop a
product. It is unnecessarily slow. I mean, the government is my
customer. I could do a better job for the customer but they
have tied my hands. It is really odd. Really odd.
Mr. COLLINS. Well, thank you. My time is expired. Mr.
Chairman, I yield back.
Mr. LUETKEMEYER. Thank you. Thank you. We will yield time
next to the ranking member, Ms. Velazquez.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Mr. Reid, according to a recent report on small business
formation, half of all startups fail within the first four
years due mainly to the lack of capital. So that is a big
challenge. To combat this trend, many market participants have
hyped crowdfunding as the future of small business finance. Do
you think crowdfunding is going to help more of these
businesses survive and become established job creators?
Mr. REID. Yes. Thank you very much for bringing up
crowdfunding. It is a big topic in the startup world. And I
think it absolutely will help. I do not think it is perfect,
but I think it is a wonderful way to bring more capital to the
market. I am actually wearing a watch today that I bought from
Kickstarter from a entrepreneur that was a Georgetown student.
She started a watch company. And this is an important way for
her to raise capital, and I think it is great that more and
more companies are finding crowd funding as a way to get that
early funding that will help them grow.
Ms. VELAZQUEZ. Do you see any unforeseen risks or concerns?
Mr. REID. Sure. You know, just like any other system, there
are potential challenges there, and there absolutely will be
problems where someone does something unethical. And I think
there will be a lot of people who even do have the best
intentions who lose money, either from the entrepreneur's point
of view or the crowdfunders. And I think that is the key issue;
that people have to understand and expect what the reality is.
There is a lot of risk in these businesses and a lot of people
will lose money. And those who are investing need to be really
careful to know as much as they can about the companies they
are putting money into.
So those things are always going to exist. But the great
thing about crowdfunding is it does allow people to find those
entrepreneurs that they really want to support. So yes, there
are some challenges and risks, but in general it is going to be
an exciting time to see how that grows.
Ms. VELAZQUEZ. Thank you.
Mr. Arredondo, this is in line with the question that was
made before by my colleague, Mr. Collins. A frequent complaint
from entrepreneurs receiving venture capital investment is that
some control over the company is often sacrificed as a
condition of the equity they receive. Do you believe that this
is a serious shortcoming with equity investment?
Mr. ARREDONDO. No, I do not. I mean, to me it is part of
the game. We got into it knowing if we are going to raise
investment capital, we are going to be giving up part of our
company. The way I approach it is if I raise a million dollar
round, I expect to grow my company several times, if not many
more times beyond that; that it will generate far more value.
So even if I give up 25 percent of the company, I expect my
company to grow in value threefold. So I do not view it as a
negative at all, and honestly, I view it if you are in a
position where you can actually negotiate with different
investors, that it is an opportunity for me to select the one
that brings the most value to my company. So I do not view it
as a negative in any way.
Ms. VELAZQUEZ. Mrs. Sawyer.
Mrs. SAWYER. Well, it is interesting. So the venture
capital community, especially coastal, they are a tight knit
little club, especially if you look at the demographics where
they get investment. For example, I am in the hardware
business, also in oil and gas. I have never even met a female
investor in my space. So you do get some interesting problems
with that for minorities. I mean, it is strange to call a woman
a minority. We are 51 percent of the population, but there you
go.
So that is why I am kind of excited to see some of these
Kickstarter and different models for investing. Anything that
adds a little more competition to a market I think is good. So
that is why I want to see more competition on the investment
side. We focus a lot on the entrepreneurs, but quite often it
takes two. And while I am seeing lots more diversity on the
entrepreneur side, I am not seeing much movement on the
investment side.
So anyway, on the whole I think it is fine, although for
minorities it can be an issue.
Ms. VELAZQUEZ. I would like to discuss the federal
procurement marketplace. What are the type of challenges that
you have faced? There are some contracting programs that have
been established to help women entrepreneurs access the federal
marketplace. So if you could share with me the challenges that
you have faced?
Mrs. SAWYER. Thank you.
So I have worked with the National Institute of Health, Air
Force, and I am beginning to work with ARPA-E. I have talked a
little bit with ARPA-E. I do not know what that stands for
actually. DARPA Energy. And then we have discussed a little bit
with DARPA. And it is kind of interesting because with the big
Air Force, Army, those big DoD offices, it is virtually
impossible for us to pitch a product. What they make us do is
partner up with a large--like Lockheed, for example. But when
you go to do a deal with Lockheed, they want to own all the IP,
where all we are worth is IP. I mean, it is really, I will say,
impossible for me to go directly to Air Force. So one route I
have is the SBIR which we discussed. I can do a product in
basically a year and a half, sometimes quicker. They will not
let me deliver a product in less than eight years, up to 14.
What were computers like 14 years ago? It is pretty much the
same with cameras. It blows my mind. It blows my mind, and I
really kind of find it quite tragic because especially for the
Air Force, we have the designs ready to go for a stunning drone
camera. So we are in the field of hyperspectral imaging which
has been used, for example, when they captured Bin Laden.
Hyperspectral was used. But what they have to do is to fly the
drone over, take it back to a super computer, process the data
in like three days, and then they will have some answers for
you. We do that in real-time. The drone actually sees in real-
time. So it is a very cool product and could have real
consequences.
You will not get it for a decade minimum, and frankly, I am
not even going to--this is sad, but I am choosing not to do any
focus on defense, and it is tragic because we are tech people.
We love to see cool products, and it is really heartbreaking.
So on the procurement side, cannot go directly to Air Force.
SBIRs take too long.
And so a change I would like to see is right now preference
is given to procurement companies that have a long track
record. Oh, wait, Lockheed has been around longer than I have
been born, times two. I want to see the reverse. Okay? I want
to see preference given to startups because I have the IP. I
have it, not them. They do not have the internal R&D houses
like they used to.
And by the way, ever since sequestration, these big defense
contractors are getting nasty. I mean, it is getting really
rough out there. And I feel for them. I do. I am from
Huntsville, Alabama, where we have a lot of defense
contractors, but they are an example of companies who are suing
startups so that we run out of cash, which happens so quickly
because we are undercapitalized, like Mr. Collins said, and
then they can get a quick acquisition. Buy us cheap and dirty.
Oh, it is tragic.
Ms. VELAZQUEZ. Thank you. Thank you, Mr. Chairman.
Mr. LUETKEMEYER. Thank you. Good long questioning.
Congressman Hanna.
Mr. HANNA. I am going to give my time to Mr. Collins. Thank
you, Chairman.
Mr. COLLINS. Fellow New Yorker. Thank you very much, Mr.
Hanna. He said I was having too much fun. So I am going to have
some more fun.
When I mentor folks, everyone should have a vision
statement, a vision statement you could deliver in 10 seconds
or less. So you are on, Mr. Arredondo. Vision. Vision of your
company. Vision statement your employees know, you know, et
cetera.
