Category Archives: angel capital

HAT TRICK

20161220-20150207-_jaj5090tby John Jonelis

He can feel it, hear it—his heart—beating hard, beating fast. Pounding above the din of those big nubbly tires and the blast of snow hitting the wheel wells. Is it anticipation? Fear? Primeval blood lust?

How will it feel to gun down a living animal? Can he really pull the trigger?

Today, Loop Lonagan joins seven seasoned hunters and four highly trained dogs to indulge in what his editor calls one of the great joys in life—slaughtering a few of God’s creatures. He’s a last-minute stand-in and rounds out the party to eight. Two hunters per dog. Perfect! How did he let himself get roped into this?

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Seasoned hunters?

Loop is a man that loves a brawl—loves it more than anything in the world. He still uses his fists when he gets a chance, but he’s never taken the life of a fellow creature—at least nothing bigger than a cockroach. Today, for the first time, he will attempt to kill pheasant with a shotgun—and for some reason it makes him itch.

Pretty soon, the storm gets mean and he wonders if it could be the weather that’s crawling under his skin. Both highway and horizon fade to white. Only a stray stop sign proves they’re even on a road. And the driver tools along as if nothing’s the matter. Loop shakes his head and mutters under his breath, “Dis is ridiculous. Gotta get myself under control.”

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White out

“Hmm?” Jonelis flips on the wipers and smears half-frozen slop off the windshield. “You say something, Loop?”

“No—no, nothin’ John” Loop goes silent. No way he’s gonna slobber all over the boss with his stupid fears. Just look at the guy! He’s barely touchin’ the wheel. He’s wearin’ that big satisfied grin like he’s in some kinda bliss. What’s he thinkin’?

Wind buffets the truck. Loop looks mournfully out the window.

Finally he can hold it all in no longer. Pointing to the GPS, he shouts, “Dis don’t look much like Route 47 to me, John boy. We shoulda oughta turn back.”

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What road?

The driver squints out the corner of his eye. “Turn back? TURN BACK?” He raises his voice to a roar. “WHAT ON EARTH FOR?”

Loop goes silent. He’s stuck here. He’s gotta tough it out.

“C’mon Loop—don’t pout like that. It snows in Chicago—every year it snows—you noticed that, right? And this whole bottom end always gets hit worst.

No response.

“Thirteen years, and my F-150 still gets me where I wanna go. It’s made for this weather.”

Still no response.

John suddenly cranks the wheel hard.

The truck swerves.

The faint white horizon flashes past the windshield at sickening speed and Loop grabs hold of something, anything.

When the truck straightens out, they’re again pointed the way they started. A 360 degree donut maneuver. Jonelis drives down the snowy path grinning and placid as if nothing happened. The guy’s gone psycho!

“Man, I love winter. Here, I’ll show you again.”

“NO!” Loop breathes fast and hard. “ARE YOU CRAZY?

“Sorry Loop. I guess I just enjoy being immune to the elements. This front is supposed to be headed east in a narrow band. We’ll probably break out of it soon.”

Loop shakes his head, grunts, and takes his hand off the sissy bar. Certifiable—the guy’s certifiable. On pure reflex, he balls his powerful hands into fists and utters a silent prayer for a different ride home. But what’s he gonna do now—walk? He drops his chin to his chest and quietly moans.

John reaches across and pats his shoulder. “Loop, you’re a bundle of nerves. Get control of yourself or you’ll be useless during the hunt.”

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Soggy bottom

Further south, they break out of the winter storm, just as forecast. The sun bursts through the clouds. Now it’s leftover snow banks and soggy ice-water puddles.

So they’re gonna live after all.

And Loop’s brand new Gore-Tex boots will prove a good investment today. He likes good investments and for the first time feels a twinge of optimism about this excursion.

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At the Club

Everybody’s in the clubhouse. But Loop still sits in the parking lot, staring out at a field, trying to ease his racing heart.

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Hunting field

All his life, he’s feared nothing, but that truck ride riled him up bad. Now he tastes bile. He swallows hard. Slows his breathing. Gotta focus on what happens next.

He goes over his fears one by one. What if he can’t hit what he aims at? What if he accidentally shoots another hunter? Or worse, a dog? These guys might forgive the first, but never the second. They spend way too much time training those little mutts.

Funny—none of that seems like such a big deal any more—not since the boss pulled that donut stunt. For the first time, Loop cracks a smile.

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Zeke on point

When he steps out of the truck, his new boots sink into mud and gravel. This sure ain’t the streets of the big city. He opens the tailgate and rummages through his gear, slips on a borrowed blaze orange hat, a borrowed blaze orange hunting vest, and dumps a borrowed box of twenty five high-brass #5 shells in the big pockets.

Slowly unzipping a soft camo gun case, he hefts a borrowed 12-gauge side-by-side, replete with elegant scrollwork and Turkish walnut stock. This is a heavy and absolutely gorgeous field piece. It’s gotta take guts to lend $3,500 worth of the gunsmith’s art to a sloppy amateur.

He works the safety and practices loading shells. Loop has never actually fired a shotgun and his doubts run wild. Sure, he aims a rifle or maybe his favorite Smith & Wesson Shield at stationary targets. But from what he’s heard, this sport sounds more like baseball or maybe even golf than the gun range.

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Practice

He practices mounting the shotgun one last time, swinging the muzzle past a nearby stand of trees, following through after each imaginary shot—just like they told him. It feels smooth and surprisingly natural. The stock fits him well.

