Tag Archives: Risk

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.

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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.

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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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THE VENTURE CANOE

_JAJ2989TJohn Jonelis

Citizens often refer to their country as the ship of state. In like manner, investors picture big corporations as sleek cruise liners or enormous freighters. The thinking goes like this: The bigger the hull, the more seaworthy the ship and the more stable the ride. And that’s true—most of the time.

While embarking on a pleasure cruise, my guests feel cozy and safe until I sing something that feels appropriate to the occasion, like The Wreck of the Edmund Fitzgerald – yes, the classic by Gordon Lightfoot. I often belt that out when afloat with friends. It never fails to elicit loud whining, often accompanied by hands clasped to ears.

I like that song. For reasons I fail to understand, this particular ballad gets under people’s skin.

The legend lives on from the Chippewa on down

Of the big lake they called Gitche Gumee

The lake, it is said, never gives up her dead

When the skies of November turn gloomy

Seems a good mariner’s tune to me, but every time I sing it, I’m assailed by impassioned shouts of, “Stop it—stop it!” What’s wrong with these people? Can it be that folks don’t want to face the inherent risks of investment?

Maybe that question deserves an explanation:

Big Cruise Ship

The Luxury Liner

Those that can afford it, invest in a voyage on a luxury liner. These vessels usually give a pretty smooth ride—in protected waters. The destination is fixed and there’s a very good likelihood that you’ll get there. The cruise director plies everybody with food, booze, and showgirls to break the monotony. Passage on such a ship is like buying a TRIPLE A BOND. You pay a premium. You receive a teensy-weensy coupon. It’s nice and safe. And a lousy investment.

Cargo Ship

The Freighter

You may choose to invest fewer resources and board a freighter. Such ships usually accept 6 to 12 passengers in relative comfort.

With a load of iron ore twenty-six thousand tons more

Than the Edmund Fitzgerald weighed empty

That good ship and crew was a bone to be chewed

When the gales of November came early

Some of these hulks venture out to the deep with deplorable maintenance records. Picture an overloaded tub, rusting around the hatches and wallowing in high waves. In various waters, piracy enters the picture—something worthy of consideration. A trip on a freighter is like buying a JUNK BOND. Low price, outsized coupon, plenty of risk.

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The Canoe

A small startup venture feels more like my 15 ft. canoe. It can bring you to incredibly beautiful wilderness locations inaccessible to the big tubs. A canoe is simple and elegant. No promenade deck. No staterooms. No galley. Limited cargo hold. An excursion in a canoe is like making a small PRIVATE EQUITY DEAL. You set out and there’s no telling where you’ll end up. I like the canoe.

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High Tech

Big Ships these days are equipped with high-tech wizardry for navigation, communication, even water purification.

My canoe carries its share of technology, too. I’m talking a hull made from modern composite materials, a powerful little electric trolling motor, a depth finder, an ice chest. And my smartphone, which provides GPS navigation, weather reports, and emergency communication!

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Efficient

It seems to me that those big ships use an awful lot of fuel. Such monstrosities require large, well-trained crews to operate safely too. That’s overhead. That costs money. I don’t like that kind of risk.

I can handle my canoe all by myself, or with a couple friends who bring no prior experience aboard. I’ll motor around all day without depleting my battery. I re-charge it for pennies. That’s efficiency! Like lean manufacturing or just in time delivery! And it’s green!

The dawn came late and the breakfast had to wait

When the gales of November came slashin’

When afternoon came it was freezin’ rain

In the face of a hurricane west wind

I go out in November, too. Along with my fishing gear, I carry a cozy Gore Tex parka, and an insulated hoodie. No problem. I laugh at the weather! Laugh I say!

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Nimble

Another thing—these big ships are very, very hard to stop or turn. They sometimes run aground with disastrous results.

I prefer my canoe. Like a startup venture, it pivots quickly. I can run it up on shore—no harm done—and explore an island, then launch it back in the water.

The captain wired in he had water comin’ in

And the good ship and crew was in peril

And later that night when his lights went outta sight

Came the wreck of the Edmund Fitzgerald

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Risk

Small stocks always fluctuate, but bonds can sometimes default. DEFAULT IS DEATH. I’ve had only one near-death experience in my canoe. It happened this November and yes, the water was plenty cold.

Did I mention that I fish out of my canoe? With a 10-weight fly rod, I cast 12 inch weighted streamers for Northern Pike and Musky. And I bait-cast huge bucktails and other hardware in the teeth of the November chill.

People make slurs about the faithful canoe. They claim that it’s too tippy. Rot, I say! Phooey! One day last week at about 4 pm, with my knees cramping from a day of hard fishing, I stand up to cast. No problem. I routinely stand in my canoe to cast for pike. It’s just a matter of balance.

