World News Gathered & Syndicated

By LIZETTE CHAPMAN

Some of the biggest names in venture capital are starting to provide start-ups with more than just capital, offering marketing, design and other services that companies typically need help with in their early stages.

The move signals a shift where investors, fighting fiercely to get into the top deals, play a more active role in the operations of the companies they invest in.

“You have to be extremely competitive to get into those 15 deals that create 90% of all the venture wealth” every year, says Margit Wennmachers, a partner at Andreessen Horowitz who heads marketing and branding efforts. “We do the reverse pitch to entrepreneurs. You pitched us? OK, let us pitch you on what you can get beyond money.”

Andreessen Horowitz, founded in 2009, now has more than 40 experts in areas like technical and executive talent, marketing, product management and design. The firm has six general partners who focus on making investments. Ms. Wennmachers says the general partners have taken salary cuts, using the savings to pay the specialists, but believe they will make the money back when the start-ups succeed.

Many Silicon Valley venture firms are helping start-ups with recruiting, a particular challenge as they are competing against technology heavyweights like Facebook Inc. and Twitter Inc for top engineers. In the past year, venture firms including Kleiner Perkins Caufield & Byers, Sequoia Capital, Greylock Partners, Andreessen Horowitz and Google Ventures have launched or expanded their team of in-house executive technical recruiters.

Google Ventures, the venture-capital arm of Google Inc., says each of the more than 70 companies it has invested in uses one or more of the firm’s engineering, design, recruiting and marketing services. Google Ventures also offers classes every two weeks under a “Startup Lab initiative” that teaches entrepreneurs how to handle specific issues, like ensuring security.

“When cash is a commodity you need to do other things to show an entrepreneur how you’ll help them,” says Google Ventures Managing Partner Bill Maris, who leads a 50-person team, of which 13 are investment professionals.

WhaleShark Media Inc. Chief Executive Cotter Cunningham says the ancillary services factored into his decision to let Google Ventures lead his company’s recent $10 million financing in August.

Since then, Mr. Cunningham has used Google Ventures’ four-person team of design consultants to reorganize the information and page layout of WhaleShark’s couponing site RetailMeNot.com and then tested multiple versions with users to select the best design. Mr. Cunningham was considering hiring a consultant for the task when Google Ventures Partner Karim Faris reminded him they already had access to a design studio.

“It’s like having a golf coach come to give you a different point of view and improve your game,” Mr. Cunningham says.

March Hedge Funds: Best, Worst, Biggest

Will John Paulson rent a billboard on I-95 promoting his $14 billion hedge fund? Is there a George Soros World Cup in the offing? Probably not. But there are a lot of people in the hedge-fund industry who are excited about the fact that hedge funds can now advertise, sponsor sporting events, and generally reach a wider audience of potential investors.

But, as with everything regulatory, it’s not quite that simple.

The industry’s ability to advertise came about when, earlier this month, President Obama signed the Jumpstart Our Business Startups Act, better known as the JOBS Act. Its main goal was to make it easier for small businesses to raise money, with which they would hopefully create more jobs. Tucked into the act was the lifting of a ban on general advertising and solicitation that hedge funds, with varying degrees of fidelity, had adhered to.

Before you assess how meaningful the new law is, you need to understand a few basics. Hedge funds by rights should be regulated by the Investment Company Act of 1940, which oversees mutual funds and most exchange-traded funds. But in order to avoid the restrictions on redemptions, leverage, and incentive compensation laid out in the 40 Act (as it’s known), hedge funds generally use one of two loopholes known as 3(c)(1) and 3(c)(7). Both exempt hedge funds from most 40 Act requirements but limit their investor audience.

Those considered 3(c)(1) funds allow up to 99 “accredited investors,” defined as someone with a net worth (not counting a home) of at least $1 million or an annual salary of $200,000. Section 3(c)(7) funds are permitted more investors, so long as they’re all “qualified purchasers,” having $5 million in investable assets. (There are many other nuances to these definitions, but this will do for now.) One of the two changes the JOBS Act made was to allow an increase in the maximum number of investors in 3(c)(7) funds to 1,999 from 499. If a hedge fund wants more than 99 accredited investors or 1,999 qualified purchasers, it will have to register with the Securities and Exchange Commission.

