Redesigning the U.S. Business Workforce by Obama Fiat

If you thought Obama’s recent fiat on immigration only on focuses on Hispanic families and other illegal aliens, you are wrong. It targets business growth across the size, maturity and territorial footprint of a wide array of US businesses.

On November 20, 2014, President Barack Obama announced an Executive Order changing the legality of current illegal residents, creating  a path to regularization and amnesty for some 4 million to 5 million illegal aliens who have been in the United States for over 5 years, are not felons and will pay taxes.  But the real economic impact of his governing by “national interest waiver” and “parole” of foreigners into the U.S. will be felt more broadly, in startups, technology-based businesses and outsourcing services.

His proposal is to govern not by enforcing law, but by waiving enforcement and announcing it as an executive fiat rather than by legislative reform.  For politicians, this will potentially expose his waiver policy to judicial scrutiny and political contests in Congress, so much so that I believe that true legislative reform is highly unlikely in the next two years.

The political impetus was humanitarian aid to foreign parents of U.S. citizen children.   The economic impact will be felt broadly, not only in industries (such as restaurants, food processing, farming, landscaping and small business) that have traditionally employed illegal foreign workers.  Indeed, the greater impact will be felt across broad sectors involving STEM technology, startups, venture capital, outsourcing, global consulting and multinational companies.

• Domestic business owners will face increased costs of compliance with new administrative regulations. Those businesses that have relied upon illegal foreign workers will likely have to increase wages because the newly protected illegal foreign workers will have new portability of their work at one employer as a basis for adjustment of status to lawful permanent resident.  The new rules for the “Deferred Action for Childhood Arrivals” (DACA) program will impact every U.S. employer who will need to adopt new employment eligibility reviews, on terms to be defined under future regulations.

• Startup Mania.

• Foreign-owned startups won’t need to worry about H1-B’s.  They will benefit either by “national interest waivers” or (on a case-by-case basis for “urgent humanitarian reasons or significant public benefit”) by “parole.”  For foreign inventors, researchers and founders of start-up enterprises, the Obama administration has set an agenda to “clarify the standard by which a national interest waiver may be granted to benefit the U.S economy.”  Under individual decisions on to “parole” a foreigner, the USCIS will evaluate and grant individual requests for admission from abroad or even extend the right to “stay in place” in the United States.  According to USCIS, waivers and paroles will be granted to “eligible inventors, researchers and founders of start-up enterprises who might not yet qualify for a national interest waiver,” but who (i) have been awarded “substantial U.S. investor financing”; or (ii) “otherwise hold the promise of innovation and job creation through the development of new technologies or the pursuit of cutting-edge research.”  http://www.uscis.gov/immigrationaction/. 
• Startup Investors.  The US government estimates that this will benefit about 400,000 highly skilled foreign workers.  U.S. angel investors, venture capitalists, startup incubators and their operational supporters will be overjoyed, though the details remain to be seen. 
• Domestic startups will probably have greater access to foreign inventors, researchers and co-founders.

• Foreign investors in US companies, global consulting companies and foreign outsourcing companies dodged a bullet.  Foreign outsourcers will probably be able to continue to send large numbers of skilled foreign workers to fill gaps in the US workforce.    However, I suspect that new regulations will be drafted to adopt (tacitly or explicitly) the restrictions and additional governmental scrutiny under the draft Border Security, Economic Opportunity and Immigration Modernization Act, see S. Rept. 113-40 (113th Cong., 1st Sess.), as passed by the Senate in mid-2013.  Thus, H1-B skilled worker dependent employers would likely need to take good faith steps to recruit U.S. workers first, advertise H1-B jobs on a U.S. Department of Labor website and offer the job to a any U.S. worker who applies and is equally if not better qualified than a potential H1-B skilled worker.

• Foreign spouses of H1-B skilled foreign workers will get the right to work. This will bring additional foreign skills and competition to the American labor market.  But Indian and other foreign outsourcing companies were disappointed not to get an increase in the current 65,000 ceiling on H1-B visas, though they must accept that such an increase would take a new law, not a new “waiver” or “parole.”

