No Thanks, Forbes. The ACTUAL Hottest Chicago Startups
A Pre-Seed Primer (if by Primer u mean Rant)
The Fallacy of “Smart People”
The Popular Markets Delusion
Moving Beyond Spam: E-Commerce’s Latest Chapter is Rebuilding Relationships & Trust

No Thanks, Forbes. The ACTUAL Hottest Chicago Startups

Look, I’m a huge fan of Forbes. I read Term Sheet religiously. I have friends who work there as journalists. And I think their April 2015 issue feature articles about Benchmark Capital and Chris Sacca are two of the most intriguing VC profiles I’ve read in a while. Flat out they are killing it.

But their take on Chicago’s “Hottest Startups” can at best be described as, well, laughable?



And from ChicagoInno’s Will & Jim:

While they certainly got some things right, the inclusion of two public companies, Grubhub & Groupon is obviously a miss. It’s not 1999 where you could IPO off a biz plan and some wireframes (I once put $2k into eFax when I was a teen, oops!!). Those companies are 9 years old now. That’s not a startup. And the inclusion of GoHealth? It’s a hell of a biz, but it was founded in 2001. I was 16. 14 year old companies are not startups. I think what much of the media often conflates is the difference between “startup” and “tech company.” Protein Bar is much more of a startup than GoHealth…

So with all that said, here’s my list of Chicago’s Eight Hottest Actual Startups (in no particular order):

  1. Raise.com - Is the fastest growing marketplace for buying/selling unused giftcards. What makes Raise.com special is their mobile focus, enabling consumers to purchase a discounted gift card, on-demand, at a Point of Sale kiosk, to immediately save money on a purchase (above and beyond regular coupons). In the past 24 months, Raise.com has raised $81M in VC funding and now boasts 125 employees.
  2. AvantCredit – The fastest growing full-stack digital lender of consumer loans, Avant was started by Enova Financial (CashnetUSA) founder Al Goldstein. With over $500M in equity and another $500M in debt raised over the past 24 months, the company is now valued above $1 billion.
  3. UpTake.io - Super secretive Uptake was founded less than 18 months ago but has made a significant mark on the Chicago scene, hiring over 100 employees in six months and consuming the bulk of Brad Keywell’s time. Fortune has the only deep scoop to date, revealing among other things that they have a deep partnership with Caterpillar.
  4. Shiftgig - The early leader in people marketplaces for temp or hourly workers, Shiftgig had a tremendous 2014 growing 10x year over year, while its member base eclipsed the 1M verified profiles mark. With a recent $10M announced Series A and over 100 Chicago based employees, the company expects to keep growing into 2015. **Chicago Ventures is an investor in Shiftgig.
  5. Civis Analytics – Founded by former Obama for America techie Dan Wagner and funded by Google Chairman Eric Schmidt, Civis is “building a data driven world.” Although mostly secretive about both their clients and products, they acknowledge working with Boeing, Discovery and the American Red Cross are known to build deep analytics platforms to service both enterprises and non-profits to better understand their customers, strategy and spending.
  6. Signal - Founded in 2009 with well heeled technologists Mike Sands, Mark Kiven and Eric Lunt at the helm, Signal (fka BrightTag) has raised over $50M in VC financing while scaling past 150 employees. Its suite of products enabled brands and agencies to track the offline to online conversion path of customers as well as glean advanced analytics from digital tag management. It may not be sexy but its consistent with strong institutional and corporate investors.
  7. Keeper Security – Despite being entirely under the radar, Keeper is consistently amongst the top grossing apps on iOS month after month for its password manager and digital vault. Having now eclipsed 50 employees (according to LinkedIn), Keeper looks to become the next great bootstrapped Chicago story.
  8. Kapow Events - Barely three years old and already the leading platform for curated corporate events booking, Kapow has made big moves including adding Grubhub co-founder Mike Evans to its board (according to LinkedIn). Despite having started 2014 active only in Chicago, Kapow now services 8 cities with Houston, Philly & DC also listed as Coming Soon. **Chicago Ventures is an investor in Shiftgig.

Close Calls: Mu Sigma (11 years old), kCura (15 years old…sorry half my age is not a startup), ContextMedia (9 years old), TrunkClub (acquired, although still effectively a startup), Sprout Social, SingleHop (9 years old).

Have a suggestion for what I missed? Post it in the comments and I’ll make some changes if people think I’m wrong.

Till next time,



A Pre-Seed Primer (if by Primer u mean Rant)

In general, I’ve been hesitant to write about VC industry dynamics and instead much prefer to opine on companies, industries, or behavior shifts. I think this is because (a) I simply don’t know how much I can add to the conversation…very few people write about VC nuances well (Semil Shah is one obvious exception). And (b) I find most VC “tips” or whatever to be the lowest common denominator of content. I mean who hasn’t seen infinite articles on how to form a pitch deck or how to find an angel investor. Probably a bit mean spirited but it doesn’t interest me.

