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TO BE OR NOT TO BE HACKED?

by William Shakespeare,

alias Moises J. Goldman and John Jonelis

 

William “Moises” Shakespeare

Hamlet—To be or not to be hacked? That is the question. Whether ‘tis nobler to suffer the slings and arrows of outrageous fortune, or to take arms against a sea of phishes, gouged by creatures who boast no scruple, nor affect any purpose higher than foul destruction—and by opposing, end them?

(Editor’s translation—Hackers are a bummer. This is war.)

Or may say ‘tis wiser to remain in dungeons rank and old—to sleep, perchance to dream—ay, there’s the rub. For in that sleep, what dreams may come? The internet makes cowards of us all.

(Editor’s translation—Should I upgrade the robustness of my internal infrastructure and firewalls?)

Horatio—But soft, me lord, to think upon the many turns a kindom make. Betwixt two means shall we choose to take.

(Editor’s translation—There are two good options.)

Hamlet—Ay, the dilemma. To guard against an angry pack of dogs that tear and rent and hack away till strength and blood be spent. How wouldst thou fight, Horatio? I would not hear your enemy say you could do it. Nor shall you do my ear that violence.

(Translation—Don’t feed me a pack of lies. If we encrypt all sensitive data and cyber-secure our network we still can’t achieve fail-safe.)

Horatio—Hear me lord; I make my case: Should bits and bytes habitate high Clouds, and thus free a kingdom’s gold? Yea, no arms, no knights, no castle walls to tug the purse’s string! ‘Stead exult in markets, foul of hogs and sheep and goat? Entice the sorcerer to play in darker arts, in unknown moat? To raise a legion—conquer lands anew beyond the sea? And so extend a kingdom’s reach?

(Option #1: The Cloud is cheap. Save your money for marketing, R&D, and expansion.)

Hamlet —Methinks this boy hath soundly grounded thought. He makes PaaS-ing SaaS at learning dearly bought. It takes no brain to buy his train of thought.

(Good logic—a no brainer. The Cloud. Platform as a Service. Software as a Service.)

Horatio —But soft, me lord, I fear foul play! This Cloud by wild winds be cast astray. It boasts no force to hole the gauze in tumult and in fray, and by doing so, steal the treasury of intellect away. ‘Tis best, to build yon castle walls of stouter stuff, some say. Keep bytes and treasure close and spend on fodder and on hay.

(Option #2: The Cloud is way too vulnerable to attack. Update your in-house network.)

Hamlet —Wouldst thou squeeze gold from a lark? Something is rotten in the state of Denmark. But harken thee—where may best advantage be? What odds see ye?

(That equipment’s expensive! What’s the probability of being hacked either way?)

Horatio —Sorcerers be that wouldst draw straight crook from snarled oaken tree.

(Mathematicians use probability trees.)

Hamlet —O cursed spite that ever I was born to set it right!

(I hate math!)

Horatio —Of haste take not. Outcomes be but three. Take heed of which I shew to thee.

(No big deal. There are only three probable outcomes.)

Hamlet—Hold, varlet! There be a fourth outcome lacked. That one repent, not hacked.

(Hamlet points out a missing variable: An enterprise upgrades internal systems and yet escapes hacking.)

Horatio—‘Tis true M’lord; yet is it moot? Such foes by needs be met; nought ground under heel of boot. Complication wears poorly on thee. There be no guarantee. This outcome we call

1-P3…….(1)

Hamlet—Ha! There are more things in heaven and earth, Horatio, Than are dreamt of in your philosophy.

(I’m not as dumb as I look.)

Horatio —‘Tis sooth, my liege—I seek not to deceive. I shall draft a map that deeper knowledge ye may tap. Yon magic shall appease; thy grace’s ire set at ease.

(I’ll make it simple, so even you can see. Take a look at this probability tree.)

Horatio—M’lord do you see? If systems new and hacking lacking, probability is simply:

1-P3.

