Tuesday, January 31, 2017

Game Plan for Building a Tech Supplier to Multinational Enterprises

New technologies are changing the way personal data can be used to simplify complex tasks for financial transactions, life sciences and business services and the “connected devices” of the Internet of Things. Applications Programming Interfaces (API’s) are stealing the show in data-driven businesses like FinTech, HealthTech, EduTech, drones and blockchain . There are lessons for legal, accounting, marketing, sales and tech. What have we learned?

1. Start with Compliance in Mind. If you are developing any solutions that depend on data, first identify what legal requirements your customers must satisfy, and be ready for the interrogation from the customer’s compliance department. Identify the customer’s vendor assessment procedures and be ready from the start.
  • For financial tech (“FinTech”), your processes (and your business model as evidenced in your contract templates) must meet the complex regulatory requirements.
  • For HealthTech, your data collection must satisfy HIPAA’s rules on data collection, storage, usage and destruction. 
  • For IoT device management, you can minimize security risks by using layers of security in all devices, limiting the processing capacity of the IoT devices, putting the processing capacity in secure servers, and designing the hardware for future software and security updates. 
  • For consumer data, position your servers strategically (for limiting jurisdictional long-arms) and choose self-certification for Privacy Shield or practical alternatives. 
Consider a structure that complies with the “Service Organization Controls II” ("SOC Type II") audit procedures of the AICPA for information governance (“IG”), International Standards Organization 27001 and, more generally, internal controls relevant to security, availability, processing integrity, confidentiality and privacy. Be ready for a source code escrow agreement, but maybe you can cut off such a discussion by demonstrating that there is no need because of your “robust controls” and the value of your patents (not just the value of the source code).

2. Start Lightweight for Agility and Adaptability. You can identify a spot in a complex process (e.g., customer onboarding for banks) and optimize constantly with feedback from customers. The process of customer onboarding is complicated by the need to get data from a broad spectrum of reliable data sources. If you simplify the bank’s compliance with its “know your customer” (KYC) requirements, the prohibitions on dealing with “specially designated nationals” (“SDN’s), anti-money-laundering (“AML”) rules and export and import controls, etc., you will have a big win. The “waterfall” development process works fine if everyone has time. Scrum and agile development require close controls of each iteration. Maybe you might develop an API that is more agile than scrum software, since you are integrating with multiple data sources rather than redefining existing (“old”) methods.

3. Start with Cheap or Free “Big Data”: Find Value in “Digital Exhaust.” People and businesses have become so focused on social media, mobile applications, etc. that you can mine the Internet for data that you might otherwise need to pay a data broker for. Free is better than cheap.

4. Integrate with the “Big Dogs”: Be Disruptive yet Collaborative within the Ecosystem. You can be disruptive and yet add value to enterprise customers within traditional ecosystems. Fill a gap that “big dogs” do inefficiently or with unnecessary layers of middlemen. For example, LendingClub.com uses its own customer evaluation process to generate and issue loans to qualified borrowers and then sells off the loan portfolio for a profit, shifting the future revenue stream and risks to the banks that want to purchase and administer the portfolios. As such, the traditional banks become a distribution channel for new FinTech generators of new loans as a portfolio.

5. Find and Support the Change Agent at the “Big Dogs.” Big companies are in conflict between the need to centralize controls under a CTO or CIO function and the need to be nimble and responsive to customers (the line of business functions). Your sales team should identify the “early adopters” of new technologies and new processes, as well as be in touch with the nominal head of the IT organization. Even if your big customer has appointed an “innovation” department to enable some form of novel thinking, understand that such teams might not have the capacity to be advocates of the changes that the Big Customer needs.

6. Train and Support the “Big Dogs.” Disruptive business models can easily fail without handholding (technical and commercial reinforcement) to ensure adoption and integration of change into daily processes. Don’t let the customer down. Give them a 90-day period of training, support, internal review, adaptation and consolidation of the changes. Otherwise, inertia will defeat the innovation. 

7. Use Process Automation for Low-Value, High Volume Tasks. You can get love and affection from the big banks which would prefer to spend their precious skilled resources on devising and implementing strategies for big customers for big fees. You can make good money taking care of the smaller customers whose needs are defined, repeatable, measurable, and time-sensitive and, most important, unloved and uncompensated.

8. Design for Key Performance Metrics. Whether in the Cloud or on premises, design your processes for the most important Key Performance Indicators, beyond the SOC Type II protocols. In the Cloud, flexibility in process integration across data sets and low latency seem to trump other operational factors. Keep processing fast by using few resources and avoiding unnecessary pre-processing of unnecessary data.

The success rate for the integration of disruptive data-driven businesses (typically, startups) with global enterprise customers is very modest. The chances for success can be improved if you simplify processes (at least for the end user), integrate your tools into existing Big Data and economic processes and provide customer engagement and support. If you have all this, you can look forward to faster and more positive evaluation as a qualified vendor and less angst in contract negotiations on limitations of liability, indemnification and risk management.