But I felt it was worthwhile to make an exception and offer some thoughts on the emergence of pre-seed investing as its vitally important for entrepreneurs to understand.

What is Pre-Seed?

The trend was first written about by Manu Kumar at K9 Ventures in April 2014. In it, he noted:

Seed is not the first round of financing any more. In fact after noticing this trend last year, I have transitioned to calling most of my initial investments “pre-seed” rounds, where the company raises close to $500K, before raising a full seed round. The Seed round is larger — closer to and sometimes upwards of $2M. The Series A is now the fourth round of funding for a company — the first is usually friends and family, or an incubator (~$50K), then pre-seed (~$500K), then seed (~$2M), then Series A (~$6M-$15M).

And the trend is building. Last month, Notation Capital raised an $8M seed fund, noting amongst other observations that “There are so few real VCs willing to invest in pre-growth. They all want to invest in the growth chart.” And yesterday, Charles Hudson, a Partner at SoftTechVC (one of the original MicroVCs) left his post to form his own pre-seed fund, citing a desire to get his hands dirtier at even earlier stage with entrepreneurs.

The Pre-Seed Evolution

This is really the only relevant part of this post (the rest is just my formalized fluff to make myself look smart): High level – the venture landscape has changed and “early stage” or “seed” or “microVC firms” are not going to be the proper source of funding for most entrepreneurs.

This is Chicago Ventures’ evolution as a fund. Chicago Ventures was born in December 2011 (let’s call it 2012) amidst the boom in MicroVC funds, of which there are now more than 200. Many of these funds will fail, but others are building strong networks, brands, and track records. I’d like to think we’re on the right trajectory in those areas, but as you’ll note, the consequence of our success was that as we did our job well, we moved further upstream in the investment stack.

We’re not the only ones. I’d imagine many iterative MicroVCs have experienced similar shifts. A deepening risk aversion is a natural consequence of the current ecosystem dynamics: incrementally more startups, increasingly verticalized target markets, and growing non-institutional early stage capital. Venture Capital is a game of missing information and the current setup provides even very early stage investors with a greater information advantage than ever before: and for us, there’s simply no option but to take it. (Remember, that we have a fiduciary duty to our investors as well). The even better news for MicroVCs is that with a few exceptions, the market is so oversaturated with startups, that even by waiting an additional 9-18 months, our entry valuation (albeit often higher) is still low enough to make fund economics work.

What this means is that many of the outlets that used to provide $250k checks to early stage entrepreneurs no longer exist.

Entrepreneurs need a new option: a firm whose model is based on high variance investments in exchange for increased ownership and lower valuations. These are  the new Super Angels. Funds such as K9 Ventures, Boldstart, Ludlow, and Brooklyn Bridge Ventures are great examples of quality firms filling this gap. Their models are predicated on having the conviction to place bets before larger investors step in.

In my opinion, entrepreneurs reading this at the 2-6 employee stage, with a product only a couple of months old or still in MVP mode, should be approaching these firms first and avoid wasting time with traditional seed VCs. The pre-seed firms are working hard to build strong upstream syndicate networks and if they believe a larger institution could be an appropriate partner, will make the recommendation accordingly.


If you’re not from Chitown, you can skip this section. High level – I maintain the highly controversial and unpopular opinion that Chicago has degraded over the past three years from a pre-seed funding perspective. And it is a real crying shame.

That seems like an insane proposition given the explosion in the Chicago tech scene, 1871’s hyper-growth, incubators such as MATTER, and the proliferation of local seed funds: Chicago Ventures, Lightbank, Hyde Park Venture Partners, JUMP Capital, and MATH.

But again, it’s all in how you define “seed.” If you’re a company in market with traction, a relevant team, 18 months of metrics and looking to fundraise $1-3M to step on the gas, Chicago is strong as hell. But if you’re earlier, there’s a gaping hole.

3 years ago, Chicago’s 45 most active angels merged together into a single entity, Firestarter Fund which often serves as a follow-on fund for $750k-2M rounds. The intentions were beyond noble but it had the effect of pushing most of those angels’ money upstream into larger financings. Other angels merged into Corazon Capital – a group I personally believe is phenomenally value additive, hands on, a dream investor – but again, a lot (though not all) of that money is being deployed further upstream.

The flip side is that there is more private Chicago money looking to enter the venture class: real estate professionals, banking, HFT, etc. But this money overwhelmingly does not have experience in helping build or manage early stage startups. Worse, because they are largely not price sensitive, they will inflate entry valuations to the point of being unpalatable for institutional seed VCs once the company hits an early growth curve. This forces those companies to continue tapping non-institutional money ad nauseum.

There may be relief in sight: local pre-seed institutions are emerging. JumpStart Ventures founded by ContextMedia execs Rishi & Shradha have made nearly 20 early stage investments over the past year. Wintrust recently announced a pre-seed equity fund. But there remains a massive hole for local startups at a critical juncture – where they need $250-500k to add a couple team members and experiment in market.

My Feelings

Earlier this week at an event I hosted, a founder who’d just closed her pre-seed round remarked to me how taxing the entire process was. Rolling closes over many months, lots of small checks, etc. She was relieved but visibly exhausted.