Mr. ARREDONDO. Yeah. So we want to change the local event
space entirely. Right now there is----
Mr. COLLINS. You flunk.
Mrs. Sawyer.
Mrs. SAWYER. Rebellion Photonics vision is to change some
of the world's largest problems using groundbreaking optics.
Mr. COLLINS. Kind of okay. A little general.
Mrs. SAWYER. I usually do oil and gas.
Mr. COLLINS. Mr. Gelman. I am skipping Mr. Reid because you
just help other entrepreneurs.
Mr. GELMAN. We are building a global free market for free
press. That is our vision.
Mr. COLLINS. Okay. So now have some more fun. Your 30-
second elevator speech that you give to an investor. Who wants
to go first? Thirty second elevator speech, go.
Mr. ARREDONDO. Imagine the beer industry without beer
distributors. You would not be able to get the beer into the
hands of all the places you would buy it from. That is what is
happening with local events. All the people organizing events
have no one to distribute their events to the places people
look. We are a local event distributor that is solving that
problem.
Mr. COLLINS. You did not tell me how much money I am going
to make or how much money you need. Or who is your competition.
Go ahead, Mrs. Sawyer. We are having fun.
Mrs. SAWYER. The oil and gas industry loses a trillion
dollars worth of oil and gas into the atmosphere every year.
Dozens of Americans are killed on oil rigs and refineries, and
it is all because they cannot see the gas leaks before they
explode. We are Rebellion Photonics and that is exactly what we
do. We are solving a $2 billion problem with our Gas Cloud
Imaging cameras which we designed in-house three years ago. We
started our first large-scale installations January of this
year. We are doing a $10 billion round and we expect to sell
for around $450 million within three years.
Mr. COLLINS. Pretty good. Pretty good. Mr. Gelman.
Ms. VELAZQUEZ. Would you mind, Mr. Collins.
Mr. COLLINS. Go ahead.
Ms. VELAZQUEZ. I am glad that BP is your customer.
Mr. GELMAN. My company, Cont3nt.com is a real-time market
for breaking news where we enable media companies and
freelancers in places like Egypt and Syria and here in the U.S.
to occupy Wall Street and the like to take that amazing photo
or video that they shoot and in real-time sell it to the likes
of CNN or BBC, get paid for it in real-time, and have it on the
air in a half hour. We are like eBay for breaking news. We are
actually not raising very much money right now, but we are
expanding globally and join us.
Mr. COLLINS. Good. Now, just in fairness, because I am a
vision mission core value guy, if you go to my office, the
vision statement is published, my six core values. And so when
I came to Congress I had to say why am I here. So my vision in
every e-mail you get from me or any of my staff, including two
of them that are sitting there will say, ``The United States of
America will reclaim its past glory as the land of opportunity,
providing a bright future for our children and grandchildren.''
That is it. That is the vision. That is what I am doing here.
Then you say, and how do we make it happen? And how do we cast
votes? Six core values. And again, very succinct. ``A firm
belief.'' Nydia, you might not agree with all these. We will
see. ``Smaller government, personal accountability, local
decision-making, fiscal discipline, and a government that
serves taxpayers and respects future generations.'' I try for
that to be as bipartisan as possible. So when we cast votes,
there you go. So for my employees, same thing in the companies,
vision, values. And so those folks that I mentor and help, I
just try to simplify things down to succinct sound bites,
whether it is talking to an investor, a bank, your employees,
your vendors.
Comments? Do you have a value statement as well as a vision
statement? Is it published?
Mr. ARREDONDO. No, that is great. I mean, we are moving so
quick that in the last three weeks we have completely changed
our business model. And that is as good as I can articulate it
today, which will be different next week. But the nature of the
business.
Mr. COLLINS. Do any of the rest of you have it published,
posted? Do the employees know what it is? Is it on your
business card?
Mr. GELMAN. We have a sign on our wall that says the
beatings will continue until morale improves. That is used to
drive much of the internal mission.
Mr. COLLINS. Well, thank you. My time is expired. Thank
you, Mr. Hanna, for letting me have some fun. I yield back my
last six seconds.
Mr. LUETKEMEYER. Thank you, gentlemen.
Next we have Congresswoman Clarke from New York for five
minutes.
Ms. CLARKE. Thank you very much, Mr. Chairman. I thank the
ranking member, Ms. Velazquez, and I would like to thank you,
our witnesses, for your insightful testimony here today. It has
been really enlightening.
Given the prolonged and protracted economic recovery that
we are all experiencing on Main Street, it is vital that we do
all we can to foster an environment where our nation's
entrepreneurs can thrive, creating the jobs that we so
desperately need. You are who we are looking to to make that
happen. And as we are all aware, as access to capital remains
one of the most daunting barriers on entrepreneurs' face today,
and I think you all have articulated that in your unique ways
and in your unique space, while some startups have been able to
use personal credit as seed capital, traditional avenues remain
elusive. I believe that the federal government can and should
play a role in filling the gap. Government programs, such as
SBIR, have a proven track record of providing the jumpstart
needed to power growth and create jobs, but I see that a ``one
size fits all'' model is not what we should be striving for.
And I think you have driven that point home today, Mrs. Sawyer.
So let me ask you a question. I got a sense of how vital
the SBIR grant was for you, but if you could fashion a
derivative of the program that would meet sort of the 21st
century technological needs of research and development, how
would you fashion that? And what direct impact on your ability
to create and maintain jobs would that have?
Mrs. SAWYER. Sure. I really like the SBIR program for crazy
research projects, because crazy research projects really do
take eight years, especially in the hardware space. But if
there could be an addition to the program that is really more
product focused, right now the SBIR--every department, NASA has
a department, DOE has a department, Army, they all have a
department, and every quarter or so they are going to put up a
list of what they are looking for, which in theory sounds nice
but in actual fact they are not the ones who should be putting
the list up because we are the ones who are on the frontier of
tech. So sometimes we will see the list and it will ask for
people to write in. And it is like a little incremental change
in the tech. When we are pulling out our hair, it is like, no,
do not ask for a camera that can do a few seconds faster; ask
for something, the next thing, which is us, real-time. But they
do not even think to ask because it is not possible for them.
They are not in that sphere.
So it would be great if they had--I am not saying a huge
part of the SBIR program, but a small part where you, the
company, the startup can recommend products. That is not
possible right now. Now, you can kind of do it if you know the
right people, but startups, there are five of us. We do not
know the right people. We do not have a lobbyist. So if there
was just a very clear way for us to simply recommend and
propose a new product, it sounds so simple, and it would be.
And they can turn it down if they are not interested, but there
is no mechanism for us to propose the next generation. And it
would not be that much of a fix to do that. Anyway, a small
thing.
Ms. CLARKE. That is a very good proposal, and it takes
someone in your space to be able to make that recommendation,
and I would want to suggest that perhaps that is something that
we could have some conversations with the agency about.
Mr. Reid, as I stated earlier, traditional access to
capital remains fairly restricted and startups typically do not
have this as an option. Could co-investment from the federal
government, if appropriately structured, play a role in
increasing traditional financing opportunities for startups?
