Tag Archives: Small business

STARTUP OF THE YEAR

by John Jonelis

Here’s a Chicago Area startup that brings pleasure, relaxation, and satisfaction to tired business people, gets them out in the open air, away from the pressures of the big city, and teaches them to smile again. Does that sound like a worthy goal?

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I think so.

Now imagine you’re in waters bounded by trees of all kinds—not a house or building in site! No water skiers. No high-powered outboard motors. Not a boat of any kind!

Well, can you imagine that?

Ah!

You see the flight of the blue heron, the bald eagle, ducks and geese. A couple of otters. Nobody in your boat sets eyes on another human being all day long! Sound good so far?

Ah!

This is nature in the raw. You’re drifting a wild river—in strong current—strewn with huge boulders. As you make your way downstream, you shoot several rugged rapids. But due to the skill of your guide and his specialized boat, the ice in your martini glass is never disturbed. You feel at ease the entire day.

Ah!

You bring along a hat, polarized sun glasses, a rain jacket, but no fishing gear. Your guide hands you an expensive Orvis 8-weight fly rod. It feels surprisingly natural and light in your hand.

Maybe you never cast a fly rod before, but your guide gives you a few pointers and moves the boat a little closer to the target—just to make it simpler for you. Now you’re casting hand-made six-inch streamers at the banks with ease. Soon you find out why the fly rod is favored on the river. It’s the most efficient tool for the job.

And fly-casting is therapeutic and highly relaxing.

Ah!

Soon you thrill to strikes from trophy smallmouth bass that fight like a tigers. The fish here grow fat as footballs. Landing one in the heavy current on a fly rod takes all your skill and strength. I can think of nothing else that gives this kind of peace and satisfaction.

Ah!

Ah!

Wahoo!

Hooray!

Yes, we all dream of exotic trips to faraway places. But this one requires no passport. No airplane tickets. All this is happening on the Wisconsin River—a three-hour car ride from Chicago!

Wanna go?

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Hoo-boy!

You gain entry to this paradise in an unusual little boat—a specially designed dory—incredibly maneuverable—easily able to withstand these rocky rapids.

Motorized aluminum rowboats and jon boats risk ripping open their bottoms and ruining their props and lower units on submerged rocks. Electric trolling motors are useless. These rapids swamp canoes and challenge kayaks. A $75,000 bass boat wouldn’t last an hour.

But the diminutive dory makes for safe passage and provides a comfortable and stable platform for you to cast your line with accuracy. It makes the raging water seem calm.

Ah!

Your guide controls the boat with incredible precision using oars.

Yes—oars!

The specialized equipment and the guide’s skill allow you to gain entry to this paradise. Almost nobody else can get in here. That makes for very little fishing pressure. That means abundant game, eager to attack your offering. And the bass here are much larger than those found on famous rivers out east.

Now, THIS is what I’m talkin’ about!

Abe Downs—a chemist by profession—runs Great Northern Fly Fishing out of Stevens Point Wisconsin—just three hours north of Chicago. He’s an Orvis-certified guide and brings his scientific training and businesslike professionalism to bear alongside his extensive fishing knowledge. He’ll even get you a discount at a local restaurant.

Abe switches to musky with the fly rod in the Spring and Fall and scores a good percentage of the time. I love fishing musky but they’re called “The Fish of a Thousand Casts” with good reason. In contrast, these huge smalleys seem always voracious for a meal—even after a cold front! They fight harder than pike. And they bite in the summertime!

Okay, I hear the objections. This ain’t no startup because—because what? Because Abe doesn’t plan to grow like Uber?

Bosh! This little company may not present an investment opportunity for your venture capital fund, but it’s a startup all the same—and quite a successful one. He’s booked most every day of the season. Like a tech startup, he makes use of specialized technology and proprietary knowledge to operate the business. Few can compete in his niche.