“Okay, dat’s DAT! Time t’ face da music.”

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Clubhouse

Inside, Loop joins the party lounging around a big table. Introductions fly by him like dry leaves on a high wind, and in this cloud of new ideas he forgets every single hunter’s name. Strange—he remembers what they call all four of the dogs. Loop loves dogs.

Then one of them lays out the ground rules and mechanics of the hunt. It sounds a whole lot more organized than he imagined and he wonders if his 85 lb bull terrier Clamps can be trained to do this.

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Clamps

A sweet gal sits at the table and slides across a mug of beer. “Initiation time!” she says. “We don’t drink before a hunt but you’re new. You get one beer—just one. Afterwards I’ll allow you the pleasure of buying the first round for the rest of us.”

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Some gals hunt

Loop slurps off the foam and downs the lager with relish. He wipes a sleeve across his mouth, and sighs.

Another group of hunters come in from the barbeque grill and offer a plate of pheasant tamales. Loop bites into his. Delicious! Like nothing he ever tasted before.

Now he’s leaning back in his chair. No more pounding heartbeat. Yeah—everything’s gonna be fine. Time for da hunt.

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Killing Fields

The group’s got two large fields today—one next to the other—all to themselves. They form a line and slowly march side-by-side, spaced well apart, dogs running all over the place, sniffing for birds ahead.

It’s almost impossible to see a pheasant running through this grass. But when one hunkers down in the brush, the dog finds it and holds its point until a hunter flushes the bird. A good dog will hold its position till the shot is fired.

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Hunting formation

Today each hunter will log 5 miles over broken ground, rocks, holes, tall grass and brambles, and slog through wet snow and water, but these little dogs each put in at least 15 miles and get wet doing it. They never seem to tire out.

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Exuberant dogs

Loop’s realizes that his bull terrier would plop down for a nap after half a mile. If he ever retrieved a bird, he’d crush and shake it until it was no longer fit for the table. But hey—Clamps is at home in the city, where he belongs. Every dog has his job.

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Clamps in his element

The guy next to him (Rick, Gregg, Bob?—Loop can’t recall) moves ahead of Shiloh’s point, flushes a bird, and fires. The pheasant drops a leg and flutters down about fifty yards away. When the dog retrieves it, the bird is wounded but still alive. The hunter immediately breaks its neck to stop any suffering. All done so precisely. Very neat and clean.

Loop gapes at that rooster in awe. This is what they’re hunting? The color of its plumage takes his breath away. And look at the size of that thing—there’s gotta be alotta good meat on that bird.

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The beautiful pheasant

When the hunter slips it in the game sack at the back of his vest, they continue their march. Loop looks at his elegant field piece and something changes inside of him.

Maybe it’s the sight of blood.

Maybe the finality of the kill.

As boots crunch through the brush, instinct takes a firm hold and his fear and doubt fade to the background. He zones in on his surroundings with a focus more intense than he’s ever experienced. The bite of fresh air. The array of indescribable wild smells. Four dogs running, leaping. Subtle pheasant prints in the snow. A sparrow flock bursts skyward to his left. A hawk circles high overhead. But most of all the dogs. He tries to keep them all in sight. Impossible.

Mud sucks at his boots, and looking ahead, he sees the field entirely drown in snow melt. No way around it. He utters a silent prayer of thanks for Gore-Tex boots, checks the line of his fellow hunters, and adjusts his position.

They slog on to the next snow bank.

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Dry feet

“Duke’s on point! Hey Loop—your turn!” He sees Duke in thick cover just ahead—nose down, teeth clenched, saliva dripping from his mouth. The animal can barely restrain himself. Wow, do these dogs love to hunt! Loop knows a bird hides somewhere within 20 feet.

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Duke on point

He makes his approach and a huge gaudy rooster flushes, cackling as it flies.

He mounts his gun. Swings the muzzle to shoot. Suddenly two dogs run into his sight picture, chasing under the bird. Nope—can’t risk a shot over them. The pheasant glides safely beyond the tree line. Yeah, those dogs broke training, but after all, they’re excited, just like he is. So what? He might still get another chance today. And maybe somebody will take that bird later.

Just like investing, hunting is lots of hope.

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Upland game field

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Hat Trick

One guy is shouting at the white dog named Jack. That one ranges too far and finally breaks with the group to sniff out an area hundreds of yards to the side.  Loop likes Jack best of all the dogs and breaking from the line of hunters, follows him.  He feels one with him and shares the joy of the hunt as if he were an extension of the animal.

When he gets close, the dog is already holding point. Without warning, a rooster takes wing!

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Jack on point

Without stopping to think, Loop swings his shotgun and fires. Bird #1 tumbles into high grass.

Beginner’s luck.

He’s about to search for it when Jack goes on point again. Loop moves ahead of the dog and kicks at a tangle of brush, then he tries another clump. It seems impossible that a big colorful bird can hide here, but Jack’s still holding that point.

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Flushing a pheasant

The pheasant flushes behind his back.

On pure instinct, he wheels and shoots. An explosion of feathers—the bird drops straight to the ground. Loop fired way too soon—way too close. A real waste—not much meat left on that carcass. He chalks it up to inexperience and tells himself to slow down. But that’s bird #2.

Both barrels empty, he pauses to re-load. But Jack is on point again!

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Jack on point again

He moves ahead of the dog, eyes wide open, searching, wanting the kill. The pheasant erupts from the brush and into the sky. This time, he waits for some shooting distance, then the muzzle roars. Bird #3 down!