Mr. REID. I think that is a great question, and it is a
unique opportunity for the government. The short answer I would
say is be careful, but probably yes. It is difficult because as
we probably would agree, government agencies would have a
really hard time picking winners and lowers. There is a really
good reason why venture capitalists who are successful get paid
what they do. And we also know that there are a lot of venture
capitalists who are not successful. And I have seen people at
universities who, you know, people in my position who end up
running a venture capital fund. And if they are any good at it
they should probably be a venture capitalist instead of a
government employee or a university employee, that sort of
thing. But if it is structured, as you said, if it is
structured carefully in ways that really do leverage the
expertise of the private sector, then I think that there is an
opportunity there for government funding to really help drive
some more innovation.
Ms. CLARKE. Thank you very much, Mr. Chairman. I yield
back. Thank you all.
Mr. LUETKEMEYER. I yield five minutes to the Gentleman from
Arizona, Mr. Schweikert.
Mr. SCHWEIKERT. Thank you, Mr. Chairman.
Share with me how each of you have either capitalized,
raised money from your early days and also what you see out
there in interest. I will share with you I have a fixation on
getting the SEC to actually do pragmatic and rational
rulemaking on things like the Jobs Act where they are about
crowd funding so bureaucratic and expensive and funding of the
trial lawyers with it that the very small companies we intended
to help are never going to be able to use it. So share with me
first how did you begin? How did you capitalize?
Mr. ARREDONDO. To start it was family and friends. That is
how we got through the first two years. We got really scrappy
over the last six where I think in my testimony earlier I
mentioned there was an i6 grant that UMKC in Kansas City got
that we got approved for, got some money there. We found an OJT
H-1B grant through Workforce Partnership and hired six
employees that way. We landed Sprint as a client. That helps.
Mr. SCHWEIKERT. Now, on something like that when you landed
that contract, did that make the value of the income from that
contract bankable? Were you able to take that contract and walk
into and almost factor the future income of that?
Mr. ARREDONDO. Honestly, it happened so fast and I was able
to leverage that to bring on three full-time employees with
that and then immediately found these other grants. And
honestly, I did not even go that direction because in the past
whenever I started the conversation it stopped two seconds
later when I have no assets to leverage against it. So maybe if
there was more conversation with a more traditional path I
could have gone that direction.
Mr. SCHWEIKERT. We will come back and talk about that
because I actually think there is a revolution coming in how we
capitalize.
Share with us. How did you?
Mrs. SAWYER. Yeah, so I have looked into factoring and
getting cash on accounts receivable, and it is virtually
impossible if you do not have three years of history.
Mr. SCHWEIKERT. Well, first, share with me, how did you
finance the startup? How did you begin?
Mrs. SAWYER. It is a funny story. I was a grad student. So
in this country there are a lot of business plan competitions
for graduate students and some of them have gotten very big. We
are talking about hundreds of thousands of dollars are awarded.
And three and a half years ago I did these and we walked away
with about $170,000 worth of cash from these business plans.
They are all over. They are in New York, Houston, San Diego.
That was our starting capital and then we got two SBIRs, and
then we started delivering smaller cameras for research. So we
basically sold what we had. We basically sold our prototypes to
researchers. And then we also last year were able to get a
little bit of debt from the City of Houston. So the City of
Houston gave us a little bit of debt to stay in Houston. We
have had to look everywhere, every feasible way to bring money
in. And I have tried more traditional ways. I was able to get
an SBA loan on one piece of equipment because the equipment we
were buying, I mean, you could not get it for working capital,
but I was able to get an SBA loan for equipment because it had
an asset.
Mr. SCHWEIKERT. For an equipment purchase. May I ask a
range of how much that was?
Mrs. SAWYER. Yeah, that was $475,000.
Mr. SCHWEIKERT. Okay.
Mr. Reid, what do you see out there?
Mr. REID. Yeah, there are so many ways companies are now
finding that early stage capital. Whether it comes from angel
investors, friends and family, traditionally, the first money
comes out of your own pocket. Friends and family come next,
which can often make those Thanksgiving dinners a little bit
awkward. And then there is a growing angel market,
organizations and companies like AngelList and lots and lots of
angel groups all over the country are now starting to really
fill an important----
Mr. SCHWEIKERT. But are you surprised in what you are
hearing around you that almost no one actually went--sort of we
all went to business school, so personal friends and family,
angel, secondary angel, VC, you know, private equity, and the
world does not actually work that way and has not worked that
way for several years now.
Mr. REID. Yeah. So few companies actually ever raise
venture capital. Even the companies that grow huge. Right?
Venture capital is not the primary financing solution. And the
angel investing in a similar way. You are absolutely right.
There are so many other ways to raise money.
Mr. SCHWEIKERT. I am very curious because you have a
fascinating business model because in some ways what you are
doing is the future of sort of this distributive type of
business model where you are selling a content without large
capital expenditures.
Mr. REID. Yes, absolutely. And I also smile at this past
conversation because that model of first you work for a company
where you conceive the product, where I worked for National
Geographic where I conceived the product, realized that the
product was taking off but it was not possible within the
company. All of my friends bought condos; I bought this. Then I
went off and created an actual prototype, launched and got some
customers. It is no longer possible to actually get any kind of
investment from outside sources without really having a very
serious prototype and some customers. We got some friends and
family investment. We won a number of regional competitions. So
we won Startup America, TechBuzz America, followed by--we got a
little bit of money in that. Closed in the angel rounds. And
now we are here.
Mr. SCHWEIKERT. Okay, and I know I am way over time, but in
many ways your concept would have married up beautifully with
crowdfunding?
Mr. REID. For the next round we were actually very much
hoping that we could do it, but we cannot yet because of those
issues that you are mentioning.
And one day, if any of the other members have an interest
in this, we really need to find a way to talk to the SEC
because they are about to destroy that capital formation for
the truly, truly small sort of egalitarian entrepreneur, and
once again, we are going to lose our future in the bureaucracy.
Mr. SCHWEIKERT. Mr. Chairman, I yield back. Thank you for
the patience.
Mr. LUETKEMEYER. Good job. The gentleman from New Jersey,
Mr. Payne.
Mr. PAYNE. Thank you, Mr. Chairman.
Let us see, Mr. Reid. Earlier you mentioned several issues
that really interest me. Specifically, your statement that
entrepreneurs come in all shapes and sizes and every person has
the ability to be an entrepreneur. I am interested in
understanding how we grow more entrepreneurs from disadvantaged
backgrounds. I have introduced some legislation earlier this
year called the Dream Jobs Act. This has helped to encourage
Americans who live in areas below the poverty line to establish
or sustain their own green businesses among other things. I
recognize that green energy is our future, but startups are as
well. Most common efforts focus on supporting businesses that
serve the underserved, but how can we increase the number of
people from low income backgrounds who actually lose startups?