Without warning, I’m two fathoms underwater. I remain strangely calm. Stunned may be a more accurate word because this has never happened to me before. Naturally I take the opportunity to scan around. I note a peculiar absence of fish. Then I become aware that my high tech automated inflatable life preserver has not self-deployed as advertized. In my perplexed state of mind, it doesn’t occur to me to pull the ripcord.

In due time the CO2 cartridge releases and I bob to the surface. In retrospect, the process actually takes only a few seconds. I know because I never gasp for air. Time always seems to stand still during such incidents.

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Recovery

I see my canoe, floating high, upright, and noble. I attempt to swim toward her. It is amazing how difficult it is to make headway in the water fully clothed and shod while tightly grasping an expensive 7-1/2 ft. musky rod between greedy fingers. But no matter. I finally reach the boat.

The searches all say they’d have made Whitefish Bay

If they’d put fifteen more miles behind her

With a canoe, it’s easy to grasp the gunwale, reach for the trolling motor, point the bow at an island and with my body making wake, head for shore. Once in the shallows, it isn’t difficult to re-board the craft. I slip my smartphone out of its high tech ziplock bag and find it operating perfectly. I do not make an emergency call. No sir! This is no emergency! It’s an inconvenience! A big ship would make the news. A canoe is more manageable. I simply retrieve my beloved fishing hat and motor back to the launch site, hoping nobody saw what just happened.

I feel that a dunking is a small price to pay for such a fine day on the water, and I’m soon warm by the fire, reading a good book, with the mariner’s song playing in the back of my head.

Superior, they said, never gives up her dead

When the gales of November come early

The sinking of a ship is a huge tragedy. But why do people fear canoe-sized business ventures? My canoe has yet to default!

Graphics by 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. It’s not our fault if you lose money.

.Copyright © 2015 John Jonelis – All Rights Reserved

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DON’T ASK WHY—ASK WHY NOT

Question Markby Howard Tullman

How the First Apprentice Winner Became an Entrepreneur

(No, The Donald Didn’t Help):

Bill Rancic readily admits he wasn’t the smartest guy on the show. But in his subsequent career, he has become very smart about getting the most out of the people around him.

Bill Rancic by Greg Rothstein

At 1871, we had the opportunity to host Bill Rancic for a keynote speech about what he’s learned from several important mentors. Bill was the first winner on Donald Trump’s The Apprentice television program, but didn’t mention The Donald, which isn’t really that much of a surprise. He talked about how he started and built several entrepreneurial ventures, and about a very important lesson that he took away from his triumph on the TV show in 2004.

I thought that his explanation for how he won the Apprentice competition was highly enlightening.

  • He didn’t say he worked the hardest.
  • He didn’t say he wanted it the most.
  • And he certainly didn’t say he was the smartest guy in the room.

Be the Conductor

Bill’s winning edge was something that we talk about every day at 1871: Nobody does anything important and worthwhile all alone. If you have a dream, you need a team—that is, if you want to make the dream come true.

Bill said he tried to be “the conductor” just like the main man at the symphony. He brought everyone together so they could make beautiful music. He knew—just like in an orchestra—that he didn’t personally have the special skills or the same abilities that each of the other members of his team possessed. But he got them all moving in the right direction.  He brought out the best efforts that each team member had to contribute.

The most amazing things get done when no one cares who gets the credit. Harmony trumps hubris. And Bill never spent his time blaming others when things went wrong. That would have been a waste of breath and energy.  When facing confrontations and tough sledding, he kept in mind what Robert Schuller said: “Tough times never last, but tough people do!”

Learn from Others

Bill was fortunate to have some great people to learn from, whose examples he follows to this day. And he knew not to do things on his own until he really knew what he was doing. He needed to play a role for a while before he tried to roll his own—even though one of his first ventures was in the mail order cigar business. Today, he’s also a restaurateur. (See Entrepreneurship: Will You Sink or Swim?).

Bill had a very clear idea of where he wanted to end up and even how he thought he’d get there. But he knew these things were going to take time. The smartest thing he could do was to concentrate on learning something from someone every day on the journey.  It’s important to have a mental roadmap, but patience is also essential.  (See Why You Need a Reverse Roadmap).

Make a Start

One of his father’s rules was “practical execution.” All talk is simply that—results and actions are the things that make a difference. His Dad used to say, “Show me, don’t tell me” or as I like to say, “You can’t win a race with your mouth.”

There’s no simple playbook or set of rules for how you invent the future – you’ve got to get the ball rolling, keep your eyes on the goal, and be agile and flexible all the time. But it won’t ever happen if you don’t get started.