And he brings pleasure, relaxation, and satisfaction to himself and his clients. Does that sound like a worthy goal?

I think so.

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On one trip this summer, my fishing partner was my son. On another, it was my friend, Rod Erickson. Neither fished with fly rod and streamer ever before. Both learned quickly and—truth be told—out-fished me. I think Abe is a good teacher.

Photography by John Jonelis, Robert Jonelis, and Rod Erickson

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Great Northern Fly Fishing

Abe@GreatNorthernFlyFishing.com

715-572-3225

1020 Tree Lane, Plover, WI 54467

 

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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Filed under chicago, Chicago Startup, Chicago Ventures, Entrepreneur, Entrepreneurship, Fishing, fly fishing, Innovation, new companies, pike fishing, smallmouth bass, Startup, startup company

TOO MANY FOUNDERS

Seth Temko

A new company is always short on cash and long on tasks. Right from the start an excited pot of people gather together and someone puts a stake in the ground “We’re doing this”. From that point forward a business entity is formed and shares are issued. From this, founders are born.

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I’ve come across a number of startups with 3, 4, 5 and even 7 founders involved in various startups over the past year. It’s always debatable about the right number of founders but there definitely can be too many. Too many founders significantly affects the success of the company, the happiness of the founders and the financial results the founders may achieve personally.

​How so? Read on!

Many founders focus on their percentage ownership in the startup. They tend not to talk about shares but percentage ownership. I own 100%, I own 50%, etc. Usually the more founders the less percentage of ownership each founder will have right at the start. This may seem obvious but think about this in the context of dilution over time.

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Personal Dilution

Dilution Over Time – Assuming you’ll be seeking financial backing and assuming you’ll be giving up equity for money, your share of the company will be reduced with every investment of cash. This effect is cumulative in your reduction of company total ownership unless you intend to maintain personal anti-dilution rights. This means you get to put in your own money along side new investors to maintain your percentage of ownership. Most founders aren’t in a personal financial position to do this. Most founders are “tapped” financially by getting the company off the ground and working for little or no money in the beginning. Even if you can afford to put in money it means your co-founders will get even more diluted and chances are they will not be happy with you.

The percentage you start with is not going to be the percentage you end with. Let’s look at some scenarios so we can get a definitive feel for this.

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Dilution Examples

Let’s say you start a company on your own. You own 100% of the shares.

Investment 1- Let’s say $1 million will be invested for 30% of your company. You will not be handing over 30% of your shares, instead the company will issue 30% additional shares and they will be assigned to the new investor. So your absolute number of share remains the same but you now own 70% of the total shares after the investment.

Result – You own 70% of shares. Investment 1 owns 30% of shares.

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Investment 2 – Now that you’ve successfully grown your business with the first investment you now raise a second round of investment. You get $2 million and give up 20% of the company for the money. This is real progress from your first investment. You’ve double your money raise and give up 33% fewer shares for the investment.

Result A – You own 56% of shares. Investment 1 owns 24% of shares. Investment 2 owns 20% of shares. If you’re scratching your head wondering why investment one is lower it’s because we’re assuming they don’t have anti-dilution rights. This means they lose the same percentage of share you do. They didn’t put any new money in with the second round of investment so they diluted like you at 20%. The net effect is it saved you a percentage of the company. Also, you retain voting control. At 56% of the company you still have the majority of voting stock. This means you control the company.

Result B – Now let’s look at the second investment assuming the first investment has anti-dilution rights. This means they get to put in money alongside with the second investor and maintain their percentage of the company. THIS IS VERY COMMON. Most sophisticated investors will force you to accept anti-dilution rights as a term of their investment

You own 44% of shares. Investment 1 owns 30% of shares. Investment 2 owns 20% of shares. Guess what? You just lost voting control of your company.