THE SECOND, AND MORE provocative, change is the lifting of the advertising ban. Because of the restrictions on whom they can take money from, hedge funds generally were only allowed to let people with whom they had a preexisting, substantive relationship invest; they were prevented from advertising to or soliciting the general public. Some funds took this more seriously than others, requiring passwords to access their Websites and never uttering a word about performance, while others interpreted the rules a bit more loosely. “It’s always been a gray area,” says Mike Seery, a director at financial advisory firm Kinetic Partners.

The ability to reach a wider audience will have a much bigger impact on smaller funds, particularly those with less than $250 million in assets that allow accredited investors. (Most household-name hedge funds permit only qualified purchasers.) Because they’re still appealing to a fairly wealthy crowd, though, advertising likely won’t be too mass-market. Some have speculated we’ll see golf or tennis tournaments sponsored by hedge funds, and an increase in advertising in, ahem, publications that speak to a more sophisticated and wealthy audience.

“A fair number of smaller to mid-sized firms are eager to see less onerous restrictions in marketing to investors,” says Ken Heinz, president of Hedge Fund Research, which compiles and analyzes data on hedge funds. “I don’t expect this to have a meaningful impact on larger funds, especially those with more than $5 billion in assets.”

THERE ARE STILL A fair number of kinks to work out, warns Kevin Scanlan, a partner at the law firm Dechert. Funds generally can accept up to 35 nonaccredited investors, but funds that avail themselves of the relaxed advertising and soliciting rules won’t be allowed any nonaccredited investors. “My take is that at the end of the day, the investor base for these funds won’t be any different,” Scanlan says. “Smaller funds are hungrier for new investors, but at the same time have smaller budgets to spend on advertising.” Also, he points out, most funds haven’t contemplated advertising costs in their fund documents. That means they could end up a manager expense rather than a cost that can be passed on to investors.

Then there’s the issue of the additional rules the SEC needs to write. Now, if hedge funds advertise, they’ll need to prove they took “reasonable steps” to verify any new investors are accredited, says Don Babbitt, a consultant at Kinetic Partners and former SEC attorney.

And the SEC isn’t likely to rush its opinion as to what those reasonable steps are. “Congress said the SEC had 90 days,” Scanlan says. “But given all they have on their plate, I think we’re looking at the end of the year.”

Nothing To See Here

Money funds saw shrinking outflows, with a four-week average of $7.6 billion through Wednesday, according to Lipper. Taxable-bond fund inflows averaged $7.4 billion, and muni funds took in $526 million. Equity funds also saw outflows, averaging $1.8 billion. In March, stock funds’ outflows hit $9.6 billion, up sharply from February’s $1.4 billion, says the Investment Company Institute. Cash was at 3.3% of assets in March.

E-mail:
beverly.goodman@barrons.com

Silicon Valley companies, hamstrung by patent litigation, are seeking help from the masses.

Tech giants like Microsoft Corp. and Apple Inc., along with several start-ups, have tapped Article One Partners LLC to crowd-source evidence that a patent they are being sued for allegedly infringing isn’t novel. Proving so in court can invalidate a patent.

It’s called finding “prior art” and has long been a core part of fighting patent cases. Now companies are trying a techie twist: describing the disputed technology online and giving awards of around $5,000 or so to those who find the best stuff, from photos to literary references to obscure foreign documents, to strike down the patent.

Peter Earl McCollough for The Wall Street Journal

Pamela Jackson, a bioengineering Ph.D. student, works part-time as an independent researcher for Article One Partners.

Powering the service are people like 32-year-old Pamela Jackson. A bioengineering Ph.D. student who lives in Oakland, Ms. Jackson saw an ad for Article One researchers while searching for a part-time job on Craigslist a few years ago.

Since then, Ms. Jackson has submitted research for 84 studies posted by Article One’s clients on topics including car engines and chemistry, far afield from her specialty in magnetic resonance imaging. She says the clients determined her research was the best six times, earning her thousands of dollars.

