Thanking Troy Henikoff for a recent1871 walk-thru, which I joined as part of an MIT delegation. We first met at Techstars Demo Day back in 2014. Three years have gone by since, Troy is now a Managing Director with Math Venture Partners, an early to growth-stage fund focusing on entrepreneurial undertakings featuring “an unfair advantage in acquiring and retaining customers to produce outsized returns.” Here is a sample of Math’s portfolio.
1871 is a digital startup incubator and is positioned as Chicago’s premier center for entrepreneurship in the tech sector. Techstars is a startup accelerator and, as pointed out above, Math Venture Partners is an investment firm.
Long story short, 1871 is first and foremost optimized as a community environment. The underlying supporting framework provides collaborative workspaces, training focusing on design, technology and business, which includes senior mentorship, incubators and accelerators. All of these opportunities are available following the under-one-roof collocation practice downtown Chicago.
“What is 1871? The story of the Great Chicago Fire of 1871 isn’t really about the fire. It’s about what happened next: A remarkable moment when the most brilliant engineers, architects and inventors came together to build a new city. Their innovations — born of passion and practical ingenuity — shaped not just Chicago, but the modern world. What started 140 years ago continues to this day. Come to a place where you can share ideas, make mistakes, work hard, build your business and, with a little luck, change the world.” – 1871
Matter is 1871’s neighbor and Chicago’s healthcare startup incubator. As shared in this Chicago Tribune’s article, Chicago has major hospitals, medical schools, pharmaceutical and device companies, a powerful healthcare hub which Matter seeks to galvanize by supporting entrepreneurial initiatives and innovative tech.
Chicago’s area is also home to leading institutions such as University of Chicago, Northwestern University, Loyola University Chicago, The Illinois Institute of Technology, and DePaul University just to name a few. So, academia and industry intersect to take advantage of talent and business opportunities.
My personal interest in environments such as 1871 has to do with a “give & take” experience. Born in Hispania and back in the distant Roman times, Seneca the Younger believed that we are learning even more when we share knowledge that we might already posses. Basically, he was talking about Human Factors and Information Interaction: a virtuous feedback loop kicks in when we strive to articulate thoughts and structure conceptual frameworks to better convey insights. That, in turn, springs new thoughts.
I pride myself about having developed a mix of creative and in-depth expertise on innovation practices thanks to a fortunate interdisciplinary career spanning 20+ years already. That personal belief is backed by specific achievements and, admittedly, some disappointments, both having delivered teachable moments worth reflecting upon.
So, in a “give and take” scenario, my “giving” has to do with sharing know-how and synthesizing relevant advice to entrepreneurs, which I have been able to provide by joining Dr. Moises Goldman’s 1871 mentoring sessions on several occasions.
Going back to Seneca the Younger’s thinking, in exchange for volunteering my time (and whichever insights I can provide) I always get to “take” away valuable experiences back home with me such as:
(1) a sense of great satisfaction and fulfillment that comes from helping others in a meaningful way,
(2) a contagious entrepreneurial spirit that one can instinctively embrace in discussions driven by passion and determination,
(3) their combined positive impact in my own work since they re-energize my thoughts and goals.
My grandma used to remind me about a Spanish saying that translates into “tell me who you walk with and I’ll tell you who you are,” which might equate to “birds of feather flock together” in English. In any case, and leveraging Human Factors again, social and professional networks can be graphically depicted by nodes (individuals) and links (relationships), which can carry information such as reputation and influence levels, as well as information dissemination paths. So, I’m glad to count those who I interact with at 1841 as part of my network and can only hope that this is a mutually beneficial relationship.
“Valuing high-growth, high-uncertainty, high-loss firms is a challenge (…) although DCF [Discounted Cash Flow] may sound suspiciously retro, we believe that it works where other methods fail, reinforcing the continued importance of basic economics and finance, even in unchartered Internet territory […] these stocks are highly volatile for sound and logical reasons.” – “Valuation, Measuring And Managing The Value of Companies” by Tom Copeland, Tim Koller, Jack Murring. Published by McKinsey & Company.
