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Chicago Startup Scene
The City That Works is A
Startup Hub
Jeff Carter
Thought leader. Co-Founded Hyde Park Angels in April 2007 (Angel #1),
the Midwest’s leading angel group. Helpe...
Table of Contents
I. Startups, Society, and Trends
II. Current Conditions in Midwest
III.Where and When to Invest
IV.What ...
“Startups are transforming our
society. Over the past 100 years,
we’ve gone from an industrial era
to a post information e...
Startups Seem Cool
When Startups Start Out
When Startups Are Successful
Networks not Hierarchies
Organizations operate from top down. Software and technology enables them to be
flatter, fleeter,...
Government not equipped to keep up
Technological and social change is happening so fast, government bureaucracy is too
lar...
Solopreneurs
Bifurcation of Population
Rise of Bitcoin
It’s a New Day in VC
Transformation of tech means
Startups access global markets 24/7
• Mobile/Tablet exploding
• 1.5 bill...
Technology Has Evolved
Cost to Start Up Dropping
More companies with more opportunity to grow are starting up
It’s Not 1999 Anymore
Faster Bigger Better
Everyone connected all the time. Bandwidth and speed are getting
exponentially faster allowing for mo...
Speed + Mobile
Mobile Subscribers UP, Telecommunication Network Speed UP
Sales In Mobile Growing
Best Performing VC Not in SV
• Spark Capital (Boston)
• Union Square Ventures (New York)
• Foundry Group (Boulder)
• Greyc...
Midwest Growing
Midwest saw a 101% jump in VC funding from 2013 to 2014. For comparison,
Silicon Valley saw an 85% jump. N...
Evidence of
Success
• In 2013, Chicago startups raised over
$1B in venture capital, up 169% from
2012; In 2014 $1.6B
• 78 ...
Top accelerators in the US are in the Midwest
TechStars, Capital Innovators, Gener8tor, Polsky Center
Top Universities and...
• Lower valuations than both coasts
• Same upside potential
• Cheaper labor and physical plant costs
• Access to Fortune 1...
35 Total Investments: 2007(1), 2008(2), 2009 (1),
2010 (5), 2011(5), 2012(7), 2013(6), 2014(3), 2015 (5)
In 2013 HPA did 6...
21 Total Investments: 2005(1),
2007(1), 2008(2) 2009 (1), 2010 (3),
2011(2), 2012(3), 2013(3) 2014(5)
(See all at WestLoop...
• Stock markets are at all time highs.
• Investing in Real Estate is risky at today’s prices
• Private Equity is risky too...
• 765 funds raised $266 Billion in 2014
(too many funds chasing to few deals)
• Interest rates will rise, hurting returns ...
Real Estate Is Dead Too
Interest Rates will rise hurting property values
Real Estate had a huge recovery from 2008 lows al...
Late Stage VC=similar risks with less return
• Later stage VC valuations are frothy.
• Too much money chasing later stage
...
“Even􏰀 more􏰀 striking􏰀 is􏰀 the􏰀 frequency􏰀 of􏰀 winners􏰀
across􏰀 different􏰀 fund􏰀 and􏰀 deal􏰀 sizes.􏰀 􏰀 Deals􏰀 in􏰀
smaller􏰀 ...
When Do
Successful Investors Invest?
• Option value of investing
• Each round similar to a call option
• Keep investing in successful companies
• Maximize valu...
Access to Capital is Easier
Angel List, Seed Invest, Kickstarter, Funders Club (Unbundling of
Everything)
Access to Market...
Billion Dollar Companies
More private companies valued at $1 billion or more than ever before
• Federal and State Income Tax Exemptions
• No tax on gains up to $10M or 10x return
• Includes state tax
• Must be a C co...
Sources of Deal Flow
Support Resources
• BuiltinChicago.org
• Chicago Innovation Mentors
• Office Hours
• Starter League
•...