Embrace Risk

Bill said, “When we’re born, we’re only afraid of two things – falling and loud noises. From then forward we learn to be afraid of other things and too often allow those fears to keep us from stepping out and taking the kinds of risks that are essential to succeed.” He quoted Emerson as saying you needed to do what you are afraid of—and if you do—success will find you.  The key is not to avoid every possible risk, but to recognize and manage reasonable risks so you can convert them into opportunities and rewards. The ship that stays in port is the safest, but it doesn’t get anywhere.

Don’t Ask Why

Finally, there is the business with the bumblebees. For years scientists figured bees were never supposed to be able to fly. The ratio of their wing size to body weight was all wrong. The laws of physics decreed that the bees couldn’t generate enough power to lift themselves into the air.  Like so many entrepreneurs who do every day what others think is impossible, no one ever told the bees they couldn’t fly. But off they went.

Today, no one says that the bees are defying physics or nature. They are defying convention. We’ve finally figured out that just because the bees don’t fly the same way that fixed-wing airplanes do doesn’t mean gravity doesn’t apply to them. The fact is that bees—just like entrepreneurs—have figured out a different way to solve the problem. They fly by rapidly rotating their flexible wings; that’s how they get lift.

Every day entrepreneurs are doing the same thing. We look at the same problems that millions of others have observed from new and different perspectives and come up with novel solutions that are often obvious in retrospect. This is because we don’t ask why; we ask, why not?

Tullman2_Full-bkt_16396_16396_16396Howard Tullman is a the father of 1871. For more from Howard, go to

http://tullman.blogspot.com

www.1871.com/

Read his bio: http://tullman.com/resume.asp

Images: Greg Rothstein, Cloudspotter/1871,

Howard Tullman, MS Office

This article is adapted from Inc Magazine

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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 © 2015 John Jonelis – All Rights Reserved

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MEASURING THE FUTURE

Figure 1The Angel Edge – John Jonelis

From the Journal of the Heartland Angels

 Yes you can – you CAN measure the future!

Drawdown

According to the Kauffman Foundation, Angel Investors—on average—enjoy a capital gain on three out of ten deals.  Out of those—on average—one is a huge blockbuster winner, three—on average—do marginally better than break-even, and the other six—on average—are complete losers.  The winner is so huge that, according to Kauffman, Angels do very well indeed—that is, on average.

You may ask, “Hey Jonelis, why all the harping on the word average?”  Because average is a fantasy.  It doesn’t exist for you.  It doesn’t exist for me.  It’s a composite of the whole crowd.

We’re all familiar with the equity line, which gives an overview of our investment returns over time.  We all want ours to look positive and smooth—something like the cartoon at the opening of this article.  I do.  This is hope.

In reality, we all experience drawdowns to our accounts.  We hope the trajectory is positive, governed by careful decision-making, and wise management and that could be true in some cases.  But the smoothing of the line comes from diversification.  You cannot achieve it with a handful of private equity deals.  And one healthy drawdown can put you out of business.  Permanently.  Your account can blow up.

Risk lies in nasty places where most investors never stick their heads.  A lone-wolf angel investor that places large chunks of grandma’s pension fund in just a few companies is likely to meet with disaster.  It’s like betting on a few rolls of the dice.  To make it worse, you plunk down your money, then wait and hope a long, long time.  A lot of bad stuff can happen.

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Measuring What’s Possible

But we can make use of a simple technique to forecast the future.  It’s relatively obscure but don’t let that throw you.  This is a really simple way to estimate the range of possible outcomes.  It’s called a Monte Carlo simulation.  You feed-in a series of winners and losers and let the computer string them together with replacement many, many times.  Say 100,000 times.  It might look like the chart below:

Figure 2

So what is that mess?  I mean, this is a whole lot more information than the cartoon at the beginning of this story.  But in reality, it’s nothing more or less than 100,000 hypothetical future equity lines.  Your portfolio may lie along any one of them.  Some of these outcomes are wildly positive, but some of them go negative a long time and you go broke.  Notice that more of the lines cluster in a central core.  It’s more likely that you’ll wind up somewhere in that group.  But no guarantees—and even some of those are lousy outcomes.

What you’re looking at is a graphical representation of Risk.  I think about this problem a lot.  It’s entirely possible that I’ll see a frighteningly long string of losses.  Maybe I’ll never see a single gain.  Maybe my children will get rich.  Or I could see five big winners in a row this year!  The probabilities are all over the map.  So that brings us to the question I’ve asked before: Are Angels fools?  Maybe, but I hope not.  Let’s talk about getting the situation under control.

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Controlling Risk

The game is to get that scatter plot narrowed-down and headed in the right direction.  Nobody but a lunatic wants possible outcomes as wild as that last chart.