“For early-stage companies, the projections usually focus on the uses of funds; for later-stage companies, the projections should be more complete financial statements. In general, VCs (correctly) take all such forecasts with a grain of salt […] qualitative elements remain the key focus of the next phases of diligence […] they can both be phrased as questions: does this venture have a large and addressable market? (market test) and does the current management have the capabilities to make this make this business work? (management test) […] the market test is much more of an art when the VC is evaluating new markets, either because there are currently no products in that space, or because the products have not yet found any path to profitability.” – “Venture Capital and the Finance of Innovation” by Andrew Metrick.
“This topic gets very important in situations where an entrepreneur has a good idea but few assets. In such cases, it’s very hard to determine what the company is actually worth and valuation becomes a subject of negotiation between the entrepreneur and the venture capitalist.” – “What’s the difference between pre-money and post-money?” by Investopedia.
The cloud age is fostering two effects:
- (1a) democratizing access to all kinds of technologies and markets, which (1b) lowers barriers for entrepreneurs
- (2a) raising the stakes to differentiate and (2b) forcing the creation of unique value
We all get into discussions about a good idea and proceed with some web searches and conversations with people in that space. Then we might quickly realize that there is someone out there making it happen already. What first comes to mind is that speed and agility are of the essence even more than ever before. Though a deeper dive can reveal opportunities for differentiation even in crowded markets. This is a dynamic market environment where there are first mover advantages as well as aggressive fast followers whose businesses leverage the learning from others’ failures and successes.
The cloud age fuels innovation and enables opportunities that “grow and diversify the pie.” This also makes Clayton Christensen’s Innovator’s Dilemma more and more apparent for large established players who get to face serious competition from nimbler unconventional companies. When successful, a cloud start-up can feature high adoption rates, take market share away from powerplayers and even shift demand curves with disruptive innovations. However, as more competitors join the fray, it is increasingly challenging to spot the few future winners in an ever larger pool of startups.
Riding a hypergrowth’s wave can result in becoming a victim of success when failing to scale. Some of the cloud’s business models allow companies not to own equipment and related facilities, which is provided by suppliers of infrastructure as a service. When growth calls for further investments these are expensed in the income statement instead of capitalized on the balance sheet.That situation makes traditional valuation benchmarks far less reliable and, interestingly enough, losses are more apparent in the mix of thriving growth.
Promising start-ups might not yet generate revenues either. McKinsey’s manual on valuation asks the question on how to do a DFC analysis when there is no CF to D and makes a case for making financial projections coupled with conducting a level of business analysis that allows to develop an “understanding.” From a quantitative standpoint, we are left with some basic valuation tools to work with. Examples:
- Discounted Cash Flow – outlines trends and growth assumptions driving a scenario that renders future projections for both incoming and outgoing cash; the exercise entails estimating the present value of that cash flow and risk is factored by the interest rate set in the calculations.
- Real Options Valuation – credited with considering alternative scenarios where the more options available in terms of management decisions the higher the value.
- Comparables – seeks to exemplify what other seemingly equivalent enterprises have already proven; assumes that the start up under analysis can either come close, mimic or outperform those references.
- Balance Sheet Analysis – looks into assets (including know-how and goodwill), liabilities and ownership equity.
- Replacement and Replication – this valuation considers costs already incurred, choosing whether to account for hindsight (replacement) or factoring all efforts spent on experimentation and course corrections (replication).
Why is this important? Early on, a pre-money valuation (before receiving financing) will define the entrepreneur’s ownership and how that could change post-money. External investments in exchange for a percentage of the shares and services compensated with options will dilute ownership for the company’s founders. Valuing business prospects and R&D priorities will also influence technology roadmapping, as well as future negotiations involving financing, partnering, mergers and acquisitions.