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There’s Really Dumb Investment Opportunities . . . and Then There’s All Aboard Florida

All Aboard Florida Folly
All Aboard Florida asking Fund Managers to Buy $1.75 Billion in Tax Exempt Bonds

Picking Winners and Losers

I have long time clients that are professional fund managers and serial angel investors. I have tremendous respect for these risk takers that play a vital role in funding businesses.  We have also been investors ourselves and served in roles within private investment funds.  It probably goes without saying that we like the space and and feel like it is an area where you can “do good and do well.”  But successfully investing in startups and businesses that are little more than ideas is really hard–it is an industry predicated upon a high failure rate. It’s just incredibly difficult to pick winners.

However, as hard as it can be to predict winners, it is often pretty easy to pick losers.  Some business pitches really scream “crash and burn” from the start. There is no shortage of really bad ideas out there. All Aboard Florida’s idea to build a profitable high-speed train between Miami and Orlando is as bad as it gets. More on that below but what is really interesting to me is that some of these obvious losers require billions in capital, are promoted or originated by very sophisticated parties and are sometimes even funded with their own money.  Like all things crazy, many of these ideas seem to originate in Florida and are welcomed by grinning politicians that are nowhere to be found when it all blows up. Will All Aboard Florida be another funded fool’s errand? Some opponents of All Aboard Florida are already throwing in the towel and concluding that raising $1.75 billion in bonds is a done deal.

A Bright Future for Florida Citrus?!?

To find a recent example of billion dollar nonsense, one need only look back a few years in order to find a prime example. In 2013, while an incurable disease was decimating Florida’s citrus industry, Coca-Cola Company thought it would be a great time to plant 50,000 acres of new citrus. The cost: a mere $2 Billion.  Coca-Cola proudly heralded that “the future of Florida orange juice is looking brighter today.” It wasn’t. In fact, it had never looked more bleak. Turns out Coca-Cola’s future was looking a whole lot dimmer too.  Stating the incredibly obvious, I sent the following tweet:TWEET

What has happened since then was all too predictable. The disease has still not been cured and Florida is experiencing its lowest production of oranges in more than 50 years.  The prognosis is actually getting worse. I don’t know exactly what has happened to Coca-Cola’s new groves, but I’m guessing it wasn’t good. Florida has lost at least 100,000 acres of groves to disease and $3.6 billion in revenues since 2007.   It was a really dumb plan and it was initiated by one of the oldest and largest corporations in the world. It is stunning to me that seemingly sophisticated managers of funds (in this case, shareholder funds) can be so obviously stupid.

Now Florida’s Transportation Future Looks Bright!

But at least it was on Coca-Cola’s nickel. Over the last few years, All Aboard Florida has been pimping this high-speed passenger train service between downtown Miami and the Orlando airport. In 2013, I wondered whether there could be something dumber than planting 50,000 acres of oranges in the face of incurable disease. Well ladies and gentlemen, we have our winner!  The pure lunacy of this train as an investment opportunity has been well chronicled by Carl Hiaasen here and here. Because I could not possibly make this case better than one of America’s most talent writers, I commend those articles to your reading. It does say something to see a writer who seems to have little experience in financial reporting so effortlessly dismantle the All Aboard Florida business model.

As obviously flawed as it may be, I nearly spewed my coffee when I saw All Aboard Florida’s recent proclamation that “The Future of Florida’s Transportation Looks Bright.” Sure . . . just as bright as its citrus industry did in 2013.

All Aboard?

While I was tempted several times, I have not written anything outside of Twitter about this half-baked idea because I have been certain that it will die under its own weight. After all, All Aboard Florida apparently needs $1.75 billion in tax exempt bond sales to make the train a reality. Unlike Coca-Cola, these guys are looking to use other people’s money. It is currently being marketed as “junk bonds” to institutional and high-income investors with a minimum $100,000 buy-in. Even though we have seen dumb ideas get funded before, surely no sophisticated party would make a six-figure investment into a bond as uniquely risky as the bonds financing this moronic train. I guess we will soon see if history repeats itself again and asset managers do the truly unexplainable.