Entrepreneur community is growing from these exits. Experienced entrepreneurs
are starting new companies.
Last year, $1.6B...
What Makes A Good
Investment?
Would You Have Invested?
• Service that lets you profit from unused office space (2012
Desktimeapp.com)
• Company that cre...
Typical Angel Deals
• Average Valuation is $2-5M pre-money. But
coastal valuations much higher
• Most seed rounds are betw...
Typical Venture Deal
• Round much larger, $10 Million+ pre-money
valuation Most VCs get involved at Series B
or later. Som...
Invest Money
Create Customers, Connections
Mentor and Advise
Help Find Talent for Firm
Create Next Rounds of Financing
Cre...
What Do Angels Look For?
• Solve a pain point with a Big Market
• Betting on the Jockey (initial team)
• Does the entrepre...
Industries Angels Like
• Financial Services (Riskalyze.com, Ycharts.com)
• Consumer Products (SimpleMills.com)
• Health Ca...
Industries Angels
Don’t Like
• Medical Drugs
• Energy (Gas, Solar, Wind, Drilling)
• Industries that Rely on Selling to Go...
Economic Turmoil Affects
Angels
• Uncertainty, wallets stay closed
• Makes Them avoid industries (real
estate)
• Psycholog...
Angel Math
Assume $1M invested evenly in 10 Deals
Assume you exit all in 6 years
1.25^6=3.8xROI Goal
Typical portfolio:
5...
More Angel Math
Angels need to invest in Gazelles, not Unicorns
Gazelles are 30x
Invest in a 3M post valuation company, se...
Top 11 Angel Mistakes
1. Investing in the first deal you see
2. Not doing enough or not doing right due diligence
3. Inves...
CrowdFunding Deals
1.Are you putting enough capital to work?
2.Do you have a material effect on the company?
3.Can you get...
Want Exposure to Early Stage
Without Doing the Work?
• Invest in a fund
WHY?
• Learning curve effects
• Portfolio
• YOUR T...
Confidential Offering Memorandum
WEST LOOP VENTURES, LLC January, 2015
JEFF CARTER WEST LOOP VENTURES, LLC 230
WEST SUPERI...
What Can You Do to Participate?
1. Become A Customer of A Startup-Even if it means
taking some risk
2. Make an Introductio...
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Presentation at FPA Conf (Naperville, IL Sept 1, 2015)

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Chicago Startup Scene, and Angel Financing WestLoopVentures.com

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Presentation at FPA Conf (Naperville, IL Sept 1, 2015)

  1. 1. Chicago Startup Scene The City That Works is A Startup Hub
  2. 2. Jeff Carter Thought leader. Co-Founded Hyde Park Angels in April 2007 (Angel #1), the Midwest’s leading angel group. Helped start other angel groups. Successful. Has made over 19 successful early stage investments, many getting follow on rounds. Highly competitive. Works. Knows how to win. Self employed since 1986. Respected. Elected by peers to CME Board and ran several committees. Strategic Planning and Budget Committee High integrity. Tells you straight, means what he says and follows through. BS University of Illinois and Chicago Booth MBA; Member of the National World War Two Museum Board LinkedIn.com/in/jeffreyrcarter/en blogs every day at PointsAndFigures.com @pointsnfigures on Twitter
  3. 3. Table of Contents I. Startups, Society, and Trends II. Current Conditions in Midwest III.Where and When to Invest IV.What Makes a Great Investment? V. What Does an Angel Do? VI.Angel Math, Angel Mistakes VII.Crowdfunding VIII.What You Can Do IX.Q+A
  4. 4. “Startups are transforming our society. Over the past 100 years, we’ve gone from an industrial era to a post information era where the network is rapidly disrupting the hierarchy and transforming the way we work and live.” -Brad Feld, Foundry Group Boulder, CO Changing Society Changing Technology
  5. 5. Startups Seem Cool
  6. 6. When Startups Start Out
  7. 7. When Startups Are Successful
