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WSJ.com: Small Business

1. Doing Equity Crowd Funding Right
   By Javier Espinoza Small businesses are about to get a powerful new tool for raising capital—crowd funding.Under the recently passed Jumpstart Our Business Startups Act, small firms will be allowed to sell equity stakes online to large numbers of investors, just as some companies now solicit funds on platforms like Kickstarter.com. And businesses won't face the usual rules and red tape that come with larger equity offerings. (Read the text of the act at http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf.)Even though the process will be simpler, there are a lot of nuances and potential pitfalls companies will need to keep in mind. We asked experts for their best advice and biggest caveats.The easiest way to offer stock online will be to use an existing platform like Kickstarter, experts say. A few sites have even handled crowd-based equity sales using different methods, such as permitting only sophisticated investors to buy shares.But after the JOBS Act takes effect later this year or in 2013, many new sites will likely enter the market. How can you tell what's the best choice? David Millard of law firm Barnes & Thornburg LLP in Indianapolis recommends carrying out extreme diligence on any site you might use. "You want to make sure that the platforms are not fly by night, they satisfy the legal obligations" imposed by the Securities and Exchange Commission, he explains.Of course, he says, just because a site has a good pedigree doesn't mean it will take hold as the industry standard: "In the tech world, the tried, true and established can become irrelevant and passé overnight."Under the new rules, businesses will be able raise up to $1 million annually, and most small investors can give up to $2,000 total. But how do you decide what your company is worth? And how big of a stake should you sell?A common mistake that small-business owners make, experts say, is to give away too much of their equity when they are at their initial stages of raising capital. "You started your business to keep as much equity as you could, so you should work hard to do that," says Dave Lavinsky, president of Growthink Inc, a business-planning firm and investment bank. Michael Bush, a small-business adviser in San Francisco, recommends offering less than 10% of equity. As for valuation, he offers a rule of thumb: Figure out how much annual revenue you expect your company to bring in two years after raising the capital. Then value the business at one to two times that number.One of the biggest changes in the new rules is removing limits on who can invest. Unlike regular stock offerings, crowd offerings are open to people of any wealth level, and companies can reach out to them directly through social networks and other venues. But that doesn't remove a very basic hurdle: Lots of people won't want to be the first on board. "Anyone who considers funding you knows exactly how much you raised already," says Mr. Lavinsky. If investors "go to the site, and you have zero dollars raised, [they] are going to be skeptical."One solution is to tap your existing customer base. "Nurture your customer base and have loyal customers," Mr. Lavinsky says. "When it comes to crowd funding, you will already have an existing relationship with those people."Companies might also consider turning to suppliers as potential stockholders. Still, some experts recommend caution, since investors will have access to the financial statement a company files with the SEC."Business owners should think about whether or not they want their suppliers and vendors to have access to sensitive information like margins and earnings," says John M. Torrens, a professor of entrepreneurial practice at Syracuse University's Martin J. Whitman School of Management.Under the new rules, small businesses don't have many reporting obligations. Before they sell stock, they must file financial statements with the SEC and disclose any risks related to the offering, says Mr. Lavinsky. They also need to make available to potential investors their income-tax returns for the most recent year, as well as certified financial statements. Aside from some other rules aimed at very large investors, that's essentially it.Still, experts advise that it's a good idea to go beyond those basics. For one thing, says Mr. Bush, small companies should be specific about how they plan to use the funds that they raise from investors. "If someone asks you how you're going to use the money, you should be able to be very specific and provide a lot of details," Mr. Bush says. "You don't want to say general things like, 'to buy new equipment.' "Experts also think that it's a good idea to give investors regular updates every three months or so, perhaps in the form of a webcast or an email newsletter."Let them know how the business is doing, where you've been having some trouble, what you're going to do to mitigate that trouble" and other important points, says Mr. Bush.It's also important to spell out those ground rules early on. "Let them know that you will be providing updates this way prior to getting the money," Mr. Bush says. "You will not be returning phone calls because you need to focus on your business." Mr. Espinoza is a London-based staff reporter for The Wall Street Journal Europe. He can be reached at javier.espinoza@wsj.com. ...
2. Big Food Franchises Get Bigger
   By Angus Loten Want to buy a restaurant franchise? It helps to own a bunch of them already.Many chains, including Burger King, McDonald's and Applebee's, are awarding more outlets to big owners who already own multiple units. Not only are the chains targeting big players in their regular franchise-marketing efforts, they're also selling the large players scores of longtime company-owned locations.Big owners, who sometimes run dozens, if not hundreds, of restaurants, are appealing for a number of reasons, say franchise consultants. They often have readier access to capital and can prop up underperforming restaurants with stronger sales elsewhere in the chain. They're also seen as less risky by franchisers, because they have a track record with a brand.But some critics say the push for large owners is edging out traditional single-location owners and handing too much control of a chain to a few big players. Some also argue that small franchisees have a greater stake in a single location, giving a small-business feel to restaurants in a giant corporate chain."You get to know everybody, and they see you as the face of the restaurant," says James Gimbel, who owns and operates a single Capriotti's Sandwich Shop in Davenport, Iowa. Capriotti's 75 locations are owned by a mix of single and multiunit operators.Of the roughly 60,000 franchisees across all food and restaurant chains in the U.S., 36% are multiunit owners, according to industry research firm FRANdata. Together, the big players own and operate more than 75% of all the U.S. locations for these brands. Darrell Johnson, chief executive of FRANdata, says the rise of multiunit ownership goes back over a decade, but has accelerated sharply since the recession. "Banks were basically not lending," he says. "So franchisers focused first on the proven operators with strong cash flows."Now multiunit owners are snapping up newly available locations at a breakneck pace, as many chains shed company-owned outlets to streamline operations amid weaker sales.In April, Burger King Holdings Inc., a Miami-based firm that took part in a 2010 buyout of the fast-food chain, announced plans to sell 278 company-owned outlets to a single franchisee, Carrols Restaurant Group Inc. The $15.8 million deal gives the Syracuse, N.Y., company ownership of a total of 575 Burger King outlets across the country, making it the system's largest single owner.About 90% of Burger King's 7,488 units in the U.S. and Canada are franchised. There are a total of 12,534 Burger King restaurants world-wide, 11,249 of which are franchised. The chain is planning to sell most of its remaining company-owned restaurants by the end of the year.Also in April, Guillermo Perales of Dallas completed a deal to buy 96 company-owned Burger King outlets in Orlando, Fla., bringing the total number of units he owns to 172. "It's very hard to be profitable these days with a single restaurant," says the 49-year-old, who declines to say what he paid. "You shouldn't put all your eggs in one basket."McDonald's Corp. has also reduced its share of company-run restaurants—to 19% from 23% in 2007—and multiunit owners have snapped up many of them."There are more restaurants per franchisee than ever before," says Richard Adams, a former McDonald's executive who runs Franchise Equity Group, a San Diego-based consultancy for the chain's franchisees. The average McDonald's franchisee today owns more than six locations, up from three 15 years ago, he says.McDonald's uses a different methodology to calculate that number, and says by its count, the average franchisee owns five outlets. As for smaller operators, McDonald's spokesperson Becca Hary says, "We will always have operators that own one and two restaurants. They are a very important part of our business. We always strive to grow our existing owner/operators into larger organizations."Still, most chains say they're actively seeking big players. McDonald's franchising-information Web page, for instance, says the chain is "seeking individuals who are capable of operating multiple locations." The pages for other chains, such as Burger King and Yum Brands Inc., parent of Pizza Hut, KFC and Taco Bell, carry similar messages.Critics say the focus on big owners is misguided. For one thing, they argue, bulk deals give large owners too much power. Joe Caruso, a franchise consultant in Havre de Grace, Md., points out that Burger King's deal with Carrols gives the big owner the right of first refusal on sales of restaurants by existing franchisees in 20 states. That could make it tougher for small players to buy into the system, or for existing small owners to expand, he argues.Mr. Caruso also suspects the deal will give Carrols more say in companywide initiatives. Franchisees with 10 units or less "could be drowned out," he says. Steve Wiborg, president for Burger King's North America operations, says Carrols's right of first refusal on sales of some restaurants won't damp competition among franchisees in those markets. "We'll continue to make sure Burger King grows in the right way," he says.Meanwhile, some industry experts and franchisees dispute the idea that multiunit owners have a bigger say than small owners. Jeff Ritson, president of Bistro Group, a Cincinnati franchisee that operates 30 TGI Friday's outlets, says large operators don't have much pull in a chain, since key aspects of the restaurant are controlled by corporate headquarters.But critics say focusing on big owners may also hurt the overall franchises. Mr. Adams, who helps retiring McDonald's franchisees downsize, says chains risk a decline in the quality of operations as the number of locations per franchisee grows. "Having that one franchisee keeping an eye on things yields happier customers and a more motivated staff. Sales always increase," he says.Mr. Gimbel, the Capriotti's owner, says that as a single-unit operator, "We can wow customers with our hands-on service." But he hasn't ruled out expanding. "It's been great building up and growing this location. I'm excited about doing that again somewhere else," he says. Mr. Loten is a small-business reporter in The Wall Street Journal's New York bureau. He can be reached at angus.loten@wsj.com. Sarah E. Needleman, the Journal's small-business assistant editor, contributed to this article. ...