Mr. REID. Great. Well, Mr. Payne, thank you so much for
asking that question. Before I worked for a nice university
like Georgetown, I ran a nonprofit organization right here in
Washington, D.C., and our mission was to go into inner city
schools and teach entrepreneurship. And that is the Network for
Teaching Entrepreneurship which exists in many other cities
around the country. And there are other organizations like
BUILD and Junior Achievement that are doing this, and that is
where I would say the answer is, is we would talk to the young
people, whether it was the teachers we trained or the
entrepreneurs that we would bring into these schools. And you
could see the entrepreneurial talent is there, but the students
often had no idea. No one had ever told them you can be an
entrepreneur. So step one was just exposing them to this idea,
this concept, and then giving them the mindset and toolset and
helping give them the skills to do it. There is entrepreneurial
talent in these underserved populations no matter what you want
to define it as, and just allowing those folks to see
themselves as entrepreneurs, to have access to training,
mentorship, and resources, you will see a lot of amazing things
come out. And I had the benefit of seeing that, too. It changes
lives just by being exposed to entrepreneurship as an option.
Mr. PAYNE. So do you think that is something that as a
government we should foster and support those efforts?
Mr. REID. Absolutely. Absolutely. Other than helping
provide funding, I have not thought deeply about the ways
government can help but I think those are very, very powerful
organizations. The entrepreneurship education at all levels,
not just universities, really makes a difference.
Mr. PAYNE. Thank you.
I will yield back at this time. Thank you.
Mr. LUETKEMEYER. Very good. We will give five minutes to
the gentleman from Arizona, Mr. Barber.
Mr. BARBER. Thank you, Mr. Chairman. And thank you all for
coming. When I hear from people like you I get very excited and
enthusiastic because your passion is obvious and you are
breaking a lot of barriers. I just wish our government was as
nimble as you are because it needs to be. Obviously, we are
not, and that is part of the problem.
I want to talk first of all though, Mr. Reid, about the
role that universities play. We are very fortunate, I think in
Arizona, at least in my community, we have the University of
Arizona, which just a year ago initiated Tech Launch Arizona,
and has consolidated essentially the launch offices from across
the university into a really solid opportunity for helping
university professors who are really good at research but not
necessarily great at building a business, commercializing their
product. In the last year alone, seven new businesses have come
out of this and 15 patents were issued. So we are making
progress.
I guess I would like to ask you how and what do we need to
do to better support our colleges and universities as they grow
to begin to build this bridge between the research lab and
commercial application?
Mr. REID. I am a little bit familiar with that program at
the University of Arizona, and yes, it is an amazing thing.
There is another program that I would love to point out that I
think helps answer your question you may be familiar with. It
is called iCorps, as in iCorps, C-O-R-P-S. And it is about
innovation. And it is actually funded by the National Science
Foundation. And some of my colleagues at universities where in
the Washington, D.C. area have led a nationwide effort. And
what it essentially does is it brings the principles of the
lean startup movement into university laboratories. And it is
amazing to watch the transformation. You mentioned how many
scientists are not great at business. That is no surprise to
many of us but that is a big surprise when the scientist learns
it. And so through the iCorps program the scientists, the
developers of this technology are paired up with business
people and mentors, but one of the most important things they
do is they actually have to go and talk to customers and that
is a transformative experience for a scientist to actually find
somebody that is willing to buy whatever it is that they think
is the greatest technology in the world. And so they learn a
lot and that is an incredibly powerful experience. So that
program is relatively new. It has been around maybe just one or
two years, but it has been expanding rapidly. Some of the
federal labs in this area are beginning to adopt it as well. So
the iCorps program is what I would absolutely say is a great
example.
Mr. BARBER. Go ahead, please.
Mrs. SAWYER. I did not know if raising your hand is the
right thing.
So I have a lot of experience with this surprisingly, and
so it is the Office of Technology Transfer. Every university is
going to have an Office of Technology Transfer, and their job,
their sole purpose is to get technology in the labs out to real
products, either through licensing, say license it to GE, or to
start a company. Both good. Products get out there. It is fine.
But there are some really good Office of Technology transfer,
MIT is an example, but most are really bad. Really bad. And the
federal government actually does have some bargaining power.
Right? Where do they get almost all their money? You all. NIH
grants are a big one. A lot of government grants. So what I
would like to see is part of--let us bring NIH. National
Institute of Health is a huge funder of research, and they fund
this research and it creates really cool medical devices that
never see the light of day because the universities are not
graded on transferring and commercializing this technology. So
what I want to see NIH do, for example, is when you submit a
grant application, how good is your university at technology
transfer? Now, it should just be one little bit of the grading
scheme for a grant, but it could have a huge effect, even if it
is just licensing. But that is good, too.
Mr. BARBER. That makes a lot of sense to me that you would
have some incentive or push to make sure they do that.
I appreciate you working in optics by the way. We have an
optics cluster down in Southern Arizona that we are very proud
of. And come visit us sometime if you do not already know about
it.
Mrs. SAWYER. Oh, I do. Arizona, University of Arizona and
Rochester are the two powerhouses in the world for optics. I
have hired two people from Arizona for optics. They are great.
Mr. BARBER. Well, graduate students are staying home and
they are also going elsewhere. That is good to know.
I know we are close to--I am almost over time but I just
want to ask this question of as many of you as quickly as you
can answer it. What can we do in Congress to help you get
better access to capital? I mean, I think that is one of the
biggest stumbling blocks I have heard from your testimony. Just
if you could each give a one or two sentence answer to that
question I would appreciate it.
Mr. ARREDONDO. Yeah, mine is really simple. I think give
resources to the organizations on the ground, in the
communities that we are working, because every community is
different. You guys are not likely to create one system that
works for everyone, and where I have found the finances so far
have been the people that I knew already and then they got hold
of a grant that they could actually then turn and give me
access to.
Mr. BARBER. Mrs. Sawyer.
Mrs. SAWYER. I would like to see the restrictions on SBA
loans loosened. It is even tough to get an SBA loan which is, I
think, a bit silly. So we are even slightly profitable and it
is almost impossible for us to get an SBA loan. So I do not
know who is getting them.
Mr. BARBER. Mr. Reid.
Mr. REID. So there is something I have seen work well in
North Carolina that I think the federal government might want
to explore. It is a qualified business venture tax credit. And
what it essentially does is if you invest as an angel investor
or what have you in a qualified business venture, which certain
types of startups qualify, then you get tax breaks for that.
And that multiples or it leverages the private investment. I
think that should be expanded to other states and perhaps the
federal tax system as well.
Mr. ARREDONDO. That is, in the state of Kansas, the Kansas
Angel Tax Credit, where if you invest up to $100,000 you get a
$50,000 tax credit against your Kansas income. That is a huge
draw, and pretty much anyone in Kansas City that is a high-
growth startup moves and becomes a Kansas company because of
it.
Mr. BARBER. And finally, Mr. Gelman.