Wednesday, January 25, 2017

"Revitalize a Spirit of Entrepreneurship" – New Mission for the SBA??

On January 24, 2017, the U.S. Senate’s Small Business and Entrepreneurship Committee quizzed Linda E. McMahon as President Donald Trump’s nominee to be the Administrator of the U.S. Small Business Administration ("SBA"). See the SBA’s website at www.sba.gov. Confirmation of U.S. cabinet members can often expose the nominees to hostility and challenges. Here, these hearings were collaborative and not contentious.

Perhaps that’s because Mrs. McMahon was a former candidate for Senator (Conn.) and introduced and endorsed for this position by the two Senators who beat her in 2010 and 2012. She was also the former CEO and President of World Wrestling Entertainment, Inc. (“WWE”), stepping down in 2009. As entrepreneurs, she and her husband built their business from a privately owned company to a publically traded global enterprise, with over 800 employees. At her hearing, she acknowledged that, "Like all small business owners, I know what it’s like to take a risk on an idea, manage cash flow, navigate regulations and tax laws, and create jobs."

The Small Business Administration plays several key roles in supporting job growth through entrepreneurship. Its purpose is to help "level the playing field" between small and larger businesses. Senators mentioned statistics that small business accounts for perhaps 90 to 98% of businesses and about 64% of job growth in the United States. Job growth is a key target of Donald Trump’s “Make America Great Again” campaign slogan.

Here’s what seems critical to U.S. job creation and “Making America Great Again.”

  • Regulatory Complexity and Compliance; Unusable Websites. Entrepreneurs face disproportionate costs and distractions from excessive bureaucratic complexity and compliance obligations, both for operations and for taxation. Small businesses often don't have the resources to wade through the complex web of “jargon-filled” federal regulations. The Senators urged simplicity, fewer regulations, quicker bureaucratic responses and “normal websites that a normal person can understand.” So they called upon Mrs. McMahon to be a strong advocate of deregulation and simplification of regulation.
  • Government Procurement. Small business is generally excluded when governmental procurement solicits big projects and fails to carve it into smaller projects. Other agencies are not held accountable for allocating a fare share to small businesses, particularly, women-, minority- or veteran-owned businesses. Senators urged her to lower regulatory burdens by promoting smaller government procurement projects and advocated getting a fair share of these projects allocated to small businesses.
  • Office of Advocacy ("OA"). This office within the SBA is responsible for intervening with other federal agencies on behalf of small businesses. It has a spotty record of success. Mrs. McMahon committed to learning about what did not work and will give it teeth to become more successful.
  • Education. The Senators identified the mismatch of job opportunities with the skills offered by the American workforce. Mrs. McMahon believes that this is due to a shortage of trained people for these jobs and committed to explore how the SBA may promote educational programs and outreach to communities. Nothing was mentioned about policy issues involving skilled immigration, such as H1-B visas or foreign entrepreneur visa waivers or parole. 
  • Access to Capital. The SBA acts both as bank lender and guarantor of bank loans. Senator Mazie Hirono, D-Hawaii, wanted Mrs. McMahon to identify the factors that restrict a small business’ “access to capital.” Mrs. McMahon replied that the recent restrictions imposing over-collateralization requirements on small business, to protect bank solvency, actually hurt job growth. Since collateralization is a key principle of prudent lending, Mrs. McMahon distinguished a good “cash flow business” from a “bricks and mortar business” (that owns it real estate). She reminded small businesses to get a line of credit once they have begun earning money, since debt can accelerate real growth and sustain continuity in a surprise downturn.
  • Critical Role of Intellectual Property. Mrs. McMahon responded to a question on the importance of teaching entrepreneurs to protect their intellectual property. IP rights were the cornerstone of the WWE’s growth. According to my handwritten notes written in my kitchen, she said: “Intellectual property was a large part of the WWE. From the beginning, we wanted to be sure of our rights. It was very important that we copyright our TV shows and our music programs. You might have invested so much, but if you don’t protect your intellectual property, you don’t have a leg to stand on. You need to protect that and spend money on intellectual property protection.” 
  • Disaster Relief. Small businesses are hardest hit by natural disasters and Mrs. McMahon stated that this is her first priority, should she be confirmed. Small businesses might not have adequate capital to replace inventory or facilities destroyed by hurricanes or floods. Both FEMA and the SBA provide assistance, but SBA provides emergency loans. Mrs. McMahon identified a key goal to focus on the disaster relief program to help small businesses get back on their feet. Sen. Marc Rubio, R-FL, asked to extend SBA disaster relief to cover pandemics like the Zika virus as a natural disaster.
  • Small Business Innovation Research Program. Aside from lending programs, the SBIR (a temporary) program provides grants to small businesses that develop innovative products. Such funding has been critical to supporting innovation in governmental programs, especially military innovation. Senators urged that Mrs. McMahon support making this a permanent part of the SBA.
  • Mentorship. Everyone agreed that the Service Corps of Retired Executives (“SCORE”) provides invaluable mentorship and advice to entrepreneurs and is a good investment for the SBA. Mrs. McMahon would like to see more mentoring. But she warned that SCORE mentors should be free to warn “this business will not be a success” when necessary. I guess she will be visiting some incubators soon! 
  • International Trade. Ranking Democrat, Sen. Jeanne Shaheen, D-N.H., asked Mrs. McMahon for support in international trade. Import-focused trade might run contrary to President Trump and other Cabinet members’ agendas, but export-focused trade (including SaaS online services and IoT devices) could be a good fit for promoting high-growth U.S. small businesses.