3. Recommended Reading for Young Entrepreneurs
   By Emily Glazer There are tons of books that promise to help people become entrepreneurs—but most of them are targeted at adults. What about the many kids and teenagers itching to start a business? We asked some experts on kids and business for their top picks to get youngsters started. Steve Mariotti, founder of the Network for Teaching Entrepreneurship, a group that's dedicated to getting low-income kids interested in business, recommends "Teen Business Blasts Off!" by Andrea Davis Pinkney and Amy Rosen. The book, a companion to a documentary film, focuses on how a group of teens started their ventures and handled things like business plans and presentations. The stories show kids that their peers have done it and so can they, Mr. Mariotti says. (He adds that the movie is worth watching, too.)Mr. Mariotti also likes "The Student Success Manifesto" by Michael Simmons, which talks about the entrepreneurial mind-set and the broader vision of life that it brings. He suggests it for a slightly older audience—those between 15 and 21—because it addresses experiences and obstacles in a more mature fashion. Among the book's lessons, says Mr. Mariotti: "What happens to you is important: Write down what you do, write down all the obstacles and one by one work against the obstacles to make your dreams come true." Jack Kosakowski, president and chief executive of Junior Achievement USA, a nonprofit in Colorado Springs, Colo., that educates students about the economy, recommends "Kidpreneurs: Young Entrepreneurs with Big Ideas!" by Adam Toren. The book, he says, teaches kids ages five to 13 the principles and rewards of entrepreneurship, using easily digestible charts, diagrams and activities. "We often hear from young people that they have a good idea for a business but don't know how to get started," says Mr. Kosakowski. "This book boils it down in an age-appropriate way."A useful book for kids 8 to 15, he says, is "Growing Money: A Complete Investing Guide for Kids" by Gail Karlitz and Debbie Honig, which breaks down ideas like saving, investing, spending and credit. "Having that foundation, financial literacy, is important," he says.Finally, Mr. Kosakowski likes Donna Fenn's "Upstarts: How Gen Y Entrepreneurs Are Rocking the World of Business and 8 Ways You Can Profit From Their Success," which discusses how the younger generation is building disruptive technology using the Web and other digital tools. Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University in Nashville, Tenn., says "Business Model Generation" by Alexander Osterwalder and Yves Pigneur is a good tool to help teens understand all of the aspects of a business, like operations, marketing and revenue, with straightforward writing and lots of graphics. "This helps them do a much better job of getting something started and getting it started correctly," he says. "It gets them looking for opportunities in the marketplace and trying to produce those." Thom Ruhe, vice president of entrepreneurship at the Ewing Marion Kauffman Foundation, recommends looking beyond books, too. For instance, he suggests lemonadeday.org, which teaches kids how to operate a classic first business—the lemonade stand—by focusing on things like creating a budget, serving customers and repaying investors. Another worthwhile site: allterrainbrain.org, which features cartoons that teach kids how to build a company, sell a product and more.Mr. Ruhe also recommends the Kids' Pages at the United States Patent and Trademark Office site (uspto.gov/web/offices/ac/ahrpa/opa/kids). Among other things, the pages explain how to establish an invention notebook to regularly document your ideas and progress. "You can find value in mining your own ideas, but you have to start with a little bit of discipline," Mr. Ruhe says.Junior Achievement, meanwhile, has worked with the Small Business Administration to create "Mind Your Own Biz," a site that walks kids ages 11 to 18 through creating a business plan. (You can find the site at studentcenter.ja.org/business.) Mr. Kosakowski also points budding business brains to youngentrepreneur.com, a social-networking site where users can post questions in categories like "Women Entrepreneurs," "Buying or Selling a Business" and "Inventors/Inventions." Ms. Glazer is a staff reporter in The Wall Street Journal's New York bureau. She can be reached at emily.glazer@wsj.com. ...
4. Can Tumblr Turn a Profit?
   By Angus Loten David Karp has focused on expanding Tumblr Inc.'s network of free bloggers for the past five years.Today, 55 million of them are posting text, photos and videos on the site. Even Beyoncé and Jay-Z turned to Tumblr's blogging platform earlier this year to release the first photos of their newborn to the public.But now, both Mr. Karp, a 25-year-old New Yorker, and his company are heading into a risky new phase: making the site profitable. For the first time, he is making plans to sell advertising and sponsorships to Tumblr's network of bloggers and their followers.It's also a big switch from product development: In the past, Mr. Karp has been critical of Internet advertising, even saying that traditional online ads turn his stomach.Meanwhile, his long-time mentor is moving on. John Maloney, Tumblr's New York-based president since 2008, is leaving the firm this month.The departure will result in some significant changes because, according to Mr. Karp, Mr. Maloney has put "everything in order" at Tumblr, from paying the bills to wooing investors, hiring staff and steering day-to-day operations.Mr. Karp says he has never worked for—let alone run—a company of Tumblr's size. He got his start in the tech world at the age of 15, when Mr. Maloney hired him to write computer code for Urbanbaby.com, a parenting Web site.Mr. Karp later used his share of the proceeds from Urbanbaby.com's sale in 2007 to start a Web consulting firm where Tumblr was initially a side project.Tumblr, which was named after Web posts known as tumblelogs, now has 105 employees. It was valued at $800 million last fall, when it raised $85 million in a funding round led by Greylock Partners and Insight Venture Partners.Mr. Karp spoke to The Wall Street Journal about how he started the company and where he's headed with it next. Edited excerpts:WSJ: How did you get the idea for Tumblr?Mr. Karp: In 2006, the idea of having an identity online that was totally yours was the thing. But the established tools were geared to writers, and I wasn't a writer. I needed tools to share little glimpses of the stuff that I was working on, looking at, reading, watching. That was the impetus for Tumblr.WSJ: What made it take off?Mr. Karp: Six months in, we introduced the ability to follow blogs. Twitter had formalized the follower model. And we're like, make this a consumption thing, too, not just a content-management system. That changed everything.WSJ: What's wrong with online ads, in your eyes?Mr. Karp: The video ads that we're hit with are always in the form of pre-roll, the video reel you get at the front of an online video. So they're delivered at the most frustrating moment possible. And everything else, I think, is strikingly uncreative.We've seen brands show up and use our tools very creatively. Our promotional tools are built around elevating that stuff up to the top more quickly. We were already promoting a lot of this content. Now, 5% of the time we're not the ones pulling those levers. The advertisers will now have the opportunity to buy a chunk of that attention.WSJ: How do you think your bloggers will react to Tumblr with ads?Mr. Karp: Our ambitions are to keep Tumblr true to what it is. And to us, that's a platform for creativity.We want lots of ways to promote yourself on Tumblr when you've got something great. You can hustle and do it organically, or you can feed a little money into the system to jump start it.The next extensions of that are being able to make it stand out even more, having it featured in front of users who aren't following you yet.WSJ: How do you expect things to be different without your mentor at your side?Mr. Karp: John had been sticking around to look out for me, keeping the bike steady as we learned how to ride. He saw the path for Tumblr being to build a really great and experienced leadership team. And that's what he's spent the last year doing.Before that, it was basically me with my head down over in the product team. If anything else came in, I would say, "John can take this, I don't want to deal with this." Write to Angus Loten at angus.loten@wsj.com ...