Her method for probing the validity of a patent often starts with a Google search, moving on to Wikipedia and more obscure troves, like Japanese patent databases translated into English. Ms. Jackson, who isn’t told which companies requested the research, declined to comment on the prior art she has found, citing confidentiality agreements.

Still, “it’s a good amount of money for a part-time job,” she says, adding she enjoys the “thrill of the chase.”

Article One, a New York-based company founded 3½ years ago, opened its Silicon Valley office last August in Palo Alto and has benefited as patent suits have proliferated in the region. With tech companies chasing hot technologies like smartphones and social networking, rivals are increasingly looking to settle their differences in court. Article One says its largest concentration of clients—some 15%—are in Silicon Valley.

Overall, about three-quarters of Article One’s cases are related to high-tech. The site currently features studies seeking prior art on technologies ranging from virtual keyboards to digital payments. Clients pay about $25,000 a study, or they pay varying annual subscription fees. The amount includes the awards for the people who find the best research.

Ray Felts, Article One’s North American president, says the company doesn’t tally how many cases it has helped win and declined to comment on most clients. But he highlights one example—the work Article One researchers did for Vlingo Inc.

Vlingo, a Cambridge, Mass., start-up that has developed a voice-activated virtual assistant, used some foreign-language documents generated by Article One researchers last year to fight a lawsuit filed against it by Nuance Communications Inc. Vlingo won the case. Nuance didn’t have a comment on the litigation.

Mike Phillips, chief technology officer for Vlingo, which Nuance agreed to acquire last year, said Article One had an “innovative” approach.

Another Article One client is Nest Labs Inc., a Palo Alto start-up that was sued for alleged patent infringement by thermostat maker Honeywell International Inc. a few months ago. A Honeywell spokesman says the company sued to ensure its intellectual property was respected. Nest says Honeywell is “trying to stifle new market entrants with unfounded legal action.”

Nest general counsel Richard “Chip” Lutton says he was familiar with Article One from when he was chief intellectual property officer at Apple. Using Article One, he says, “we can extend our reach.”

Write to Jessica E. Vascellaro at jessica.vascellaro@wsj.com

By EMILY CHASAN

Lending to small and medium-size businesses after the recession recovered more slowly in the U.S. than in other countries such as Canada, France and Italy, according to a report expected to be released Thursday by the Organization for Economic Cooperation and Development.

The Paris-based OECD examined small-business lending across 17 countries from 2007 to 2010.

It found that during the recession, lending to small- and medium-size businesses generally declined as a percentage of all business loans.

In many countries, small-business loans continued declining even after the recession ended in the summer of 2009, the OECD said.

In the U.S., the pace of small-business lending fell by just over six percentage points in 2010 from 2009, and the level of small-business lending as a percentage of total business loans hasn’t returned to precrisis levels, it said.

U.S. banks of every size pulled back on small-business loans during that period, cutting lending to small and medium-size businesses by $43 billion, the OECD said, citing statistics from the Federal Deposit Insurance Corp.

But the biggest U.S. lenders, those with over $50 billion in assets, cut back the most, lending $18 billion less to small businesses in 2010 than they had in 2009, the report said.

“The financial institutions in the U.S. tightened credit to small and medium-size businesses for five [quarters] longer than many other countries,” said Sergio Arzeni, an economist who oversees entrepreneurship and small business for the OECD.

He added that this was the opposite of the 2001 credit-tightening cycle, when the credit conditions for smaller businesses recovered more quickly.

Meanwhile, small-business loans, as a percentage of total loans in Canada and the U.K., already exceeded 2007 levels by 2009 and then held steady in 2010.

In France, small-business lending as a share of the overall loan market stayed constant before, during and after the crisis. In France, Italy and the Netherlands, the pace of small-business lending rose more than five percentage points in 2010 from 2009.

An overaggressive approach by banks to meet Basel III lending requirements early may be behind the decline in countries where lending to small and midsize companies has been slow to come back, according to Mr. Arzeni.

“The banks weren’t lending as much to small businesses because they were focusing on building up their capital requirements,” he said.

