38. Cross-Border Investing (Michael Goldberg)

*Please excuse any errors in the below transcript

Nick:  Michael also runs a Venture fund called the Bridge Investment Fund. Michael thanks so much for joining us today, and happy to have you here on the program.

 

Michael:  It’s great to be here. Thanks Nick.

 

Nick:  Before we get into today’s topic which is capital across markets and cross border investing. Can you walk us through your background and how you became involved in Venture investing?

 

Michael:  I have a little bit of a non-traditional path to become a venture capital investor, which in some ways because many DC investors have a non-traditional path. I did my undergrad at Princeton, studied Public Policy. Spent 3 years living in South Africa, running border education programs.  In advance of South Africa’s first democratic elections in 19994 when Nelson Mandela was elected.  Then came back to the US, did join MBA at Masters International Affairs at Warton at John Hopkins. Then kind of cut my teeth in the private sector world for the first time, at this small internet company, in internet 1.0 called #AOL.  For any listeners that actually used dial up back in the day. My current students have never heard of #AOL.

 

They only get their internet access on their phone, or via broadband. So I worked for 4 years doing international business development, for #AOL mostly focused on Asia. We did a joint venture with Lenovo to enter the China market.  So I had some experience doing not direct investment work per say at #AOL, but while joint venture and partnering work. Then ended up setting up a Venture Capital fund back in my home city of Cleveland, Ohio with my partner based in Israel.  Focused on investing in early stage medical device technologies, coming out of Israel sort of pre US commercialisation teaching as you mentioned at Case Western Reserver University for the last 6 years. Started off with a temp position, focused on the entrepreneurial finance class, access to capital, and then I have a full time visiting professor position. I’ve continued to do a lot of work all over the world, which I   know we’ll touch on today.

 

 

Nick:  Well great yeah. You mentioned Israel there and I know you’ve had unique experience working with companies in the Middle East and Asian countries, to either help support entrepreneurship or raising capital. Can you first touch on the specific countries that you’ve had interaction with in the past, whether it be on the investment side or facilitating fund raising?

 

Michael:  On the direct investment side it’s been pretty focused on Israel. So as I mentioned my business partner for my venture fund is based in Tel Aviv, and we went out to raise a small fund. It’s a $10 million dollar fund with a hypothesis that there was excellent opportunities, particularly in the medical space in Israel that we thought we could marry with an advisory board and the connections we had at the Cleveland clinic, and health care institutions in Cleveland.  More broadly speaking I’ve been fortunate to work in a number of countries around the world. In 2012 I was Fulbright scholar in Vietnam, so based in Hanoi and worked with a number of entrepreneurs there. I was a mentor with the #Founder Institute, and did some lecturing. Not just in Vietnam but also Laos, Cambodia, and Myanmar. I’ve taught entrepreneurship at 03:01 University in Turkey, and done some work as an advisor for a seed Accelerator and Honkorai.  I’ve done advising for the #US State Department in a number of countries in Europe including, Greece, Spain, Macedonia. Done work in Tunisia and as I mentioned at AOL, did a lot of work in China and continue to do some advisory work, for a venture capital fund based in China. So I’ve been fortunate that I’ve really been able to touch a lot of international markets, with my work.

 

Nick:  Yeah. Israel in particular I had an opportunity probably about a year ago, a partnership with a venture fund out there. I was pretty impressed by the access to capital from a grant stand point, from various government subsidies for very early stage core science start-ups. To really get them off the ground and get some traction before they go out for professional C capital.  Have you found that to be the case?

 

Michael:  Absolutely. In my move to which you alluded, we talked a lot about the role of government and donors. I mean I come from a city in Cleveland without access to the type of private capital, that’s available in Silicon Valley. You looked up other sources of support, and that namely is government or donors. In Israel it’s been well documented in a number of books, and StartUp Nation is one of the most famous, particularly when Israel had its influx of really talented, skilled, highly trained, refugees from Russia in the early 1990’s.