The big banks and hedge funds are doing this for their stock, futures, and currency portfolios—(and yes, my charts are taken from that world).  A robust strategy in those markets can be right 60 to 70 percent of the time.  Of course, to be right that often slices returns thinner and thinner till the strategy finally stops paying off.  But the advantage to being right so much of the time is very small drawdowns.  Small drawdowns mean less chance of going broke.  Look at this chart:

Figure 3

That’s more like it.  Who wouldn’t be all-in with that set of possible outcomes?   I admit it’s wildly exaggerated, but hey—it makes a point.  You don’t need a PhD in Statistics to see that the strategy in this chart is a whole lot better than the previous chart.  Just compare them!  Which one do you like?  That’s how to use this technique!

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Making the Magic Work

For a simple but more detailed explanation, see my white paper, ALTERNATE HISTORIES [click here]    “But,” you rightly object,  “That paper deals with short-term trading.  How do you apply that to Angel Investing, which is anything but short term?”  Well, I think we can answer that one.  Let me suggest an experiment:

Using Kauffman’s averages, make up a few sets of imaginary investment outcomes—sets of ten.  Each set will have one huge winner, three mediocre to break-even results, and six complete losers.   For units, use dollar gain or loss in a range that fits your investment horizons.  Shove those numbers into a Monte Carlo software package.

Here’s the drill:  Run this several times, each time with a larger quantity of sets.  You want to find out how much deal flow results in a range of outcomes you can live with.  That gives you an estimate of your risk.  Like I said, it’s simple.

By the way, don’t invest in an expensive, complicated Monte Carlo package.  Get a simple one, like the free Equity Monaco package offered by TickQuest.   [Find it here]    ■

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Read it in NEWS FROM HEARTLAND [click here]

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Heartland Logo 2NEWS FROM HEARTLAND – The Journal of the Heartland Angels, is published quarterly as an information service to its members. Articles may be reproduced in full with attribution for educational purposes. Copyright © 2014 Heartland Angels – John Jonelis, Editor – John@HeartlandAngels.com

CAVEAT EMPTOR – These articles are for educational purposes and not investment advice. Investment involves substantial risk. Please perform your own due diligence.  Contact Ron Kirschner – Ron@HeartlandAngels.com

FOR MORE INFORMATION – www.HeartlandAngels.com

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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 © 2014 John Jonelis – All Rights Reserved

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WHAT MAKES IT GOOD

Techweek Part 4 –

Two Points T

by storied business consultant, Joe Perogi,

as told to John Jonelis –

Been hearin’ complaints ‘n’ controversy about Techweek this year. People gripe so you figure there’s gotta be a good reason, right? Yeah, I hear you. Yer sayin’, where there’s smoke there’s fire. But all them critics completely miss THE HIDDEN ROOM that you and me stumple upon—the hidden room that makes this thing truly amazing. Now the dust is settled, lemme take you on a tour o’ what I seen.

First, permit me t’ introduce myself. Name’s J. P. Pierogiczikowski, but you can call me Joe Perogi. Everybody else does. They say I have way too much fun. Maybe they’re right. Confidentially, there’s alotta money in it, too.

Da Speakers

We meet at the office in the backroom o’ Ludditis Shots & Beer.

Ludditis Shots and Beer 3

It’s just a good stretch o’ the legs from here to the Chicago Merchandise Mart and we get there in fifteen minutes easy. This event takes up a whole floor and gets a special elevator.

On this tour, you and me start in a room packed with chairs and people eager to hear Sal Khan of Khan Academy—one o’ da featured speakers. I wanna hear this guy. His company solves problems in education. Uses technology to help the kids learn ‘n’ helps the teachers make better use o’ their time. That’s huge. I’m figure this is gonna be good.

Khan Academy’s gonna partner with big business—a move that’ll give ‘em a longer reach. None of us know about that at the time—all we wanna do is hear the guy talk.

Look at that outrageously pretty lady on stage. Now she’s tellin’ us how great the speaker is. Now she points out the big screen. Hey, Sal Khan ain’t even here. You’re here. I’m here. We paid to be here. All these other people are here, too. But no Sal. He’s on Skype. So I’m a little bit offended, but whaddaya gonna do? They call it Techweek, so I figure we’ll give it our best shot.

All the computers crash at Sal’s office out in California or wherever he really is. But Sal’s no quitter. He carries on—with his smartphone. Ever notice how people believe them smartphones can do anything? Maybe it’s ‘cause they call ‘em smart when they’re really just pocket-size computers waitin’ to go wrong.

THE MERCHANDISE MARTWe look at the big screen and see this faded picture of Sal Kahn. You can tell he’s holdin’ the phone too close to his face. That’s why he looks kinda distorted. And he’s got a lousy connection—maybe one bar, tops. Truth be told, none of us can get our phones working here in the Chicago Merchandise Mart. Too much concrete. But apparently the organizers think smart phones is a smart move. So we sit through snips and swipes o’ Sal’s voice, cutting in and out. Nobody knows what the hell he’s saying. It creates a feeling of suspense, doncha think? I mean, the way that distorted face skips and jerks across the faded auditorium screen.