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So what happened here? Well, in this case investment #1 said “hey I want to maintain my 30% ownership” so they put in additional investment along with investment 2. So you didn’t bring in $2 million, you brought $2.6 million. The extra $600,000 was invested by investment 1 to not get diluted in the round. So you, the founder, took the additional dilution.

If you wanted to maintain voting control then you’d needed to have taken in less money from investment 2, say $1.5 million, and restrict them to getting 16% or less of the company’s total shares. Then the match from investment 1 would have kept you keeping over 50% of the stock. BUT, some investors won’t accept less than the percentage they want. It’s just not a “meaningful enough” ownership stake. If investment 2 insists on 20% you have a tough choice. Maybe you can convince investment 1 to not maintain anti-dilution rights but it’s highly unlikely.

small business

Now Bring On the Extra Founders

We saw in the simple example above the dilution of a single owner. Let’s now assume there are five founders and each has 20% equal ownership of the stock to start with.

We’re going to stay focused on you for this set of examples but keep in mind that all the founders are in the exact same boat. I’m assuming here that all five founders are fully vested in their 20% stakes to begin with and none of them have anti-dilution rights or the personal finances to invest additional money with the subsequent investors.

It requires the pool of three of the five founders to have voting majority of the company. 20% times 3 founders = 60% of the shares and therefore voting control.

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Investment 1 – $1 million comes in for 30% of the shares, anti-dilution rights are in place.

Result – You now own 14% of shares. The other four founders own 14% of shares each. Investment 1 owns 30% of shares. It requires four of five founders to pool enough shares for voting majority with the company.

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Investment 2 – $2 million is invested by a new investor for 20% of shares.

Result – You own 7.9% of shares. The other four founders own 7.9% of shares. Investment 1 owns 30% (they invested an additional $600,000 to not be diluted). Investment 2 own 20%. You took in a total of $2.6 million total. The founders now have lost voting control of the company.

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At this point, subsequent rounds of investment dilute you personally even more. If your company hits a problem and experiences a reversal of fortunes you’re pretty much obliterated in your ownership percentage.

Theoretically, on the total value of your shares the 200,000 shares you own keep going up in value. This is a good thing and any general shareholders should be happy. As a founder you may have a very different outlook on things. After all, it’s your baby.

 

Founders Not Pulling Their Weight or Leaving

The romantic notions of a startup and the realities are very different things. If the founders involved have started other companies, their eyes are wide open and everyone should have a good idea of the general effort, stress and dynamic pace they’ll encounter. MOST HAVE NOT.

Those who have not started a business with no other means of financial income are in for lots of surprises. This is not for the faint of heart. Some will abandon the effort. Some will not be adequate for the task. Some will just be impediments to success and must be removed.

What happens to the share ownership of those that prove not valuable and not worthy? Nothing, unless you plan for it. Once stock is issued, they own it. Period. Founders shares are usually very cheap. They may be a penny a share of less. So even if a million shares are issued to the founders only $10,000 is paid by the founders to own the shares. That usually is far short of the capital that’s going to be required to get the business off the ground.

The value to the company is going to be the fruits of their labors. That can be organizing and fundraising, creating operational plans, writing code, leveraging business networking, etc. The impact should be ongoing NOT just one-time. A startup is a marathon, not a sprint. You shouldn’t have someone permanently and significantly benefiting from company ownership for running a short fast “dash” of effort.

Peter Thiel of Paypal founder fame likes to see two founders in a company. No more and no less. In his personal funding he finds that to be the magic number for execution and effectiveness.

​In the groups of four to seven founders (yes, I’ve come across a startup with seven members) it tends to be a democracy, kind of like a band. One or two founders will have the strongest voice and front facing effort but decisions tend to be “group think”.

When one of the principle advantages startups have is being nimble, group think slows things done. Also, quite frankly, it’s a pain in the ass to work with a large group of founders as a coach, adviser, partner or investor. Hassle is friction and no one likes to get burned.