They weren’t frankly quite sure what to do with them, and they created a number of initiatives some under the chief scientist program. Which as you alluded to provide a healthy I was going to say match, but it’s even more than a match. In certain areas you can leverage 4 to 1, 5 to 1, government dollars to private money. They also set up a State back venture capital fund that really helps start the metro capital industry in Israel. I mean fast forwarding from kind of the early 90’s to today, it’s a pretty vibrant eco system there. I think it’s interesting in Israel because they’re so well net worth, than other parts of the world outside of Israel, and frankly their markets, or their technologies and the products. I mean the country only has 6 million people are in places outside of Israel. They’ve done a really excellent job, kind of leveraging government support to develop home grown access to capital, and then attracting capital from the outside.

 

Nick:  Yeah I’ve noticed a number of players in the eco system out there, sort of springing up and getting a lot of traction. Maybe we can jump into some of that later with our crowd, and some other topics. But first on the topic today, I wanted to jump into some of the challenges that we see when it comes to cross border investing. Aside from the obvious reasons like language and distance, what are some of the most significant challenges that you’ve seen when it comes to cross border investing?

 

Michael:  That’s a great question Nick. I take confidence at a very high level, and that confidence could be in the legal systems in Europe. Many investors sort of sitting in the United States will look overseas, and if they look at the structure and have confidence that the corporate entity, whether there is a kind of protections that they would expect here. I think frankly in general people, this is true for a number of reasons, have more confidence when they are investing close to home. Some of that obviously has to do with sort of access to local entrepreneurs, but just on the legal system making sure that there is confidence.

 

That the underline structure of the investment, so that if things go the wrong way and unfortunately in the start-up world they often do, more often than not. At least there’s confidence people will understand that they’re currently stage investors, angel investors. People who listen to the show will understand. The nature of early stage investing is high risk, but you’re adding an additional element of risk by putting a foreign entity in the mix. Now to address that what you see, and you’ve seen this for years. I’ve seen it in Israelis companies and I’ve seen it in European companies. That decision for early stage companies to either set up their corporation locally, or with relative ease without actually being located in the US.

You can set up a US Delaware C-Copr. So a number of companies that are looking to target foreign capital, will go ahead and incorporate in the United States, even if they’re sort of physically not here as a way to provide that confidence to investors.  I think the second piece on the confidence piece, and this is particularly true in markets where I’ve worked like Vietnam. The lack of transparency. Some of this has to do with legal. Some of this is just sort of on the corruption and cronyism side. As I worked in Vietnam it’s a very hard place to do business, and there were challenges there, and getting enough confidence it is a good place to do business.

 

Nick:  Yeah. I know you’ve known #John Houston for some time.  If John maybe with his group or own his own, came across an attractive company in a different region. He’s got a pension for USBS, C-Core companies. I know you can’t speak for John, but do you think somebody like John would look to structure that C-core maybe in Delaware, or stateside somewhere before making a placement?

 

Michael:  Absolutely. Many of my ideas I’ve talked to John about, and John for many of the listeners may know is the leader in the Angel Capital community, in Nashville here in Ohio. For many Angel funds and many Venture capital funds, when they’re going out to their investor base. Many of them will sort of state right away, we will not do deals outside the US. So for certain Angel funds and certain venture capital funds, it’s a complete non-starter unless they structure that way. For some companies this means doing a reverse merger, into some sort of a US company. There’s a company in Cleveland called #Symbionix. it’s not in our portfolio unfortunately, because they were bought last year by 3D Systems. But when they took in some US capital from venture capital fund base here, they had to do what’s called a reverse merger to set up structure where the parent became a US company, and the subsidiary was based overseas. But absolutely many investors won’t, that conversation is over for more structured funds, angel funds, or venture capital funds if they are not a US corporation.

 

Nick:  Maybe we can dive into some of the financial things. Maybe some legal issues, and some strategic issues here, but let’s jump into the financial stuff first on that point. I guess my curiosity is, is the start-up going to have to pay twice? So if they are located in a different country, and they formalised herein the States. Are they going to have to pay taxes to a state entity, a federal entity, and then also in their home country? Then are there any other financial and or audit issues, that you come across from cross border investing?