Three shells, three birds—all in the space of a couple minutes!

A hat trick!

Jack retrieves one bird, then another, his tail wagging. Loop stuffs both in his vest and picks up the one he pulverized by shooting too soon. He glances at his hands, smeared with blood from the ruined bird, and amazingly, it doesn’t bother him. A couple hours ago he wondered if he could pull the trigger and now he doesn’t even want to wipe his hands clean. He reflects that the blood of these birds is a gift. His game pouch bulges out behind and he enjoys the weight of it. He can hardly believe that he gets this privilege—to experience this primal sport and come away with real food. Again, he utters a silent prayer of thanks.

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One for the Road

Giddy from the hunt, Loop heads back toward the group, all his misgivings gone, every emotion urging him to break into dance. For the most part, he restrains himself. Zeke joins up with Jack, and Loop closely watches those two dogs.

He hears hunters call to each other in the woods.

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Jack and Zeke

Two shots! He pivots toward the sound. Two more shots in rapid succession! A pheasant flies out of the trees, fast as it can go, well out of range of the barrage of pellets aimed at its tail.

Before it can fly past him, Loop swings his gun, leads the bird, and fires.

A head shot! It instantly falls out of the sky.

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Zeke retrieves

Zeke retrieves the bird and Loop stows it, feeling a deep satisfaction he’s never known. That’s bird #4—and he’s spent only four shells! Plenty for the day! He won’t fire his shotgun again this trip.

The hunters form ranks and march across another field. And Loop gets treated to an amazing site. Shiloh points a bird. Zeke and Jack honor that point like the well-bred canines they are. How do they train dogs to do that?

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Zeke and Jack honor Shiloh’s point

Loop draws in a lungful of cold air. What a great day! Everybody gets at least three birds. Even John shot birds, but he claims it happened by accident.

On the way in, he pulls out his phone and snaps off a photo of the group.

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Hunting party

Then they head back to the clubhouse to clean up, drink beer, smoke the compulsory cigar, and tell lies.

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Meat on the Table

Back at the lodge, Loop makes a proposal that they all immediately accept. Dinner at his downtown penthouse.

He phones home. “Yeah Meadows—tell Anatole t’ dig out dat recipe fer Pheasant Zummer. I’m brinin’ da birds. And pick out da best wine. Yeah, all da trimmins, too. I’m showin’ up in an hour with seven happy guests in muddy boots!

He hears a professional, Very good sir,” and can hardly wait to experience the joy of a feast with his friends. These aren’t just any birds—these are HIS birds—birds he hunted down alive and killed himself! He’s sure every one of those hunters feel the same way about their kill. And he remembers something John said—words that got him here: “That feeling of satisfaction lasts for days, maybe weeks.”

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By accident?

Loop’s fallen in love with this place. A hunter’s paradise! It’s gotta be one of Chicago’s best startups and he wonders if they need another investor. The place looks prosperous enough. There’s no membership fee—no monthly dues—no volunteer work—you pay for your birds—that’s it. Nice clubhouse and bar. Good fields. Extended season and no bag limit. You can hire a guide and dog here. They even clean your kill. Wanna go?

And he decides to ride home with the same crazy driver that got him here.

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Erienna Hunt Club is located one hour south of downtown Chicago. The season runs from September 1st to April 15th. If you’ve got any primeval instincts left in your modern mind, check it out!

http://www.eriennahuntclub.com/

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Favorite club

 

All photography by John Jonelis and Loop Lonagan, with thanks to all his hunting mentors, especially Gregg Patz, Rick Bohning, and Frank Spellman.

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Chicago Venture Magazine is a publication of Nathaniel Press www.ChicagoVentureMagazine.com Comments and re-posts in full or in part are welcomed and encouraged if accompanied by attribution and a web link. This is not investment advice. We do not guarantee accuracy. It’s not our fault if you lose money.
.Copyright © 2017 John Jonelis – All Rights Reserved
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ENGINEERING YOUR PITCH

jockey-and-horse-t-ms-officeInsights from the Cornerstone Angel Meeting

by Stephanie Wiegel

Angel investment deals aren’t made on the spot as the TV show Shark Tank suggests. Instead, entrepreneurs are excused from the meeting after delivering their pitches. If you’re vying for early investment money, what’s said behind these closed doors can make or break a deal. Continue reading

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YOU MIGHT AS WELL DANCE

help-t-ms-officeIT Guys—Stop Playing Defense

by Howard Tullman

Not feeling enough love? Yes, techies are under appreciated until spit hits fan. But if you’re one of them, you’ve got a bigger role to play than you think. Here are three ways to raise your profile.

I feel bad for the guys in our IT department because they suffer the same career issue as the heads of Homeland Security. As we all know, terrorists and other scumbags only need to get it right one time and horrible things happen. Yet our counter-terrorism teams and other law enforcement agencies must try to be right every time. Then, when nothing happens, no one bothers to thank them or offer recognition for their work.

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People whine about cost, delays, and all the stupid rules. They figure that protecting us is what we’re paying these folks to do. The best the good guys can hope for is a tie. No harm—no foul. And no credit for keeping us safe.

I Don’t Get No Respect

IT departments in almost every business get the Rodney Dangerfield “I don’t get no respect” treatment. They’re taken for granted and get little or no recognition—from anyone—even though the complexity, significance, and risks associated with their responsibilities have multiplied exponentially in the last decade.

Face it, we humans only understand the degree of our dependence on machines and systems when they shut down, data disappears, and systems stop delivering the information we need to proceed.

