On Tuesday, October 28th, I had the privilege of attending the final presentations for the first six “graduates” of AlphaLab.

Quick perspective – AlphaLab is an offshoot of Innovation Works, a quasi public/private endeavor dedicated to the formation of start-up businesses in western Pennsylvania. These companies typically are high-tech in nature and AlphaLab is basically looking for the next FORE Systems.

AlphaLab is an “incubator.” From about sixty plus applications, a total of six companies were invited to move in to a physical facility on the South Side (East Carson Street) with the idea in mind that they would create business plans for their unique product/service ideas. Once there, they were given office space, access to mentors --- including attorneys and accountants --- conference rooms, all of the requisite “back-office” gear such as copiers, printers, and the like.

Perhaps most importantly, all six chosen start-ups were given a $25,000 stipend. Since most of these companies are comprised of young, struggling entrepreneurs, that $25K looks like millions!

After five months, each start-up was ready to make its final presentation. I enjoyed every one of them as they were obviously passion-driven pitches that truly were the essence of entrepreneurial thinking. It was clear to me that these young people have been contemplating their ideas deeply and fully for a considerable amount of time.

I really can’t say which of the six was superior. They were all terrific and they all seemed feasible. Of course, there are holes, but entrepreneurs are very good at “work-arounds.” These holes will be filled.

Needless to say, $25,000 doesn’t get you very far. The presentations were all oriented towards raising angel or venture money. The pre-money valuations of these companies ranged from as low as a half a million dollars and there seemed to be no upper end on a couple of them. Again, I think your chances of succeeding with any of these companies are reasonable … for an unproven start-up. (Translation: You’ve got one chance in one hundred of hitting a home run; maybe one chance in twenty of getting your money back; and one chance in fifty of actually making a few bucks.)

But this (incubator) is precisely what our region needs. Think about it. There are literally thousands of small, struggling entities in this region. Each and every day they are grinding it out, trying to break through. Some of these companies are led by “cone-heads” (a term of endearment), some by sales people, and some by beaners. In all of these cases, they probably lack their significant counterpart. In other words, the beaner needs a sales person and the cone-head needs a beaner. This all tends to work itself out over time. The problem is … time costs money and few of these companies have any financial staying power.

The odds of success I gave above are the odds generally quoted for typical start-ups. But these companies are not “typical.” In point of fact, and in my opinion, the chances of success are probably considerably better than posted.

I say this because these companies have had tremendous advantages during their embryonic stages.

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As consumers and businesses increasingly become more internet savvy, many of them are choosing to purchase goods online. Not only is it easy, convenient, and fun, but it is also a great way to get the best deal. It seems even better when the company you are buying from is out of state and you don’t have to pay sales tax, right? Well, not exactly. What many people, and businesses, don’t realize is that even though you purchase a good through the internet, mail order, etc. you are still required to timely pay tax on the item. The tax you are required to pay is called Use Tax and it is equivalent to the sales tax you would be charged for purchasing the item in Pennsylvania.

At this point, you might be saying to yourself, “Well, so what? I have never paid Use Tax and I have never gotten caught. I don’t plan on starting now.” Our advice, beware; the PA Department of Revenue has recently started to crack down on businesses who have not paid Use Tax. In addition to possible hundreds or thousands in back taxes, penalties can include costly fines and accrued interest and a possible audit by the Revenue Department which could result in the discovery of other non-compliant items. Your business is required to track all out of state purchases and registering for Use Tax filing with the PA Department of Revenue. You are then responsible for timely filing and paying Use Tax owed.

This tax tip is brought to you by Wilke & Associates, LLP. To learn more about how government compliance can affect your business, please call (412) 278-2200.

We are fortunate to have clients who have taken to our financial educational approach to investment management.  As such, they tend to stay relatively calm during periods of market uncertainty such as we are currently experiencing.  However, they do ask legitimate questions that center on their individual goals and how the market’s downturn may impact their realization.  This is our attempt to address those questions. 

