How to Do Good AND Do Well at the Same Time

Often the best investments are those where the entrepreneur is way out on the leading edge of the possible. These break-out deals are generally priced right, with low early valuations/share price, and yet have the potential to disrupt or reinvent existing businesses and sometimes even entire industries.

These break-out developments represent potential opportunities for big profits while also often addressing a major problem or existing challenge to the health and welfare of our society. Solving big problems with disruptive innovation is the way to both riches and honor.

Northfield Laboratories, started just outside of Chicago in Northfield, Illinois, was such a company. In the mid-1980’s, the AIDS epidemic was ravaging society, threatening to move into the mainstream as a serious pandemic. It needed to be contained. It was determined that one major source of transmission was blood transfusions. An “artificial blood” was needed that would be totally sterile and guaranteed free of AIDS or other blood-borne diseases, could be used for any patient without having to match blood types, and could be priced competitively to current blood transfusions.

About a decade earlier, unaware of the AIDS epidemic to come, a U.S. Navy doctor and surgeon in Vietnam saw many soldiers and sailors die on the battlefield because there was not such a product, particularly one that would not require matching blood types. Such a product would be invaluable for urgent battlefield emergency care.

When the doctor returned from the war, he was determined to create such a life-saving blood product. He went to work, recruiting several researchers, funding product development through government and defense grants, and moving the development well along into animal trials. The emergence of the AIDS crisis gave the project even greater urgency.

The nascent team came to the attention of one of this book’s authors while I was a venture capital investor at the Allstate Insurance Company. . . . The Allstate Venture Capital Division would on occasion roll the dice on potentially break-away investments, particularly when there could also be a significant societal benefit. Northfield Laboratories was such an investment opportunity.

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VCapital New Investment Opportunities Webinar

VCapital is currently raising funds for two new investment opportunities: Camras Vision, a company which has developed a new device to treat Glaucoma, and The Padcaster, a company which has developed products to turn smartphones and tablets into mobile video production studios.

On November 15, 2017, at 2:00 PM CST, we will be hosting a webinar where the CEOs for each of the companies will be presenting. Please join us for this informative meeting on these two new opportunities.

Please register for VCapital New Investment Opportunities on Nov 15, 2017 2:00 PM CST at:

https://attendee.gotowebinar.com/register/661033374267671297

After registering, you will receive a confirmation email containing information about joining the webinar.
Sincerely,

Leonard Batterson
(312) 203-6820
lbatterson@vcapital.com

Jim Vaughan
(312) 450-4363
jvaughan@vcapital.com

How Venture Capital’s Riches Are Becoming Available to More of Us

Changes in the venture capital playing field will also contribute to making the coming years good ones for venture capital investors and great ones for entrepreneurs.

As we mentioned earlier, the accessibility of venture capital investment opportunities is becoming democratized. Today there are roughly a half million individual venture capital investors in the US alone, and that number should expand dramatically in the coming years.

Recently launched online venture capital portals have opened investment access to America’s estimated 10 million accredited investors (i.e. individuals and couples with net worth, excluding the value of their primary residence, of $1 million or more, as well as individuals with annual income of $200,000+ or couples with annual income of $300,000+). Further, the JOBS (Jumpstart Our Business Start-ups) Act allows venture capital firms to advertise to these accredited investors.

On top of that, regulations implementing Title III of the JOBS Act, enacted by the SEC in the spring of 2016, open venture capital investment access, albeit with tight limitations, to the rest of America too. These JOBS Act provisions should increase substantially the availability of venture capital investment dollars. What a great time to be an aspiring entrepreneur!

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You Can Find Great Venture Capital Investment Opportunities in Chicago

The Chicago area is a great illustration of the need for the right environment and what can happen when the entrepreneurial eco-system is built.

. . . Since the entrepreneurially challenged days in Chicago, many flowers have bloomed. In addition to the tech incubator 1871, run by visionary Chicago entrepreneur Howard Tullman, which now houses over 400 digital start-ups, a second large tech incubator, called Matter, has also emerged. Housed in the Merchandise Mart (built by retail pioneer Marshall Field), it supports about 200 start-ups focused on life sciences and biomedical. The major universities now all have courses in entrepreneurship, business plan competitions, associated venture capital investment firms often funded by university alumni, tech accelerators, and mentor and coaching programs. VC funds have also emerged for minorities, women, military vets and just about anyone with a good idea.

There is now substantial venture capital funding available in Chicago, and also coming in from both coasts and all around the country, as Chicago becomes more widely known as a center for tech and other innovation. Up until now, the start-ups spawned have been somewhat more modest, but Cleversafe, the first billion dollar Chicago-founded tech company funded by Chicago-based individual investors and VCs, has moved this city into the big leagues. The 80+ millionaires minted through IBM’s recent acquisition of Cleversafe are now reinvesting their gains in new Chicago-area start-ups — the virtuous cycle.