Mr. GELMAN. Yeah. I definitely agree with the things that
people have said here. I would add that the tax credits could
be a very big thing. Empowering companies on the ground and
also giving R&D tax credits, like Canada, for example, does. A
lot of companies are moving out of Silicon Valley and moving to
Toronto because they actually could write off all the R&D that
they can do. And so that is a wonderful thing. Provide great
technology. If that is one thing that we could do, that would
be a spectacular one.
Mr. BARBER. I think all of us in Congress have a
responsibility to break through some of these barriers. We have
a new company in Tucson, Strong Watch, that is developing
surveillance technology for border security. We have Syncardia
to develop the artificial heart. We have got some great
inventions all across this country. We need to find government,
both getting to help as well as getting out of the way. And I
really appreciate what you have done. Keep on doing it and keep
pushing us to do better.
Thank you. I yield back.
Mr. LUETKEMEYER. Thank you.
My turn, I guess. Thank all of you for being here today. It
seems as though each of you has found a niche, and through your
hard work and your willingness to take a risk and sacrifice and
stay determined, you have been able to succeed. And I know, Ms.
Sawyer, I am wondering why nobody at the federal government is
wanting to give your company a chance. For every one of you
that succeeds, Mr. Collins buys 20-something that do not. That
is the problem we have with startup companies, and I am sure
that the government is sitting there trying to sift through
these--which ones are going to make it, which ones if we do
business with you are going to be here next week, next month.
And as a result, they are a little reluctant sometimes to take
that risk.
So what I would think would need to be a way to approach it
would be some sort of a private-public partnership where the
government would work with you and get together and say we need
this. And you could say, well, you can do that but we can do
this better if you do that. And by working together I think we
could probably come to some sort of agreement. Would you agree?
Mrs. SAWYER. I think it is an interesting idea, but I do
find, especially with defense, mainly with defense procurement,
oh, my God, I mean, America is so great because of our free-
market system. And through the procurement process, the defense
department has blocked themselves out of a free market and is
the opposite of a free market.
So let us say, you know, 19 out of 20 startups they work
with fail. I do not believe that, but let us say--we would
still be cheaper than working with one of these behemoth
defense contractors, even if 19 out of 20 of us fail. Right now
procurement is fascinating because it is not how quick you get
the product done or how good the product is; they get paid on
how long they draw it out. So especially with Defense, you are
not getting a great deal. So if you want to do a cost-benefit
analysis of working with startups, I can guarantee we will be
cheaper even then. So let there be other reasons not to work
with startups, but it cannot be a cost argument.
Mr. LUETKEMEYER. I know that I have got a technology
company that works at the Department of Vets a lot and they
have the same problems. They are one of the approved vendors
that work with them every day. They come to them and say, hey,
we need this, and it still takes months, and months, and months
to get something done. So yours is not an unusual comment that
I hear, so.
Mr. Reid, you had a great idea with regards to the tax
credits. Do you have an idea of return on investment of those
at all?
Mr. REID. I do not have number statistics. I know it was a
program that was renewed each year and there was a huge amount
of interest in the community each year when it was at risk of
going away. And I was more involved in this years ago when I
lived in North Carolina, so I have not followed the details
since then.
Mr. LUETKEMEYER. I know my state is Missouri, and we have
gone through a process in the last few years of going through
all the tax credits. We have got lots and lots of programs with
tax credits. And you go through them and some of them you get a
great return on investment and other ones you are paying
people. That is money out the door.
Mr. REID. I am pretty sure this would be one of the best
deals.
Mr. LUETKEMEYER. It sounded like a great idea. I was just
kind of curious if you had some numbers on it because that
would be very instrumental in being able to promote that and
move forward with it.
I guess one of the questions I have got is with regards to
what regulation or set of regulations are your biggest hurdle
to overcome?
Mr. Gelman, why do you not start?
Mr. GELMAN. It is tricky because when you work on the
Internet, I mean, aside from there are some taxation issues and
things like that that are happening----
Mr. LUETKEMEYER. My next question is going to be tax
policy. If you want to go ahead, that is fine, too.
Mr. GELMAN. I mean, tax policy is tricky. When you are
running a web-based company, an online company, any of these
growth web-enabled companies, you are not competing against
your neighbor or the next state or the next city. You are
competing against the entire world. And so when we have major
policy decisions, like taxes, like Internet regulation, things
like that, net neutrality, these have an effect because they
make us less competitive against other countries. And those
other countries can just as easily take our business because it
is online. It is very simple. And these are things that we have
to struggle with.
So I would say probably the biggest thing--I would not say
that that is the single biggest thing that is hampering kind of
innovation. I think there are other problems that are
significantly in excess of that. Number one is just the
difficulty in there is so much kind of--theoretically there are
so many available programs that are out there. There is so much
incentive that is kind of out there, none of which is
accessible to businesses like ours. And when you also have
problems like crowdfunding is coming out and it is going to be
a spectacular thing if it ever makes it out in a way that we
can make it, it is going to open up a new capital market.
At the same time, almost half of my team is abroad. The
reason it is abroad is because the people we work with are
U.S.-educated entrepreneurs that graduated here. They are all
U.S.-educated entrepreneurs. They graduated college here. They
could not get a visa. They had to go abroad. Now they have 25,
50, 100 person shops in Ukraine, Cambodia, and India. And so
now we work with those guys over there. We have to because that
is where the minds are. If there is any way to keep those jobs,
those people here, it would go a long ways. If you talk to any
startup around anywhere, in any region, be it D.C. or Silicon
Valley or Kansas, they will tell you there is a huge talent
crunch. We can never find enough people, and we cannot keep the
people that we have. So I would probably focus on that as the
top thing in addition to tax policy.
Mr. LUETKEMEYER. So you are talking about visa problems is
a big problem for your particular industry?
Mr. GELMAN. Absolutely. Any technology.
Mr. LUETKEMEYER. That is not something we do not hear
regularly from technology companies. With the H-1B visas, we
have got to reform that.
Mrs. Sawyer, what is your biggest concern with regulations
and/or taxation?
Mrs. SAWYER. Regulation-wise, for Rebellion Photonics,
because we do do some defense work, we have a huge amount of
additional accounting infrastructure that we have to do and it
costs a lot of money. And then my engineers, it takes a lot of
their time away from real engineering. And this is--we went
through an audit. We passed. It is fine, but all of this
somewhat ridiculous accounting, ridiculous accounting for a
seven-person company because there is just so much structure
that they treat us almost like a Lockheed. This is ridiculous.
And this is, by the way, the reason you do not see many
diversified defense companies. There is so much accounting and
infrastructure required to be a vendor for the U.S. Government,
especially Defense, that that is all you can do.
Mr. LUETKEMEYER. Is it a barrier for you that you cannot
overcome?
Mrs. SAWYER. We are thinking about cutting the whole
defense portion of our business. When you look at the defense
vendors, they only do defense. There is a reason for it.