 

Michael:  The cop out answer is it depends, and it does depend on a country by country basis. Some countries are focused on preventing double taxations. So they’ll have tax agreements between the United States and a number of countries around the world, to address that very issue.  That being said, often times these things are a bit complicated, and there are plenty of service providers out there, that raise their hands and for a fee legal, tax, accounting, or sort of helping start-ups with this. For thinly capitalized start-up companies, these cost can be significant. I think things have gone better. I actually had #Jason Mendleson from the #Foundry Group talked to my entrepreneurial finance class, and we were talking about how things had changed. Even over 10 years that these guys, since #Brad Feld and Jason had their blog, and then they put out their venture deals book.  The clarity around term sheets. Jason was saying that when they published venture deals book it was like, the legal community didn’t like it so much because they were making things sort of more easy, and more transparency out there which was great on many levels. But it sort of tacked on its side of things, still complicated. It depends on a deal by deal basis. It’s certainly something that early stage companies sort of have to be aware of. It’s very much country by country basis, some countries are better at this than others.

 

Nick:  So if we were to pick a country that you’ve had experience with in the past, and you’re going to do an investment at a seed stage. Are you engaging an audit partner at that stage, in structuring the term sheets such that there’s limited opportunity for financial engineering, or potentially even corruption?

 

Michael:  This is the key in who your partners are, for Angels or Venture funds that are looking to dive into international markets.  Being a lead investor, an Israeli, a Vietnamese, a Moroccan start-up company, sitting in Cleveland Ohio, or Chicago, or San Francisco is a challenge.  It’s a challenge on sort of many different levels. I think that the key is finding good local partners that can help guide that. Those local partners will help bring in the right advisors, tax, audit, and others. It’s very challenging in somewhat sort of unrealistic to think, that even the most sophisticated early stage investor sort of sitting in the US can really sort of navigate that, even with great advisors. I think having the right partners in the deal as part of your syndicate, can help someone really dive that well.

 

Nick:  So will you look for a partner that’s in region, as to co invest with them?

 

Michael:   Oh absolutely. Frankly that has been the strategy of our Venture capital fund. On the Israeli side we tend to invest sort of pre US commercialization. But our syndicate partners certainly earlier off tended to be local Israeli investors that can help us navigate the landscape. Now my partner is based in Israel so we have some additional help in that way, but I think it’s critical. Then for some of these other things, I’ve travelled a lot recently as I mentioned and I’ve seen some of the Angel activity that’s happening. Some of this is really done let’s call the expatriate community. They’re sort of looking to connect back. Maybe it’s a Greek American that has been successful, a Czech American.  I think the motivations and I know you’ve talked about it with other folks that have been on the show in terms of, wire Angels motivated is primarily return on investment. But there may be other factors that are at play. And for some expatriates looking to give back to their community, they’re interested in seeing the local start up scene in their home community grow. It’s critical for those folks to connect back, and I think it happens naturally because many of the expatriates are connected with people they grew up with. Or other angels in their community, to connect back with folks who can help navigate the process. It’s just too hard to do kind of cross border.

 

Nick: It’s amazing the number of Angels that are all over the place, places I never would have expected. I think you mentioned you were just in Europe, and did a tour of a number of countries. I think you mentioned Crete. But I just got an email from a group of Angels in Crete, couldn’t believe that somebody from Crete was reaching out. It’s unbelievable.

 

Michael:  Yeah. The more shocking thing was I did a head talk in Crete 3 weeks ago. Actually on my online class and looking at entrepreneurial eco systems. As you know I have this massive open online course on Coursera. We have 45,000 students now from 190 countries. And this question of how to enable more Angel investors, to get active in communities because of technology is such a natural connection, as people look to Cretans. That have been successful sort of outside and want to give something back. I’m just super impressed by the ability, and the hustle of local entrepreneurs to kind of track down expats. It’s still hard to pull off. But smart entrepreneurs are using those networking skills, and whether those networks are built using LinkedIn or other sort of let’s call it more traditional ways. Then the kind of old fashioned, maybe their Dads know, maybe their grandparents know, and so it’s really happening. It’s still like any early stage investor looking to close capital. It’s still a challenging process. You can be doing with somebody sitting on your street. But I’ve been really impressed by what I’ve seen with entrepreneurs looking to broaden their networks, outside of their own community, and own country to attract capital.

 

Nick:  Instead of just taking a broad international approach to investing, it sounds like you need to establish some partnerships with groups that are in specific regions, and you can learn more about those regions and the nuances. As opposed to doing a shot gun approach on Asia for instance.