Why don’t anybody get up and walk out? Easy. It’s that gorgeous gal on stage—she’s really somethin’. Class. Intelligent-looking. Businesslike. She apologizes. Now she’s promising they’s gonna fix the problem. Now she’s watching that big screen with such intense interest—like she can understand what he’s sayin’ and she’s hangin’ on every word. She creates in us what they call a sense of suspended belief. (I read that somewhere.) And it keeps everybody in their seats.

Sal keeps cutting in and out till his battery dies and that means, lecture over. It teaches me a lesson: It’s usually more about marketing than technology. But you don’t know that till the technology breaks down.

Did I mention that the Blackhawk’s rally is going on downtown today?Blackhawk logo You don’t wanna go? Hey—they won the Stanley Cup. It’s a big deal. Okay then, let’s crash a few more presentations.

So we take in summore lectures. Seems like every speaker talks in some important-sounding corporate lingo. It’s all meaningful stuff, right? Maybe it’s what they call high-elf—I dunno. I’m wishin’ I can be with the Blackhawk fans. So you and me ditch the lectures and hit the booths.

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Da Booths

There’s rows ‘n’ rows o’ these little islands o’ commerce packed side-by-side, with all sortsa people plugging up the floor and it all seems to go on forever. Pretty soon I get turned around and confused and everything’s a blur. Don’t it hit you that way, too? This place is so big, a guy can get lost in here real fast.

Look around. Everywhere it’s corporations hawking their wares. (There’s that word Hawk again.) Notice how most people just mill past the booths. Except fer that one—the one serving free booze. We stop there for a while. Pretty good, huh?

FREE BOOZE

So I learn a second lesson, but it don’t hit me till later: Big corporations waste lots of money. But they help an event pay the bills.

Then, just when I’m about to give up and say goodbye, we find the hidden room.

startup city logo

Da Hidden Room

See that wall with the huge Startup City logo painted on it? Looks like a dead end, don’t it? We walk up and take a closer look at the artwork. There’s a small door on our right. We go through there and WHAM! It’s a whole ‘nother room packed with booths ‘n’ people ‘n’ lotsa noise. These is all startup companies. Seventy of ‘em. Ambitious entrepreneurs, brilliant inventors and gutsy financiers ready to take a risk on a new idea. This is where the action is. So let’s do the rounds. Hey, I know summa these people! I like this place!

And whaddaya know—they got a competition goin’. The judges go from booth to booth and try to pick out the five best startups. Which o’ these folks is the judges? I can’t tell. It’s kinda like a benched dog show.

Now we find out the winners are gonna get announced at a special event with the mayor. Our tickets ain’t good enough to get in—those tickets musta cost thousands! No problemo. We crash it.

We’re in and now the mayor’s up there giving a speech:

“…I think the city of Chicago will become the mecca of the Midwest in startup cities,” he says. IMG_9067“The city of Chicago is building the digital economy as the fifth pillar…” I gotta ask you: Where’d he get all that mecca and fifth pillar stuff? I mean I like the guy but them terms don’t feel right coming outa him. Maybe if he wore a keffiyeh or a turban er somethin’. Naw, that ain’t never gonna happen.

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Da Shortlist

Then they announce the winners. But I’m an investor and I got my own short list. Lemme tell you about ‘em:

cervia diagnostic logoCervia Diagnostic Innovations is gonna wipe out cervical cancer by replacing the age-old pap smear with a better test. They got all the research and their team’s fulla PhDs and Nobel Prize winners.

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PaletteApp logoPaletteApp is bringing architects and interior designers outa da closets and into the digital world and saving companies a whole lot of money.

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youtopia logoYoutopia is gettin’ high school kids emotionally involved in those service projects they gotta do and documenting the results fer the colleges they wanna get into. You got a high school kid? Then you know that’s something worthwhile.

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faspark logoFaspark is helpin’ us all find street parking for our jalopies. It’s based on data analytics and probability of success and reduces time cruising the streets by 70%. Shows up as a map on your phone. They’re setting up in Chicago and Munich at the same time.

UPDATE – Faspark now gives you parking garage information in addition to the street parking.  Check out this article in Crain’s Chicago Business.  

None o’ them great companies made the finals ‘n’ that makes me scratch my head. And now they announce the winner:

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Da Official Finalists

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wedeliver logoWeDeliverFirst Place. I gotta say, this one’s on my short list now I get to know ‘em, and there’s an article about them in this magazine. But this is my first look at ‘em. You ever see these guys before? Great business model. Terrific CEO. Tech enabled same-day local delivery for brick and mortar businesses. These guys is gonna level the playing field with Amazon and create a buncha jobs right here in Chicago—and that’s just fer starters.