  8. 8. Networks not Hierarchies Organizations operate from top down. Software and technology enables them to be flatter, fleeter, and first. Everything Will Be Unbundled Organizations that are generalists will be disintermediated by focused competitors that engage specialized business silos Everyone is a Node on the Network Mobile technology makes everyone a node on the network they operate in. Software is Eating the World The way we produce, interact and transact enabling flatter, customized chains of distribution and peer to peer networks. “What’s different today is that we are seeing on a daily basis revolutionary new ideas, devices, and form factors, not evolutionary enhancements.”-Arvind Sodhani Intel Capital in the WSJ (Jan 1. 2014) The MegaTrends
  9. 9. Government not equipped to keep up Technological and social change is happening so fast, government bureaucracy is too large and inefficient to keep pace. 63% of the federal budget goes to entitlements today. (Uber, Airbnb) Rise of the Solopreneur Mobile technology makes everyone a node on the network they operate in. This has deep ramifications for the way we work, where we work, when we work, and how we work. It also has implications to how we raise and educate our children. (Food Trucks, Independent Consultants, RIAs) Bitcoin and Mobile Payments new technology is mobile enabled, closes loopholes and strings in internet technology, and provides a searchable, online, transparent accountability function The Minor Trends
  10. 10. Solopreneurs
  11. 11. Bifurcation of Population
  12. 12. Rise of Bitcoin
  13. 13. It’s a New Day in VC Transformation of tech means Startups access global markets 24/7 • Mobile/Tablet exploding • 1.5 billion smartphones were sold last year • Everyone socially connected through digital • Credit cards designed for “click to purchase” • ApplePay, iBeacon, Bitcoin
  14. 14. Technology Has Evolved
  15. 15. Cost to Start Up Dropping More companies with more opportunity to grow are starting up
  16. 16. It’s Not 1999 Anymore
  17. 17. Faster Bigger Better Everyone connected all the time. Bandwidth and speed are getting exponentially faster allowing for more transaction volume.
  18. 18. Speed + Mobile Mobile Subscribers UP, Telecommunication Network Speed UP
  19. 19. Sales In Mobile Growing
  20. 20. Best Performing VC Not in SV • Spark Capital (Boston) • Union Square Ventures (New York) • Foundry Group (Boulder) • Greycroft (New York, LA) • IA Ventures (New York) • First Mark Capital (New York) • First Round Capital (New York) • It’s time for a revolution in the Midwest
  21. 21. Midwest Growing Midwest saw a 101% jump in VC funding from 2013 to 2014. For comparison, Silicon Valley saw an 85% jump. NYC, 59%. Last year the Midwest saw over $6 billion in exits
  22. 22. Evidence of Success • In 2013, Chicago startups raised over $1B in venture capital, up 169% from 2012; In 2014 $1.6B • 78 companies raised $1M in early stage capital • Chicago Named #7 Best Startup Hub In World in 2015 (#5 in US)
  23. 23. Top accelerators in the US are in the Midwest TechStars, Capital Innovators, Gener8tor, Polsky Center Top Universities and Engineering programs in the Midwest Chicago, Northwestern, Illinois, Wisconsin, Michigan, Purdue We Got Game
  24. 24. • Lower valuations than both coasts • Same upside potential • Cheaper labor and physical plant costs • Access to Fortune 1000 customers locally Great Value
  25. 25. 35 Total Investments: 2007(1), 2008(2), 2009 (1), 2010 (5), 2011(5), 2012(7), 2013(6), 2014(3), 2015 (5) In 2013 HPA did 6 new investments and 10 follow on rounds with 1 exit Invested over $13M and created over 500+ jobs. Now has 111 angels and growing to 150. Track Record: 3 failures, 5 exits and the the rest operating
  26. 26. 21 Total Investments: 2005(1), 2007(1), 2008(2) 2009 (1), 2010 (3), 2011(2), 2012(3), 2013(3) 2014(5) (See all at WestLoopVentures.com) 2 exits, 4 no-exit, 15 operating (exits were 3.7x 49%IRR, 1.37x 19.8% IRR) Jeff Carter Personal Track Record