5. Google Tweaks Search, Hurting Firms
   By Sarah E. Needleman And Emily Maltby Google Inc. recently tweaked the way its search engine ranks websites, seeking to downplay sites it suspects of artificially boosting their rankings. Now some small businesses say they are scrambling to avoid being relegated to the Internet's junk bin.Among them is Andrew Strauss, the 47-year-old co-owner of San Francisco-based Oh My Dog Supplies LLC. In the past, about 70% of his customers found his company from the results of Google searches, often for terms such as "dog beds" or "dog clothes." Ever since Google's algorithm change at the end of last month, he says his website isn't showing up in Google rankings—at least not where most people would see it. Traffic through Google has plunged by 96%, he says. Mr. Strauss expects his six-year-old business to generate sales of $25,000 this month, down from $68,000 in March, the month before the changes. "We're completely crippled now," he says.Mr. Strauss thinks it's possible his site's rankings nosedived because he had paid for hundreds of inbound links in response to a traffic drop of more than 50% following one of Google's 2011 algorithm changes. He says he abandoned that strategy because it didn't work. His business also contributes posts about dog-related topics to websites like EzineArticles.com and Squidoo.com, with links to his site in each. Still, he doesn't believe his site should be punished for that. "It's just a regular marketing activity," Mr. Strauss says.Google declines to divulge specifics of its search-ranking algorithm, but it discourages paid links and low-quality website links. According to Google, the recent shifts in its algorithm, known as "Penguin," will enhance the user experience and don't punish businesses that follow its guidelines."The Penguin algorithm update was designed to reduce Web spam, which is when websites try to get a higher search ranking than they deserve by deceiving or manipulating search engines," says Matt Cutts, a Google engineer. "In many cases, the affected sites had been spamming for a long time," Mr. Cutts adds.Among the tactics Google dislikes are "keyword stuffing," or overloading Web pages with keywords, and paying for inbound links as a way to artificially boost search rankings. Google makes about 500 changes to its algorithm annually. Penguin, the most recent update, affects only 3.1% of U.S.-based Google search queries, Mr. Cutts says. Ralph Slate, 43, of Springfield, Mass., also says he's getting pushed way down in the rankings as a result of the recent changes.In the past, his database of hockey players often appeared in the first page of rankings when users searched for hockey players such as Evander Kane, or Jonathan Toews, for instance. But now, HockeyDB.com appears several pages deep into the ranking—an area where Mr. Slate worries few Google users would bother to go. Traffic to HockeyDB.com is down by roughly 30% from the 50,000 daily visitors it was averaging prior to Google's update, he says.Mr. Slate suspects the reason is that thousands of other websites, including hockey forums, link to his HockeyDB.com. He doesn't know which of those other websites Google might view favorably or unfavorably. "I have never paid for a link, and I don't do link-sharing sites," says Mr. Slate. "I don't do keyword stuffing. That's why this is so frustrating."Google provides free tools, exposure and advice for webmasters and small businesses around the world, Google's Mr. Cutts says. "We're trying to level the playing field for those focused on building useful sites with compelling content for their users," he says.Because Google makes so many changes to its algorithm, it's often difficult for small-business owners with limited resources to stay on top of all of its tweaks, says Barry Schwartz, a search-engine analyst in New York. ‪ Still, those whose business models rely mainly on Google to draw customers to their websites should plan to follow Google's guidelines, advises Lee Odden, a search-engine marketer in Minneapolis. "You want to make sure that income doesn't go away," he says.‪ Some entrepreneurs say that as a result of Google's recent adjustments, their websites are getting boosts.The Austin, Texas, company SpareFoot Inc. has seen traffic to its website double in the past few weeks, according to Tony Emerson, who handles search-engine optimization for the 41-person firm. "It was vindication," he says, because he believes that some of his competitors engaged in unfair practices to get their sites to rank higher than his. "It's been frustrating. We'd been doing the right thing for so long." SpareFoot, a database of storage companies, gets paid each time a customer who is moving—or simply needs extra closet space—uses one of the self-storage facilities listed on the site. Mr. Emerson projects the heightened traffic will yield a proportional increase in sales."We should fare well," adds Jim Hale, a marketing manager for the Mayo Clinic. The Rochester, Minn.-based medical nonprofit saw its traffic increase 63% last year, compared with 12% in years prior. Mr. Hale credits Google's earlier rounds of algorithm changes as the biggest factor for its traffic increases.But Michael Eisenwasser, president of SongLyrics.com, a subsidiary of SoundMedia Inc. in Chicago, says his website is suffering. Traffic to the website, which relies mainly on advertising to generate income, has declined 20% from Google since Google's update last month.Mr. Eisenwasser says he doesn't believe he's guilty of violating Google's guidelines. But he suspects his site's rankings suffered because low-quality sites point to his. "We're being punished because other sites are linking to us, sites we've never talked to," Mr. Eisenwasser says. He's now trying to contact the sites to ask them to remove the unwanted links in hopes of restoring his site's previous ranking on Google, he adds.Stained-glass artist Pam Hansen, 57, of Savannah, Ga., thought she was helping her Internet business by reciprocating links with other websites and signing up to get her site on link exchanges, such as LinkPartners.com and LinkMarket.com.Now, she's racing to remove the links because her site, AGlassMenagerie.net, is ranking much lower for certain search terms, such as "stained-glass windows"—one of her top products."I'd rather focus on doing the glass but I'm spending all my time trying to redo the website," says the entrepreneur, who launched the business in 1996. She has no formal computer training, she adds.Ms. Hansen says she knew there was a problem the day Penguin launched. Her Web traffic, usually hovering between 500 and 600 visitors a day, plummeted to less than 200.She used to get several customer inquiries and one or two orders each week—but no more. Write to Sarah E. Needleman at sarah.needleman@wsj.com and Emily Maltby at emily.maltby@wsj.com ...