Under the Basel III rules, banks have to restructure their balance sheets to meet new liquidity and risk-weighted asset ratios, and small-business loans can often fall under the riskier categories.

“Although banks have until 2019 to fully meet the capital requirements, they probably were trying to catch up with the new ratios too fast,” Mr. Arzeni added.

Small businesses are more dependent on external sources of financing because they have less ability to offset their exposure to financial crises through hedging and have less access to the bond markets, he said. The OECD also found that small- and medium-size businesses often held back payments to suppliers or slowed tax payments to try to fill the gap.

With fewer loans available, small businesses around the world generally increased their use of overdrafts, credit lines and trade credit with suppliers, for instance, the OECD report said.

Small businesses also sought fewer loans as weak sales and difficulties attracting customers caused many to pull back on expansion plans. But stiffer credit terms also played a role, the report said.

The OECD defined “small” businesses using definitions set by government agencies and financial institutions. In the European Union, small businesses are typically defined as those with fewer than 250 employees.

In the U.S., the Small Business Administration broadly uses 500 employees as an upper limit.

The OECD found that increased government loan guarantees and venture capital and equity funding were the most common government responses to the financing gap.

Countries including France, New Zealand and Sweden offered additional programs such as tax exemptions and deferments, credit mediation, business advice programs or various export guarantees.

Mr. Arzeni said that he believed that public policy programs aimed at helping small businesses had made a difference.

Denmark, for instance, had four different types of small-business policy programs, including special guarantees for start-ups and new business advice programs.

In that country, the pace of small business loans grew 22.9 percentage points from 2009 to 2010.

A version of this article appeared April 19, 2012, on page B7 in some U.S. editions of The Wall Street Journal, with the headline: Small-Firm Loans Lagged in the U.S..

By ROSS KELLY And NEIL SANDS

SYDNEY—Lend Lease

Group, Australia’s largest property developer, swung to a full-year net profit on the absence of heavy writedowns that marred its previous result.

Lend Lease didn’t provide much guidance Monday, apart from saying that it expects construction volumes in Australia to decline as government stimulus wanes. Offshore construction markets remain difficult, it said.

The company posted full-year net profit of of 345.6 million Australian dollars (US$308.6 million), compared with a A$653.6 million net loss in the previous year, when a rapid economic slowdown, particularly in the U.S. and Europe, generated nearly A$1 billion worth of asset writedowns and negative property revaluations.

Operating profit for the year ended June 30 was A$323.6 million, beating the company’s guidance of a result in line with last year’s A$307.5 million, and a A$319 million average forecast of four analysts.

With offshore construction activity subdued, Lend Lease had to cut costs to boost its operating profit.

Revenue fell roughly 29% to A$10.57 billion from A$14.79 billion on lower construction activity and the impact of a stronger Australian dollar.

A slowdown in construction often lags behind a broader economic slowdown because many of Lend Lease’s jobs are booked a year or two in advance and can often take years to complete.

Lend Lease, which blends property management and development with investment management, said it will pay a final dividend of 12 cents, down from 16 cents last year.

The company last year added a number of big projects to its development pipeline, such as the A$6 billion first stage of Barangaroo redevelopment in Sydney and the GBP1.3 billion expansion of the Stratford City shopping center in London, which it said will underpin earnings growth over the longer term.

Macquarie noted the shift away from the U.S. in Lend Lease’s earnings to contribute just 7% of operating profit, down from 30% in the 2009 financial year. Asia Pacific, however, accounted for 65% of earnings, up from 55%.

The broker is forecasting the group’s net operating profit to grow 8% this financial year but earnings per share to fall 6% as the full impact of a recent A$806 million equity raising is felt.

Goldman Sachs

noted the lack of specific earnings guidance saying, “we expect investors will take this to indicate a weak FY11 and therefore delayed recovery back to EPS growth.”

Write to Ross Kelly at ross.kelly@dowjones.com

By KATY MCLAUGHLIN

Chef and restaurateur David Burke’s business sounds like a financial-crisis perfect storm. Consider:

His restaurants are mainly in hard-hit areas including Manhattan’s Upper East Side and Las Vegas. Mr. Burke has no experience owning restaurants in a down economy; he launched his empire during restaurant boom times, starting in 2003. And the $7 billion fine-dining industry will see a 12% to 15% drop in sales this year, according to Technomic, a Chicago restaurant industry consultant.