  27. 27. • Stock markets are at all time highs. • Investing in Real Estate is risky at today’s prices • Private Equity is risky too! • Central Banks have artificially pushed interest rates to all time lows. Rate increases are a matter of time. • During deflationary or inflationary times, traditional assets don’t perform Venture Capital is diversification
  28. 28. • 765 funds raised $266 Billion in 2014 (too many funds chasing to few deals) • Interest rates will rise, hurting returns and opportunities • Banks aren’t lending for leveraged deals • Tax reform; new debt isn’t deductible in Lee-Rubio bill • Private equity can’t afford to buy later stage startup companies like Uber • Dow=18,000, public companies too expensive to buy and leverage Private Equity is Dead
  29. 29. Real Estate Is Dead Too Interest Rates will rise hurting property values Real Estate had a huge recovery from 2008 lows already Governments under pressure and might raise property taxes
  30. 30. Late Stage VC=similar risks with less return • Later stage VC valuations are frothy. • Too much money chasing later stage • Later stage VC deals are harder to get into with much larger check sizes It’s Smart to Be Early
  31. 31. “Even􏰀 more􏰀 striking􏰀 is􏰀 the􏰀 frequency􏰀 of􏰀 winners􏰀 across􏰀 different􏰀 fund􏰀 and􏰀 deal􏰀 sizes.􏰀 􏰀 Deals􏰀 in􏰀 smaller􏰀 funds􏰀 and with 􏰀smaller􏰀 check 􏰀sizes􏰀 were 􏰀two 􏰀to 􏰀three 􏰀times􏰀 more􏰀 likely􏰀 to􏰀 produce􏰀 “venture􏰀 returns”—greater􏰀 than􏰀 a􏰀 3x􏰀 TVM— than 􏰀deals􏰀 in􏰀 larger􏰀 funds. 􏰀􏰀􏰀 “ It Pays To Be Early Too Source: StepStone Venture 􏰀Capital Research Report June 2013: 􏰀􏰀The 􏰀 Real 􏰀Options 􏰀of 􏰀Silicon 􏰀Va
  32. 32. When Do Successful Investors Invest?
  33. 33. • Option value of investing • Each round similar to a call option • Keep investing in successful companies • Maximize value of capital Early stage investing has better risk/reward ratios
  34. 34. Access to Capital is Easier Angel List, Seed Invest, Kickstarter, Funders Club (Unbundling of Everything) Access to Market is Easier Etsy and several democratized online platforms, Amazon Ebooks, Streaming Television creating new networks. (Network Beats Hierarchy) Get Big and Grow Value in a Hurry! Twitter, Tumblr, Braintree, all started in 2007 (Everyone a node on a network) Easier To Grow
  35. 35. Billion Dollar Companies More private companies valued at $1 billion or more than ever before
  36. 36. • Federal and State Income Tax Exemptions • No tax on gains up to $10M or 10x return • Includes state tax • Must be a C corporation • Have less than $50M in assets on initial investment • 5 year holding period Massive Tax Advantages with Qualified Small Business Stock *Consult tax professional for individual interpretation
  37. 37. Sources of Deal Flow Support Resources • BuiltinChicago.org • Chicago Innovation Mentors • Office Hours • Starter League • Ms Tech • Junto Institute Tech CoWork Spaces • 1871 • MatterChicago • TechNexus • WeWork • Nextspace • Catapult Chicago • Chicago Innovation Exchange • Catalyze Chicago • Insight PD University Programs • Polsky Center (Chicago Booth) • Levy Center (Northwestern) • Illinois Launch (Univ of IL) • Liautaud Center (UIC) • Knapp Center (IIT) • Gigot Center (ND) • Coleman Center (DePaul) • Weinert Center (Wisconsin) Angel Groups • Hyde Park Angels • Cornerstone Angels • West Suburban Angels • Irish Angels • TiE Midwest • Arch Angels • MCOIN Accelerators/Incubat ors • TechStars • Impact Engine • The Bunker • Family Farmed • Elm Spring • Leap Innovations • Blue 1647 • UI Labs • REach
  38. 38. Entrepreneur community is growing from these exits. Experienced entrepreneurs are starting new companies. Last year, $1.6B was raised by Chicago startups, with over $6B in exits $800 Million by PayPal. Company founded in 2007, exit 2013 $350 Million by Nordstrom. Company founded in 2009, exit in 2014 IPO $2 Billion. Company founded 2006, exit in 2013 IPO $12.8 Billion. Company founded 2007, exit in 2012 Acquired by SAP, $1B+. Founded 1999, exit in 2014 Recent Chicago Exits
  39. 39. What Makes A Good Investment?