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Even More Opportunities to Win with Venture Capital

Ironically, more traditional venture capital firms like ours, which only allow investments from accredited investors and, even though accessible online, set a higher minimum investment requirement (our new firm VCapital has a minimum individual investment requirement of $25,000), welcome these new (online crowdfunding) firms that are democratizing the industry. Frankly, they are so new relative to the typical lead time from investment to return that it’s too soon to say how well they will do for investors. More on that later. Nevertheless, for us, the ability of a venture to attract a large number of these firms’ smaller investors represents valuable market intelligence, demonstrating early concept appeal. It’s somewhat like virtual market research. If the venture goes on to show progress and has greater subsequent funding needs for expansion, we may be more likely to invest. We may not get in quite as early, but the risk when we do get in (which will likely still be early in the venture’s growth) will probably be less too . . . an acceptable tradeoff.

. . . Putting all this together, it looks like we are actually just now entering the golden age of venture capital for individual investors and the entrepreneurs whose dreams they will be able to fund and then benefit from financially. This book is written for both groups – individual investors and entrepreneurs – to help guide them along the path to potential wealth.

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You Can Find Lucrative Venture Capital Opportunities Almost Anywhere

As awareness of recent venture homeruns has grown, there has been a surge in innovative venture activity. It’s no longer limited to Silicon Valley and Boston’s Route 128. Venture capital activity is flourishing in New York, Los Angeles, the DC metro area, Austin . . . and anywhere where creativity, ambition, and the funds to nurture it are found.

Venture incubators and supportive angels are emerging everywhere. Cleversafe is a great example. While people often talk about the Midwest’s conservatism and reliance on agriculture and heavy industry, Cleversafe’s billion dollar+ win was created in Chicago. In fact, Inc. recently reported that Chicago (which is where our funds are based) is now second behind only New York City in the number of fast growing private companies on the Inc. 5000.

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How this Midwest VC Hunts for Big Returns in MedTech and Beyond

As Vice President of Investments at VCapital, it’s my job to make money for our investors, and while we consider ourselves to be sector agnostic, we do like the idea of investing in emerging MedTech companies for a number of reasons. First of all, these kinds of companies are providing valuable products and services to mankind, and it’s nice to support companies who have some pretty noble aspirations like that. Yes, we’re primarily out to get a return for investors, but backing companies which help society is a win-win situation for all of us.

Our Involvement with MedTech Companies
For instance, Intensity Therapeutics is a company which is developing technology that will significantly extend the lives of cancer patients. Another company we’re currently working with is conducting research and developing technology to reduce the cases of blindness. Our CEO, Len Batterson, has a particularly strong feel for these kinds of MedTech companies, with a strong background in healthcare himself.

The VCapital model itself allows us to find out about emerging medical technologies and companies like this because our advisers and our investors are always listening for news about such opportunities. Since each one of these people has perhaps 10 or more contacts in various industries like medicine, we have a large pool of information available to us at any given time, and it then becomes a matter of making some good choices. This gives us tremendous reach, and alerts us to situations where we might want to get involved.

Chicago Presents Numerous Opportunities
In addition to the foregoing tendencies toward medical and health care organizations, there is simply an abundance of these kinds of companies here in the greater Chicago area, so it’s natural that we have a chance to take a good look at many of them. There are also a number of great universities in the region which are becoming more involved in entrepreneurship in the medical arena.

Given the fact that there are at least 200 startup companies at Matter (a Chicago-based incubator for healthcare startups) working on and developing medical technologies and drug development, plus world-renowned hospitals, there’s just a wealth of opportunity in this one particular industry. As a matter of fact, that can be a little bit of a problem, because it requires a lot of digging, a lot of checking, and a lot of old-fashioned research, to separate the really promising ones from those which seem less likely to catch on.

The Camras Vision Opportunity
This opportunity was brought to the attention of VCapital by one of our friends who’s an Angel Investor in Durham, NC. We did our due diligence on the company, and found that they were offering a unique medical device for those with late-stage glaucoma.
This device is a shunt which is put on the outside of the eye, but underneath the eyelid, and it allows for external drainage, and helps significantly with dry eye syndrome, which can be a major problem for people with glaucoma. Camras Vision will be marketing this device as the first-ever unit which allows for personalized pressure control, to hinder the progress of glaucoma and the deterioration of the eye.

There’s also much more to like about this company. The CEO, Ray Krauss, is pretty much a living legend in the field of medical devices, having spent more than 30 years developing cutting-edge technology of value to society. He was the #2 man at Summit Technology which developed PRK, which is now known as Lasik. He spent 10 years with J&J’s ophthalmology division. He’s already worked with startup companies with as few as two people, and as many as 200, and has also worked with Angel Investors and venture capital firms to secure funding for some very important projects. Lucinda Camras is the Chief Scientific Officer, and she has five patents pending right now for various medical devices. So you can see that there’s a pretty strong leadership in place at Camras Vision, as well as having a product that we feel is likely to become very popular by around 2020.