Mr. LUETKEMEYER. The cost does not outweigh the benefit to
doing business with the government. Is that what you are
saying?
Mrs. SAWYER. Yes. And then also, as a vendor, as a
customer, you do not want your vendors to be you are their only
customer. You want your vendors to be diversified. That way
when the ebbs and flow of defense contracts is inherent,
because of war ebb and flow, they do not have to shed hundreds
of thousands of jobs if they were more diversified. But they
cannot be because of the really intense procurement
infrastructure that is required. I know procurement is not sexy
and no one is going to take it up and change it, but if you
did, huge cost savings, fewer people would be fired when--we
know defense budgets change. And then also, you could get
really cool new tech out that you currently do not. And that is
why you do not see many startups, really innovative startups
doing defense because they would have to give up everything
else.
Mr. LUETKEMEYER. Mr. Arredondo.
Mr. ARREDONDO. Honestly, my biggest issue is we have run
into the H-1B issue as well. Talent is in incredibly short
supply, and you see a lot of people off-shoring tech work. I
mean, there is a new company in Kansas City that specializes in
tech development, and all of their work is overseas. They only
have a few project managers in Kansas City. If there is a way
to stem that tide, I think the United States would be able to
benefit greatly from it.
Mr. LUETKEMEYER. You talked in your testimony a while ago
about collaboration with some local groups to get your company
off the ground. What do you mean when you say collaboration?
Was that financially or were there other things that you were
talking about?
Mr. ARREDONDO. I use the word collaboration a lot, so I am
not sure 100 percent which one you are talking about.
So it might have been when I was talking to the two grants
that we had access to. One was Workforce Partnership, who has
made--they have a person on their team that her job or part of
her job is to engage with us directly and go to events and get
to know us. And then the grant, the i6 grant through UMKC,
likewise, has an outreach arm that reaches out to us to help us
understand what it is about. And so again, there is a
relationship there. Another example on the collaboration side
of a success is Sprint is actually getting really engaged with
startups in Kansas City, and the only way they have been able
to be successful is they had an individual that spent several
months just going to events, talking to us, understanding the
actual problem, and then they are equipped then to make the
decisions and allocate funding because they know where the
holes are.
So when I talk about collaboration, I mean, those are a
couple of the examples to kind of show. And that is why I am a
big advocate of finding ways to get the resources to those that
are with us on the ground that know those needs and holes in
each community individually.
Mr. LUETKEMEYER. That makes a lot of sense.
Mr. Gelman.
Mr. GELMAN. Actually, on that collaboration topic, just to
add to what Adam was saying and actually what Jeff was saying
earlier, the trick with these growth startups is we move
incredibly quickly, and we try to move incredibly quickly. And
most of the time kind of the goal was just to get out of the
way. However, the big trick with helping is that it has to help
in a way that matches our pace. And the trick is most of the
time frankly it is just not going to be possible for a
government grant to match that pace. And that is fine because
the government really has to be very careful about how it does
things. But what the government should then do is instead of
trying to go direct to us--I mean, often, you know, there are
programs that can do that but they always take longer--they
should go to the qualified community organizers, essentially
the middle men, that are acting either as VCs. You know, we
have an investor in our company that is a VC of a state. So the
CAT Gap Group of Virginia is an investor in our company. They
are a very fast paced, fast moving part of the Virginia
government. Whatever their structure is, they essentially act
like a venture capital firm. They are given money by the
government and then they move very quickly to execute. A lot of
the associations, companies, incubators that we work with have
benefit some from government funding. In fact, they are much
better at getting it than any entrepreneur that is focused on
their business. If the government was better at taking this
large S and giving it to the people that can distribute it as
quickly and effectively as possible, you will see exponentially
high returns on that investment and you will be shocked at how
little investment is needed to get incredibly high returns.
Usually, government thinks in millions of dollars. This is tens
of thousands, hundreds of thousands of dollars that will get
you millions. Thank you.
Mr. LUETKEMEYER. Very good. I am out of questions.
Ms. Velazquez, would you like to have a second round?
Ms. VELAZQUEZ. Yes. I just would like to--solicit your
comments regarding the issue of more resources invested in the
area of education, especially for those new faces in America so
that we can prepare a new workforce with the skills that you
need in the area of science and technology.
And two, as part of an H-1B visa, we need to pass
comprehensive immigration reform. Would you agree with me, Mr.
Arredondo?
Mr. ARREDONDO. I do not know if I want to dive into
immigration reform. I am not particularly studied up on it.
Ms. VELAZQUEZ. Well, the students that are here that cannot
go on to college because they cannot get full scholarships in
order to be able to attend college because of their immigration
status. We are talking about four million students. So does
that----
Mr. ARREDONDO. Well, I mean, immigration, I believe, is a
part of it, but I mean, I think Estonia is starting to teach
programming in grade school. I guarantee that country is going
to be a powerhouse in the technology world here soon. And the
thing about technology, I know a lot of it focuses on
technology, but technology is going to be weaved into every
single industry no matter what we do. So it is integral to
everything. And I believe one of the things we can do is kind
of acknowledge that and find ways to encourage it at a younger
age because honestly, right now, the best programmers from the
United States that I have found are the ones that started
teaching themselves how to code when they were 10 years old,
not the ones that went to school for it. So it is all kind of
wrapped up in the one.
Mr. REID. Yeah, I would love to jump in on that.
The issue about immigration, I know there are a ton of
issues and I am not an expert in all that, but I can say that
America, one of the reasons we are such an amazing country for
entrepreneurship is because we have welcomed some of the most
amazing entrepreneurs as immigrants over the 200 plus years of
our country. And whether they are young people who were brought
here by their parents and are now being asked to leave or
people that graduate from our universities and want to start
companies and create jobs and wealth and are also being asked
to leave, or the folks who would like to get hired into the
fast-growing companies and are not allowed to, those are all
things that are self-defeating. They are hurting our country.
And it seems like those issues should not have to be tied up
with everything else. But yes, I absolutely agree. This is a
great entrepreneurial country, and one of the biggest reasons
is because we have allowed those amazingly talented immigrants
to come here and thrive here and create jobs that help the
country overall.
Ms. VELAZQUEZ. Thank you.
Mrs. Sawyer.
Mrs. SAWYER. Yeah, I would like to add one thing to the
visa discussion. Even if we doubled the number of people who
come on H-1B visa, I probably still would not be able to get
one because Yahoo and Microsoft and Facebook have legal
departments who are going to be faster and more money than me
to apply for these visas for their employees. So I would really
like to see that when hopefully when we do get more visa
allowed for tech workers, if some of those could be cornered
off for small businesses. It does not even have to be startups.
I will just take small businesses. That would be great for us
little guys without the legal department because that
competition is unfair and they will win every time. So if you
could just give me a corner, a little corner I could fight in
to get those it would be extremely helpful.