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The truth is, you can’t do anything intelligent today without solid, timely, reliable, and accurate data. It’s the oil of the digital age and the IT guys are the ones with their mitts on the meters, mechanisms, and measurements. IT infrastructure is the make-or-break gate, tool and tunnel through which everything critical in our data-driven world passes. If they don’t get it right, your business simply doesn’t get done. Relative to your competition, you might as well be in the Dark Ages.

The Tide is Changing

I’ve been spending a fair amount of time with IT teams and I’m encouraged to see a few positive signs.

  • A slowly growing acknowledgement of the importance of IT.
  • Recognition of the turmoil caused by under-investing and under-appreciating the IT team.
  • How neglect exposes your entire company to critical and severe problems.

But time only changes what you don’t change first. I tell all the IT people I meet that they have to be their own best advocates and change agents if they really want to see meaningful improvements and add real value to their businesses.

This is no easy sell. These folks aren’t really built that way.

Selling their ideas is the last thing they ever thought they’d be stuck doing. But the waves of change are coming—and you can swim with the tides or sit still and be submerged.

I’ve found three specific ideas and approaches that senior-level IT folks can focus on to make a serious contribution to the future of their firms.

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1—Be a Weapon, not a Shield

Playing great defense isn’t enough. The smartest IT players are extracting from the plethora of connected devices and turning the data they develop into “weaponized” information—decision tools that move their businesses ahead by providing better and more timely solutions, both to internal users and outside clients. What gets done is what gets measured. Help your team optimize every aspect of the operation with real-time decision support. That puts everybody in a position to correctly make the most critical calls—like when to double-down on winners and how soon to ditch dogs. Providing increased metrics and visibility is what the best data-driven IT strategies are all about. Money is just expendable ammunition. Data is power and guess who’s in charge of the data?

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2—Focus on Future

Everything is about the future. We need bridges—not more bandages. The network is the name of the game. Help your team exploit the extensive resources outside of your own shop. Connect your company to critical partners, collaborators, and new technologies that are beyond your four walls. Do it securely, without sacrificing speed, accuracy or ease of access.

Make sure your people are an active and effective part of all the “social” conversations that concern your business because these new channels are changing the way we all confer, compare, communicate, and consume. Unless your products and services are part of the ongoing conversations and decision sets, when the buyers are ready to buy, you’re nowhere.

Holding down the fort isn’t enough; you’ve got to do more than simple maintenance because your business needs a vision and a path forward—not another Mr. Fix-It.

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3—Be In the Room Where It Happens

If you don’t ask, you don’t get. As a senior IT professional, step up and insist that your presence and your input is central to securing the best solutions for the business. If you’re not there, if you don’t have some skin in the game, if you’re just a spectator, then the changes that do happen will happen to you, not through you. It’s not always safe to step up, but it’s the smartest bet you can make. If you don’t believe in yourself and your abilities, who else will? And take my word for it; waiting never gets you to a better result. The world is moving too quickly to give anyone the luxury of time. Just like in racing, you need to understand that no one waits for you.

If it’s any consolation in these tough and troubling times, just remember that they’re going to blame you for anything and everything that goes wrong anyway. So, if you’re already walking on thin ice, you might as well dance.

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Howard Tullman is the father of Chicago’s 1871 incubator.

Read his bio on Wikipedia: https://en.wikipedia.org/wiki/Howard_A._Tullman

Check out his websites at http://tullman.com/

and http://tullman.blogspot.com/

Write him at 1871@Tullman

Image credits – Howard Tullman, Getty Images, MS Office

This is an excerpt from an article in INC.

http://www.inc.com/author/howard-tullman

Image credits – Howard Tullman, Getty Images, MS Office

Chicago Venture Magazine is a publication of Nathaniel Press www.ChicagoVentureMagazine.com Comments and re-posts in full or in part are welcomed and encouraged if accompanied by attribution and a web link. This is not investment advice. We do not guarantee accuracy. It’s not our fault if you lose money.
.Copyright © 2017 John Jonelis – All Rights Reserved
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BILLION DOLLAR UNICORNS

Kenneth M. Freeman

The world seems captivated by the growing number of unicorns – private companies theoretically worth more than $1 billion based on their latest round of funding. There are now more than 100 unicorns, led by Uber with a valuation of $66 billion.

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If you were an early investor in any of these $billion+ gems, you’re winning big!  But what about investors who got in on the latest fundraising rounds?  Are the bragging rights of an expensive unicorn deal worth losing money on your investment?

The traditional venture capital investment formula is to select promising ventures early, while valuations are still low. Selecting several young businesses adds diversification and improves the likelihood that one or more will become a success.

While many unicorns have achieved notable marketplace success and will undoubtedly survive and thrive, their current valuations strain credulity, leaving late-round investors vulnerable to substantial losses. How likely is a big win when the venture is already valued at $10 or $20 or even $50 billion?

Uber’s annual revenue run rate is expected to exceed $10 billion by year-end. They retain 20% or $2 billion, which, with many markets left to conquer, is impressive.  But do these numbers justify a valuation of $66 billion? Remember, a future value of less than $66 billion for Uber will mean a financial loss for their latest investors.

Airbnb’s 2015 revenues are estimated at $675 million and projected to reach $2 billion by 2020.  Their latest investment round puts their worth at $30 billion. 2014 revenues were estimated at $900 million for Square and $600 million for Palantir. These companies aren’t likely to go away. But do these numbers justify valuations of $5 billion for Square and $25 billion for Palantir?  Is Snapchat (with still negligible revenues) really worth $22 billion?