Opportunities on the Horizon for VCapital
We have a number of opportunities currently which might be described as being in the ‘deep due diligence’ phase, and we’re very excited about how some of these prospects might turn out. One of these involves a company which has developed ground antennas that communicate with satellites, and even though we don’t have a lot of expertise in that particular field, we’ve done an enormous amount of homework to get up to speed on what we need to know. Another very promising possibility has to do with a company doing work in the area of breast cancer, and we’re very hopeful about what that might lead to.

Our Preferences
Probably more than any other single factor, we here at VCapital like to give preference to companies based in the Midwest, and particularly in the greater Chicago area. We now have about 175 investors involved at VCapital, so we have a lot of potential for growth, because we can find the funding for quite a few startups, if they meet our criteria. The more deals we make the stronger we get, and the better we position ourselves to make even bigger and better investments in the future.

Undoubtedly, many of these will be in the MedTech field, but regardless of the specific industry, we feel we can educate ourselves to whatever degree is necessary, so we can make intelligent decisions and reward our investors accordingly. To find out more about our company, and how you might become involved, please visit www.vcapital.com.

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How to Win in Venture Capital: Avoid FOMO*; Concentrate on Early Stage Investments

(*FOMO = Fear Of Missing Out)

As a consumer, you may love Uber. Lots do. But Uber is a vivid reminder of the potential perils of FOMO-driven late stage venture investments. While most early stage venture investments may not evoke your friends’ envy, and each one faces considerable risk of even surviving to maturity. Nevertheless, early stage venture investments offer the best shot at the rich returns that venture capital investors historically have enjoyed.

Uber is an instructive case study in the perils of late stage investing, especially in well-known “unicorns” – still private ventures valued at $1 billion+. Yes, Uber has achieved remarkable market penetration and become a household word. So it’s not surprising that as Uber sought later stage rounds of private venture funding, many investors felt that FOMO urge and the company’s valuation moved ever higher. Its latest fundraising round valued the company at $68 billion.

But for late stage investors, here’s the million (or is that billion?) dollar question. Will this business ever, under the scrutiny of public markets, justify that valuation? I wouldn’t bet on it. Despite its tremendous consumer market advances, Uber still hasn’t turned a profit. The Wall Street Journal recently reported that Uber suffered a $3 billion loss in 2016 and that losses continued at $708 million in the 1st Quarter of 2017.

In fairness to Uber, some factors contributing to those losses have been fixed. Uber has closed down its money-losing business in China in exchange for a 17.5% stake in China-based ride hailing leader Didi Chuxing as well as a $1 billion investment in Uber from that Chinese leader. More recently, Uber combined its money-losing Russian business with Russia-based Yandex NV’s Yandex Taxi. It’s also now winding down its subprime auto leasing program, which, in supplying more drivers with the essential tool of the trade – a car – discovered losses approaching $9,000 per leased vehicle. They had been projecting only about $500 per car. Oops! Finally, Uber has replaced founder Travis Kalanick as CEO with Expedia’s proven, highly regarded CEO, Dara Khosrowshahi.

So things should get better. The question though is whether things can improve enough to justify a $68 billion valuation. Several mutual fund leaders holding shares don’t think so. The Wall Street Journal reported in late August that Vanguard, Principal Financial Services, and Hartford Funds recently marked down their investments in Uber by 15%. T. Rowe Price reduced the value on its books by 12%.

The Wall Street Journal has also reported that Khosrowshahi’s deal could make him billions. Companies don’t offer packages with that kind of potential unless the problems are REALLY big. I learned that from personal experience when, many years ago, I was hired as CEO of a dramatically over-leveraged LBO. If I could make the company “work,” I’d earn a 4% ownership stake. Even Jeff Bezos or Mark Zuckerberg couldn’t have made that company “work.” Sometimes you have to learn the hard way.

We fear that lots of late stage ventures, especially unicorns, will never enjoy exits justifying their late round valuations. According to CB Insights, as of last October there were 176 unicorns globally, valued collectively at $628 billion. As of late August, 2017, there were more than 200, valued collectively at over $700 billion. The number has continued to grow because excessive valuations may be impeding many from going public. Private owners have little interest in IPOs below latest private round valuations. Potential corporate suitors aren’t biting either for the same reason. The pipeline is clogged with too many over-valued unicorns.

Even when IPOs do happen, recent results haven’t always been positive. Snap and Blue Apron are two good examples.