Let’s use a question and answer format to cover the most common issues.

Client

Is this time different?  Is this presenting a new paradigm that should make us more cautious than usual?

Fragasso Financial Advisors (FFA)

We believe there are no new paradigms.  History repeats itself, but with new wrappings.  Please click here to view the attachment reflecting all downturns and upturn years from 1926 through mid-year 2008.  Is this time different than the two downturns of the 1930s?  World War II?  The 1970s Oil Embargo?  The early 2000s?  How about the recessions of 1946, 1957, 1962, 1981, and 1990?  Sounds like ancient history, and much of it is.  But 2008 will become old news also. 

So what makes this different?  Probably nothing except the causes.  Recessions and near-recessions occur because of economic factors and they have historically resulted in meaningful recoveries.  If there is no recovery this time, it will not only be the first time in history that has occurred, but you will have much more to worry about than the value of your portfolio.

We submit that the lessons of history, through all time periods, will prevail.  So this time is not different than the other times in the effect, the outcome and how we should continue to invest our money.  And that would be guided by the sound textbook principles that we utilize on your behalf.  Diversification, balance and asset allocation have earned their place in the textbooks because they work.

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Last Saturday, I was a guest on Larry Kudlow’s WABC radio program. Larry’s a good friend and we have been talking quite a bit lately on his TV and radio shows about the ways in which Federal regulations have created the sub-prime mortgage crisis. This is far and away the most underreported aspect of the mortgage story, and aside from Larry’s shows and a few conservative media outlets, such as Townhall, it has been completely missing from the discussion.

That’s a shame, because there simply was no such thing as a developed Subprime mortgage industry until the US congress created it by ordering banks to issue loans to people who were not credit worthy. Community activist groups (such as the Public Interest Research Group and Acorn) and civil rights law firms (such as Miner, Barnhill & Galland) had make their living by accusing banks of racism when the banks hesitated to approve loan requests from minority citizens with poor credit scores. Fair Housing laws, championed by American Heros like Martin Luther King, Jr., had long-ago outlawed the practice of ‘redlining’, which is refusing to sell or rent to blacks in certain neighborhoods. But a new generation of activists modified the concept of redlining, applying it not just to race-based home sale covenants, but to any refusal to lend to a minority member, even for sensible financial reasons.

The Community Reinvestment Act was created as a result. Initially the act was used, not to get banks to lend to minority households, but to get them to cut checks to ‘community groups’. Left of center activist agencies, which had pushed for the act in the first place, used it as a shakedown tool. So long as the banks kept paying off to the activists, the activists would hold off on sending complaints to the bank regulators’ CRA files.

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There’s a lot of talk among entrepreneurs about the value of an idea.  Many entrepreneurs believe that a brilliant idea will spawn a great company.  We read about companies like eBay that took one simple idea – online auctions – and turned it into a powerhouse company.

Yet ideas alone aren’t worth much.  Very few companies, including eBay, became successful based on just an idea.  Unless your idea turns into a patent that no one can replicate, it’s worth nothing until you can add the right elements to it.

Therefore a savvy entrepreneur will quickly try to back their idea with smart management, paying customers, and strategic partners as early as possible in order to build value around their idea.  All of this can be done even before the company is ever officially launched, generating a ton of value in the formative stages.

Smart Management

There’s an old saying that the wrong idea with the right management team can at least have a chance of surviving, but the right idea with the wrong management team is altogether doomed.

That’s because the true value of an idea isn’t about the idea itself, it’s about the execution of that idea.  There were lots of companies that easily replicated the idea of online auctions to compete with eBay.  Do you remember them?  No?  Neither do I.  That’s because eBay’s management team executed so much better than their competitors who had the exact same idea.

You can brag and boast about your great idea, but unless you can pull together a team that can actually pull it off, you’ve got nothing.  Investors are well aware of this fact, which is why they often evaluate their investments on the merits of the management team of a new startup company more so than the business idea itself.

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