Fund Managers Not Getting Aboard

I was encouraged that the financial world has not completely lost it’s mind when word started to circulate last month that efforts to sell these bonds has been falling on deaf ears.  Lyle Fitterer, managing director for Wells Capital Management was quoted as saying “We looked at it, but we are not going to be participating, . . . It came down to a credit decision.” That would be fund manager-speak for “there is no way in hell we would get our money back.” I also enjoyed the quote from Jim Colby, who apparently manages about $1.6 billion of high-yield municipals: “It was not priced to demand . . . That is about all I will say.” Apparently Jim Colby is no fool either. I’ll say what he won’t. For anyone to take this kind of extreme risk, the investment returns would have to be so sky high that the train would have to be projected to belch golden bricks from its smokestack. The jury was still out as to whether Daniel Solender of Lord Abbett & Co. in Jersey City, New Jersey is as sharp as his contemporaries. The firm apparently oversees $17 billion but he reportedly had not decided whether to invest as of the publication of the article. I’ll assume he was either just being political or had not yet really taken a look. 

Next week, Merrill Lynch will be taking these junk bonds to the U.S. municipal market to help fund All Aboard Florida. What could possibly go wrong? We will see how many bond fund managers know less about investing than Carl Hiaasen. After all, the outlook couldn’t be brighter, right? 

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Kickstarter Went B Corp – Why Your Company Should Not

Kickstarter B Corp

So, Kickstarter Went B Corporation

Kickstarter got some well deserved publicity for electing to become a Delaware B Corporation (more formally referred to as a public benefit corporation) rather than continuing its status an elective B corp.  That is commendable and I applaud their decision but it must be said that, well, your company probably isn’t Kickstarter.  I have written in the past about why social enterprises should think long and hard before making this legal status binding.   Rather than restating those points, let me point out why it may well work for Kickstarter (and its existing apparently very happy investors) but it would not be wise for most social enterprises (or regular businesses that aspire to have some social benefit beyond simply making money for shareholders).

Kickstarter is Not Raising Money and Does Not Need to Do So

According to current investor Chris Sacca, “[Kickstarter] is a fast-growing, highly profitable enterprise.”  Highly profitable enterprises do not need to worry very much about what future investors think about their corporate structure.  If your company does not need investment now or in the future, you may not care either.  However, most private companies do not have that luxury. Some potential investors will not like the public transparency.  Some might not like the causes the company elects to support. As I have said before, many investors (especially institutional investors) simply run from anything “new” like the plague. The reality is that until issues like fiduciary obligations of B Corp directors, derivative lawsuit claims, enforceability of investor protections and a host of other issues are addressed by Delaware courts through fact specific litigation, expect most sophisticated investors such as venture capital managers to be leery at best. Their cautious lawyers will be all the more suspicious. Don’t need the money? Then have at it. Not sure? Being a bit more measured is probably prudent.

Kickstarter is Apparently Not Planning on Selling . . . Ever

Ok, here is where Kickstarter gets to really rarefied air. According to the New York Times, Kickstarter CEO Yancey Strickler stated that, “We don’t ever want to sell or go public.” Well, that might come as a bit of a surprise to the limited partners of the venture funds that already invested. Suffice it to say that the B corporation is going to complicate either a sale or an IPO. It probably won’t make it impossible, but it will be an issue–especially early on in the life of this relatively new statute. As a lawyer that has long advised companies in sales and IPOs, added complication isn’t exactly a welcome visitor to the sale or IPO. If you are amongst the business owners that intends to never sell or IPO your company, I guess you don’t care. I don’t know too many of those business owners. In fact, those owners probably don’t care enough to be reading this blog either so I am assuming that if you read this far, you’re probably not like Kickstarter in this regard.

