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Tom Churchwell Venture Capital Speech at University of Chicago GSB

The following are high level notes of Tom Churchwell’s speech discussing venture capital at The University of Chicago Graduate School of Business (Chicago GSB). This talk took place in Chicago on January 22, 2008. I’m posting it today in celebration of this week’s Midwest Venture Summit.

Typical Fund Structure
– Management Fee 2.5% of committed capital
– Carried Interest – after losses offset by profits
– 80% Net Profit – Investors
– 20% Net Profit – General Partner
– 50-70% desired return…
– Vesting occurs over 5 years

– Experienced, successful entrepreneurs abound throughout the country
– Start-up companies have access to abundant early-stage venture capital
– Skilled attorneys, accountants, consultants are readily available
– The majority of start-ups can result in successful IPO’s within 2-3 years
– Increasingly hedge funds are an alternative financing source
– Angel capital is more available in Chicago than it used to be

– The space a VC plays in is extremely important – industry sector, growth

– Tom has changed management 3 times on average in the 60 companies he’s invested in

– Buckets of entrepreneurship seed entrepreneurs, beta stage, scaling skills

– Discipline = Success

– Proprietary product or service
– Sustainable competitive advantage
– Viable business model
– Large markets
– Experienced management team
– Appropriate use of funds
– Target 10-15x growth 5-7 years
– Objective: Sale of IPO in 5-7 years

– The most critical resource
– More important than all other elements
– Stage appropriate, later stages may require different management
– Must have a significant stake in success
– Tom says “Management experience is management experience, big company experience is just as good as small company experience in his view.” (Note: I actually find a *mixture* of both sizes in your experience to be of high value)
“We don’t make money on IPO’s, we make money selling to the Baxter’s, Motorola’s etc.”

“Nothing succeeds like revenue, it’s the cheapest form of capital.”

In 60+ company investments, I can only say that once it was the technology that made the company fail. It’s about getting the product in the marketplace.

What makes you say yes?
Passion. A product I have to get on the marketplace that solves a real problem. Management discipline which means they can step back and say realistically this is how long it will take, this is the team you will need, etc.

Revenue is an outcome, it’s not a driver. What is going to cause the business to scale? It’s business model testing. I don’t care about year 5, I care about what will get us more proof of concept and closer to a success.

The first screening process is where did this plan come from, if another VC sent it to us, we pay attention more. I ask, “Do I want to have a beer with this guy? You shouldn’t be there if you can’t say yes. ”

60% of the time we at least get our money back.

Scientific Board of Directors (compensated with a point of equity +/- a bit)
– Should be at least equivalent in stature to the scientific founders
– Like the Board of Directors, should have complementary skills
– Used properly, play a vital strategic role
– Typically meet semi-annually

Tom never signs an NDA.

The Business Plan
– Executive Summary is most important
– Shorter is better
– Assume the full appreciation of the technology will come in the due diligence
– Avoid jargon
– Avoid the hockey stick
– Focus on the revenue model
– Have a realistic exit strategy
– IPO’s are rare – most VCs are quite happy with a nice M&A exit
– Nobody reads the full business plan – I care about the executive summary
– Cashflow is more important than revenue during this phase

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The Chicago Business School Speech to Air on Cspan2

Cspan2 will air “The Chicago School” at 11AM Chicago time on this Saturday, the description is as follows:

Johan Van Overtveldt talked about his book, The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business. He described the history of the school and the ways the University of Chicago’s economists have shaped their field. The central figure in the school’s libertarian-leaning economics program was Nobel Prize-winner Milton Friedman. After his presentation the author responded to audience members’ questions.

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Google Book Search Partners with University of Chicago and Big 10

I was flipping through the most recent University of Chicago alumni magazine and noticed a small blurb about The University of Chicago and 11 of the Big Ten partnering with Google Book Search. The press release states:

“These universities, through their provosts and other key leaders, have worked
together on some of higher education’s greatest challenges and opportunities.
This partnership with Google is one of the most ambitious undertakings in the
history of the CIC, and sets the stage for a remarkable transformation of library
services and information access. We’re opening up these resources as both a
common good shared among the universities, as well as a public good available
more broadly, ” said Barbara McFadden Allen, director of the CIC.”

This announcement followed 5 days after Barry Schwartz reporting about custom search engines. It appears things are heating up again in the Book Search arena.

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Julie Roehm Chief Marketing Officer Article

Julie Roehm wrote this interesting Imedia Connection article about when it’s time for you to fire your CMO.

I’d like to add a few items to Julie Roehm’s list:

1) If they don’t understand the basics of search engine optimization (SEO) and marketing. More importantly, they need to understand how this gets incorporated in other traditional forms of marketing which are still relevant in our society.

2) They need to understand blogs and customer listening. In other words how to innovate in real time from customer feedback. They need to have a CEO and a board which fully understand and support these efforts. A good way to determine if one is qualified in this regard is to be a blogger themselves who “gets it”. Not in terms of frequency, but in terms of quality and conversation.

What others can you think of to add to Julie Roehm‘s list? I’d like your thoughts.