6. Rise of a Cloner Draws VC Fans, Critics
   By Ben Rooney Mention the name Rocket Internet to entrepreneurs and venture capitalists and you are likely to get some very mixed reactions. The Berlin-based incubator is as much feared, even reviled, as it is admired by others. What is it about this company that engenders such passion?The simple answer is that in an industry dominated by artisans, Rocket is the Henry Ford: It has moved the process of producing start-ups from a cottage industry to a factory. The next industrial revolution is starting on Johannisstrasse in the heart of Berlin's Mitte district at Rocket's headquarters, which the company refers to as "the factory."What Rocket Internet, founded by the unflinchingly aggressive Samwer brothers, has done is to shun technological innovation and concentrate on execution innovation; they take an existing proven business model and out-execute everyone else. "Taking an existing business model" is the polite way of saying "cloning," a subject that is guaranteed to rankle many entrepreneurs.But while everyone in the industry likes to think of themselves as innovators and pioneers, the reality is that clones are hugely popular, generate a lot of wealth and many VCs are very happy to back them."Building and investing into clones is a perfectly valid concept and noble activity," says Allan Martinson, a Tallinn-based VC. "In fact, most of the returns generated to VCs in central and eastern Europe [CEE] have been coming from clones.""European entrepreneurs often come under scrutiny for copying successful ideas from the U.S. and importing them over here," said Davor Hebel of the London-based Fidelity Growth Partners. "They are labeled as unimaginative, unambitious and unethical. However, I believe that 'copycats' can create a huge amount of value and often transform the markets in which they operate. Copycat entrepreneurs need to have big enough ambition, tailor the approach to the context in which they operate and leverage unique assets their competitors don't have."European VCs bridle at the idea that on this side of the Atlantic we simply steal ideas from the other side. According to ProFounders's Sean Seton-Rogers, "U.S. companies take European ideas and tailor it to the U.S. market—Vente Privée was cloned by Gilt Groupe. Also, for every business in the U.S. that's successful, there are many U.S. clones. Groupon spawned Living Social spawned TownHog, and so on."Some have argued that Rocket harms the ecosystem, that the mere threat of it entering a market is enough to put investors off. Rocket's managing director Alexander Kudlich conceded the point. "There might be a point that it is not beneficial to the direct competitors of Rocket companies," he said. But "we bring more discipline to the market. They [rivals] try harder and they become in absolute terms better than they would have been without the threat of Rocket." Jeff Coe of the Berlin-based Linden Ventures, who said he hasn't invested in any clones so far, said that while he hadn't run into a Rocket clone, it would be a factor. "I know Rocket has the capital and the aggression to "scorch the earth" of competitors, making the landscape very difficult to compete within."But Leonid Boguslavsky, one of Russia's leading investors, said that while Rocket was a factor in their deliberations , it wasn't a key one. "Of course ru-Net takes into account what Rocket Internet is doing in the same market: not just what they are doing but others too," he said. "But when investing in any company we will do so if we like it and we believe in it."What is the experience of being cloned like? Jacob de Geer, CEO of iZettle, a service that allows anyone with an iPad or iPhone to take a credit or debit card, was phlegmatic about it. Was he worried that Rocket Internet were working on a device that will offer a similar service to his. "No," he said. "If you are not being copied, you are in the wrong business."The market is huge, we are the first mover. So far we are the only ones doing what we do, but if it's Rocket or someone else, the only thing it impacts is that we have to become better at what we do. Competition is always healthy."However his fellow Swede, Hjalmar Winbladh, founder and CEO of Wrapp, a social gifting service that has been cloned by Rocket is less sanguine. "What is worrying from an innovation and entrepreneurship point of view is cloners seem to be going after younger and younger companies," he said. "They have more resources and can steal the technology, text, everything from a small start-up and deploy that on a massive scale before the small innovator has the muscles to fight back." Brent Hoberman, who founded Lastminute.com in 1998 and now runs VC firm ProFounders, was skeptical about the long-term success of clones. "If we want to create $1 billion companies in Europe, copying what someone else is doing is unlikely to get you to a position of global leadership." He also questioned the claim that clones help educate the market and clone founders go on to breed innovative companies."Is that true? Have we seen any home-grown innovations from people who have left clones? They tend to go and clone something else rather than innovate."But is innovation such a great route to success? Apparently not. A 1993 survey by Peter Golder and Gerard Tellis in the Journal of Marketing Research found that the mean market share of pioneers was only 10% and that only 11% of pioneers were market leaders. It should be noted that the survey was not specifically looking at Internet companies.According to Golder and Tellis: "Being first in a new market may not confer automatic long term rewards. An alternative strategy … may be to let other firms pioneer and explore the markets and enter after learning more about the structure and dynamics of market…"The logic of success is not to be first to enter the market, but to strive for leadership by scanning opportunities, building on strengths and committing resources to serve customers effectively."It is a manifesto that could have been written in Johannisstrasse. ...
7. For Tech Firms, the Desk Matters
   By Geoffrey A. Fowler In the Bay Area's tech culture, you're judged not by the appearance of your clothes, but by the style of your desk. Custom-furniture designers who sell to tech companies say business is on a tear, driven by a flood of funding for start-ups, shifting fashions and new ideas about how employees work together.Furniture makers who survived last decade's dot-com bust say the cubicles, odd accent chairs, neon colors and lava lamps that were hallmarks of 1999 are out of fashion today. Looking back, "people were saying we're going to show how cool we are by getting the craziest, funkiest stuff there is," says David Pierce, who founded furniture maker Ohio Inc. in San Francisco in 1998."Today we are designing and building things that will have a longer shelf life both aesthetically and functionally," says Mr. Pierce, who quadrupled Ohio Inc.'s staff in the past two years to a dozen people. His latest designs, used by start-ups such as Dropbox Inc. and SoundCloud, feature simple modernist lines and natural materials like salvaged wood. One popular desk can move up and down on gears via a hand wheel to accommodate a trendy style of working while standing.The pricey look is out of fashion, with some firms, like Ohio Inc., selling locally made desks for as little as $500, in large quantities."People aren't dropping huge dollars on expensive systems and crazy interiors," says Melissa Wallin, chief executive of Design Blitz, which counts start-up Khan Academy among its clients. "Despite having sizable budgets, many of my clients specifically want their spaces to feel accessible lest they turn off potential recruits with an opulent or frivolous-appearing interior." The look of an office crossed with a playground (think: foosball tables and beanbag chairs) has been replaced by that of an office crossed with a coffee shop—or even an Apple Inc. retail store. A stripped-down style can also communicate a commitment to new kinds of corporate structures, with communal tables suggesting a flat hierarchy built around collaboration."Traditional office furniture isn't well adapted to the way that young companies and young people like to work," says Yves Béhar, founder of San Francisco design firm Fuseproject. Simple, modular tables can also be moved around to reconfigure for new projects, or to accommodate rapid growth, he says.At Palo Alto mobile start-up Color Labs Inc., employees work on long connected tables made by CEO Bill Nguyen from sawhorses and blonde-wood boards that he bought from Home Depot, at a cost of about $60 per desk. There are no cubicles, and when employees need to work together in a more concentrated space, they sit in restaurant-style booths with cushioned seats and wooden backs.There's still space for individuality. At Google Inc., where teams can choose from a wide variety of desks and cubicles, the company recently began experimenting in its New York office with giving employees make-your-own desk kits, a kind of erector set for grown-ups. The kits may make it to Google's Bay Area offices after the trial. At Ohio Inc., Mr. Pierce says today he also weighs what will happen to the furniture when a company gets bought, or goes under. "Most of our desks would look great someday as someone's dining table," he says. Write to Geoffrey A. Fowler at geoffrey.fowler@wsj.com ...