• Foreign students will likely get increased access to work in the U.S. after U.S. university training under an expanded and extended definition of “optional practical training.”

• Foreign skilled workers who entered the country legally and are in limbo waiting for green cards (lawful permanent residency) will have new flexibility to change jobs without getting sent to the back of the queue for green cards.  This newfound job mobility will give them higher, more competitive salaries and thus less likelihood of being abused as “cheap labor.”

• U.S. labor unions, Obama’s core supporters, have kept their mouths shut.  They probably will be happy to see higher wages for H1-B’s due to portability and no increase in the 65,000 H1-B cap.   They can’t complain about humanitarian waivers and parole for family unification under the DACA program.

• Governing without a legislature.  In the short term, Obama’s executive order to waive the application of the law on a wholesale basis is good for business (especially high-tech, e-business and startups).  As a political gesture, it is probably bad for the incoming Republican-controlled Congress and the constitutional balance of power.  Thus, it will unlikely be overturned legislatively until a new Congress in 2016.

Not only illegal aliens, but businesses of all sizes, universities, startups, venture capital, business angels, tech-based operations can rejoice.   Of course, the devil’s in the details. 

Bringing Phoenix Value to Failed Startups

Entrepreneurship is strewn with startup corpses.  Dynamically, the world’s entrepreneurs, investors, governments, business schools (and their supporters like attorneys, accountants, incubators, consultants and advisors) have created millions of new startups in the last few years.   But startups have a high failure rate.  Yet few commentators discuss the painful process of what happens to failed startups. 

Like political questions, a “startup failure” depends on how you define it.  About three-quarters of venture-backed firms in the U.S. don't return investors' capital, according to a Wall Street Journal report on the research of Shikhar Ghosh, a Harvard Business School senior lecturer.   For him, “failure” means 0% ROI.  The same article cited more optimistic venture capitalists’ estimates that 30% to 40% of startups “fail completely” while another 30-40% return the original investment, and only 10% or 20% yield substantial returns. 

“Startup corpses” have “Phoenix Value.”   A “loser” is any project with 0% ROI.  Starting with the “Dot Bomb” bust in 2003,  some are purely domestic, like the web developers who offered new social “community” business models in 2003 for $500,000 that today would cost $5,000 to $20,000.  Others involve cross-border startups (and more mature enterprises) entering the U.S. markets seeking customers, funding, talent and sometimes a new home.  For example, this category includes “pet robots,” web analytics software and online video editing. 

A “winner” is a successful traveler from the Gulf of Nothingness to the radiant shores of Exitness.  Steps could include incorporation to “friends and family” funding, to VC rounds 1 and 2, to bridge loans where the founders mortgaged their souls (and shares), to sale of non-strategic assets, refinancing, generation of strong customer relationships and highly profitable exit sale.

However, don’t think that failed startups are always lost causes. Professionals can resuscitate, reutilize and reintroduce the lost value from startup corpses.  To help recover value from the startup crematory, an ecosystem of “Phoenix Value hunters” has arisen.   They consist of attorneys, restructuring experts, valuation advisers, investment bankers, stable businesses looking to fill tech gaps and “Phoenix Value” investors. 

Here are a few lessons learned from the trenches.

• Founders and early-stage investors in startups want to ensure the legal entity owns the intellectual property, trade secrets and, to the extent possible, the people doing the innovation. 

• VC investors want a preference in liquidation.  This means not only a preferred payment (ahead of common stockholders) but also a preferred return (the “liquidation preference” multiple of invested capital).

• VC investors need the right to fire the founder from management roles.

• Founders can leave failing startups and build anew, but the manner, timing and perceptions about their departures will impact their ability to raise capital in the future.

•  “Phoenix Value” investors can make good money by buying distress assets from a failing or failed startup.  They don’t anticipate any more “funding rounds.” “Phoenix Value” investors create Phoenix Value for transformation of “dead” or “useless” innovation into productive assets in a sustainable, well-funded business.

• Proper foresight in management and administration of intellectual property (as well as the people who create and manage it) can reduce losses, increase gains and avoid surprises that can kill or delay prospective acquisitions.

• Some bankrupt companies in one country might reappear in the markets of other countries, thanks to Phoenix-stage investors finding and generating new value from the ashes.

 So, when considering a startup or a new product development plan, keep planning for both success and failure.   Understanding how failures can be used to retrieve and revive a “sunk cost” can make a big difference in your personal and professional success.

"Pitch Night" - Tips for Innovative Start-ups

“Pitch Night” is the opportunity for startups and innovators to show their business ideas to potential investors/advisors and get feedback on their presentations. I recently attended one in the health IT sector and thought that the critiques presented by these advisors were invaluable advice, not just for this sector, but for anyone interested in exploiting a new e-business idea. I thought I would share some of these key lessons with you today:

1. Who Will Pay for Your Solution? Identify your business opportunity and target market by explaining who is in pain and willing to pay money for your pain-relieving solution.

1. Your pitch should explain:
1. “This is our customer.”
2. “Our customer base is losing money (estimated at $XX per “transaction”/ “event” for YY transactions per year) because of problems we solve. [Describe the problems.]
3. “This is why our customer will gladly pay for our solution to overcome their current chronic problems.”
2. Don’t develop “a tool in search of a problem.”
3. Talk to 100 buyers before you finalize your solution’s design. Understand how they identify their pain and what your solution does and fails to do to resolve that pain.
4. Lawyer’s caution: Be careful. If you explain the “problem that you solve,” you might be explaining the trade secret in your patent application. Think about your “inside voice” (trade secret disclosure under a non-disclsoure agreement) and your “outside, or pitch” voice.

2. Finding the Niche: Steer Away from Obvious Competition. While your solution might have a broad market, you risk losing to deep-pocket competitors who also see a broad market. So target on a niche market where you can acquire a dominating competitive advantage.

1. For large enterprises, third party administrators (TPA’s) already manage large health and wellness programs. They might not see the value of your product.
2. For smaller enterprises, the value of your technological solution might come from the combination of lower per-capital costs of managed services (normally provided by a TPA) where you combine managed administrative services (like a TPA) and the underlying technological solution in a single pricing plan.
3. Identify your “similars”: competitors who have a similar solution, and refine your solution to be different.
4. Explain why you are different and your solution cannot be accessible to your competitors: patents, trade secrets, licensing, governmental monopolies, regulations, first-mover advantage, etc.

3. Prove your Concept. Investors want to know your solution works and is accepted by at least one key “early adopter.” Develop a pilot program to gather performance metrics that demonstrate “proof of concept.”

4. Exploit your Big Data. If your innovative solution collects data (through sensors in the “Internet of Things,” a “tracking” or wearable “monitoring” devices), then develop a plan to own and commercially exploit the value of such Big Data across all your revenue streams.

1. Lawyer’s caution: Before you exploit personally identifiable information (“PII” under data privacy laws) or personal health information (“PHI” under HIPAA), adopt legal procedures for obtaining consents to use it and for securing it from hackers.
2. Design your data collection strategy based on whether it complies with privacy rights. It’s “privacy by design.”

5. Exploiting Mobility; Provide Teleservices. Design your solution for use in telemedicine. If you are selling sensors or other tracking devices and services, identify how your solution overcomes existing problems of distance, such as remote villages lacking world-class medical support, or on the ocean or in the air, or other scenarios where it is predictable that the user will lack access to adequate medical care without your solution.

6. Consider Selling to Channels, not just to Customers. A channel consists of an industry player that regularly supports your target customer’s critical needs. It might be a distributor. But it might also be a strategic buyer who has a gap in its product line and would want to integrate your solution into its solution. Find the gap. Such a strategic buyer might invest in return for some form of preferential distribution rights.