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Resentment Waits for Low Value Producers

Nothing breeds more contention with founders than the guy who “doesn’t pull his own weight”. When a couple of founders are putting in major time and taking on major stress while another founder just isn’t executing with the same passion, commitment and investment – resentment builds.

True Story – A dynamic duo had launched a hosted Ecommerce platform in the late 90’s called Apollo Solutions. These young guys mortgaged their condos and went full steam ahead. The pair felt they needed an MBA involved so they brought in a third partner to write a detailed business plan to present to investors and bring in money. They felt his plan was terrible and he just didn’t fit into the company. They fired him and moved on. They said he didn’t do anything meaningful so they denied his stock grant. Within 12 months along came CNet to buy them out. Guess who came out of the woodwork, yep, MBA guy. He sued which put the sale on hold. This leveraged the founders to pay out a large settlement just so they could sell the business.

Short Timers – What happens when initial founders want out? They leave and they take their shares with them. The guys left are doing a ton of work and usually for reduced or no pay. Most founder shares are very, very cheap so there was no real cash contribution. What happens? They get to benefit from the remaining founders’ efforts.

Some Remedies to Prevent Short Timers from Benefiting – First off, nothing says founder shares need to be fully purchased and handed out on day one. Instead you can carve out all or a large portion of shares and keep them in the “treasury” of the company.

Instead of handing out a big wad of shares on day one, you can divvy up stock options that vest over time. This would be similar to what you’d do with employees. I recommend three or four years to fully vest with a portion vesting immediately and upfront. So for example, if a founder is going to get 200,000 shares in total over three years then have 50,000 share vest immediately and 50,000 shares per year for the next three years. To keep people more on the hook you can have the shares vest equally every month at 1/36th of 150,000.

You’ll have to work out some of the “what ifs”, i.e. what if the company is bought (vest immediately), etc. What this does is allow people who want to leave, to leave, but it keeps a large pool of shares held by the company to give to employees, investors or new founders without having a big dilution effect on everyone overall.

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Phantom Shares and Warrants

For minor partners or those recruited late to the game, sometimes phantom shares are useful although most investors won’t like them. This is a contractual promise to issue shares to people if they meet contract goals and objectives and often there are restrictions. So these persons often get upside financial gain if the company sells for example (phantom shares turn into real shares and are automatically converted into the sale). Phantom shares have no voting rights and no immediate dilution impact. Warrants are similar. They give someone the option but not the obligation to buy shares of the company stock at a set price. Often there is an expiration on this right. They aren’t good forever.

Get it right from the beginning. Don’t have too many founders and put a vesting plan into place for all the founders to start. This will get commitment and best efforts and still allow people to leave on agreed terms if something doesn’t work out. You’ll all feel better about your role as a founder and have better odds of personal success.

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Copyright © 2015 Seth Temko. All rights reserved.

Images from Seth Temko, MS Office.

This article previously appeared in ATTACK PLAN – www.attackplan.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 © 2016 John Jonelis – All Rights Reserved

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Filed under angel, angel capital, angel investor, dilution, Entrepreneur, Entrepreneurship, investor, vc, venture capital

ARISE 2.0

DSC_5954by Loop Lonagan

Whadaya think happens when 15,000 people get behind the entrepreneurs in their own neighborhood?  Good things—that’s what happens!  Energy.  Enthusiasm.  Stuff gets done!  Lemme tell you about it:

This is Loop Lonagan reporting and tonight I’m watchin’ a guy pitch his new venture like a Gospel Preacher workin’ up a frenzy on da pulpit!  I hear his bold words.  This guy believes in hisself—and why not—he’s growing a thriving business!  This is the Arise 2.0 accelerator and it’ll change our city fer the good.

(Hey, this thing gets my Irish up.  So ‘scuse me if I don’t sound smooth.)