8. Picture (Not) Perfect
   By Barbara Haislip Like the saying goes, a picture is worth a thousand words. But many of the pictures on company websites inspire just one: "Huh?"Without the resources to hire professional shutterbugs, many small companies tap employees to handle the pointing and clicking—with disastrous results. They put up product pictures that are too fuzzy to make out. Or employee photos that are more embarrassing than the ones in a high-school yearbook. Sometimes they even use shots that are patently off-putting, like a picture of their offices with traffic cones and construction rubble out front.Whatever the problem, poorly considered pictures can hurt a company's sales and reputation. Sarah E. Endline, founder of chocolate maker sweetriot, found that out when she put blurry photos of her chocolate-covered cacao nibs on the company website in 2005.Ms. Endline got emails from customers asking what exactly the product was. (One popular guess: chocolate-covered raisins.) The photos were so hard to make out, they even confused the staffers. "One time we almost printed the product photo upside down," Ms. Endline says.The photo flub ate into her sales, she says, although she can't quantify how much. By 2009, she realized she needed better pictures, and turned to a French photojournalist, Jean-Luc Mège, whom she had met at a restaurant. The photos—both of the products and the company team—have been amazing ever since, she says. Now "customers love our photos," Ms. Endline says. "We put them in every delivery box and send them often as postcards."Sometimes pictures don't just leave customers confused—they make them a little queasy, too. Matthew Griffin, president and chief executive of Baker's Edge, says he had some cringeworthy photos on his site between late 2005 and late 2006. To show that the company's signature brownie pan could double as a roasting rack, "we had a photo that had our brownie pan with a huge, bloody hunk of meat on top—showing off its awesome features," Mr. Griffin says.The photo "wasn't doing us any favors," he says. Customers asked, " 'What is a giant meat hunk doing on your pan?' " and " 'What is going on with the product?' " he recalls. Around April 1, some folks wrote to say they thought the picture was a great joke.Mr. Griffin can't say how much business he lost due to the "horrifying meat pans," but by 2007, the company got the message and ditched the photos. It now taps employees who are talented photographers to take the shots, and has outside pros touch them up.Another poor picture didn't bring any customer blowback, but Mr. Griffin suffered "direct consequences" for it: an image of his then-pregnant wife squeezed into a chef coat. She said it made her look "gigantic," he recalls. "I had to personally delete that image so I could stay married."Some photo issues are more subtle than Mr. Griffin's, but can do just as much to hurt a company's image. According to presentation-design firm ProPoint Graphics LLC, one of the most common problems comes in the "About Us" section, where companies put up pictures and bios of their officials. All too often, it ends up as "headshot soup," with photos of individuals all taken at different times and with different backgrounds."The disparity in the photos distracts from the intended use of the photos, which is to portray a cohesive unit of individuals," says Daniel Pries, co-founder of ProPoint. "Rather, it portrays a jumbled assortment of individuals, which communicates inconsistency and carelessness."In some cases, the individuals who show up on company sites don't even work there. "We have experienced clients of ours using stock photos in their presentations and website to represent actual people—mainly office or meeting shots," Mr. Pries says. One client, he adds, was called out on it by a customer "when the photos of their supposed people showed up on another company's materials."Sometimes Mr. Pries has to use a bit of trickery to keep company presentations looking good.In one case, a client had a corporate group shot in which everyone in the photo was wearing a suit except one person who refused to do so. Mr. Pries didn't want to leave the image as it was, because it would send a message that the company was disorganized. So, ProPoint grabbed a stock image of a man in a suit and put the suit on the dissenter in the group shot.Getting those details right is crucial, Mr. Pries says. "The images you use should reinforce your brand and message," he says, "because in the end it is the pictures that your clients will remember." Ms. Haislip is a writer in Chatham, N.J. She can be reached at reports@wsj.com. ...
9. American Express Targets Small Businesses
   By Andrew R. Johnson American Express Co. won't charge small businesses to use a service for creating discount offers that are delivered to Amex cardholders via a new smartphone feature and other platforms as it looks to expand merchant acceptance of its high-end cards.Small merchants represent the last mile for credit-card companies, which want as many retailers as possible to accept their plastic to increase transaction volume. American Express enjoys mass acceptance among major merchants such as Best Buy Co., Wal-Mart Stores Inc. and Target Corp., but has been less present among small businesses, which often scoff at the fees they must pay each time a customer swipes a card."With small merchants we believe particularly now it's a...cluttered space [for merchant offers], and we don't want to charge small merchants for this," said Ed Gilligan, vice chairman of American Express.Large merchants can load one offer for free but must pay for additional offers based on customer use.In addition to having offers delivered to cardholders' mobile phones, all merchants who use American Express' Go Social platform can have deals presented via social-networking services Foursquare and Facebook, which have partnerships with the credit-card lender. Merchants must accept its cards to use the service.The latest proposition for consumers from American Express is a service that presents similar offers inside of American Express' existing mobile app. Cardholders can click a tab to see all the offers available to them, ranked by their past spending and their location when they have the app open on their phones.The feature was added to the company's iPhone app in an update Monday and is expected to be added to its Android app in the future, Gilligan said.Cardholders can redeem an offer by clicking a button to sync it to their card account and then using their card at the participating merchant. The discount is applied to a cardholder's account as a statement credit in about three to five days."Essentially we're bringing to bear all the data that we have from cardmembers and from merchants, and from the transactions that happen in between," said Luke Gebb, vice president of global marketing for American Express.American Express has the ability to generate revenue by charging other merchants fees to load offers and by increasing customers' use of their cards, Gilligan said."Every time a transaction is consummated where we connect the cardmember and merchant, we're getting more spend on our network," Gilligan said.In addition to being the largest U.S. credit-card lender by spending, American Express also operates a processing network that handles transactions between merchants and cardholders. That model differs from Visa Inc. and MasterCard Inc., which operate processing networks but rely on banks to lend and issue cards to consumers.They also have been getting into merchant offers.Visa is testing a service that lets cardholders receive offer notifications via email and text message based on their location. MasterCard announced last month it was partnering with a company called Local Offer Network to allow banks to give their cardholders access to "daily deals" content.American Express has been particularly aggressive, announcing partnerships last year with Foursquare and Facebook that let cardholders receive offers based on locations they have checked into and companies they have "liked." Earlier this year it rolled out a similar service with Twitter, allowing customers to load deals to their cards by tweeting special messages. ...