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Crowdfynd LogoCrowdFynd is a lost-n-found service that uses crowdsourcing to find yer stuff.

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Furywing LogoFurywing is is a gambling play. I don’t like online gambling, but it ain’t my place to judge.

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24Fundraiser logo24Fundraiser is a one-stop solution fer online auctions.

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neststepio logoNextStep.io helps you get yer daily workout by usin’ yer daily routine. I like that idea a lot. Gotta find out more about this one.

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trinet logoThe whole Startup City production is sponsored by TriNet. I talked to them folks at length and came away impressed.

Then I get a big surprise on the way home:

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Da Hawks

I ride the water taxi to the train and it turns out I don’t miss the Blackhawks celebration after all. The train’s loaded with drunken smiling people singin’ songs, makin’ a whole lotta noise, and generally havin’ a great time. Now it’s my turn, so I belt out The Wreck of the Edmund Fitzgerald.

IMG_9086-001

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Back to Part 3 – BNC TUESDAY NIGHT SMACKDOWN

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Photos courtesy Techweek, The Chicago Blackhawks, John Jonelis.  Logos courtesy companies.

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 © 2013 John Jonelis – All Rights Reserved

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WORTHY OF AWARDS

The Chicago Innovation Awards – Part 3

John Jonelis

Time Share Gulfstream JetI’ve jumped aboard a Gulfstream G450 to interview the legendary Loren Bukkett. I want his take on the Chicago Innovation Awards. He finally puts away his phone and turns to me. “Okay, let’s talk,” he says.

I take that to mean he’s already finalized all the deals that peaked his interest. Nice to have a large staff to handle the details. But here in the jet cabin, it’s just Loren, his wife Aussy, and me.

Aussy is doing some form of shorthand on a tablet computer. That woman hasn’t spoken since I climbed in the plane. Maybe Loren asked his wife to keep it buttoned. Maybe he wants to control what information gets out. At this point, I’m afraid to ask her a direct question. I even wonder if this is their secret strategy to keep outsiders off balance. If so, it’s working.

They give out so many honors at the Chicago Innovation Awards tonight that I can’t keep it all straight. So much glitz and pizzazz. Jumbo screen. Music. Entertainment. Applause. Streaming internet content. I appreciate the way they present a standardized set of videos to highlight the mission of each winner. A professional job and it moves things along nicely. With sponsors like Disney, Comcast, and Wrigley, they can afford to do it right.

Chicago Innovation Awards

Chicago Innovation Awards – jaj

I pull out my notes. “Let’s do the ‘Up-and-Comer’ category first.” I proceed to read off the list but Loren waves me to a halt.

“We’ll do it my way,” he says. And he goes on to tell me about every company that won an award at that event. He does it in depth. No notes. No prompts. At his age, that kind of memory astounds me.

“Now John, keep in mind that for twelve years, every company with an award from this group is a success. And there are a lot of them. That’s impressive and gives an old investor like me a feeling of confidence. Of course my people check out these companies in depth, but you can’t help but come away with some degree of certainty—a belief deep down that every one of them will find a way to make it.”

“You said they’ll break that perfect record this year.”

“That’s the awards to those two politicos, not the companies. No as I see it, what we have here is a large pool of opportunity. I already set some wheels in motion. Don’t ask me which ones.” He clasps his hands behind his neck and leans back. “When you get to be my age, you either turn into a curmudgeon or you win back some of that idealism you enjoyed as a youth. These days, a big part of my strategy includes companies that are doing-well-by-doing-good. I saw a few tonight. One of them is BriteSeed.

I nod. “I saw them pitch earlier in the year—at BNC I think. They made a big impression on me.” I splash three fingers of his excellent Hennessy into each of our snifters. Maybe the combination of spirits and altitude will keep him loose.

“It’s a hot sector,” he says. “Their SafeSnipstm technology could be life-saving. Imagine it on a large scale. No more surgical accidents. Billions of dollars saved.” He leans toward me and lowers his voice. “Keep your eye on Northwestern Global Health and their rapid HIV diagnosis. And Recall-Connect built an automated system to match defective medical implants with patients. No more wading through reams of paper files. Medline came out with an anti-viral face mask. Preventing disease is real attractive to me, but this one’s a family company, so…”

“No need for investors?”

“We’ll wait and see. My only concern with Feeding America is scalability. But they won the Social Innovator Award so people need to take that group seriously—very seriously. Any way we can fight hunger, we oughta do it.” He gingerly takes a tiny sip of his cognac as if he’s already had enough to drink. “I’m interested in the People’s Choice Awards winner,” he says. A little company, New Futura, wants to help Latinos achieve the American dream. Naturally I’m attracted to those kinda offerings. Then there’s Moneythink helping high school kids with their careers. That’s about it for the do-gooders.”

“What about Belly?”