Many venture capital investors say traditional valuation methodology – the net present value of projected future discounted cash flows – is impractical for venture capital.  They suggest that venture capital valuations rely on perceived potential along with passionate commitment and a dose of hope.

But valuations at early stages appear to implicitly reflect traditional valuation logic.  They recognize the riches of potential success, albeit impossible to quantify precisely, while discounting those values sharply to reflect low success odds and inherent risk.

The problem with unicorns’ soaring valuations is that they seem to assume the stars are perfectly aligned and everything will go right.  That rarely happens.  Yes, it largely did for Microsoft, Google and Facebook, three huge winners over the past 40 years.  But how many of those are there?  Even Apple had to survive near disaster before its remarkable success.

What if governmental regulations block portions of Uber’s or Airbnb’s planned expansion?  What if Uber drivers are ultimately ruled to be employees rather than independent contractors, changing the company’s fundamental economics?  The risks are even greater for unicorns with more limited revenues today (and most with large losses).

We at VCapital, are not interested in ventures already valued at $1 billion+, where a return of 10 or 20 times investment is far too unlikely.  Gambling in Las Vegas might be a better bet.

We believe in the historical venture capital success formula, focusing on early fundraising rounds – after venture potential is qualified through angel/seed funding but before valuations escalate wildly.  For early stage investments in ventures valued at $5 or $10 or $20 million, while most fail, success could mean an exit valuation in the tens or even hundreds of millions of dollars.  A few of the ventures we’ve supported over 30 years have even exceeded valuations of $1 billion, but you can’t count on that.

This has worked well for our team over three decades.  While the VC industry’s average venture success rate (i.e. achieving any positive return on investment) is about 20%, through rigorous due diligence our success rate has averaged 37%, and our investors’ annualized returns have averaged well above industry norms.  Delivering an attractive return to investors requires a few exits at 10, 20 or more times the initial investment to offset the 63% that come in as modest winners or complete loses.

So why are later-stage valuations soaring to stratospheric heights?  We think it’s due to FOMO—Fear of Missing Out.  Getting in on a unicorn round is great for bragging rights, but for late-stage investors, getting out with a profit may be tough. We’re betting FOMO results in lots of loudly bursting unicorn bubbles.

We’re not concerned about a repeat of 2000’s broad dotcom bubble, which devastated the finances of millions of Americans, since today’s soaring valuations belong to companies that are still private. Their investors are primarily institutions and ultra-wealthy individuals who can weather the risk, so impact will be contained.

We are concerned, though, that a series of loud unicorn bubble bursts could cool the flow of investment dollars feeding life-changing innovation.  That would be unfortunate, since conditions for tech-enabled start-ups have never been better. It would also be unfortunate for the 8 million+ accredited investors (defined by the SEC as having net worth of $1 million+ excluding primary residence or ongoing annual income over $200,000), who finally – thanks to the JOBS Act – have access to professionally managed venture capital investing.

We believe that following the historical venture capital success formula will continue to generate attractive returns for investors who stay focused on pursuing strong ROI. In contrast, late-stage investors in pursuit of bragging rights to unicorn deals will increasingly find themselves under water.

Kenneth M. Freeman is the Strategic Marketing Advisor and Member of the Board at VCapital, LLC   http://www.vcapital.com/

This article appeared in NEWS FROM HEARTLAND

Image from MS Office

Chicago Venture Magazine is a publication of Nathaniel Press www.ChicagoVentureMagazine.com Comments and re-posts in full or in part are welcomed and encouraged if accompanied by attribution and a web link. This is not investment advice. We do not guarantee accuracy. It’s not our fault if you lose money.

.Copyright © 2017 John Jonelis – All Rights Reserved

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DRIVING VALUE WHEN FUNDING RUNS LOW

funding-tDavid Johnson

Overview

The funding environment for early stage startups has been shifting for some time, but as shifts accelerate, founders, executives, and investors should look to reassess their strategies to ensure that they remain optimal in a capital constrained environment. Q2 2016 saw the lowest rolling 12-month average deal flow for early stage investments since Q2 2013, this in spite of actual early stage dollars invested having increased by 127% over that period. Increasingly, early stage investors are looking to place fewer but more sizable bets on startups that are perceived as having the most promise. This can, and likely will, lead to a widening gulf between early stage startups that have a clear path to additional funding and those that may struggle to generate investor interest.

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Source: PwC/NVCA MoneyTree™ Report, Data: Thomson Reuters

This change is being driven by a number of factors, including venture capitalists hitting bandwidth limits (even for the most talented of multi-taskers, there are only so many investments one can effectively manage), maturation of certain investment theses (notably “Uber for X” models and consumer focused mobile apps), and the changing funding environment that has allowed early stage VCs to seek a level of market traction that in years past had only been expected of more mature startups. As a result of these changes, the business press is increasingly flooded with stories of well-funded startups failing, seemingly out of the blue, as anticipated follow-on funding rounds fail to materialize, and angel and VC investors pivot to focus on companies with a clear path to cash-flow breakeven. In this kind of funding environment, what is a startup entrepreneur to do?

funding

The good news is that, regardless of funding, the levers of sustainable value creation have not changed. Companies that provide differentiated, value-added goods and services to their clients are companies on a firm foundation. But every good strategy must take into account the resources available for that strategy’s execution, and as the early stage funding market shifts, startup leaders must take the time to objectively assess their current situation and look to chart an optimal path.