(The probability of an internal network not getting hacked.)

Hamlet—What make I of this plunder? To ask a fool is to blunder.

Horatio—Magic formula ye seek, to make right your decision? Fortunately, Shakespeare knows it with precision.

(Be cool. I got this.)

Horatio—Look here, dear Ham, and spy yon enterprise, floating on the Cloud. P’haps never to hack or wound with sharp blade. We dig our likelihood with a spade:

‘Tis thus:

P1+(1-P1)(1-P2)=1-P2(1-(1-P1)………(2)

(The probability of not getting hacked on the Cloud.)

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Hamlet(Aside) Madness in great ones must not unwatch’d go. A screw is loose. He rhymes like Dr. Seuss.

(Horatio’s gone bonkers.)

Horatio —But hark—magicians work dark secrets in a day that mortal man can plumb no other way. I spell it in a cypher and so you see the final answer to this mystery.

(Here dummy, I’ll spell it out for you.)

Hamlet—Indeed, this must I see.

Horatio—Floating on a Cloud, your enterprise two chances be allowed to escape from doom, not hacked asunder. The Cloud foul Russian must attack rapaciously before the knife may reach your back with certainty.

(If your enterprise is on the Cloud, hacking is a two-stage process. The Cloud may get hacked. But even then, your enterprise may escape damage.)

Horatio—To ride the Cloud in skies of blue, equation (1) must be less than (2). Hence:

1-P3<1-P2(1-P1)…….(3)

We boil down that poison thus, and there you have the clue. If the fates should sing this song aloud, my enterprise will float along.

P3>P2(1-P1)

(The absolute condition for an enterprise to go to the Cloud.)

Hamlet—Dost thou think me easier play’d on than a pipe? For ‘tis sport to have the enginer Hoist with his own petard, an’t shall go hard.

Horatio—Dost thou salve the ego with a threat? Is this the way all friends are met? But hear me, Sire, ‘tis plain to do. I will write it out for you. Be ye not a foe to the way the numbers go. Ye shall recall the probability of hacking free be 1-P3. If a wise man, on gauzy Cloud his merit bent, to the tune of 80%, the numbers show thus:

1-P2(0.2)

(Here ya go, Mr. Bigshot CIO—if the probability of not getting hacked on the Cloud—P1—is 80%, then 1-P2(1-0.8) hence 1-P2(0.2)

Hamlet—Still it be Greek to me.

Horatio —Here, my lord, I will unravel the way that ye must sway, to the ending of thy quest. Be in knowledge, not in jest.

(Gotcha!)

Hamlet—Get it over before I die.

Horatio —Here’s an end so ye may rest like bones inside a chest.

If P3>(0.2)P2 be true, to the Cloud get ye hence, else makest equipment new and play yon cards close to thy vest.

(This is how the CIO makes the decision.)

Hamlet(Aside) This be a fellow of infinite jest, of most excellent fancy. He rhymes obtuse like Mother Goose. Yet I shall the effect of this good lesson keep as watchman to my heart.

(Translation—Good! Let’s have a beer.)

(Curtain)

.[DOWNLOAD ARTICLE IN PDF FORMAT]

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NOTE – This example follows similar logic and Decision by Professor J. Sussman used in his lecture to the Engineering Systems Division entitled, DID BELICHICK MAKE THE RIGHT CALL?

[READ BELICHICK PART 1 – PDF]

[READ BELICHICK PART 2 – PDF]

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About the Authors

Dr. Moises Goldman is uniquely involved with STEM (Science, Technology, Engineering, and Mathematics). He is a member of several advisory boards at MIT and is a founding member of the TALENT program at IMSA.

John Jonelis is a writer, publisher of CHICAGO VENTURE MAGAZINE and NEWS FROM HEARTLAND, author of the novel, THE GAMEMAKER’S FATHER. BFA, MBA from Kellogg.