Mr. GELMAN. So, I mean, obviously to your point,
Congresswoman, you know, I am an immigrant myself. My family
came here from the Soviet Union. You would look around the
startup spaces that we work in and you will find 50 percent
immigrants that are Americans now. And you will find a lot of
people at the same time, as education is getting better in the
U.S., teaching these kinds of things. So I run a hackathon. One
of the winners of the last hackathon was a team of 14-year-olds
from a magnet school in Maryland over here, and they were
spectacular. There were there other teams that were added.
There was a father with his son and like two other kids that
were doing it. They are building spectacular products. If you
can maintain that, if they can get a better education, if they
can stay in the country, be it through college or after college
with H-1B.
Ms. VELAZQUEZ. After all the investment that has been made
through public school.
Mr. GELMAN. Exactly. And they love it here. They love it
here and they contribute. And the more of those people that we
can keep, the better we will be off.
Ms. VELAZQUEZ. Thank you.
Mr. LUETKEMEYER. Well, thank each of you for being here
today. We certainly appreciate your testimony and your hard
work and your inspiration to us. I know each one, I see the
enthusiasm and the patient in your eyes and in your demeanor
and your testimony, and we appreciate that. We thank you very
much. We wish you well.
With that, I ask unanimous consent that members have five
legislative days to submit statements and supporting materials
for the record.
Without objection, so ordered. This hearing is now
adjourned. Thank you.
[Whereupon, at 3:50 p.m., the Committee was adjourned.]
A P P E N D I X
House Small Business Committee Meeting
Wednesday, November 20, 2013
Written Testimony Submitted by Adam Arredondo
About Me
Thanks so much for having me. I am very excited to be here
and I'd first like to start by wishing you all a very happy
Global Entrepreneurship Week!
My name is Adam Arredondo. I am an entrepreneur from Kansas
City. I am the CEO & Co-founder of Hoopla.io, an internet
startup.
As a Kansas City native, it's been incredibly exciting to
be in the middle of all the entrepreneurial activity and
momentum that has been building over the last several years.
Kansas City is unique in that it's currently the only place in
the world with Google Fiber, the world's fastest residential
internet. However, the entrepreneur and startup community that
has developed around it and the principles we have learned
about building and nurturing it are applicable to any community
across the country.
Kansas City Startup Village
Outside of running my company, I am a co-leader of the
Kansas City Startup Village which is an organic, enterpreneur-
led effort in the first neighborhood in the world to get Google
Fiber. Startups congregate to work, network and live in this
neighborhood on State Line Road, where Kansas and Missouri
meet. My company is one of those startups.
It is first important to know that Kansas City Startup
Village was not planned. We are not following any blueprint.
In late September of 2012, a string of serendipitous events
occurred that resulted in three properties and five startup
companies settling down half a block for each other in the
first Google Fiberhood. One of these houses was purchased by a
local startup leader who recruited hackers and entrepreneurs
from around the country to live in his Google Fiber enabled
house for three months rent-free to build their startups.
In the 14 months since, Kansas City Startup Village has
grown to 13 properties and 25 startups within six blocks of
each other. Entrepreneurs have moved from 12 different states
to live and work in the Village. Delegates and business people
from over 45 countries have visited. And, most importantly, the
Kansas City Startup Village has created over 70 jobs ... All of
this with ZERO outside funding.
There are three main reasons why the village has seen such
rapid success and notoriety.
First, the efforts are 100% entrepreneur-led. We volunteer
our time because we know that a strong Village makes for a
strong Kansas City startup community which is better for every
startup in it, including our own. Government, corporations and
universities are absolutely critical in the sustainability of
vibrant startup communities but those groups must allow the
entrepreneurs themselves to take the lead followed by direct
engagement to find the support mechanisms.
A great example of this is my being here today. As an
entrepreneur, neither my company nor I could afford to pay for
this trip so I reached out to supporters around Kansas City and
it was Greg Kindle with the Wyandotte County EDC that made sure
we were afforded this opportunity to tell our story.
Second, we have created startup density. In the Village, we
talk about ``serendipitous collisions'' all the time; unplanned
interactions between fellow entrepreneurs which often lead to
new ideas and collaboration. Events are great for creating
startup density, but are temporary. Kansas City Startup Village
offers startup density on a daily basis.
Finally, it's important to know that although Google Fiber
may start the conversation and perk initial interest, it's the
welcoming, collaborative community that gets people to stay. A
perfect example of this is Mike Demarias, a 22-year old
entrepreneur from Boston. Mike said, ``I came to Kansas City
for Google Fiber and free rent, but I decided to stay for of
the awesome community.''
Startup vs Small Business
One of the big questions we get asked all the time is ``Is
there a difference between a startup and a small business''.
The answer is definitely, ``Yes''.
Although a startup can be categorized as a small business,
very few small businesses can be categorized as a startup.
No startup aspires to only become a small business.
Startups want to scale rapidly. Startups want to become the
next big thing. Startups want to disrupt the status quo.
Startups want to innovate.
Startups also have different needs than small businesses.
Startup Needs
A need of most small businesses is access to capital to get
the business off the ground. Startups are no different.
However, startups rarely qualify for traditional financing
through banks and other financial institutions leaving
entrepreneurs to scramble to find other funding options. And
unfortunately, those funding options are few and far between.
My company has been lucky enough to find two grants through
local organizations.
We were selected to receive funding through the Digital
Sandbox which is the result of a $1M federal i6 grant. Thanks
to this grant the Digital Sandbox has been able to provide
startup capital to over 20 startups in the Kansas City area.
We were also lucky enough to discover a grant through
Workforce Partnership funding through the H-1B program. This
allowed our company hire six new employees. This has had a huge
impact on the progress of my company. In all, over 23 jobs were
created in the Kansas City Startup Village alone, thanks to
that grant.
The important point here is that I accessed these grants
through local organizations that interact with the startups on
a regular basis and are best equipped to understand a startup's
needs, effectively distributing funds.
My recommendations to you is to provide local EDCs like
Wyandotte County EDC, workforce development organizations like
Workforce Partnership and startup focused efforts like the
Digital Sandbox with the funds they need to continue the good
work they do on a daily basis.
No community is the same. Please, focus on providing the
resources to those that know their community best and allow
them to continue their good work.
Thanks for listening. Onward and upward!
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Testimony of Jeff Reid
Founding Director, Georgetown University Entrepreneurship Initiative
United States House, Committee on Small Business
``The Startup Movement''
Wednesday, November 20, 2013
Thank you very much for the opportunity to speak here
today. I will be brief but hope to make a few points that are
helpful for you as you make decisions and policies that affect
the entrepreneurs of America.
First of all, we are all entrepreneurs. I had the honor of
hosting Nobel Peace Prize winner Muhammad Yunus at Georgetown
University a few years ago, and he has famously said that ``All
human being are entrepreneurs.'' He makes the point that,
across the millennia, if humans were not entrepreneurial, they
would have never survived. It is only through civilization in
recent centuries that the entrepreneurial spirit was
suppressed. I agree completely--we are all entrepreneurs, but
that entrepreneurial spirit has been suppressed and is now
beginning to be unleashed all over the world.