For those startup entrepreneurs concerned about the near-term future of their companies, assessing a company through the following three lenses can instill a disciplined, value creating mindset that is well suited to a shifting landscape:

 

  1. Cash Management. Too few startups understand the drivers of their company’s cash flows, and every report of well-funded startups abruptly failing without sufficient funds to cover employee payroll (a failing that could leave employers facing criminal charges) highlights this failing. Management should understand the near-term sources and uses of cash if there are no changes (“base case”), identify steps to conserve cash if needed, and have a clear sense of the amount of time the company has before the cash runs out.
  2. Business Model. While the effort to attain product market fit gets more press, developing and refining the correct business model is a key milestone for every successful venture. The ability to demonstrate a viable business model will significantly enhance the options of any startup.
  3. Goals. Are the current goals in-line with the company’s current cash situation and stage of business model development? A rule of thumb for liquidity constrained environments is to never count on new funders. If your current investors would be unwilling or unable to invest follow on amounts, plan accordingly.

 

Conclusion

Funding does not create good companies, but a lack of funding coupled with a persistent cash burn can kill any company. The key to avoiding this fate is acknowledging the possibility and taking steps to objectively assess, and if necessary modify, a strategy before it is too late.

 

About the Author David Johnson is a career change agent who has served as an advisor, board member, interim manager, investor and operator at organizations ranging in size from pre-revenue startups to Fortune 500 organizations. David is a frequent speaker and writer on the topics of value creation and performance improvement. He can be reached at david@abraxasgp.com or 312-505-7238.

Images courtesy David Johnson and MS Office

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225 West Washington Street, Suite 2200, Chicago IL 60606 www.abraxasgp.com

This article appeared in NEWS FROM HEARTLAND – The Journal of the Heartland Angels

 

Chicago Venture Magazine is a publication of Nathaniel Press www.ChicagoVentureMagazine.com Comments and re-posts in full or in part are welcomed and encouraged if accompanied by attribution and a web link. This is not investment advice. We do not guarantee accuracy. It’s not our fault if you lose money.

.Copyright © 2017 John Jonelis – All Rights Reserved

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INVESTING: IT’S ALL ABOUT THE CASH

by Scott M. Anderson

Angel investing is influenced by many factors affecting the startup including: technology, unmet demand, scalability and, most important, the founding team. These and many other factors will have a critical impact on the success or failure of the investment. However, there is one common factor to them all: Cash. cash An investor and founder are in the elevator together. The investor says “Nice idea, how much capital do you need?” The founder says “$750K”. Investor says “Why $750K?” Founder says “We believe it’s the right amount based on other startups I’ve heard about.” Or she might say “It seems like the right amount based on the size of other angel investments.” Or she might say “It just seems like the right amount.”

Those responses are all wrong!!

A more appropriate response would be: “We’ll need $450K to fund losses the first two years, $250K to buy tooling and another $50K for inventory and other working capital needs.” After hearing this better response, the investor thinks: “As with most founders, I’m certain her numbers are worthless. However, this founder seems to have specific numbers which suggests she’s analyzed them and may be a good overseer of my invested money. I’m interested in her assumptions. I’d like to meet with her again.”

At a minimum, any founder must have a high level understanding of how much capital is needed and the reasons why. She must be prepared to communicate these reasons as part of her elevator speech. Similarly, each investor should ask for and expect an immediate response from the founder, which reflects her understanding of why the investment is needed.

How does the founder determine what she needs? And how does the investor determine if the investment amount is right? A cash projection will meet the needs of both parties. An analysis of the startup’s cash inflows and outflows will confirm the company’s investment needs. At a high level, the cash projection is easily calculated as net profits + capital expenditures + required working capital (such as inventory stocking required to achieve sales). More complex business models would require a more in‐depth treatment.

The investor met with the founder again and received the following projected Income Statement (in $000s). table-1 Let’s examine these numbers to see if they confirm the founder’s response in the elevator:

  1. First 2 years of losses of $450K. The loss in year 1 is $242K and the loss in year 2 is $208K. These sum to total losses of $450K. RESPONSE IS CONFIRMED.
  2. Tooling cost of $250K. The Capital Expenditures (CAPX) in year 1 is $250K and $0 thereafter. RESPONSE IS CONFIRMED.
  3. Working Capital needs of $50K. The working capital is required to be $20K and $30K for years 1 & 2, respectively, totaling $50K. RESPONSE IS CONFIRMED.

The founder has provided numbers at the meeting which agree with those she cited. That’s good. The founder would lose all credibility if they did not support her elevator speech. But, has the startup asked for enough at $750K? Let’s examine a projection of the cash in the startup’s bank account. With an investment of $750K in year 1, the following is a projection of the startup’s cash in the bank: table-2 The cash bank balance is projected not to be negative at the end of any year over the projection period and the total financing received exceeds the total cash out, so an investment of $750K would be adequate based on the earnings performance projected by the Income Statement. However, the large cash balance of $238K at the end of year 1 suggests that the timing needs of the startup may not match the investment. In fact, the investor would rather invest the excess cash of $238K in year 1 for a different investment which would pay off within 12 months. Such an alternative investment would enable the investor to realize a financial return on the excess cash while still fulfilling his total commitment of $750K to the startup. Following this thinking, if the investment were made in two installments versus one, the following projected cash balance results: table-3 A two installment investment better matches the startup’s need since no excess cash exists at any time during the financing period. The investor would suggest to the founder that the $750K investment should be made in two installments: $512K in year 1 and $238K in year 2. An investor’s diligence process should be stepwise: a layer of information is requested, and provided by the company. Additional information is requested and provided, until the investor is completely clear about the startup’s execution strategy.