Arise 2.0 gives Chicago a whole new slant on business.  They ain’t here to make a few people rich.  No, they build up local business so they can build up da local community.  Business is just a means to an end.  The goal is healthy neighborhoods, jobs, prosperity all around.  That’s the real end game here

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Arise already put together all the stuff of success plus a big kicker:  They got Investment—half a million in seed money.  They got the University o’ Chicago.  They got Tony Wilkins from Hyde Park Angels.  They got 1871—a great space to birth an accelerator.  They got a Ten-Year Action Plan that’ll pump out four new companies every year.  Yeah, they got all o’ that.  The kicker is da power of 15,000 people from the Salem Baptist Church because Rev. James T. Meeks figured out this great way to help his community.

You wanna bet against them odds?  I’m here to take yer money if yer patsy enough to try.  We’re talkin’ Free Enterprise nurtured by Da Church.  There’s a whole lotta motivation and commitment here.  This model could spread across the map!

 

Mentorship

Tony Wilkins runs the Arise 2.0 Accelerator.  I know Tony.  He’s smart.  I figure him for the brains o’ the operation.  Tonight he gives us a story about how to drive success.  Lemme say this slow so I get it right.  Here it is in his own words:     

DSC_5913I’m on my 537th business flight.  Southwest Airlines.  Isle seat.  A gentleman comes in last and squeezes into window seat beside me.  He looks jittery and nervous.  I ask him, “Are you okay?”

“Sorry sir.  This is my first time on a plane, I’m a little nervous.”

“It’s okay,” I say.  “It’s fine, don’t worry about it.”

The plane goes up.  But half way through the flight, he’s having problems.  He’s sweating.  He’s fidgeting.  I say, “Hey, the hard part’s over.  We’re in good shape.  The pilot wants to land just as much as we do.” 

“I understand, but I had something to eat last night and I have to apologize to you in advance, ‘cause this is not gonna work out well.”

DSC_5914So in my best mentorship mode I say, “You know…there’s a bathroom on the plane.” 

“PRAISE THE LORD!  WHICH WAY IS IT?”

 So mentorship worked out for him.  And it worked out for me.

If people knew better, they’d do better—like my travel companion on Southwest.  Everybody’s had somebody in their life who’s made a comment, performed an action, did something that made them say, “I can do that!”  So just presenting them with that information is often the most powerful thing in the world.

And they’ll become mentors to successive companies.

DSC_5915Accelerators across the country do the exact same thing.  We bring in mentors who, because they once had mentors, come and say, “I’ll spend an hour and a half.  I’ll spend an evening.  I’ll sit and talk to these companies.”  And many stick with them. It gives folks a higher perspective. 

Tony also passes on the knowledge to run a business:  How to hire and fire.  Marketing.  Funding.  Legal.  Operations.  Pitch practice.   “But,” he says, “the most important thing is mentors because that means contacts and business relationships and exposure to risk capital so these businesses can expand, become sustainable and scale.  If you remove barriers to mentorship and capital, good things happen.  We don’t know exactly what’s gonna happen—we’re just gonna have good things happen.” .

 

Church Business

I figure all o’ youse is wondering about the same thing.  The Church and business working together?  DSC_6147“Absolutely!” says Jamell Meeks, the pastor’s wife who oversees this bold initiative.  “The Bible says where your treasure is your heart will be.   So you can know a person’s heart by where they put their treasure.”  I gotta read that book fer myself.  Father Lonagan always said to leave it to da professionals, but I dunno.  Maybe I sound ignorant once in a while.  But I hate to actually be ignorant.

DSC_6133David Storch from AAR CORP is backing Arise with piles o’ da green stuff.  “It’s the entrepreneurs that make things happen,” he says. “They’re the lifeblood of the community.  Politicians talk about buzzwords like education.  But it’s really hard to talk about that when you don’t have food on the table or a roof over your head. But if you touch more people, you will build more successful businesses, which will create jobs, stimulate the economy, allow for education, which creates equality, creates opportunity, which we desperately need as a city, as a nation.