 

Michael:  I think so.  I know Angel has been a topic that you covered on your show with Bill, who’s the leading Angel syndicate. He did an interesting interview. I heard him with Jason Kocanos talking about an investment that he had made in a company from #Gdansk Poland. Like how is a company from #Gdansk Poland, end up being funded by. I think like #Hugh Lender hinged around and then Anderseen Horowitz and others came into the deal. Now that company the guys have relocated to Silicon Valley. As amazing as the story is, and it is a great story. Those guys were sort of sitting in Silicon Valley, going down Sandhill Road making the connections. And they still have a technical team based in Poland, but what if the entire team was in Poland. Would that deal have happened? I don’t know, maybe not. Maybe technology was sort of strong enough that it would have happened anyway, but that’s the challenge for entrepreneurs. You’re probably going to still have to get on a plane, and there’s resources and visa issues and all these things. But it’s hard to close big rounds in the total virtual world, just via Skype. These people sort of back home at some point. It’s hard to see this stuff getting done completely via Skype and Google hangouts, and via email.

 

Nick:  Yeah. It seems like a talent relocation epidemic of sorts that permeates everything.  Some of the great companies that get funded from the Bay area, they want them to relocate to the Bay area, or at least a significant portion of their operation. We have this issue in Chicago. We also have this problem within the State. Some of my friends that are involved in State politics, big issue that they’ve seen is all the talent from really small rural communities, relocated to places like Chicago. You get this weird sort of talent suck to concentrated regions. While I appreciate all the talent and the access, and the folks I get to interact with in Chicago, it is a strange issue. But sorry to get on this tangent here, lets jump back into some of these challenges. Michael can you touch on some of the legal challenges that you’ve either encountered, or you would recommend for Angels and groups to be aware of, in cross border investing?

 

Michael:  Many of some that I alluded to before, sort of this corporate structure and location issues. And kind of what are the protections that a company be invested in via location. And unfortunately I’ve seen it in some of my own companies, where there are normal things that happen within a company and the founder leaves or is fired. Or there’s some compensation issue that sort of happens, and all of a sudden you find yourself battling this out, and there’s a law suit that is filed in the locale. Some of that questions about if your investors are taking board seats on companies, and that may or may not be true. Depending on the size of the Angel investment perhaps they would take a board seat.

 

And then is there a policy that the company has and that board members have, so that if somebody comes after them in a market where they are working. These things are complicated enough in the US, but then you kind of throw on what does it mean to be the subject of a law suit, in some other country. So I mean these are the sort of unforeseen things that we all hope don’t happen. But its making sure that you are in there with the right partners, and I think just on that specific issue of what sort of exposure do you have. Many Angel investors that want to be hands on are like, yeah I absolutely want to board seat, and I want to do all these things. You might want to think about depending on the location where you are, if there’s any potential exposure that comes with having a board seat of a foreign corporation. So again I think it’s partnering with the right syndicate and country, making sure that you’re well represented by your start up in those countries, to help you navigate what will likely be new territory for you.

 

Nick:  Got it. I know a challenge I had in my last formal role. I was developing a breakthrough product. We had a big challenge with rolling on other regions, on the patent and the IP side.  Not only the cost of just filing, but then the enforcement mechanisms are all different and was just a nightmare.

 

Michael:  And this can be a huge cost to early stage companies that are not well capitalized. The number of countries which you can potentially sort of file protection in. And hey there’s any number of legal service providers that would love to do that work for you, for a lot of cash that companies may not have.  Every situation is going to be different. IP challenges particularly in some Asian markets are really vexing, and in reality many early stage companies IP is such a core piece to what they’re doing. That putting the resources behind protecting it does make sense for the investors in the company over time.

Some companies that we may all be investing in its more of an execution play anyway, and the IP protection isn’t going to make a ton of sense in terms of sort of research allocation. And certainly figuring out the maze of international IP protection as well.

 

Nick:  Yep very fair point. On the corruption side, have you ever had direct first hand exposure to corruption in another region, or in an investment that you’re a part of?