Entrepreneurs are not just those crazy people in Silicon
Valley. Entrepreneurs are not just young white males with
piercings and tattoos starting tech companies over Mountain Dew
and pizza. Entrepreneurs are not superhuman. All too often in
our popular culture, those are the stereotypes that we see and
hear about, but those images do not tell the whole story. When
I begin teaching a new class at Georgetown, I often ask my
students, ``When you hear the word entrepreneur, what do you
think of?'' Their answers are predictable: Bill Gates, Mark
Zuckerburg, Michael Dell, Richard Branson. They say what so
many people would say, and they missed a huge point.
Entrepreneurs come in all shapes and sizes, and EVERY PERSON
has the ability to be an entrepreneur.
Being an entrepreneur is as much a mindset as it is a
career choice. You can work in a startup that somebody else
founded and be entrepreneurial. You can work in a large company
and be entrepreneurial. You can work in a non-profit, or--
heaven forbid even a government agency and be entrepreneurial.
There is a great entrepreneurial community growing right here
in Washington DC, led by a vibrant community of leaders
including the founders of 1776. It can be done anywhere. If
Professor Yunus can find thousands upon thousands of successful
entrepreneurs--nearly all women, by the way--among the rural
communities in Bangladesh--some of the poorest regions on
Earth, then we can certainly find--and develop--more
entrepreneurs in communities all across America. And, if I can
change the culture of a 225-year-old university to be more
entrepreneurial, then it can be done anywhere.
That leads me to my second point: Education matters. Yes,
you can teach entrepreneurship. Entrepreneurship is not magic.
It is not true that you must have a ``great idea'' to begin
your life as an entrepreneur. It is just not true that
entrepreneurs are simply standing in the shower one day and the
so-called ``great idea'' just hits them as if lighting had
struck, and then they go off and become millionaires.
Colleges and universities--like Georgetown University and
so many others--have been teaching entrepreneurship courses for
decades. And now, more and more, community colleges and even K-
12 schools are teaching more courses and lessons that instill
an entrepreneurial mindset and skillset in America's younger
generation. And with new curricula that emphasize evidence-
based entrepreneurship, customer discovery, and lean startup
principles, there are tools, processes, and frameworks that can
make an entrepreneurial effort much more likely to succeed.
And that is of critical importance. Our education system
needs to change from one that teaches young people how to get a
job and survive in a hierarchical employment environment to one
that teaches them to embrace risk; that change is inevitable
and not inherently bad; that they can pursue their passion and
make a living doing it.
What can Congress do to help? In short, be more like
entrepreneurs. Solve problems. Serve your customers. Stop
constant fighting and gridlock. Refuse to stand still. When you
hit an obstacle, get creative and find a way to get things
done.
Other suggestions:
Clarify the rules. Minimize uncertainty in
regulation.
Remove red tape.
Fix the idiotic immigration laws that kick
out the brilliant entrepreneurs that want to stay here,
build companies, and create jobs.
Recognize that entrepreneurs are not the
same as small business owners.
Celebrate entrepreneurs.
Support entrepreneurship education efforts.
In closing, I thank you for this opportunity to speak. I am
passionate about growing the entrepreneurial spirit of America.
I see young people every day who I am confident are going to
change the world in amazingly positive ways through
entrepreneurial efforts. I am very optimistic about the power
of entrepreneurship in America, and I would be happy to answer
any questions you may have, or help in any other way.
Anton Gelman, Small Business vs Startup
My name is Anton Gelman, I am the CEO of Cont2nt.com--a
two-year old venture-backed startup based in Washington DC. We
are building a market for breaking news that enables
freelancers and media companies to sell their photo and video
stories to media outlets around the world in realtime. We are
eBay for breaking news--or put another way, we are trying to
build a global Free Market for a Free Press.
Cont3nt.com officially launched a bit over a year ago and
we now have 24,000+ journalists, and 2000+ media companies, in
25 countries around the world. I am responsible for creating 5
jobs in the USA (including my own), 5 internships, and an
additional 4 jobs abroad. We are expanding rapidly and intend
to have a presence in every country in the world by the end of
next year.
I've been involved in entrepreneurship all my life--
starting from ``Anton Enterprises''--a landscaping company I
started when I was 12, to the web development and strategy firm
I ran throughout college, and all the way to the company I have
right now. I have run small businesses, and I now run a
startup. And I can tell you that there is a WORLD of difference
between the two.
A ``lifestyle business'' is an organization that grows
linearly and aims to provide an income and independence to the
people that run it. I have tremendous respect for lifestyle
businesses and the people that create them. However a ``growth
business'' aka ``startup'' is NOT a lifestyle business and
treating them the same (as we have been doing) does not allow
us to provide services to this crucial element of the American
economy.
A startup is ``a temporary organization in search of a
repeatable business model'' (Definition by Steve Blank). This
is a very strange definition for what we think of as a company.
But it is very true.
Startups are not a storefront--it is a rocket-ship. I write
this with all seriousness. The goal of a startup is to test a
hypothesis that should take this idea worldwide and try and
dominate a market segment previously un- or under- addressed.
Their growth is never linear (if it is, they are dead), it is
either exponential or out-of-business. As a consequences they
tackle big problems, run on intellectual property, and build
jobs faster than is possible in any other industry.
Startups are usually technology-based, run on intellectual
property, and (often) venture funding. A company goes from
theory to operations in 1-12 months, and can scale from the
original founding team to dozens or hundreds of employees
within the same period. It is fast growing, fast iterating, and
acts much more like IBM than a mom and pop shop. As a
consequence--their needs are very different from what has been
traditionally thought of as a small business.
Existing legislation is much too slow, based in existing
banking-loan infrastructures, and cumbersome application
processes. Startups don't have 6+ months to wait for program
approvals, we have no physical collateral to back our bank
loans, and the tax breaks given to research businesses usually
pass us by. Because of the reliance on the old ``lifestyle
business'' model--almost all previous legislation and programs
have been ineffective in targeting startups.
As a consequence, aside from a very rare exception (like
SBIR), I do not know any startups that are able to take any
advantage of government programs--it is usually impractical to
even think about it. This is a shame because for minimal
investment startups provide exponential growth & world-changing
services, and policy can help increase our competitiveness on
the world stage.
With the adoption of the JOBS act, the beginnings of crow-
funding, and immigration reform--it is clear that this is
becoming a mainstream issue, and we are all the happier for it.
However as good as these efforts have been, they are in their
infancy, and have yet to become truly useful to help the
startup economy.
I would urge policy makers and legislators to quickly
implement the changes needed to streamline small business
programs and target startup companies with resources like R&D
tax credits, access to funding (not reliant on traditional SBA
loans), immigration reform, and a network of trusted
organizations that could help dispense government offerings
faster and in a way that is targeted at growth companies.