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Photography and Graphics – John Jonelis, 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. Please perform your own due diligence. It’s not our fault if you lose money.
.Copyright © 2017 John Jonelis – All Rights Reserved
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THE BIG LITTLE TRAP

by Scott M. Anderson

An investor, Sally, recently heard two pitches. The first was from A-Dot-Co, which will produce polka-dot jellybeans using a new patented process. The second was from BetterBean, will produce purple jellybeans using a trade secret method which improves existing manufacturing processes.

Having spent several years owning a candy company, Sally was interested in both opportunities.

Jellybean T

Sally knows that the jellybean market is large and well established. With a few regional exceptions, she knows the annual market growth has been 3% for many years.

sales projection MS Office

Accordingly, she was a bit surprised to see strong growth projections in the presentations from both A-Dot-Co and BetterBean. More diligence would be required.

Sally asked both companies to submit detailed materials in support of the projections they presented. She was particularly focused on the factors responsible for revenue growth. Since the market is large and established, Sally knew that growth for a new entrant must come from either expansion of the overall market or from switching behavior (customers switching from established providers to new providers). She was hopeful that the detailed support material for each revenue projection, would reflect management’s understanding of these market dynamics.

 

A-Dot-Co

A-Dot-Co

Sally received the following support detail from A-Dot-Co:

A-Dot-Co Revenue

She knew from prior experience that the total candy market was very large and she was glad to see the jelly bean sub-market in excess of $2 billion. There would be plenty of upside for A-Dot-Co. She was also glad to see that in year 5, the founder did not expect to exceed 1.0% of the market. Any larger share percentage would require major resources and additional funding rounds.

However, before investing, Sally still needed more information on the detail behind the market share projections. She scheduled a follow-up call.

On the call, A-Dot-Co was very enthusiastic. It went like this:

Sally: “Thank you for your revenue detail. I have some follow up questions. How do you expect to land nearly $2 million in revenue in the first 2 years?”

Founder: “A-Dot-Co is well positioned to achieve our revenue goals. We have a seasoned team who formed many candy company startups in the past.”

Sally: “That’s great. But how do you intend to land $600K of sales in year 1?”

Founder: “My team has deep knowledge about the jelly bean market. We only need a mere 0.03% of the market to land the projected $600K! Surely there are enough polka-dot jelly bean eaters out there to achieve this projection!”

A-Dot-Co’s founder fell into The Big Little Trap.

trap MS Office

 

The Trap

The Big Little Trap occurs when a founder believes his future projections are achievable because the market is so big and the market share percentage is so little. Specifically, that the sales goal will be very easy to accomplish because the market goal is such a small percentage, such as 0.03% with A-Dot-Co. (“It’s so small that anyone can reach it…as easy as falling off a log!”) In fact, the Trap victim might further say that the percentage is so tiny, that it may take only a few customers to reach it, and “…clearly the market has more than just a few customers!”

The response to an enthusiastic Trap victim: “I’m glad you’re excited. Name the customers!”

 

BetterBean

BetterBean

BetterBean submitted the following detail to Sally:

BetterBean Revenue

 

As before, Sally was glad to see confirmation of the jelly bean market. (They must have used the same market study). But she was even happier to see customer detail behind the revenue projection.

target market MS Office

The detail reveals several important items:

  1. BetterBean knows his target customers and may already have relationships established with them.
  2. Knowing BetterBean’s target customers should lead to a more efficient operation by helping the company prioritize the company’s limited time with its important customers over less strategic prospects.
  3. BetterBean has applied the 80/20 rule—at least 80% of the revenue is derived from specific, identified customers. The remaining revenue will come from other customers, currently unknown. Forecasting is an inexact science and to communicate over-precision in the detail implies the founder may be taking his projections too seriously. BetterBean has not been overly precise.
  4. When—not if—BetterBean misses its projections, the detail will provide insight as to why the projections were missed. The “why” is more important for fixing future revenue projections.
  5. BetterBean is more transparent than A-Dot-Co. Specifically, BetterBean’s founder has shared his target customer list, perhaps with the hope that Sally may have contacts to be leveraged at those customer accounts. Conversely, A-Dot-Co has shared no customer detail, suggesting that its founder may not know who his customers will be. This is concerning if true.