The Committee hopes to make a decision next week, but the record remains open for two weeks after Jan. 24 for additional submissions concerning Mrs. McMahon’s nomination. Speak now or hold your peace.

Thursday, January 19, 2017

International Entrepreneurs: Welcome to America (Visa Waiver / Parole)

We promised you a final update. Here it is.

The Final Rule on the U.S. International Entrepreneur Visa Waiver (Parole) was published this past Tuesday, January 17, 2017. Applications can be submitted on July 17, 2017 and anytime thereafter. Get ready! Bring on your STEM, IoT, SaaS, cybersecurity, DRaaS, fintech, blockchain, edutech, healthtech, Big Data and Cloud Computing!

Summary.  Under the new Rule, the USCIS may authorize a foreign “entrepreneur” to work in the U.S. for a U.S. “startup entity."

  • The entity must have been formed not more than five years before the filing date of the application.
  • The entrepreneur must own a “substantial percentage” of equity in the “startup entity,” being 10% at the time of the application and being diluted to not less than 5% after subsequent additional funding. 
  • “Qualified” U.S. investors must have made a minimum “qualified investment” of $250,000 in acceptable securities (convertible debt, equity or contracts for such securities). The investment must have been made within 18 months before the foreign entrepreneur’s application.
  • If qualified, the foreign entrepreneur can remain for up to five years, divided between two periods of up to 30 months each.

This is good news for U.S. startups and high-growth innovative companies and U.S. private equity investors.

Implications for Foreign Startups Coming to America. Foreign startups might use the rule too by converting to American startups! Globalizing foreign startups could take their teams to the U.S. for some functions but not others. Maybe this Rule could be a tool for globalizing high-growth companies that already have begun their development and growth abroad, but want to have the leadership located in the U.S. The Rule supports foreign entrepreneurs despite:

  • the original location of some business operations and assets outside the U.S., such as R&D, product testing, marketing, sales or administrative support; 
  • the conversion of a foreign startup to a U.S. startup (through a little gymnastic flip using tax-free corporate restructuring); and
  • the existence of some foreign capital investment. 

Since the Rule was not intended for such scenarios, the Trump Administration might interpret the policy basis to focus on U.S. job creation. Foreign startups that contemplate using this visa approach might wish to limit the relative importance or the growth of foreign jobs.

Comparative Benefits. As with any innovative governmental program, the International Entrepreneur Visa Waiver (Parole) Rule is not an “open floodgate.” The USCIS estimates that only a total of 2,940 entrepreneurs will be able to qualify in this initial year of the Final Rule.

Given this focus and orientation on growing local American startups, this Rule may be more difficult to comply with, both initially and upon renewal, than a H1-B, L1-A, L1-B or E-1 or E-2 visa for foreign high-growth companies coming to the United States.

Thursday, January 12, 2017

Update on U.S. Visa Waivers for "International Entrepreneur"

Are you a foreign entrepreneur/innovator wanting to come work and grow your business in the U.S.?  The Visa Waiver for International Entrepreneurs is “almost” ready.

In August 2016, the U.S. Customs and Immigration Service, a division of the Department of Homeland Security, published a Proposed Rule that would enable the USCIS, on a discretionary basis, to admit foreign entrepreneurs of startup companies for temporary stays in the U.S. in order to grow their businesses.  Qualifying entrepreneurs would need to meet stringent requirements. The duration would be for an initial two years, with the possibility of renewal. 

The Proposed Rule was open to public comments until October 17, 2016.  After reviewing hundreds of comments, the USCIS issued a final International Entrepreneur Rule, with changes from the Proposed Rule.   This final Rule went to the Office of Management and Budget (OMB) for review on December 29, 2016.  The OMB’s Office of Information and Regulatory Affairs (OIRA) evaluates a final rule, typically within 90 days.  However, this OIRA review was completed very quickly by January 5, 2017, we think in anticipation of the expiration of the Obama Presidency on January 20, 2017.  Therefore we expect the final rule to be published shortly in the Federal Register.  It is likely that this Rule will be effective under the forthcoming Trump Administration.  However, pending actual publication, details of the final Rule remain confidential.

While President-Elect Trump might take steps to invalidate this “rule by executive penmanship,” we think President-Elect Trump will not object to this new rule.  His opposition to immigration has been focused on illegal immigrants, while he promotes entrepreneurship, jobs in America, tax-paying business operations and innovation.  Whatever its configuration, the new International Entrepreneur rule will be good for global startups as well as the American innovation eco-system.

Once we know more, we will keep you informed.