From the founder’s perspective during the diligence process, it’s critical that each diligence level be consistent with all prior levels. In our example, the founder responded in the elevator with a high level description of why she needed $750K. That was diligence level one. The projected Income Statement, CAPX and working capital projection provided by the startup was diligence level two. Fortunately for the investor and the founder, the level two diligence substantiated the information established in the elevator.

My recommendation to the investor for this startup is that the next diligence layer should focus on the detail behind the rows on the Income Statement. Examples include: with sales, which customer(s) will account for 80% of the sales in the projected years? For cost of sales, what are its major components? What explains the increase in gross margin percentage from year 1 to year 3? For the expense row, what are the major expenses and what explains the increase in year 2?

Responses to each of these inquiries will have a direct impact on the cash projection. A complete diligence discussion is beyond the scope of this article. However, the diligence process would continue until the investor is satisfied with the strategy and underlying assumptions. Throughout the process, focus must be maintained on the cash projection to understand how the diligence analysis will impact the amount and timing of the anticipated investment.

Scott M. Anderson is a principal at Anderson Financial Services, LLC and has been performing cash projections for decades as an investment banker, a workout specialist and, recently, as an advisor to investors and startups. He can be reached at scott@andersonfsllc.com.

Image from MS Office

This article appeared in NEWS FROM HEARTLAND

 

Chicago Venture Magazine is a publication of Nathaniel Press www.ChicagoVentureMagazine.com Comments and re-posts in full or in part are welcomed and encouraged if accompanied by attribution and a web link. This is not investment advice. We do not guarantee accuracy. It’s not our fault if you lose money.

.Copyright © 2016 John Jonelis – All Rights Reserved

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IN YOUR FACE RISK

by John Jonelis

“Oh, you’re an angel investor! Isn’t that risky?” I hear such drivel all the time. Are people afraid of outsized returns? Or perhaps they don’t understand risk, don’t know how to measure it, or how to take control of it. Yet all that is quite easily done and it’s a real charge to play the game using a Monte Carlo simulation (MC). I’ll show what’s likely to happen if you follow three simple rules. Then I’ll break one rule—just a little bit—and we’ll use the simulator to see what happens.

fear-color

Rules of the Game

Rule #1 – Diversification and the Law of Large Numbers—This is the only free ride in the investment world. Invest in as many dissimilar companies as possible.

The portfolio technique known as the Efficient Frontier suggests you indulge in alternative investments to the tune of 10% of your overall portfolio to maximize return and minimize risk—that’s right, both! Angel investment is definitely in the alternative camp, so restrict your fun to 10%. No more! It’s true—angels are like anybody else. They also own stocks and bonds, futures and options, currency spreads and real estate, antique cars and art collections.

Rule #2 – Identical Minimum Sum—Nobody knows whether a company will succeed or fail. Nobody. Even the best, most experienced, wisest, most savvy investors can’t tell. So out of your alternative portfolio, invest the identical minimum sum in each and every deal—no more, no less—no exceptions! Make it as small as you can. 2% is a good number to shoot for. Ideally, with profits taken along the way, you’ll eventually own 50 to 100 companies!

Rule #3 – Join an Angel Group—Contrary to public opinion, most investors aren’t multi-millionaires. An angel group allows you to invest small sums in concert with others in the group, and coincidentally, it makes it possible to obey Rules #1 and #2.

I also assume that a personal research staff isn’t in your budget. A good angel group solves that problem by splitting the workload among its members according to their particular expertise. A strong group will accelerate your learning curve. The trust and camaraderie you build with other members makes angel investing a real joy. My own experience as a member of Heartland Angels has broadened my horizons and given me so much more than I could ever contribute.

It’s not a rule, but read the book ANGEL INVESTING by David Rose. You’ll be glad you did.

dice

Beware

If you don’t like to help companies grow from raw idea to industry leader; if you aren’t willing to participate in the fascinating and often perplexing details of a new business venture; if you can’t stand people; if you’re afraid—then invest in a mutual fund or put your money in gold coins and count them every day, just for something to do.

 

Picture Your Risk

I’m visually oriented. To paint the picture of risk, I use a Monte Carlo engine. MC is a sophisticated and arcane statistical tool that any child can use. If you’re a spreadsheet whiz, you can set it up yourself. I downloaded a program called Equity Monaco that makes it easy to enter investment outcomes, and analyze results.

NOTE: If you find yourself gazing at a bunch of confusing readouts with a vacant stare, read my paper, ALTERNATE HISTORIES. It’s written in plain language. It’s short. You’ll be an expert in no time.

angel

How Angels Make Money

Angel investing is long term—3-10 years. But like any investment class, you’ll cash out of one deal and put that money in another. It’s a continuing cycle. It’s also a homerun strategy. Can a homerun strategy be a winning strategy? Let’s run the numbers and see.

First, we need a data set of ordinary, average, run-of-the-mill trade results. Turns out, the Kauffman Foundation keeps statistics and publishes them.