Steve Rogers from da Harvard School o’ Business once said, “The transformation of a community really begins with people within the community becoming great entrepreneurs.”

After that great quote, Pastor Miles Dennis of Second Baptist says, DSC_5995“We’ve almost forgotten—forgotten that entrepreneurship is the great transforming agent to turn around our communities.  They will change lives and yes, they will employ many people.  They will help others to become entrepreneurs.  The entrepreneurial spirit is alive!” .

 

Da Companies

Da competition fer each spot is super fierce.  A thousand companies wanted in but they whittled it down to these four.  These is Chicago-style companies—small outfits with allota upside and da gumption to grow.  Lemme tell you a little about ‘em:

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DSC_5939THE FROCK SHOP—Chicago’s Designer Rental Service

Jennifer Burrell Jen@frockshopchicago.com

Visit their website [click here]

How come us guys can rent tuxedos but da women gotta buy them fancy dresses?  And after a gal spreads her photo all over Facebook, she won’t wear that dress again.  But there’s something about da confidence beautiful designer dresses give women. Gals used to buy an outfit, hide da tag then return it after an event.  But nowadays the department stores is wise.  So Frock Shop’s got the rental business figured out and they’re thriving.  They’re gonna use online sales to scale fast.  Jennifer says, “Visit the Frock Shop where you can borrow the dress and keep the memory.” .

 

DSC_5983RS INDEPENDENT HOME HEALTH CARE

Ted & Reena Williams rena.williams@rsihhc.com

Visit their website [click here]

89% of seniors prefer to stay home and age gracefully.  30% need some kinda help.  This company goes into the home, cooks meals, gives meds, does laundry and housekeeping, takes ‘em to the doctor, and acts as companions—a whole lot more service than the usual rent-a-nurse.  And that means you can spend quality time with yer parents during those last years. They already got a contract with the veteran’s administration and they partnered with the Cancer Foundation.  This one’s creating jobs. .

 

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MA’S BEST

Brian Smith  brianearl2001@yahoo.com

This is a traditional baking operation, but when this guy describes eating his dinner rolls, it makes yer mouth water.  They already sell at 18 Chicago outlets.  Competitive advantages:  Better product.  No middleman.  Direct from oven to the store. Their direct competitors each do $137M a year and Ma’s Best outsells them 2:1 wherever they get shelf space.  Industry as a whole is $115B.  As Brian puts it, “That’s a lot of bread.” .

 

 

DSC_6084bSWISH DREAMS

Kenya Mercer  kdrew@swishdreams.org

Visit their website [click here]

Kids do lousy in school ‘cause they’re bored.  Kenya says, “Let’s give our kids the core academic values and let them have fun doing what they love—all at the same time.”  So they teach literacy, leadership, and physical fitness as one program.  And they get double-digit gains in literacy, fitness, and leadership on da assessment tests.  This one plans to expand nationwide. .

 

 

Salem Baptist Church LogoSALEM BAPTIST CHURCH

Pastor James T Meeks  info@sbcoc.org

……………………………………………..Visit their website [click here]

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DSC_5921ARISE 2.0

Tony Wilkins  tonywilkins76@gmail.com

Visit their website [click here]

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The accelerator strategy has three distinct components:

  • Remove barriers to mentorship.
  • Give broader perspective, contacts, and knowledge.
  • Structure risk capital to expand.

Check ‘em out.  Maybe be a mentor.  Maybe an investor.  But don’t sit on yer hands—da future’ll pass you by. .

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Loop Lonagan’s articles are verbatim as told to John Jonelis

Photography by John Jonelis

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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Filed under 1871, angel, angel capital, angel investor, big money, chicago, Chicago Ventures, Education, Entrepreneur, Entrepreneurship, Entrepreneurship and Politics, Hyde Park Angels, philanthropist, philanthropy, The City, University of Chicago, vc, venture capital