UPDATE 7/2009:  New Personal Life Media Interview

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Billy Dexter – MTV’s Chief Diversity Officer

Billy Dexter is a power networker in Keith Ferrazzi’s league. I had the priviledge of seeing Billy speak this week at a National Black MBA event here in Chicago. He is dynamic, funny and charming. He currently serves as MTV’s Chief Diversity Officer, it was not a job he asked for, they asked him. To study Billy is a great case study of the importance of personal branding to future success.  

Billy was working as a headhunter on the search at the time. MTV couldn’t decide which candidate to select and met with Billy to discuss the issue. After the meeting, MTV HR called Billy and said they changed their mind, they wanted to hire Billy instead! He thought they were joking, but they weren’t. They asked him to make his offer for them. In his words, he went “real ghetto with it”. They accepted his initial proposal untouched and h felt like he should have asked for more! I’m not doing the story justice with this blog entry, you should hear him tell it one day!

One of his networking tips that is distinct is that Billy says, “people need to feel comfortable with you.” It’s an interesting concept, one that Billy himself is a bit challenged to explain more deeply, though he claims not to be a natural.

Here are some of Billy’s tips for success:

– Develop a script to engage people and your “30 second commercial”

– Attend an opportunity event frequently

– Develop both up and down mentoring

– Study, refine and prioritize your personal and professional networking contacts

– Put your execution plan on paper by date and context

– Find ways to make connections with others

– Constantly monitor you results celebrate your accomplishments and adjust your plan, if required   

As I stated, Billy Dexter is both interesting and enganging, I look forward to building a relationship with him over time.

If you ever need someting to start a conversation about with Billy – try golf, he is an avid golfer!

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Chicago GSB Named #1 MBA by Business Week – 10 Metrics to Redesign

The University of Chicago Graduate School of Business (Chicago GSB) was rated the top MBA program in the Business Week bi-annual MBA survey of recruiters and students.

As a proud alumni, I want be clear that I appreciate the quality students, alumni and faculty at Chicago GSB.

However, theses surveys have not changed much since the rating systems were started several decades ago. What’s missing from that survey is alumni and the alumni experience now that MBA programs are a mature and not a growth industry. The metrics and experience here is much more unclear and are overdue for significant redesign.

Some questions I’d like to see in a redesigned survey that should carry a one third weighting alongside current students and alumni:

1. What is the alumni satisfaction rating of the institution from alumni at the 5, 10, 20 year mark?

2. What Internet based networking tools are in use? For example, I’ve asked Ted Snyder for a Simple Machines Message Board for all alumni (privacy set to no outside view) for several years and this has not been made a priority which is sad as it’s simple to implement. I want to be able to post obscure topics and find that needle in the haystack, whether I’m going to Shanghai and need to network, what to find others interested in using blog buzz to help price options or other new topics of interest. In other words, which school has not only the best network, but a culture of lifting all boats and leaving nobody behind?

3. What percentage of the alumni does the institution have accurate contact data for in a shared directory for all alumni to use? What is the strategy to create value so that all alumni are excited about staying in touch with the school and the network?

4. What is the ratio of dollars spent on alumni every year versus new student attraction? If it’s a quality alumni experience, the ratio will be less. This is a simple metric to calculate once the data is transparent.

5. What percentage consider themselves fully employed and utilized?

6. Do salaries really go up from graduation level or are most of these salaries higher due to churn and burn industries with long hours? Stated a different way are the salaries the GMAC publishes for the sole purpose of student attraction misleading? Some suggest that they are. Considering the GMAC publishes these studies during the application season, the business school self-reported salary data is highly suspect.

7. As the baby boomers age and pockets of shortages arise, we need to change the campus recruiting policies to focus on hiring gifted thought leaders based on competencies regardless of year of graduation – there are pockets of underemployed MBA’s form the 2001-2003 era that should be redeployed fully to roles worthy of their skills – the current process doesn’t allow this to occur and it is obsolete – it exists only to encourage student attraction and influence each year’s performance stats – you see it in the Business Week stats – it’s all about salaries (which are inflated because they are mostly not jobs with normal hours) – isn’t there more to life than just salary?

8. What percentage of the alumni are currently giving gifts to the school?

9. What percent of alumni are living in the geographic region of their choice?

10. Does the school have functional and relevant alumni activities both in industry verticals and in geography?

These are just a few of the metrics that I would invite Business Week, Wall Street Journal and Financial Times to explore fully for overhaul. Please feel free to comment and add ideas to this discussion, link to this post or forward it to anyone via e-mail whom could influence this positive and needed metric changes. Thank you for joining the conversation for needed reform.

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About Last Night…

What a busy night, I met some new friends Ed Kohler and Banjamin Higginotham of Technologyevangelist came down all the way from Minnesota to attend Techcocktail2!!! What wonderful people. Techcocktail2 was full of great conversation and networking about tech in Chicago. Afterwards, Robert Scoble was staying the night near O’hare airport and I got make a surprise visit with him and meet Maryam for the first time.

Some selected images of the evening:

Two Amsterdam tourists, Maryam Scoble and Robert “Will you link to me please?” Scoble

Lou Calamaras, Brad Spirrison and Katie Spirrison

Frank Gruber and Eric Olson

Ron “Can I have your card?” May