Here’s the bottom line, according to Kauffman, 38.1% of startups grow and get acquired by a larger company, at which point all the investors throw a party! 11% become lifestyle businesses. These may provide a nice living for the employees but it takes the investors a really long time to cash out. 50.9% of companies go belly-up. Of those, 0.9% just disappear!

startups

Actual Angel Returns

Let’s keep this simple. From the investor’s perspective, all the returns from Kauffman’s wealth of past data boil down to five distinct outcomes. I express these as multiples of cash invested. (“10x” is a return of 10 times your investment.) Then I list the probability of each outcome.

return-vs-probability

Return as a multiple of investment vs. probability

Kauffman Foundation

 

Using these numbers, and applying our rules, it’s simple to build a simulated portfolio that represents likely outcomes.

Let’s assume that 10% of your portfolio amounts to $50K. Your angel group’s minimum investment is 10K. That means you need to plunk down 10% of your stake per deal, rather than the recommended 2%. You’re undercapitalized! Your Identical Minimum Sum, is high.

What does that mean to you? You’ll participate in fewer trades than some rich slob. All other things being equal, your results will be less predictable. The rich get richer, etc. etc. But you’re young and aggressive. Let’s say you go ahead anyway.

Now create a list of outcomes, based on Kauffman’s stats.

how-deals-shake-out

Notice that you follow all three rules. You invest exactly the same amount each time. Using an angel group, you invest the smallest amount you can get away with, and you participate in as many attractive deals as you can.

 

The Face of Risk

We’re ready to run our simulations. Feed those numbers into your MC engine and let the computer do the work. (I apologize for omitting legends from the charts, but the numbers in my program are too tiny to read. Hey, these are actual screenshots from my software package. So permit me to clue you in:

  • The X axis is about 100 deals.
  • The Y axis runs from zero to almost $2,500,000.
  • All equity lines start at $50K—your alternative portfolio.

std-10-long

10 possible equity curves

Here’s an MC output of 10 runs from the set we just built. Each line is a distinct equity curve that represents your portfolio. All are possible. Notice that two of them go negative quickly and never recover. But the rest do quite well. This isn’t enough data to draw any valid conclusions. Let’s run more simulations, using the same data set.

std-30-long

30 possible equity curves

Here we have 30 equity curves. The projections are getting clearer. Let’s run a few more, using exactly the same data set.

std-100-long

100 possible equity curves

Ah! Here we go—100 outcomes. The variation is nice and tight. Kurtosis is evident in the plot—in other words, the most likely results cluster around the mean. Looks like a good experiment to me. Let’s use this one.

 

ANALYSIS

Analyzing these plots is amazingly intuitive. For this experiment, the equity lines all start at $50K—your portfolio. A few outcomes go negative, but most look quite promising. The luckiest investor walks home with $2,450,000. MC plots don’t necessarily follow a standard distribution, but the mean looks to be about $1,450,000. Let’s focus on that number.

If we achieve the mean, we’re looking at an average return of 28 times investment. Does 28x get your attention? It gets mine! It even raises suspicions about possible survivorship bias in Kauffman’s numbers. But these are the best statistics we have so we’ll go with them.

How much is 28x as an annual percent return? That depends on turnover of deal flow. The shorter the hold time, the larger the IRR. 3 years is better than 10.

By the way, you may be wondering which curve is yours. There’s no answer to that question. But since your portfolio is so small, you’re more likely to find yourself on the fringe. An investor that’s filthy rich and participates in many more deals, enjoys a more predictable outcome and probably lands close to the mean.

 

BREAKING THE RULES

Let’s find out what happens if we break just one rule. And who doesn’t do that? So you invest $100K in a really juicy deal. It’s the best prospect you’ve ever seen and you figure it’ll make you rich. This thing can’t miss! Hey, it’s just one investment—how much difference can it make? You have just violated the Identical Minimum Sum rule. I know. I made this mistake once.

We add it to our data set and run the simulation. For this, we increase your portfolio size and retain all the same trades from the last run. This is what the hotshots call sensitivity analysis.

undis-100-long

100 possible equity curves – breaking one rule

Whoa! Look at what that one lapse in discipline does to your projections! The mean is now flat—zero times return! Half the outcomes are negative. No, I don’t’ want to play in this sandbox.

Successful investing is primarily adherence to a solid set of rules. That’s called discipline. The goal of discipline is to keep the probabilities in your favor. Discipline defines success.

That doesn’t mean that a successful angel can get by without a good skillset. You need to exercise brilliant judgement. You must perform your due diligence. Knowledge and experience are huge. Always keep the human side in mind. And you need to follow-up. Watch your companies closely as they pivot and grow. I leave you with this thought:

david-rose-quote

Also read – ALTERNATE HISTORIES

 

John Jonelis is a writer, investor, fisherman, author of the novel,

THE GAMEMAKER’S FATHER, publisher of Chicago Venture Magazine, and editor of News From Heartland.

The term IDENTICAL MINIMUM SUM is from the author.

Thanks to David Rose and his book ANGEL INVESTING.

Statistics from the Kauffman Foundation.

MC plots from Equity Monaco by TickQuest.

Graphic courtesy MS Office.

DISCLAIMER – Do your own due diligence. It’s not my fault if you lose money.

Chicago Venture Magazine is a publication of Nathaniel Press www.ChicagoVentureMagazine.com Comments and re-posts in full or in part are welcomed and encouraged if accompanied by attribution and a web link. This is not investment advice. We do not guarantee accuracy. It’s not our fault if you lose money.

.Copyright © 2016 John Jonelis – All Rights Reserved

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Filed under angel, angel capital, angel investor, big money, Chicago Ventures, Education, Entrepreneur, Entrepreneurship, Financial Markets, Heartland Angels, Information, Innovation, Invention, investor, new companies, risk in, vc, venture capital