10. Kickstarter 'Bug' Exposed Projects
    By Jeremy Singer-Vine A security lapse at the popular crowd-funding website Kickstarter.com exposed more than 70,000 project ideas that weren't ready to be viewed.The information that could be seen didn't include credit-card numbers or other sensitive personal details, but it could make users more wary of Kickstarter's data practices and lower their expectations of privacy on the site.The lapse stemmed from a website update in late April, the company conceded on Sunday.Kickstarter provides an online platform for users to raise money from friends and strangers for project-based creative endeavors, such as building a videogame, making a documentary or recording an album. The company said, "The bug made accessible the project description, goal, duration, rewards, video, image, location, category, and user name for unlaunched projects. No account or financial data was made accessible."The company said it didn't yet know if many people beyond a Wall Street Journal reporter saw the nonpublic information, but believes the exposure was limited. Kickstarter said it patched the security hole on Friday afternoon, after The Wall Street Journal began analyzing the exposed data. "Obviously our users' data is incredibly important to us. Even though limited information was made accessible through this bug, it is completely unacceptable. We want to underline once again that zero account or financial information was at any time made accessible by this bug," Kickstarter said Sunday.The information, while not visible to casual visitors, was reachable through a set of data feeds—together known as an application programming interface, or API. Kickstarter processes all pledges through a third-party, Amazon Payments. The company says it never sees users' credit-card information.The three-year-old Manhattan-based company is a darling of the New York start-up scene. Last year, it was reported that Kickstarter had raised $10 million in venture-capital funding from high-profile investors. Among them were Union Square Ventures; Twitter co-founder and executive chairman Jack Dorsey; Flickr co-founder Caterina Fake; and Joi Ito, director of the MIT Media Lab at the Massachusetts Institute of Technology.Kickstarter takes a 5% cut of the funds successfully raised through its site. In 2011, visitors pledged nearly $100 million to more than 27,000 projects. That dollar figure appears to be growing exponentially. This year Kickstarter boasted its first of several million-dollar projects, and its first $10 million project—for a smartphone-enabled watch named Pebble. But for every mega-success, there are hundreds of flops—and even more projects that never make it through the site's vetting process.The Journal was able to download nearly 77,000 of Kickstarter's most recent projects and drafts, dating back to mid-March, before Kickstarter plugged the security hole around 1:40pm Eastern on Friday.When told about the lapse, Kickstarter users whose draft projects were affected didn't seem particularly troubled. Sam Billen, a teacher and musician in Lawrence, Kan., had set a goal of $5,000 to help fund his first full-length album in three years. "I'd expect things like [the breach] to happen as they're growing," Mr. Billen said. "It's probably a one-time thing. But I think there are possibly some bigger projects out there where it might have been a bigger issue." On April 27, Kickstarter touted its new home page in a blog. "Oh, and try to find the secret Easter Eggs hidden on the page," the company wrote, referring to the playful surprises that computer programmers often work into websites and video games. "Wink wink, nudge nudge." Corrections & Amplifications Kickstarter.com is based in Manhattan. An earlier version of this article incorrectly said the company was based in Brooklyn, New York. ...
11. New Tech Spenders in Feeding Frenzy
    By Shayndi Raice Silicon Valley start-ups are being energized by some new big spenders in town: Facebook Inc., Groupon Inc. and Zynga Inc.This year, Facebook and newly public Groupon and Zynga have been snapping up companies at a record pace. In the first three months of the year, the three companies bought at least 21 firms, more than double their combined acquisitions in the same period a year ago, according to Dealogic and people familiar with the deals.While Facebook, Zynga and Groupon haven't been shy about buying companies in the past, they recently have ramped up their acquisitions pace and delivered some of their highest-ever prices for deals. Many of the deals, such as Facebook's purchase of app developer Glancee, are strategic moves into mobile technologies or new markets, instead of like past acquisitions to grab engineering or other talent.The activity is an outgrowth of the huge sums that the Web companies have raised, or expected to soon raise, through IPOs. Groupon and Zynga went public late last year, snagging $805 million and $1 billion, respectively. When Facebook goes public this week, it is expected to raise up to $13.6 billion.The rapid-fire acquisition pace and the swelling deal prices are rippling across Silicon Valley, boosting the expectations of many entrepreneurs and investors that lucrative—some would say overly expensive—payouts will continue."The effect [of Facebook, Zynga and Groupon buying companies] has been throwing a match into an already very heated venture environment," said Patricia Nakache, a partner at venture-capital firm Trinity Ventures, which invested in travel start-up Uptake that Groupon acquired in February for an undisclosed sum. "It is leading in the short term to an even more frothy investment environment." Jason Willig, chief executive of San Francisco-based mobile game company Booyah, agrees: "I think there is tremendous opportunity for big exits."Of all the companies, Facebook has been the fiercest acquirer, buying 12 firms in the first three months of 2012, compared with 12 for all of last year, according to Dealogic.That puts Facebook in line with one of Silicon Valley's most voracious buyers, Google Inc., which grabbed 13 companies in the first three months of 2012, according to Dealogic.Since the first quarter, Facebook's deal making has included its biggest-ever purchase: the $1 billion agreement last month for photo-sharing app firm Instagram Inc. At the time, Facebook CEO Mark Zuckerberg said the acquisition differed from past deals in that Instagram's technology would be incorporated into Facebook's mobile strategy to help the social network beef up its presence in the mobile market.The Menlo Park, Calif., social network is spending its funds in other ways too, buying $550 million worth of AOL Inc. patents from Microsoft Corp. Meanwhile, Zynga this year also made its biggest-ever purchase: a $180 million acquisition of games maker Omgpop in March. The sum exceeds the $147.2 million that Zynga said it spent in all of 2010 and 2011 to buy 22 companies. Zynga declined to disclose how many acquisitions it has made this year apart from Omgpop. Rob Coneybeer, a venture capitalist at Shasta Ventures, has seen firsthand how hungry Zynga has been in acquiring start-ups. He invested in 20-person mobile game company Wild Needle Inc., which he said Zynga scooped up several weeks ago for an undisclosed sum.Mr. Coneybeer said Zynga executives were "rapid in their decision making and they made an offer that was easy to say yes to." Zynga wooed Wild Needle by selling the start-up on its reach and cross-promotion abilities, he said. Wild Needle employees were "really fired up," he added."Zynga can't afford to miss the next big hit," said Mr. Coneybeer. "Games have a shelf life so Zynga by definition will have to be a voracious acquirer." Groupon, the Chicago-based daily deals site, bought seven companies in the first three months of 2012, compared with seven in all of 2011, according to Dealogic. But unlike Facebook and Zynga, Groupon isn't spending big sums, instead shelling out just $28.4 million on start-ups so far this year, according to a regulatory filing.Recent deals include San Francisco mobile-payment company Kima Labs, which Groupon bought in February. Terms weren't disclosed.Groupon said the purpose of the deals has been to snag talent to build up product and technology offerings. That is a shift from last year, when Groupon focused on buying daily-deal sites in international markets to expand its footprint.Executives at Zynga and Facebook have sought to blunt expectations that their buying streaks will continue. Zynga CEO Mark Pincus said in an earnings call last month that big acquisitions such as Omgpop will be rare.Facebook's Mr. Zuckerberg, in a blog post announcing the Instagram deal, said, "We don't plan on doing many more of these, if any at all."But entrepreneurs aren't discouraged. Mike Ouye, CEO of games company Red Robot Labs Inc. in Mountain View, Calif., said Zynga's $180 million for Omgpop is a sign that entrepreneurs building one-hit wonders in the mobile space have the chance to sell that hit for potentially hundreds of millions of dollars. Mr. Ouye adds that he has already had some calls from bigger companies looking to buy, but wouldn't disclose the details of the conversationsVenture capitalist Ms. Nakache said hope springs eternal. "Silicon Valley is a glass half-full optimistic place," she said. Write to Shayndi Raice at shayndi.raice@wsj.com ...