Snap’s valuation in late 2016, shortly before its IPO, was $18 billion. Its $17/share IPO represented a valuation about 10% higher, but it is unlikely that many late stage investors were able to sell out right away. The market has been rocky since, and Snap’s current stock price of $14.46 represents a valuation of $16.8 billion, roughly 7% below its pre-IPO level.

Blue Apron has had an even tougher time. According to Reuters, its $10/share IPO translated to a valuation 14% below its last private fundraising round two years earlier. Since then, the stock has retreated from $10/share to $5.34 as of September 6, reducing its valuation more than 50% below its pre-IPO level.

That brings us back to our major point. Avoid FOMO-driven late stage investments. We believe the way to win in venture capital is by concentrating on early stage investment. Of course, that’s not to say that winning is easy. Historically only 15-20% of ventures generate a positive return. Most lose their entire investments. Ten years out, most those ventures won’t even remain in existence.

But if you work with a savvy venture capital firm that practices rigorous venture screening and due diligence, and if you diversify enough within the asset class, your odds of success can improve. By diversifying, we don’t mean a mutual fund-type approach. That doesn’t suggest the degree of screening and due diligence rigor that is possible. We mean investing in perhaps five to ten high quality deals, where each one has strong potential. Such selection rigor should result in beating the historical average 15-20% deal success rate, and history suggests that some of those successes should be big winners.

Consider these illustrative scenarios. We believe they are realistic for the kind of high quality venture capital firm we just described.

  1. Assume you make five investments of equal dollars, four fail entirely, and one returns a multiple of 10x after five years. That would double your total investment in five years, representing an average annual return of 15%. If that one winner returned a multiple of 20x, your total investment would have been quadrupled, for an average annual return of 32%.
  2. Let’s say the firm makes ten equal size investments, eight fail, one delivers a return multiple after seven years of 10X and one delivers a return multiple after seven years of 20x. That would be a tripling of your total investment in seven years, representing an average annual return of 17%.

These kinds of returns are realistic for the savvy professional venture capital firm that screens its options rigorously and invests only in ventures it really likes a lot. VCapital’s leader Len Batterson’s team record over 30+ years, focused almost exclusively on early stage deals, is a deal success rate of 37% and average annual gross return of 28%. That’s what high quality venture capital investment is about.

And please, whatever you do, avoid FOMO. The odds in these late stage deals don’t look good.

We Are Bullish on the Future of Venture Capital

We’re bullish on the future of venture capital. For anyone who thinks the greatest innovations are behind us and questions how much is still left to invent, we would argue that the greatest days of innovation and hence of venture capital opportunity are still to come.

. . . The tools and technologies that are rapidly emerging will be much more powerful and useful than much of what we’ve seen to date. Think about computers and information technology as an example. When the authors were in college, a computer filled a large room, generated so much heat that it required costly air conditioning, and yet had far less power than today’s typical smartphone we all carry around.

Moore’s Law has changed all of that, enabling the modern digital revolution. In 1965, Gordon Moore, the co-founder of Intel, observed that the number of transistors per square inch on integrated circuits had doubled roughly every year since their invention. Based on that observation, he essentially predicted that computing would double in power roughly every one to two years as well. That prediction, of course, was prescient and anticipated the massive increases in computing power that we all enjoy today.

Similarly, we have seen awesome advances in medical and biotechnological capabilities over the past 10, 20, 30 years. The mysteries of our genomics have been solved, and a result has been the ability to tailor lifesaving drugs to specific genetic problems.

. . . We could go on and on, but the point should be clear—we are already enjoying the benefits of technological advances we could not have imagined 50 years ago. Foreseeing enhancements to present known and working technologies and their future combination and integration into more complex forms provides a window on the opportunity for even greater technological innovations in the years to come.

Importantly, the advances already upon us and behind us represent a technological infrastructure enabling and facilitating future advances. Further advances, as they accrue, will enrich that technological infrastructure even further, enabling advances at a logarithmic pace in many fields. Moreover, entrepreneurs in most fields of technology will be helped further by advances in information technology—software and Internet technology—already behind us. Those advances in information technology will enable knowledge to be built and disseminated more effectively and efficiently than ever before, bringing down the costs of initial startup requirements and shrinking their development timelines.

 

Len Batterson is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund

When Crisis Management Is Required, the VC Can Be Very Important

In the case of seriously distressed situations, the venture capitalist can be expected to take a very active role, particularly if acting as the lead or co-lead investor. In these cases, the VC will become involved in operating decisions and will likely press for management changes, and those with operating skills may even take an active role in the management of the business, however reluctantly.

As previously discussed, when Control Video got into serious trouble, the major venture capital investors engineered the turnaround, kept funding the company week-to-week while the turnaround was in progress, selected a new management team, and then recapitalized the company once it was stable. All this led to the creation of America Online, with its eventual market value of over $350 billion.

A venture capitalist hopefully always adds value, but in some cases can make all the difference.

 

Ken Freeman is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund