At the Venture Association of New Jersey (VANJ) meeting on October 23, 2012, Jack Kaplan went to Whippany to “school” some 60 attendees in the right and wrong ways for entrepreneurs to make decisions about their businesses.
Kaplan, a serial entrepreneur and adjunct entrepreneurship professor at Columbia Business School, made an impact with his discussion style, which included frequently tossing questions to the audience.
Kaplan said as an entrepreneur, he isn’t an innovator. However, if he likes an idea, he knows how to make it happen, make it a business and then take it to an exit.
Exits are tricky in many ways, so Kaplan is guided by a couple of principles. In any exit he makes, he always protects the core team that got him through the company’s beginning stages. Usually that team consists of a founding partner, a CTO and a sales and marketing person.
He plans an exit very early in the game, trying to self-fund through friends and family, personal investment and sweat equity until a company has a proof of concept. Once that proof exists, the company’s valuation is higher, he said.
Kaplan tries to sell companies in three to five years, but “these days it’s very difficult to do. Many entrepreneurs don’t make it beyond the first-round funds or a Series A. They may be good at starting something, but they don’t know how to grow it.” He advised tech founders not to “fall in love with the technology. It’s not the technology that sells; it’s the solutions.”
Discussing the mistakes he had made with his own company, Datamark Technologies (Princeton), a gift and loyalty card provider to the restaurant and retail market,, Kaplan said he regrets deciding to take money from an institutional investor that offered harsh terms. GE Capital invested $2.5 million in Datamark for a 20 percent equity stake. It had seats on the board, and Kaplan wasn’t able to sign checks that exceeded $25,000. “I couldn’t buy or sell or do anything with the company without GE’s approval,” he noted.
GE expected heavy returns and growth of 25 percent to 30 percent annualized. “I started losing track of the company. I was in meetings all the time. I couldn’t grow the company that much,” Kaplan said. “I wasn’t performing, and I started taking a lot of heat,” he noted. GE told him he had to sell the company and refused to give him more money. Datamark was the No. 3 company in the gift and loyalty card market by design, and GE wanted it to be No. 2.
So Kaplan looked for recently exited dot-com companies that had cash, and he found one that would buy Datamark. But after the acquisition, that company didn’t perform well and filed for Chapter 11. Luckily, during the ownership period Kaplan had kept Datamark together and hadn’t integrated it into the new owner’s organization. So he bought the company back, put a new team together and began rebuilding Datamark. It was then acquired by Ceridian, a Fortune 500 company, in a cash transaction.
Sharing lessons learned with his audience, Kaplan said picking a core team is important to growing the venture. “I made mistakes with my core team, putting personal interests before professional interests,” he said.
“I also made mistakes with my law firm,” he noted. “When I selected my first law firm, I knew who they and some of the players were, but I didn’t look for the right law firm to work with us” to build the business.
Near the end of Kaplan’s talk, an audience member asked what he thinks of crowdfunding authorized by the Jumpstart Our Business Startups (JOBS) Act. Kaplan said he is totally against it, which sparked a lively discussion. Joel Cartun — a serial investor and the founder of Vestcom International — predicted that no money will be raised from nonaccredited investors via crowdfunding until the second or third quarter of 2013 because the rules haven’t yet emerged.
Cartun noted that there are crowdfunding issues for follow-on investors because they won’t want to put money into companies that have to wrangle several hundred small investors to approve deals. However, Jay Trien, senior partner at Raich Ende Malter & Co. (Chatham) and VANJ president, said there is a solution: a company can issue an agreement permitting someone to speak for the group. “You can’t run a business if you have to poll several thousand people each time you have to do something,” he pointed out.
Trien predicted the SEC will continue to postpone devising rules out of concern that crowdfunding will be misused to cheat the small investor. “I look at it from the other point of view,” he said. “Look at how the big guys have been taking advantage of the little guy.” It’s true that this will attract the criminal set, he said, but they can be identified pretty quickly. “Why should a guy who wants to invest only $2,500 be closed out? They don’t stop me from buying $2,500 worth of lottery tickets.”