12. New York Tech Boom Sets Pace
    By Jennifer Maloney New York has the nation's fastest-growing tech sector and has surpassed Boston as the No. 2 hub, behind Silicon Valley, for Internet and mobile technologies, according to a report released Wednesday by the Center for an Urban Future.The study, funded by the Association for a Better New York and AT&T New York, compiled data on 486 digital start-ups formed in New York between 2007 and 2011 that received angel, venture-capital or other outside funding. "New York for a long time has badly needed to diversify its economy to rely less on Wall Street," said Jonathan Bowles, executive director of the Center for Urban Future and co-author of the report. "Tech is providing such a boost for New York…It's attracting capital from outside the city. It's luring incredibly smart people to New York that otherwise would have stayed in Silicon Valley or Boston."Of the seven leading technology centers in the U.S., New York was the only one to see an increase in venture-capital deals, which are predominantly, though not exclusively, with tech companies, according to the analysis. Nationally, there was an 11% decline in venture-capital deals.In the last five years, information-technology jobs in the city have increased by 29% to 52,900 from 41,100, according to the center's analysis.The report gives substance to what tech-sector observers say they have been seeing over the past few years: an explosion of tech start-ups in Manhattan neighborhoods such as the Flatiron District, Hudson Square and SoHo, and more recently in Dumbo in Brooklyn."When I walk around Dumbo, you see a lot of web designers and engineers talking about building websites," said Chad Dickerson, CEO of Etsy, which was founded in Brooklyn in 2005. "It definitely has the feel of a burgeoning tech sector."Mr. Dickerson said he moved to New York in 2008 after working for a decade in Silicon Valley.His career path mirrors a shift of more than a dozen established tech start-ups, which have moved to New York in recent years from the San Francisco Bay area, Boston and other places, according to the report.New York is drawing tech companies in part because much of the innovation happening now is connected to industries that are centered in New York: advertising, fashion, financial services and media. "The technology world needs expertise that it hasn't needed in the past," said Seth Pinsky, president of the New York City Economic Development Corp.Another big draw: Google's 2010 purchase of a former freight warehouse in Chelsea. The company's move signaled the tech world was taking New York seriously and has acted as a magnet, pulling other digital companies to the city.The 10 New York tech start-ups that received more than $50 million in funding between 2007 and 2011 include Gilt Groupe, an online designer fashion sales company; ZocDoc, a platform for finding and booking appointments with doctors; Tumblr; and Foursquare.The city's support services also have grown to accommodate start-ups. The city now has more than a dozen incubators and co-working spaces, up from just a few in 2009.Still, challenges remain for the future growth of the sector. Tech companies have cited a lack of engineers and the need for better broadband infrastructure, said Bill Rudin, chairman of the Association for a Better New York. The planned Cornell University-Technion Applied Sciences Campus, coming to Roosevelt Island, should help, he said.Mr. Pinsky said the city is working on improving broadband infrastructure and creating even more incubator space for start-ups.The demand for real estate in downtown neighborhoods by tech companies and others attracted by the "cool factor" of start-ups has led to plummeting vacancy rates in SoHo, Herald Square, the Flatiron District and Chelsea, said Ken Fishel, president of president of Legacy Real Estate, a commercial real estate company. "It's a tectonic shift in which the center of Manhattan has, from a commercial standpoint, moved south and west," he said. Write to Jennifer Maloney at jennifer.maloney@wsj.com ...
13. 5 'IP' Mistakes Start-ups Should Avoid
    By Antone Johnson Venture capitalists, angel investors and start-up lawyers these days tend to be obsessed with "intellectual property," or IP. And for good reason: In the information economy, the core assets of a new venture are likely to be talented people, the IP they create, and little else. To maximize future value, founders should try to lay a solid IP foundation even before a new start-up is incorporated. Here are five common mistakes to avoid: 1. "Contamination." Perhaps the single greatest source of IP anxiety in Silicon Valley stems from the fact that engineers and executives tend to build on what they know best when starting a new venture. If a former or "day job" employer can lay any claim to the IP upon which a new start-up is built, that claim, however tenuous, injects risk into the venture. And that risk grows in magnitude over time proportionate to the success of the business. A classic example is the so-called "Winklevoss Twins problem" made notorious by the movie "The Social Network." Some degree of ambiguity regarding IP ownership may be inevitable, but if a sliver of equity must be granted to settle the dispute, it makes quite a difference if the "sliver" is in a company worth $1 million or $100 billion. In Facebook's case, the settlement netted the Winklevoss brothers stock worth many millions of dollars. Of course, such disputes are rarely litigated except when the new start-up turns out to be a big success, in which case everyone scrambles for a piece of it. 2. Mixing up what came from where. IP rights ordinarily belong to the individual who creates the work unless the creation occurs as part of the person's job, a so-called "work for hire." One common mistake is to use a non-employee contractor or consultant to produce work without obtaining the necessary assignment of IP rights to the client company. After the contractor has been paid, the company's leverage to coax him or her into signing more legal documents is more or less gone.This all gets complicated, thanks to the natural fluidity of start-ups as business enterprises: A software developer may have started out tinkering with a side project during evenings and weekends, bring some of that knowledge or code to bear on a consulting engagement with a colleague who founded a startup, and ultimately join the team as a co-founder or one of the first employees. Commonly, co-founders are asked to assign all rights in any IP they may have created in the past that relates to the new business in any way as part of the "purchase price" for their shares of stock. Assuming the individual has those rights to assign in the first place, that takes care of the past, but it still leaves the future. To ensure that the company gets the benefit of future innovation, every employee, co-founder or contractor should sign an agreement with the start-up, commonly called a Confidential Information and Invention Assignment Agreement or similar mouthful, that clearly assigns IP rights in all work done on the company's dime going forward to the company. 3. Planning to launch a business around a clever, catchy brand name that can't be used. Registering a corporate name with a state or obtaining a domain name doesn't necessarily mean the same name can be used in commerce. Here is where trademark law rears its ugly head. It's also one of the most notoriously subjective areas of law. If I start a company called CloudTech Solutions Inc. in California, and you start one in New York called TechCloud Systems Inc., are they confusingly similar? An entire law school final exam could be given on this one question. There's no substitute for consulting with a qualified trademark lawyer before investing heavily (financially or emotionally) in a brand. Although it never hurts to consult the U.S. Patent and Trademark Office TESS online database, that kind of search alone is notoriously inadequate. 4. Confusing types of IP and means of protection. Even industry veterans occasionally confuse a trademark with a copyright or a patent with a trade secret. Often multiple IP rights reside in the same product or creation. They may overlap but they're viewed as discrete rights under law and should be treated accordingly. So, a little terminology goes a long way: 5. Overvaluing patents. Although entrepreneurs often want to "patent an idea," ideas themselves are not patentable. To be patentable, an invention must be a new, useful and non-obvious method or process, described in enough detail that it can be "reduced to practice" by a person with the relevant technical expertise.What makes patents unique is that they can legally prevent a copycat competitor from doing business, regardless of how hard it may have worked to develop something similar or equivalent to the patented invention. (In other areas such as copyright or trade secret, with few exceptions, independently developing a similar product or work without actually copying the original is perfectly legal.) Patents require the greatest investment—of technical employees' time and the company's money—and they tend to be narrow in applicability, and written in highly technical terms. The process is slow and expensive, but for those who succeed, the payoff is a 20-year government-sanctioned monopoly over the patented technology. The "Holy Grail" in IP is obtaining a valid patent that your fiercest competitors cannot avoid infringing in order to do business at all. Patents are most valuable in areas such as pharmaceuticals.But they can be of minimal value in Internet and software businesses because those categories of businesses generally come with continuous change in technologies and business models. ...