The Tax Man Doesn’t Care About Your Social Purpose

Kickstarter had no choice but to be tax inefficient. You probably do have that choice and making a decision to be a B corp may well kill it. Part of Kickstarter’s adopted social charter is apparently to remain as tax inefficient as possible (or at least to avoid dirty loopholes). Good for them! However, Kickstarter was a C corporation for tax purposes before it elected B corp status and it will simply continue to be a C corporation afterwards. C corporations are generally tax inefficient. Kickstarter had no choice but to be a C corporation because of the tax requirements of its own venture capital investors. Is that the case for your private company? It may sound stupid to state the obvious but Delaware B corporations are, well, corporations under Delaware’s General corporation law. As such, they will either be S corporations (if eligible and properly elected) or C corporations. In either case, the tax efficiency and structural benefits of a limited liability company taxed as a partnership are off the table.

The Social Purpose Can Be Achieved Without B Corp Status

As I have said before, I really like social enterprises and I am glad that the option to be a public benefit corporation is now out there in many states. However, keep in mind that Kickstarter already did many of these things before electing formal B corp status and your company can likely do so without making a decisions that will be potentially limiting and potentially difficult or costly to unwind. That is the real bottom line: you can achieve all the same goals without making a decision to organize as a B corporation. It’s sort of the present day version of “Come on sweetheart, do we really need a certificate from the state to prove we are committed?” Only in this case, your mother probably does not really care if you get the state certificate. If you can achieve the result without the risk, why would you? Maybe you are like Kickstarter . . . but the reality is that your business probably isn’t.

 

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Mergers and Acquisitions: Avoid Unnecessary Legal Fees

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When we formed Corridor Legal, we did it with the intention of changing many of the big firm practices that drive unnecessary costs and, worse yet, create inherent conflicts with clients.  For instance, conflicts are created when firms train junior lawyers by having them learn the practice by charging clients for their time and then using seasoned lawyers to review that work.  The client is charged for both the junior lawyer’s time (which is much more time than it would take a qualified lawyer) and then also charged for the review by the seasoned lawyer (which often takes more time than simply having the senior lawyer do it themselves).  The fair thing to do is to write off the junior lawyer’s time.  Some do, many do not.  When I was buying a significant amount of legal services as general counsel of a public company, I would not allow first or second year lawyers to work on our files.  If the work was complex, I expected partners to be doing it themselves.

Law Firm Revenue Tricks in M&A

Another area of conflict with law firms involves lawyers that attempt to sell clients documents that they do not yet need (and may never need) in advance of a contemplated sale of a business. I recently had the opportunity to hear two large law firms pitch for representation of a venture-backed company that is considering beginning a sale process. Both law firms recommended that the company prepare a full advance set of transaction documents for the sale of the company at the very beginning of the process. Conveniently, if the company agrees, the law firm gets paid to do the work in advance regardless of the outcome. This is almost always a bad move for the client and often results in paying attorney’s fees for the same deal twice.

The reason is because preparing documents for mergers and acquisitions requires one to actually know the form of the merger or acquisition. Is it going to be a stock sale, asset sale, merger, reverse-merger? In most cases, the seller has only a preference at the beginning of the process. The seller may have a strong preference, but until a buyer agrees it is only a preference. The form of the deal is mostly determined by the identity of the buyer and by pure negotiation and leverage. Do not let the lawyer tell you that preparing documents in advance will materially impact anything that a sophisticated buyer will do. Everything is negotiable.  At the right price, a seller that wants to do a stock sale is probably willing to do an asset sale. If a buyer wants to do an asset sale but critical assets cannot be assigned without the consent of an unwilling third party, it is not going to be an asset sale. That is how mergers and acquisitions deals get done. Doing a full set of documents for a stock sale that turns out to be an asset sale is a complete waste of time. Guess who pays for that wasted time (and guess who gets paid)?

What if the client decides not to sell the company after all or is not actually successful in finding a buyer? If the law firm does the documents in advance, the law firm still gets paid.  Do not think for a minute that this is coincidental. As an aside, we also see this trick used in financing documents. If you are going to try to raise money for your company, do not let a law firm sell you investment documents for the round before you know that you likely have a round and what the form of that round and investor rights will be. We have represented venture funds that receive template stock purchase documents from a naive company. Those documents go straight into the circular file (I have literally seen companies charged in excess of $30k for documents that were never even read by the investor).