  40. 40. Would You Have Invested? • Service that lets you profit from unused office space (2012 Desktimeapp.com) • Company that creates memorable experiences for customers and employees (2012, KapowEvents.com) • Company that does performance reviews in 15 minutes (2014 JuvodHR.com) • Company that makes it easy to donate money? (2014, PublicGood.com) • Social network for math and science nerds (founded 2012, Brilliant.org) • Company that provides free stock market charts (2008, Ycharts.com) • Company that finds you discounted parking (2007 ParkWhiz.com, 2011 SpotHero.com) • Company that uses an algorithm to find social sentiment index on companies and correlate to stock performance(2012, Likefolio.com) • Company that manages public grants and employs big data analytics and automates compliance (2013 StreamLinkSoftware.com) • Company that creates a “risk number” for clients (2012, Riskalyze.com)
  41. 41. Typical Angel Deals • Average Valuation is $2-5M pre-money. But coastal valuations much higher • Most seed rounds are between $300k and $1M depending on the business (Average is $400k) • Seed round should be 12-18 mo runway (company is pre revenue, pre product) • Angels looking for return. Average return for all angel deals is around 27% IRR • Typical deal is 7-10 years in length. • Angels should look for 30x
  42. 42. Typical Venture Deal • Round much larger, $10 Million+ pre-money valuation Most VCs get involved at Series B or later. Some in Series A; Few do seed • Demand a Board Seat • Maybe, but not usually co-investors • Money isn’t about runway, but about growth • VC looking for outsized ROI (Home Run Theory) • Might replace existing management team
  43. 43. Invest Money Create Customers, Connections Mentor and Advise Help Find Talent for Firm Create Next Rounds of Financing Create Possible Exits Angels typically don’t run companies What An Angel Does
  44. 44. What Do Angels Look For? • Solve a pain point with a Big Market • Betting on the Jockey (initial team) • Does the entrepreneur want to build a blow out business or lifestyle business? • Evidence the product works (no ideas, actual products) and there is demand (customers) • Disruption-product should be a game changer in some way • Path to Exit (target 30x)
  45. 45. Industries Angels Like • Financial Services (Riskalyze.com, Ycharts.com) • Consumer Products (SimpleMills.com) • Health Care, Medical Devices • IT/Digital Media • SaaS Businesses (Desktimeapp.com) • Transportation, Logistics (Supply-Vision.com) • Chemicals • Niche Manufacturing (UICO.com, NuCurrent.com)
  46. 46. Industries Angels Don’t Like • Medical Drugs • Energy (Gas, Solar, Wind, Drilling) • Industries that Rely on Selling to Govt • Industries that need huge start up costs (Stock Exchanges)
  47. 47. Economic Turmoil Affects Angels • Uncertainty, wallets stay closed • Makes Them avoid industries (real estate) • Psychological effects • Governments create uncertainty
  48. 48. Angel Math Assume $1M invested evenly in 10 Deals Assume you exit all in 6 years 1.25^6=3.8xROI Goal Typical portfolio: 5=0x They will bust, you lose 2=1x The Zombie 2=3x The Singles 1=30x The Angel Home Run $50,000 in Uber returned $80M