And yet…Mr. Burke reports overall growth, some of his restaurants are booked to capacity on some evenings, and restaurant-industry analysts say he is one of the few high-end players with the right idea for the times.

How could this be? Mr. Burke, it seems, has figured out a way to navigate the downturn. His strategy is to throw out the high-end-dining playbook that says discounting should be subtle. Instead, he is offering dramatic, attention-getting and significant discounts. By engineering the menu carefully and keeping labor costs in check, he is able to slash prices without losing money, he says.

His promotions have included $20.09 three-course meals with items such as oysters and lobster at many of his upscale restaurants, including two in Manhattan (where, without discounts, entrees run $29 to $44), and $5 burgers and milkshakes at his Chicago steakhouse (where a 14-ounce sirloin is $48 on the regular menu). On one menu, he crossed out prices of wine and listed new prices with the term “sale” — a rarely seen word in fancy restaurants.

TRY IT! David Burke’s promotions include a wine auction and $20.09 three-course meals

One of his most unusual promotions is the Wine Auction at the tony David Burke Townhouse in Manhattan. Diners are handed a list of high-end wines with prices ranging from $200 to $600 struck out with red ink. The sommelier approaches the table, suggests that diners make him an offer and begins a negotiation. Wine director Bruce Yung says he sells an average of five bottles a night, meeting his reserve price or better.

“It’s worth a shot,” says Mr. Burke of his unorthodox approach to selling fine wine. “I’m sitting on close to $200,000 worth of wine anyway, already paid for.”

The D Word

Discounting is a strategy high-end restaurateurs have traditionally avoided or carried out in subtle ways, out of fear of eroding the cache of their brands. But this winter and spring, an unprecedented number of fine-dining restaurants slashed their prices.

Mr. Burke tries to set his restaurants apart from other bargains being offered mainly by making his discounts as drastic, easy-to-grasp and catchy as those of one of the few restaurants doing well these days: McDonald’s.

“I have teenage kids who go to McDonald’s for a dollar meal,” Mr. Burke says. The snappy ring to that promotion inspired him to come up with a high-end equivalent. “I see that it’s working for them at a buck, so it might work for me at $20,” Mr. Burke says.

 

Wooing Diners in a Down Economy

2:07

Chef David Burke is known for his creative cuisine. Now he’s using that same creative approach to weather a downturn in dining out. He talks with WSJ’s Beckey Bright about his strategy.

Starting in January, he rolled out $20.09 meals on Sunday nights at David Burke Townhouse and Fishtail in Manhattan, and at David Burke Fromagerie in Rumson, N.J. At Primehouse, in Chicago, he offers the $20.09 deal for lunch six days a week, excluding Sunday. At David Burke at Bloomingdale’s, in Manhattan, he serves a $20.09 dinner every night of the week. For a $5 supplement, diners can have a one-pound lobster or filet mignon entrée.

Last year, DB Global, Mr. Burke’s New York-based company, had $35 million in revenue, and for this year he predicts $45 million. Like many multi-unit operators, he reports that his less-expensive restaurants are doing well this year. For instance, David Burke at Bloomingdale’s, which has both a sit-down restaurant and a Burke in the Box take-out area, is up 2% over last year. Sales at all three Burke in the Box restaurants — the others are at McCarran International Airport in Las Vegas, and Foxwoods Resort Casino in Connecticut — are up from last year.

Still, even his high-end restaurants, while taking a hit, are doing better than many of their high-end competitors: Primehouse had a 2% decline in sales in the last quarter of 2008 and beginning of this year, compared with the prior year; Fromagerie is down 5%, and David Burke Townhouse in New York City saw an 8% sales drop. Across Manhattan, meanwhile, fine-dining operators are reporting sales declines of around 15%, and some celebrated restaurants, including Fiamma, a highly praised Italian eatery in the same price range as Mr. Burke’s fanciest restaurants, recently closed.