Even assuming an actual M&A deal gets done in the very same manner predicted at the time the company does the advance documents. The documents prepared in advance will often be so one-sided that no sophisticated buyer will accept the terms without substantial revisions and rounds of negotiations. Again, this is not accidental. The law firm that drafts the advance documents often takes totally non-market positions because the process of revising documents after the buyer refuses to accept the terms drives additional attorney time (read: costs) for the seller. Are you seeing a trend here?

Stick With a Term Sheet

We are continuing to see a mergers and acquisitions marketplace where sellers have unprecedented leverage in the sale. Some sellers are likely to be so sought after that they may be able to get competing bidders to agree to almost anything–including the terms of definitive transaction documents. However, on a percentage basis, this is still seldom the case and, even where it is, there is plenty of time for the documents to be prepared once an agreement in principle is reached. There is no good reason to take the risk of incurring that expense at the beginning of the process. Company’s should always prepare a document that fairly represents the deal they want to do (whether in a sale process or in a capital raise) but that should be done through a short and simple term sheet that is very inexpensive to produce and involves very little attorney time. That term sheet can be easily modified in negotiations and the deal described is non-binding on the parties until full documents are competed and signed. Once the general deal terms have been agreed, it is then prudent to spend the money on producing full deal documents.  Before that time, you are probably wasting your money (and enriching your lawyer).

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Its Getting Frothy: Transactional Legal Services as a Barometer of the Economy

Transactional lawyers can often provide some significant insight into the business climate. It is not based on economic prognostication skills, it is simply based on type and volume of work being done. By that measure, this economy is hitting on all cylinders. Many clients call their lawyers when they are hiring employees, and when they are letting them go. For some time now, it is well chronicled that companies are mostly hiring.

But it isn’t just jobs–deals are increasing at an astounding rate. In late March and early April, we closed five meaningful investment transactions in a seven day period. That was partially coincidence, but several of those transactions had been in the works for some period of time. In bad economies, even good deals often do not get funded. In good economies, investors and acquirers fight over deals. We are getting to the point where competition among buyers and investors is increasing. I am getting those calls again where funders are trying to find deals. While moderating a recent panel of professional investors, one thirty-year venture capital veteran quipped that “2015 will be the best year to sell a business since 1998.” I don’t think that is an overstatement–but it may actually be eclipsed by 2016.
If you are interested in raising capital into your business or selling, the pendulum has finally swung back in your direction and it appears to be staying there for a spell.

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Show Me the Money – Panel Discussion at Full Sail’s Pitch Day

Many thanks to Professor Ron Cook and the team at Full Sail University for inviting me to participate in their panel discussion on capital fundraising for small companies.  It was a great time and, as always with any event hosted by Full Sail, as professionally produced as any production you can find anywhere.  I also enjoyed the comments of my co-panelists and the interaction with the crowd–both during and after the event.  An additional thank you to Nathan Chitty of Central Capital Group of Florida, who was kind enough to send links to my personal comments.  I am listing these links below but consider watching the entire panel discussion.  Feedback appreciated.

6 12:50 http://bit.ly/fss21250 Mark Mohler Tell about yourself and how your got to where you are today.
14 20:45 http://bit.ly/fs-s2-t-2045 Mark Mohler Q: Mark, Tell us about the clients you have had successes and failures.
16 22:57 http://bit.ly/fs-s2-t-2257 Mark Mohler Q: Mark, Tell us about Crowdfunding
23 32:00 http://bit.ly/fs-s2-t-3200 Mark Mohler Q: Funding has changed in the last 10 years how?
28 41:15 http://bit.ly/fs-s2-t-4115 Mark Mohler Q: What do you look for in a pitch, best and worst pitches
34 52:47 http://bit.ly/fs-s2-t-5247 Mark Mohler Q:What are 1 or 2 critical advice in giving a funding pitch?

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