 

Decision Time

Sally rejected the opportunity with A-Dot-Co. It fell into The Big Little Trap—and didn’t even realize it. The lack of transparency did not generate confidence in the company’s management team.

Sally proceeded with further diligence on BetterBean.

The Big Little Trap grabs victims all the time. Like Sally, an investor should consider the market size, but only in the context of the startup’s upside potential. As she observed, there’s, “…plenty of upside for A-Dot-Co.” However, market share is not the justification of year-to-year or month-to-month revenue goals. Market share is best seen as a byproduct of sales efforts.

The jellybean example is fictitious, but the Trap is very real. Watch for The Big Little Trap at your next pitch session. See if the founder falls into it!

 

About the Author

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

Graphics from MS Office

 

This article appeared in NEWS FROM HEARTLAND

NEWS FROM HEARTLAND – The Journal of the Heartland Angels is published tri-annually for its members. We encourage reproduction and quotation of articles, if done with with attribution. Copyright © 2017 Heartland Angels. John Jonelis, Editor – John@HeartlandAngels.com

FOR MEMBERSHIP IN THE HEARTLAND ANGELS, contact Ron Kirschner Ron@HeartlandAngels.com

FOR FUNDING, apply online. Go to www.HeartlandAngels.com

NEWSLETTER SITE – View past and present editions at News.HeartlandAngels.com

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. Please perform your own due diligence. It’s not our fault if you lose money.
.Copyright © 2017 John Jonelis – All Rights Reserved
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THE TRUMP EFFECT

WHAT THE NEW ADMINISTRATION MIGHT MEAN FOR HEALTH CARE

By Erik Clausen

Several months have passed since the U.S. Presidential election, and…we’re still here, folks. After years of political rhetoric and theatrics, and a few months of uncertainty, we are starting to gain some clarity around exactly what the new administration and its policies might mean for the life science industry and, by extension, marketers within it.

Most importantly and as a wise man wrote before the election, “There is no need for panic.”

the scream EdvardMunch

Edvard Munch – The Scream

Now that the rhetoric has momentarily quieted, we need to balance Trump’s desire to make dramatic policy changes with the realities of the legislative process and with the expectations of a public that benefits from life science and healthcare innovation. Widespread policy changes take time to implement and often require strong Congressional support, even with a Republican-controlled House and Senate. The recent defeat of the health care bill is a case in point.

In other words, as we look at the major policy changes that are likely to affect life science marketing in the years ahead, we need to recognize that there will be time to adjust marketing strategies and tactics accordingly. This may even mean building multiple marketing plans to address different contingencies.

fear MS Office

 

Possible repatriation of US dollars

U.S. pharmaceutical companies have substantial funds tied up in accounts overseas due to punitive tax laws. The administration has proposed, as part of his economic stimulus plan, to dramatically reduce this tax rate and encourage those dollars to come back to the U.S.

In theory, by lowering the tax burden on these businesses, the economy will see an uptick as businesses are encouraged to invest. These companies benefitting from tax relief would in turn reinvest those dollars domestically in the form of new deals, R&D, acquisition and job creation.

Since pharmaceutical and instrumentation companies typically grow based on acquisition, we could see a resurgence in life science M&A and dramatic increases in the value of emerging biotech, diagnostic and tools companies. No doubt, these topics are top of mind at industry gatherings like the January 2017 J.P. Morgan Healthcare conference.

dollars MS Office

If this move does have the immediate and positive effect on the life science sector as promised, it would give corporate brand managers and marketers much to do to position their companies correctly to take full advantage of the M&A environment.

