Building Wealth through Venture Capital. Freeman Kenneth M.

Capital

Building Wealth through Venture CapitalA PRACTICAL GUIDE FOR INVESTORS AND THE ENTREPRENEURS THEY FUNDLeonard A. BattersonKenneth M. Freeman

      Copyright © 2017 by John Wiley & Sons, Inc. All rights reserved.

      Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

      Published simultaneously in Canada.

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       Library of Congress Cataloging‐in‐Publication Data

      Names: Batterson, Leonard A., 1944– author. | Freeman, Kenneth M., 1949– author.

      Title: Building wealth through venture capital: a practical guide for investors and the entrepreneurs they fund / by Leonard A. Batterson, Kenneth M. Freeman.

      Description: Hoboken: Wiley, [2017] | Includes index. |

      Identifiers: LCCN 2017016750 (print) | LCCN 2017020511 (ebook) | ISBN 9781119409373 (pdf) | ISBN 9781119409366 (epub) | ISBN 9781119409359 (cloth)

      Subjects: LCSH: Venture capital. | Investments. | Business enterprises – Finance.

      Classification: LCC HG4751 (ebook) | LCC HG4751 .B368 2017 (print) | DDC 332/.04154 – dc23

      LC record available at https://lccn.loc.gov/2017016750

      Cover Design: Wiley

      Cover Image: © norph /Shutterstock

      Preface

      While taking some time off after selling his Chicago‐based company, MusicNow, to Circuit City in 2004, founding chairman and CEO Chris Gladwin had a new idea. It came to him while musing about how to store his extensive collection of photos on his personal computer. There just wasn't enough storage on his computer to house all those pictures.

      Storing those keepsakes online in the cloud might work, but Gladwin worried they might then, outside of his control, be subject to loss or perhaps hacking. Not surprising, since he's an MIT graduate, Gladwin began reading books on encryption, and a really big new idea came to him that could alter the way data (including his and others' pictures) were stored and secured.

      He realized that the execution of his idea would require forming a high‐tech company, putting together a team that could pull it off, and raising a lot of capital. While his MusicNow was a nice little company, a truly high‐technology startup with this big of an idea had not been developed and funded in Chicago in many years. Such startups had been gravitating to places like Silicon Valley, the towns around Boston's Route 128, and the Washington DC metro area, so the decision to try to do all this in Chicago seemed on the surface to be potentially as risky a decision as going after the big idea in the first place.

      Chicago, like many other cities, had once been a hub of bustling entrepreneurship, with many hard‐driving, creative, fearless minds conjuring up the future. But such innovators – like Marshall Field in retailing, Potter Palmer in retailing and real estate, Michael Burke in telecommunications (Tellabs), the Galvin Family in electronics (Motorola), and Casey Cowell in data communications (U.S. Robotics) – seemed to be “yesterday's newspaper.” Until Chris Gladwin came along, there had been a long dry spell, and never in the dot‐com era had there been a high‐tech company created in Chicago that brought to the Midwest's commercial capital that virtuous cycle of local entrepreneur, assembling local talent, and capitalized through local funding.

      The creation of that virtuous cycle depended upon not just Gladwin's big idea and his ability to assemble the required talent, but also his ability to attract the necessary funding – first from friends and family, then from local venture capitalists, and then from the wider world of risk capital.

      Fortunately, Chris Gladwin had a lot of friends. Even better, some of them were individual accredited investors.

      Once he exhausted that source of funds (which happens even to friendly people with big ideas), he turned to professional high‐tech venture capital investors. There were not many of these in Chicago, so it was a tough slog raising the additional $1 million he needed.

      Fortunately for his new company, which he dubbed Cleversafe, Gladwin was (and still is) also a really decent, philanthropic sort. Practicing that philanthropic bent, Gladwin hosted a poker party with proceeds going to charity, to which he was able to attract several local entrepreneurs and venture capital investors.

      One of the venture capital investors, Jim Dugan of OCA Ventures, knew Chris well and decided to back his idea, even though many other professional VC investors had already turned Gladwin down. Gladwin then went out on the road to find additional capital to join with Dugan and OCA, and ran into our then‐actively investing firm, Batterson Venture Capital. Our firm, along with OCA, recognized that with the rise of big data, big data storage and security were soon to be a big deal.

      “Fairy Tales Can Come True, It Can Happen to You…”

      The rest, as they say, is history. It may have taken a bit longer than we expected, and ultimately $100 million in investments over time, but when Cleversafe was sold to IBM in late 2015 for $1.3 billion, there were an awful lot of smiling faces in Chicago; 80 millionaires were minted among friends, family, and Cleversafe employees, and numerous already accredited investors suddenly became a lot wealthier.

      Gladwin's big idea and its intersection with practical need resulted in market demand, and brilliant execution resulted in a home run win for the entrepreneurial Gladwin, the company's employees, and its venture capital investors. Many got back more than 10 times their investment. The very earliest investors made a multiple of 40 times their early investment. Cleversafe proved that a major high‐tech company could be created in Chicago in the 21st century, and so lots more are ready now to skip Silicon Valley and build their dream in the Midwestern heartland.

      Opportunities like Cleversafe, while rare,