He pauses a moment, pats his stomach, then grins. “That’s another hot sector. That company is off and running in 10 markets with half a million customers already. I’m sure they’ll do well. But I’m not in the mobile app or social media space.”

“Doesn’t that limit your exposure to startups?”

“That it does, John. That it does.” He takes another tiny sip of cognac. “Anymore,” he says, in his Midwestern idiom, “Anymore there’s so much money chasing mobile. So many new startups and only a few will pay off. The good ones get bid-up. Way too high for my liking. New York, Boston—all those great centers for venture capital are in love with mobile and social media. Maybe it’s good for Silicon Valley but it doesn’t fit my strategy. That’s why I come to Chicago. Of course I make exceptions.”

“Do you see a bubble?”

“Well, you always need to keep that in mind. For me it’s more a problem of value.”

Anybody that follows Loren Bukkett knows that deep value is his favorite strategy. Then he shifts gears. “Do you know anything about NuMat Technologies?

That catches me off-guard and I fumble over my words. “Some. I saw them present at another Chicago event–can’t recall where. Seemed like a winner to me but with so many great offerings, the judges at that event looked elsewhere. Do you think the technology is practical? Can they actually store and transport natural gas in bulk the way they suggest?”

“Keep your eye on them,” he says. And suddenly I wish my investment portfolio could stretch that far.

“And Coyote helps trucking avoid dead runs by sharing between companies. That’s the same thinking that put you and me on this beautiful jet. I like that business model.”

He takes more from his snifter and my hopes of getting him to comment on the awards to the governor and mayor are one step closer to reality. “1871,” he says. “That is without a doubt the most significant incubator I’ve come across. They made up their minds to do it right. 50,000 square feet with an option to double. Three universities keep offices there. Venture capitalists too. A successful startup from Northwestern keeps two big rooms to teach folks to code in new languages. Lots and lots of aspiring companies—and you gotta pass their standards to get in! This is one of the new hybrids—part incubator, part accelerator. Most of their companies are outside my investment horizons but every one of them is highly interesting. It must be a great resource for you.”

“Sure, I’ve been there a number of times. They run a lot of events and always invite the community. If they expand, I may take an office there. What’s your opinion on Options City?”

Loren lifts his feet back to the tabletop. “That one hopes to cure a sore point of mine. They want to help the little guy fight back against high frequency trading syndicates. We’re talking trading in-and-out in nanoseconds. Nowadays these guys own 70% or more of the volume on most of the exchanges. And naturally, the exchanges reciprocate by giving them the same privileges as market makers. But they don’t carry any responsibility like market makers. Or risk. They don’t make orderly markets. No, they hit and run. They’re speculators. Why should they get the first look at all the trades?  It’s all driven by greed on the part of the exchanges. I think it should be illegal.”

I’m leaning forward and nodding vigorously. “It’s the High Freaks that changed my approach to trading. I had to slow my timing way down and widen my stops—take on more risk.”

“Well alotta people are going broke because of it. These operations spend upwards of $100,000 a month for the fastest hookup and shortest wire to the exchanges and then run everything by computer algorithm. This new company wants to level the playing field.”

“Can they do it?”

“The jury is still out.”

Loren talks another twenty minutes to cover it all. Food Genius, mentormob, and mobcart, all leverage the Internet to aggregate information and communication. Cummins Allison of all people is selling a document scanner for banks. Borealis makes a light that takes 90% less energy and lasts 30 years.

That leaves Bright Tag, Catamaran, Littelfuse, and SMS Assist.  An impressive event in execution, scope, and promise.  It amazes me that so many fine businesses are right here in Chicago.  All they need to succeed is a boost in the economy. 

We clink glasses. “So Loren, I still want to talk in-depth about the awards to the governor and mayor.”

He flashes me a dirty look.

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Continue to Part 4

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Copyright © 2012 John Jonelis – All Rights Reserved

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Filed under 1871, BNC Venture Capital, Characters, Chicago Innovation Awards, Chicago Venture Magazine, Chicago Ventures, Conflict, Entrepreneur, Entrepreneurship, Entrepreneurship and Politics, Events, Innovation, Innovation and Culture, Internet, Internet Marketing, Invention, Kellogg, Marketing, MIT Enterprise Forum, MITEF, Mobile App, Mobile Marketing, MobiM, Northwestern, Software, University of Chicago

THE FEAR OF RISK

The Story of Ray Markman-Part 10

by John Jonelis

Ray MarkmanFriday, 4:20 pm

My office door swings open and in walks Loop Lonagan holding a bottle of scotch by the neck. “Hadda settle for da cheap stuff,” he says.  “Where’s Alex?”

“Sent him to the club to warm up.” I pull two drinking glasses out of my beat-up old WWII Air Force desk.