Some of the impact of Mr. Burke’s discounting is measurable: The Sunday discount dinner at Townhouse in Manhattan turned a night that typically grossed $5,250 into a $12,750 night, Mr. Burke says. There are softer benefits, too, such as increased goodwill, publicity, and customers who discover the restaurants and return on full-price nights, Mr. Burke says.

Internal Breeding

Mr. Burke is somewhat insulated from the risk of besmirching his high-end image with discounts because of his unique public persona, says Ed Levine, founder of the food blog SeriousEats.com. “David Burke is the master of the culinary grand gesture, so this is perfectly in keeping with his brand,” Mr. Levine says. Mr. Burke now has “pricing gimmicks” that link up with other gimmicks he’s used over the years, Mr. Levine says. Mr. Burke, for example, bought his own breeding bull to sire the beef cattle used at Primehouse. He also lines his beef-aging cave with Himalayan rock salt, which he sells for $29.99 for a two-pound box.

Discounting, if done too often for too long by too many players, can erode pricing power in the long term, says Dennis Lombardi, executive vice president of WD Partners, a restaurant and retail consultant in Dublin, Ohio. Citing one example, “customers have been trained to expect to buy pizza at a discount,” because of all the coupons and deals, Mr. Lombardi says.

Mr. Burke says that by limiting most of his discounts to Sunday and varying the deals, he avoids such expectations.

Less Bass

With careful planning, Mr. Burke says he is able to keep food costs on his discounted menus at about 45% of the menu price, which is higher than the traditional 35% most fine-dining restaurants aim for but still enables him to earn a profit, because people tend to order more drinks when they are paying less for food. He sprinkles in luxurious ingredients, though some, such as dry-aged beef or black bass, are served in smaller portions than on the a la carte menu. He caught a break this winter when the wholesale prices he was paying for lobster fell to about $5 a pound, from a norm of $7.50, enabling him to include on the discounted menu items such as lobster carbonara and half an “angry lobster,” a spicy signature dish.

Stephen Hanson, a New York-based restaurateur who manages operations for the Chicago hotel where Primehouse is located and who helped devise the concept for the restaurant, disagrees with the discounting approach. Mr. Hanson says he fears that the customer will think, “Were you gouging me beforehand?” But Mr. Hanson, whose company, New York-based B.R. Guest Restaurants, owns 14 other restaurants in New York and Las Vegas, says he is content to let Mr. Burke, whom he calls “a marketing genius,” decide the menu pricing.

During a weeklong promotion in October at Primehouse in which Mr. Burke sold normally $12 burgers for $5, the restaurant made money, Mr. Burke says. Serving lunch to 30 to 40 people on an ordinary day yields about $8,000 per week. During the promotion, the restaurant served 300 lunches a day, Mr. Burke says, for a weekly lunch take of $30,000. While food costs were higher, because more was served, labor costs stayed almost the same, because waiters at the restaurant make most of their wages through tips and the kitchen required only two extra line cooks, who make $15 an hour, he says.

In addition to discounting, DB Global is reducing labor costs. Every week the company analyzes how many bookings have been made at each restaurant and looks at past history to determine how busy it will be. Then it pares or increases hourly staff — about 70% of all employees — accordingly. In winter, about a dozen cooks usually return to their home countries, including Mexico, India and France, for six weeks of unpaid vacation; this year, Mr. Burke encouraged them to take two or three months off. Because his three Manhattan restaurants are in close proximity, he also moves staff from less-busy to fuller restaurants and asks them to multitask. For example, the company butcher now also makes ravioli and crab cakes.

DB Global also focuses on retaining every potential customer. On a recent Tuesday, Fishtail was too full to accommodate more patrons. Mr. Burke instructed the Fishtail hostess to send patrons to nearby David Burke Townhouse, promising a free drink would be waiting. Out of 20 potential guests, 18 took the offer, Mr. Burke says.

—Ms. McLaughlin is a staff reporter for The Wall Street Journal in Los Angeles.

Write to Katy McLaughlin at katy.mclaughlin@wsj.com

Printed in The Wall Street Journal, page R3