 

Michael: Not directly for an investment that I was a part of. But as I alluded to, I spent 6 months in Vietnam in 2012 and its really entrepreneurial exciting market. As I talked to investors and people that were sort of kicking the tires on opportunities there, a sort of insecurity that comes with the lack of transparency. And there’s been a number of highly reported corruption cases that happened there, and China as well.  I think maybe in a place like China, there’s actually a little bit more scrutiny right now around corruption, and its giving investors a little bit more confidence, and I think ultimately governments like Vietnam. I just got back from this trip to Greece, and Greece is maybe less about corruption and more about administrative bureaucracy, and inefficiency.  Just making it super painful for entrepreneurs to get a company up and running, and they’re just getting nickel and dime. Its actually not corruption, it’s just like an incredible inefficient system. That being said just on, there is corruption in a lot of these places, and I think that dissuades investors for good reasons. Ultimately countries that are in these kind of grey areas, need to decide if they want to clean this up. And the economic situation there is so derelict, entrepreneurship is super critical for new job creation, and the hope of the country. I taught at Greek Angel Investors and they’re still sort of sitting on the side line and saying, I don’t have the confidence to go back in there at this point, until more of this stuff gets cleaned up. And how fast is that going to happen? When I left Greece couple weeks ago, is a lot of hope, a lot of great entrepreneurs. But I don’t know if it’s going to happen fast enough to kind of give the capital markets, the confidence to get back in there and back entrepreneurs.

 

Nick:  A challenge if they can’t keep the entrepreneurs, or can’t get the capital, riding that ship from an economic stand point, is going to be very difficult. But Michael you’ve touched on a number of challenges and factors to consider. Any other advice or strategic considerations for state side Angels and or groups, that are exploring more of an international investment strategy?

 

Michael:  You alluded to OurCrowd which #John Menedved is doing. And some of the groups that I was doing is Israel. I was tapping into investor basis primarily in the Jewish community that had connections into Israel but had a desire and kind of an interest, in supporting technology out of Israel and wanted exposure to it. I think OurCrowd seems like a great vehicle to do that. They’re smartly syndicating with other inter groups and venture capital investors. Hey maybe the Israelis and OurCrowd are a little bit further ahead, of what I’m seeing in other places. We are truly a melting pot in the US. We got people from sort of every ethnicity and people have some deep roots. Last year I was in Budapest in Hungary, and I saw Prezi which is based there. I went to a really cool accelerator called iCatapult, and saw a bunch of young entrepreneurs. Cleveland and Chicago also has a huge Hungarian community. We got some historic links to a place like Budapest and how you connect the dots back.

 

I talked to entrepreneurs in Budapest and I was like, you guys should be coming to Cleveland and Chicago, and talking to people of Hungarian descent about what’s going on there. Because frankly many of the immigrants who came to Cleveland, Chicago from Hungary, they did it in the 60’s or the 50’s. They have great memorise of the place. They don’t know that Prezi is there, with all this exciting sort of start-up companies. Some of the onus I put back on entrepreneurs. How do they get the hustle to show up in places like Cleveland and Chicago, and get in front of folks? Then on the other side, frankly aside from many Angels that listen to your podcast are involved in Angels investment, they’re probably doing a lot of international travel. Instead of just being on an international cruise, seeing the sights, and seeing the coliseums, want to know what’s happening in the start-up scene in Rome. But trust me there’s some accelerator in Rome. I’m sure they’d love to meet Italians from Chicago, or Cleveland, or LA or wherever. That kind of entrepreneur tourism is really energising, and the minimum just sort of hearing what people are doing, and maybe it leads to an Angel deal. So I’d really encourage people to wherever you go in the world type in Rome, South Palo, Horai, for a seed accelerator and you’ll find somebody. I mean it’s not that hard to find where these people are hanging out.

 

Nick:  I hear you. A buddy of mine he’s a 20 something Angel investor, and just took a back packing trip to Israel, Palestine, Turkey. He actually stopped in at accelerators and at venture fund, in different places when he was out there. So I was inspired to maybe challenge myself to do some more of that. Michael I wanted to get your input, I’m not sure if you’ve had any exposure to the whole “Let PJ Stay” story, and that movement that’s been buzzing around social media. But founder of Eco Labs of course the health tracking company, I mean #PJ is from Belgium. I guess going to be deported pretty soon, because he and his team’s visas are expiring. So there’s a big movement around this. People are signing petitions.

I saw #Brad Feld was tweeting about it the other day. Do you have a position on PJ’s case, and how we can think about fostering innovation and bringing people from other countries, when we have laws and we have immigration policies to navigate?