Lonagan pours a jigger or two into our tumblers, leans back and inhales the aroma of the scotch. He grins. “Warmin’ up won’t do ‘im no good.”

“That scotch won’t do you any good, either.” From his sloppy speech, it’s clear to me that Loop’s has too much alcohol in his belly already.

“Shuttup ‘n’ drink it. I know what I’m doin’.”  He downs his and pours another, then pulls out his notes.  “Lemme give ya what I got left on Ray Markman. Where d’ya want I should start?”

“Tell me why he leaves Britannica.”

The Fear of Risk

Lonagan flips a page of his notes. “Okay, by dis time, Ray’s da executive veep at Britannica. If he sticks another 8 months, he’s gonna be president.  Deeze guys is payin’ ‘im hundreds o’ thousands o’ dollars and givin’ ‘im every perk a guy can get.  First class travel ‘round da world, unlimited expense account, cars, clubs, seasons tickets to da Bears, da Bulls, da works.”

It sounds like a good life to me. “So why doesn’t he stay with the company?”

Risk - The Game

RISK – A Parker Brothers Game ™

Lonagan thumps his notes. “He wants to get da company into video—dat’s da up-and-coming tech play at da time. Dey already got every subject in the world between da covers o’ Britannica—a wunnerful resource—and dey got a name dat holds incredible prestige.  Nobody can compete with ‘em.  So Ray pitches video and alotta udder good ideas fer products not even on da market yet.”

He scoots his chair closer and leans forward on my desk. “Ray really studies da video business. So far, it’s just mom and pop stores.  But he knows it ain’t gonna end there.  It ends with da big guys musclin’ out da little guys.  Dat’s how it always ends and dat’s what’ll happen here.  Britannica’s da big guy.”

Board Room - Mary Poppins

BOARD ROOM – From MARY POPPINS – A Walt Disney – Buena Vista Production

“Is all this reliable, Loop? Can you back it up?”

“Naw, it’s second, third hand. But it sounds like Ray t’ me.  Wanna hear it?”

“Sure, go ahead.”

He clears his throat and reads Ray’s words from his notes: Some of these guys are interested in just one thing—retiring. That’s all they care about—that’s all they ever talk about.  Who wants to retire?  I don’t want to retire.  I said, ‘Why do you want to retire?’

I tell them, ‘The risk of DOING is less than the risk of STAYING PAT. I can’t convince them.  They have all this money.  They’re buying bonds, not stocks.  They’re looking in the rear-view mirror.  They can’t visualize.  I quit and start my own video company.’

Lonagan looks me in the eye. “You see ‘is problem? Deeze guys is worried about risk.  They’s at dat time in life when it’s too late to recover from a big loss.  We all reach dat point if we don’t get hit by a truck er somethin’.  Ray just sees it different is all.”

I lean back in my chair and close my eyes. That’s thirty years ago and Ray still doesn’t want to retire today.  I find these words wonderfully revealing.  It seems a shame that so few of us relish our work the way Ray does.  People actively seek to escape it.  He finds joy in it.  This is a man at home with his business environment.

On the Loose

Lonagan clears his throat and breaks me from my reverie. “So Ray’s on da loose with ‘is partners and whadaya think? Britannica comes back to ‘im and wants ‘im to do their video business.  Dey had ‘im on da inside.  Dey turned down da idea.  Now dey hire ‘im as a consultant.  ‘Course, he charges a huge fee.  And they pay it! 

 “So he gets into da video business, doin’ real good right from da get-go. 

 “He calls his company Heritage Home Video and does lotsa udder projects.  All sorts o’ how-to videos.  Then he gets ahold o’ dis Jane Fonda video ‘n’ makes it by far da #1 seller at da time.  You remember that one.” 

Jane Fonda Exercise Video

Jane Fonda Exercise Video

I grin to myself, recalling Jane Fonda on the cover of that tape.  They even advertised it on television.

“Back then, ever’body rented video. But Ray ain’t rentin’ any o’ da Jane Fonda stuff.  He figures, it don’t do no good to rent it ‘n’ watch it one time.  It’s an exercise video.  You gotta watch it over and over.  So people is payin’ 59 bucks for dis thing.  Then there’s videos on how to play baseball, golf, basketball, a lotsa others.  So Ray and his partners get all dis video business that coulda belonged to the big company.” 

Lonagan’s slams his fist on the desk. “Y’know how I see it?  Britannica rules da Internet today if dey keep up with technology.  But dey throw it all away just like Sears and Monkey Wards throw away their catalogues dat ever’body relied on fer years ‘n’ years.  And doze guys coulda ruled online retail the way Amazon does now. 

I nod. So Ray saw it that far back.

 “Remember dis, John—Fear o’ risk strangles yer vision every time.”

 

Continue to Part 11

 

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Copyright © 2012 John Jonelis – All Rights Reserved

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