7. Sustainable User Intrigue, not Fatigue. In your sale to users, you cannot merely sell them the product and a six-pack of diagnostic data presentations from the user’s uploading of his/her data to your servers. Over time, the user will become tired because “nothing changes” after the initial use and the initial improvement. To be sustainable, you must design sustainable user demand after the initial “quick success.” Possible solutions:

1. Telemedicine
2. Real-time feedback loop for health improvement (or other benefits) when your solution collects the data from the user
3. “Emergency” alerts, dashboards and “managed care” support
4. Habit-forming disruptive self-service that simplifies life and gives it more meaning with less hassle.

Pigeon Power!

Why establish your startup in France?  Why invest there?  

On April 12, 2013, the French government reportedly rejected Yahoo’s bid to acquire 75% of a leading video sharing website Dailymotion, owned by Orange, a subsidiary of France Telecom, S.A.  The ostensible reason was that control of a crown jewel of French Internet startups should remain in France.  No great French Internet company should lose its French identity.  The French government owns a 27% stake in France Telecom, S.A.

This result will only harm the French economy by encouraging French entrepreneurs and SMB’s to seek venture capital, growth opportunities and technologies outside of France.   This comes after a year of hostile words by Arnaud Montebourg, France’s Minister of Industrial Renewal  (“productive renewal”) against foreign steelmakers and others who might bring in foreign investment and foreign business methods for French industry.  It will deprive Dailymotion of capital investment needed for sustainability and growth.

Having studied, lived and worked in France, and as a tech business lawyer in New York, I offer my own lament to French entrepreneurs and SMB’s in their own tongue.  (If you only studied French in high school, try www.translate.google.com for a breezy translation.)

Où bâtir votre startup français?   Evidemment, la France ne vous accueille pas. 

C’est ça le message du gouvernement de François Hollande, dont le Ministre du Redressement Productif Arnaud Montebourg a refusé le 12 avril 2013 de permettre à la startup Dailymotion de se vendre le contrôle à Yahoo, Inc.  Le Ministre aurait permis la vente de 50% mais pas le 75% convenu entre la « startup » vedette française Dailymotion (fondée en 2005) et Yahoo. 

Quelles seront les conséquences de la « fin du capitalisme libre» que M. Montebourg a annoncée en 2012 ?  

D’abord, les entrepreneurs français (et leurs investisseurs, comme les « anges d’affaires » (Business Angels) et les fonds de capital risque) vont croire que les subventions et certaines baisses prioritaires de taux d’impôts, récemment annoncées en France, sont illusoires.  On va conclure qu’il vaut mieux établir les moteurs de croissances dans les pays étrangers des « Pigeons ».   L’Ireland, le Canada et, bien sur, les Etats-Unis vont les accueillir avec des visas d’entrepreneur, de startup, d’investisseur et de commerçant.  Sous Hollande, la fuite des cerveaux, des jeunes et des PME va s’accélérer.  Même s’ils ne se délocalisent pas personnellement pour des raisons de famille, les PME pourront établir des sociétés affiliées étrangères dans de tels pays d’accueil, où il trouveront du capital risque (venture capital), des marchés, des taux d’impôts raisonnables et le droit du travail plus équilibré que devant les tribunaux de Prud’hommes. 

Ensuite, déprimés par un dirigisme protectionniste en France, les prix de vente pour les PME français vont rester en dessous des niveaux atteints normalement dans d’autres pays.  

Enfin, au lieu de préserver la façon de vivre, et de protéger les mœurs et coutumes français, ce gouvernement de François Hollande va vider la France des personnes qui auraient soutenu autrement sa place de leader dans les économies européennes et mondiales. 

Et je ne parle as des obligations de la France d’ouvrir des portes à l’investissement étranger sous la convention de l’OMG (WTO) sur les investissements portant sur le commerce international.   Non, je me tais.  Je ne veux pas condamner la France du non-respect de la lettre des lois.   Montesquieu m’a enseigné quand même « l’esprit des lois. »

In short, look around.  Chercher le business là où vous êtes bien accueilli.