Of course, this assumes that the financial boon to corporations is reinvested or used for acquisition and not simply distributed to shareholders. Increased deal-flow will lead to increased budgets. This will undoubtedly bring increased noise in a busy economy. Therefore, we should focus on building long-term brand equity in an expanding GDP and economy.

 

Corporate tax rate reduction

The administration will also propose in the President’s Budget Bill, a much lower corporate tax rate. This plan would significantly reduce the cost of capital and reduce the marginal tax rate on labor.

By most analyses, these incentives could increase the U.S. economy’s size in the long run, boost wages, and result in more full-time equivalent jobs—including in the life science sector. The question remains, what the estimated reduction in federal revenue will mean for federal funding of medical and scientific research. Such grants often precipitate early discovery that soon become commercialized.

 

tax tax tax MS Office

The size of the proposed tax breaks for corporations are, simply put, Huge.” But if the administration can actually get it through Congress, it has the potential to give corporations exponential buying power, increase cash flow, build up inventory, and re-invest in technology. Dismissing any possibility of a bubble and or the rich simply getting richer, these tax breaks should create jobs and boost all sectors of the economy, including life science and healthcare.

 

Reforming the FDA

In his 100-day plan, Trump specifically cited, “…cutting the red tape at the FDA…” as among his highest priorities. In the plan, he stated that, “…there are over 4,000 drugs awaiting approval, and we especially want to speed the approval of life-saving medications.” We can only assume that such reforms would also have a direct effect on approval and clearances for new medical devices and diagnostic tests, as well.

An accelerated approval process at the FDA could potentially have a positive effect—at least in the short-term—on the life science sector. With therapeutic candidates and devices moving more rapidly through review than anticipated, biotech, pharmaceutical and device companies in mid to late stage clinical phases could see increased valuations of companies with early approvals.

fda MS Office

Additionally, this could encourage earlier stage companies to get more ambitious about moving candidates to the clinic and could make would-be acquirers more bullish.

In the long term, if that accelerated review brings products to market too quickly, it could threaten public health, cause another costly set of reforms, and damage the brands of those companies.

 

What does the new agenda mean for marketers?

While it will take some time to feel the effects on any proposed legislation or policy changes, the administration will tie everything back to growing the economy: no small challenge. A lot has to come together with or without a cooperative Congress. The President will have to build a consensus.

marketing MS Office

For now, as marketers we need to do what we’ve always done—assess market opportunities, pinpoint our target audiences, develop smart strategies to reach and influence their behavior, and measure outcomes. Certainly, researching the impact of policy decisions is part of that research, but acting too quickly on proposed policy changes only fuels uncertainty.

And, if there is one truth in the market, it doesn’t like uncertainty.

screaming robot MS Office

In the end, even if the President is able to pass a fraction of what he’s proposing, it should lead to economic prosperity and marketing opportunity in our industry.

Now, if we could just turn off his Twitter account, we might make social media great again, as well.

 

chempetitive group logo

About the Author

Erik Clausen is part of the Chempetitive Group, a Chicago based marketing initiative for pharmaceutical, chemical, biotechnology, diagnostics, and medical devices.

This article was previously posted online

Graphics: THE SCREAM courtesy www.EdvardMunch.org

All other graphics 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. Please perform your own due diligence. It’s not our fault if you lose money.
.Copyright © 2017 John Jonelis – All Rights Reserved
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CHICAGO—THE BEST INCUBATOR IN AMERICA?

by Denny O’Malley

Recently, Inc.com published an article about the best cities for early-stage companies. The premise: Chicago is the surprise winner.

Why would that be? San Francisco and New York are both beautiful, thriving cities that dramatically represent the diversity of American ideas. San Fran—younger, more venture-oriented, with beautiful natural vistas. New York—the classic, bustling private and public equity concrete jungle.

What do they have in common? It costs a kidney to pay rent for a closet. Continue reading

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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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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.

unicorn-from-ms-office

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.

chart-1

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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