  49. 49. More Angel Math Angels need to invest in Gazelles, not Unicorns Gazelles are 30x Invest in a 3M post valuation company, sells for 90M you get 30x. Most angel deals exit at 20M-60M Unicorns are Billion dollar plus firms. There aren’t many of them, although they are more prevalent
  50. 50. Top 11 Angel Mistakes 1. Investing in the first deal you see 2. Not doing enough or not doing right due diligence 3. Investing outside of domain expertise 4. Investing at too high a valuation 5. Investing in an uncapped convertible note 6. Signing docs without an experienced lawyer 7. Not reserving additional capital for next rounds 8. Investing in fewer than 20 deals 9. No long term commitment 10.Dragging out investment process unnecessarily 11.Junking up term sheets with dumb terms
  51. 51. CrowdFunding Deals 1.Are you putting enough capital to work? 2.Do you have a material effect on the company? 3.Can you get access to company reports? 4.Are you getting common or preferred equity? 5.Angels do better hunting as a Wolfpack 6.Spray and Pray only works in Vegas There has been plenty written on the pros to crowdfunding and I am not opposed to it. But, there are risks
  52. 52. Want Exposure to Early Stage Without Doing the Work? • Invest in a fund WHY? • Learning curve effects • Portfolio • YOUR TIME • TIME
  53. 53. Confidential Offering Memorandum WEST LOOP VENTURES, LLC January, 2015 JEFF CARTER WEST LOOP VENTURES, LLC 230 WEST SUPERIOR, CHICAGO, IL 60654 JEFF@WESTLOOPVENTURES.COM (312) 203- 5270 QB148933.0000221641392.7 THIS CONFIDENTIAL OFFERING MEMORANDUM (“MEMORANDUM”) HAS BEEN PREPARED SOLELY FOR THE BENEFIT OF INVESTORS INTERESTED IN THE PROPOSED OFFERING OF MEMBERSHIP INTERESTS (THE “SECURITIES”) IN WEST LOOP VENTURES, LLC (THE “COMPANY”) AND CONSTITUTES AN OFFER TO AN OFFEREE ONLY IF THE NAME OF SUCH OFFEREE APPEARS IN THE APPROPRIATE SPACE ON THE COVER HEREOF. BY ACCEPTING THIS MEMORANDUM, THE RECIPIENT AGREES TO MAINTAIN IN STRICT CONFIDENCE THE CONTENTS HEREOF AND TO UTILIZE THE INFORMATION CONTAINED HEREIN SOLELY FOR THE PURPOSE OF EVALUATING A POTENTIAL INVESTMENT IN THE SECURITIES. ANY DISCLOSURE OF THE CONTENTS OF THIS MEMORANDUM, WHETHER IN WHOLE OR IN To Get a Formal PPM Please contact Jeff Carter at 312-203-5270 or jeff@westloopventures.com or Attorney Kathleen Swan, Quarles and Brady (312) 715-5015 kathleen.swan@quarles.com Thanks for your time. Would love to have you involved
  54. 54. What Can You Do to Participate? 1. Become A Customer of A Startup-Even if it means taking some risk 2. Make an Introduction to a Potential Customer 3. Mentor Entrepreneurs for FREE 4. Give Startups Feedback 5. Talk about the local Startup Community with your friends, neighbors and work associates 6. Invest via a local early stage VC fund or angel group 7. Encourage local government to support startups by becoming a customer and easing regulations
  • ChicagoZen

    Sep. 14, 2015

Chicago Startup Scene, and Angel Financing WestLoopVentures.com

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