 

Michael:  Sure. I’m a little bit familiar with the case, and saw the video that his supporters put together to try to make their case movement. Hey they’re singing in the choir with me. I teach lots of international talented students. I think #Tom Freedman actually on one of his calls, say when we hand out our PHD degrees; I would extend it to MBA’s to our international students. We should give them the piece of paper and a green card. And we have a traditional kind of reunification immigration policy. The fact that we’re not focused on keeping our best and brightest there. Countries like Canada and other places, are welcoming these guys with open arms. We’re really idiotic about it. We should be embracing folks like PJ and others keeping them here. I think some of the number of efforts whether its visa, and obviously increasing H1B’s by allowing people who are bringing such economic value, and great ideas to stay here. Obviously hey we’re increasing our employment base and new companies. I think we’re just sort of deepening the relations that we have with their home countries. A friend of mine here in Cleveland wrote a book called “Immigrant Ink” and it detailed a number of NASDAQ companies that were started by foreign entrepreneurs, and it’s astounding and it’s not surprising. The work ethic, the talent. Unfortunately as you know well immigration is such a hot button issue, and everybody is sorting of screaming at each other, and no one is really listening. But I couldn’t feel more strongly that we need to do more to keep our foreign talent here, because they can really ultimately create awesome companies, and new jobs for everyone.

 

Nick: So Michael what are you currently most focused on?

 

Michael:  This MOOC, as my kids referred to it. It’s like the MOOC that eat their Dad.  I’m doing a lot of travel. I’m actually heading off to Namibia, South Africa because I’m planning my trip right now. I just got a second Fulbright to do some work around my MOOC in Namibia, leading a social entrepreneurship boot camp for the state department in Namibia, Botswana, and Zambia, Zimbabwe and some work for the state department in Botswana. I’m so intrigued and energized by kind of what is happening, more on the eco system side. And on the funding side, our funder we’d love to raise more money at some point. Like a lot of venture capital funds out there, we’ve got to get the realizations to raise more capital which I think is the way that it should be.  So I’m doing more teaching and connecting, and mentoring than I am deploying capital and companies right now.

But I think eventually I’ll get back in the capital deployment world, but it’s been fun. I love the international connection piece, so that’s where my focus is right now.

 

Nick:  If we can cover any topic in venture investing, what do you think we should address, and who would you like to hear speak about it?

 

Michael:  I think Nick you need to get on a plane and meet me in Vinhook in a couple weeks, and I obviously deep into this. But I think more international perspectives. I don’t know to what degree you’re able to track your listening audience. I’m sure it’s primarily domestic given the nature of the folks you cover. But I think the topics that you’re covering here are a great international interest, and things are different. I appreciate what you’re doing and talking to people in places like Cleveland. The Chicago eco system is different than Silicon Valley. I think as you continue to broaden your network, outside of sort of the major start up areas. Those emerging stories are really interesting, and can be really instructive to people. So get your passport ready, hit the road.

 

Nick:  I’m just looking at the geographic break down right now as you mentioned that. It’s definitely overwhelmingly US, mostly California and New York. But Israel is 10^th on the list.

 

Michael:  There you go.

 

Nick:  I didn’t know.

 

Michael:  Even place like Iran. Like Iran is big in the news this week, the US agreement. The entrepreneurship in the community in Iran is so exciting. I’ve never been there. I did have a number of students take the class from Tehran. I spoke via Skype to an institute focused on entrepreneurial eco system development in Tehran. My MOOC is the only MOOC on Coursera that translated into Farci. Like a Jewish guy sitting in Cleveland Ohio Skyping in to talk to Iranian policymakers, about entrepreneurial eco system development. What an amazing opportunity to exchange ideas. It’s a whole new world out there. Who knows he’s going to show up to be listening to Full Ratchet.

 

Nick:  Maybe some oil money, we’ll see.

 

Michael:  There you go.

 

Nick:  So Michael what’s the best way for listeners to connect with you?

 

Michael:  My email address is micheal dot goldberg at case dot edu. My Twitter is @mgcleve. Either of those ways is probably the best. A lot of people around the world, so you can find me at LinkedIn as well.

 

Nick:  Thanks so much for carving out the time, and be willing to do this and sharing all your thoughts on it.

 

Michael:  I really enjoyed it. It was great talking to you. See you in Namibia.