14. Twitter Gambles on a Patent Plan
    By Emily Maltby, Scott Denne and Shira Ovide Employees are often required to cede the rights to their designs and inventions to their employers. But Twitter Inc. has recently upended that tradition by drafting a policy that will put control over how such patents are enforced into the hands of its engineers and employees. The company's unusual approach—aimed at curbing patent litigation—is triggering fresh discussion among the founders of some tech start-ups about weaknesses in the current patent system. For small companies with minimal resources, they say, it's often better to focus energy and resources on executing an idea rather than researching patents and filing patent applications. They argue that patents left in the hand of individuals are less likely to be exploited as a litigation weapon between companies. What's more, software engineers may be more keen to waive patent rights to work collaboratively. The debate comes as entrepreneurs generally are paying closer attention to patents' potential value because of a coming change in patent law. Under the America Invents Act, which will take effect next March, a patent will be awarded to the first person who files an application. Historically, patents have been awarded to the first person who created the invention.Twitter's "Innovator's Patent Agreement," which was introduced last month, prevents the company from suing others for patent infringement unless it's acting defensively or the employees whose creations were patented give it permission to do so.Adam Messinger, Twitter's head of engineering, said his company's approach isn't appropriate for everyone, but he said that if others adopt similar principles, "You will reduce the overall amount of patent litigation, which I think is not value creating" for Silicon Valley.Mr. Messinger said Twitter's policy was a reaction to growing concerns about how patents are being used in litigation. "Everyone is not quite sure it's right. Everyone would like it to be better somehow," Mr. Messinger said. "This is our small contribution."With the values of some technology patents reaching frenzied levels, few, if any, big tech companies with lots of patents are likely to take a similar stance.Even at nascent companies, some lawyers argue, giving employees control over the ideas and designs they develop is risky and perhaps even foolish. They note that patents can be critically important assets for start-ups. Since such companies generally don't make much of a profit, many investors zero in on their patents as a way to get some value from a company if it eventually fails. Adopting an agreement like Twitter's would be akin to "taking bullets out of my own gun," said Nick Soman, the founder of LikeBright.com, a social-media dating start-up. Investors and new hires "want to know where you are driving unique value," he said. "The best value is your ideas, and sometimes the best protection for that" is the intellectual property itself. Come Lague, the chief executive of Zetta Research, which buys patents from failed start-ups and sells them to other companies, believes Twitter's new policy could affect the value of its own patents. If a patent has encumbrances on how the intellectual property can be used, "that is not a free and clear title," he said. At this point, Twitter doesn't have any patents of its own, but it has at least two patent applications pending. Some of its critics say Twitter's new position is merely an attempt to discourage other companies from filing patent-infringement lawsuits against it. "This is a P.R.-and-pray strategy," said Robert Aronoff, the founder and managing partner for Pluritas LLC, an advisory firm for companies buying and selling patents.Twitter's position has supporters, though, including some venture-capitalist investors. They say that patent litigation chills innovation and that they're frustrated nascent companies must spend time and money defending themselves against patent-infringement claims. "In the software field, you don't need a patent to innovate," said Jason Mendelson of the Foundry Group, a venture capital firm in Boulder, Colo. "It's not making a new lawnmower or drug or solar cell. It doesn't cost millions in R&D."Because companies that own patents can later sell them, patents can even wind up in the hands of "patent trolls," a derogatory term for companies that enforce patents they have acquired by going to court. Lawsuits brought by trolls, also called nonpracticing entities, have become more than five times more common now than they were in 2004, according to a 2011 Boston University study. The study estimated that from 1990 through 2010 such lawsuits cost innovators $500 billion in lost wealth. Software-company founders generally have neither the time nor the money to file patent lawsuits themselves, but it can also be close to impossible for them to know in advance whether they are infringing on someone else's patent, some founders and venture capitalists say.Twitter itself has been hit with several patent-infringement claims, including one that alleges it violated a patent that covers methods for delivering messages from known senders over the Internet, which is still pending, and another involving creating an interactive virtual community of famous people. In that case, a jury found last fall that Twitter hadn't infringed any of the asserted claims.Start-ups may also have to contend with bigger rivals that hoard patents strategically and then use them as a basis for infringement suits. For instance, about 20% of the start-ups backed by venture-capital firm Spark Capital received "threatening letters" at some point from companies claiming potential intellectual-property infringement, according to Bijan Sabet, a general partner. Mr. Sabet said such threats force the companies and investors like Spark to spend time and money they can't afford to waste. (Mr. Sabet used to be on Twitter's board; Spark invested in Twitter.) Many of Twitter's supporters hope it has the clout to create a new movement among tech start-ups. If founders adopt Twitter-like agreements, software engineers will be able to create new products that build on others' innovations without as much fear they will trigger lawsuits, these supporters say. David Sacks, founder and CEO of Yammer Inc., a San Francisco business-software company, said he will throw out Yammer's existing employee patent agreements, which turn over patents based on employee work to the company, and replace them with something similar to Twitter's policy. "What we hope is that more entrepreneurs and engineers will want to work for us because we're an 'IPA' company," he said, referring to the Twitter policy."It solves a problem for me that I've been thinking about for two years," adds Angus Fox, founder and director of Multizone Ltd., a mobile-applications developer for the public sector based in Leatherhead, U.K. "We hire subcontractors, and we need to protect our [intellectual property] but preserve their rights. It's a very difficult area for a start-up." The company hasn't yet filed for any patents, but it plans to patent several ideas before turning them into products, he said. Reece Pacheco said he is "certain" he will adopt an IPA at his New York start-up, Shelby.tv., a video-sharing website. "If the innovators had a vision for the technology, that's what's best for it, rather than using it to be litigious," he said.Last month Twitter posted its draft patent policy on GitHub, a website for sharing software code, to solicit feedback and spark conversation. It says it's incorporating the feedback into its draft. Write to Emily Maltby at emily.maltby@wsj.com, Shira Ovide at shira.ovide@wsj.com and Scott Denne at scott.denne@dowjones.com ...
15. For Small Firms, the Check is Not in the Mail
    By Angus Loten One of the potential downsides of being a supplier or a vendor to a big company is that you may have to wait a while to get paid.‪On average, big businesses – those with 1,000 or more employees – paid their bills more than a week past the due date on invoices, according to a report that's expected to be released by Experian next week.‪These big businesses appear to be taking even longer than they did last year to cut checks, and thus, settle their accounts with suppliers: The wait beyond contracted terms – that is, the date agreed to at the time of a sale – grew by 27% over the past year, from six days to nearly eight days, according to Experian.‪‪This trend is particularly disturbing for many small business owners and start-up founders, because they tend to be highly dependent on regular cash flows for working capital to pay their own suppliers and vendors, along with their employees.‪"You've done the work, but there's no cash coming in," says Brandon Cotter, who runs an online small-business invoicing service.About 14% of nearly 5,000 entrepreneurs cited late payments -- or customers that didn't pay at all -- as their biggest challenge in 2010, up from just 2% in 2008, according to a study released Wednesday by the Ewing Marion Kauffman Foundation of Kansas City, Mo.In 2011, small businesses waited up to 46 days on average to get paid, six days longer than in 2010 and 10 days longer than 2006, according to the National Federation of Independent Business, a small-business lobby group.‪Small-business lending broker Ami Kassar in this video makes the argument that big companies should try to help America's small businesses by paying their bills in 10 days, rather than several months.‪Readers: we'd like to hear your stories.‪How long are you waiting to get paid by the big companies you are supplying? And how are big companies that are late payers affecting your business?Email me at angus.loten@wsj.com This online story was updated to include a Ewing Marion Kauffmann Foundation study on small business. Correction: As a result of erroneous data provided by the Ewing Marion Kauffman Foundation, an earlier version of this story misstated the increase in small-business owners citing late or non payments by customers as their biggest challenge, which rose to 14% in 2010. ...