That in itself doesn’t bother me. Entrepreneurship isn’t easy – difficulty is simply the reality. One of the variables a firm like Chicago Ventures optimizes for is to spot the survivors: the hunters, the killers – founders with thick skin who can push through rough patches with positivity. What does bother me is that the founder mentioned has effectively no outlets for empathy or professional support. Despite raising capital, she is still largely on her own.

Empathetic support and experience are the roles pre-seed funds can fill. It isn’t charity – these firms should be appropriately compensated for their risk and infrastructure. But it’s hard to build healthy, balanced entrepreneurs and startups if there aren’t healthy, balanced institutions supporting them.

Till next time,


The Fallacy of “Smart People”

Yesterday’s primary Twitterati discussion centered around Henry Blodget’s thought provoking piece DEAR SILICON VALLEY, Here’s Your Wakeup Call. In it, he bemoans the lack of responsible, diligent analysis amongst some of today’s leading VCs, and their unbridled, unchecked optimism.

Some were quick to malign Blodget for his representation of all Silicon Valley through the lens of a single (or a couple of investors). But I actually tend to agree with Blodget’s unspoken, yet underlying point: that as the tech world has had a strong ten year run on the backs of a white hot NASDAQ, the new generation of tech VCs have achieved something of a cult, unbounded status (at least amongst my peers).

What do I mean by this? On a couple of recent occasions, take Jet.com’s recent $140M raise pre-product as an example, I’ve responded to the question of “what do you think of that?” with one of my go-to responses: “It feels off to me, but there are a lot of smart people around the table, so I must be missing something.”

But this is a fallacy. Smart people do dumb things. Especially when driven by ego, fear, exhaustion or pressure. All realities of the current venture climate. I don’t think outsiders recognize how competitive the current state of the venture world is. No one, absolutely no one, not even demi-gods like Marc Andreessen are exempt from the strain.

As an aside, if you looked up my bio on paper, I’d probably make the (reasonably) “smart person” category. I went to NYU undergrad, and fortuitously managed to pull down an MBA from The University of Chicago. But even within the context of good choices, I’ve made extremely poor micro-decisions. Two examples:

1. Good Choice: Getting nearly six figures into the middle of the pot way back in 2007 holding two pair versus a naked flash draw.

Bad Micro-Decision: Not asking to run it twice to hedge variance.

Result: Bye bye college tuition. (Bad side of variance)

2. Good Choice: Asking a girl at the bar, now wife, on a date.

Bad Micro-Decision: Playing with fire for years, not fully committing, leaving optionality open.

Result: She waited – now happily married. (Good side of variance)

I suspect that the overwhelming majority of the tech investors, entrepreneurs, and evangelists that I, my peers, the press, etc, look up to are actually quite brilliant.

But it doesn’t prevent them from making poor micro-decisions, even within the context (or guise) of good choices.

I will continue to spend time working to understand the rationale behind any given investment or choice when “smart people” are involved. Yet, confusingly, within flawed reasoning there may exist many pieces of correct and insightful logic. That’s always the mystery.

So thanks to Henry Blodget for reminding me to more diligent, even when otherwise smart people are involved.

The Popular Markets Delusion

As the public equity markets have exploded in the past 18 months to accommodate the growth in technology software companies, it’s become a subject of considerable discussion here at Chicago Ventures. Everything from the recent nosedive in valuations across the adtech sector, Zulily’s precipitous drop, the crowdfunding IPOs, all the way to the continual nuances of everything SaaS.

Though we’d be foolish to ignore public market sentiment entirely, I think it’s equally foolish to base seed stage investments and theses off contemporary trends and momentum. Speaking 15 months ago to StrictlyVC Managing Editor Connie Loizos, Brian O’Malley (then partner at Battery Ventures) now at Accel Partners opined:

What’s interesting, and what has surprised me, is how much people are influenced in terms of which companies they think will break out based on which companies are having success today. 

There’s a lot of emphasis right now on these more enterprise-focused businesses, which has a lot to do with enterprise-focused businesses doing incredibly well on the public market. But the reality of my doing a Series B investment is that I’m not going to be selling for three to five years, and the market might be very different by then. Even still, people are willing to back much less mature companies in the space du jour rather than invest in something that has some scale in a space that’s out of favor.

If what Brian noted is true at the Series B level, how much more so is it true for a seed stage investor like Chicago Ventures.

This is one of the reasons I get frustrated when entrepreneurs try to sell me on the value of their market by referencing recent large acquisitions of similar companies. While those deals may well reflect the general size of the market, it’s unlikely to have a significant correlation to how their market looks in 7-10 years.

As an example, let’s take crowdfunding. Last month’s Lending Club and OnDeck IPOs have reignited chatter in the space. But what many early stage investors fail to recognize is that early thought leadership in the space emerged in 2008-2010, (and, in my opinion) culminated with Charles Muldow’s benchmark whitepaper A Trillion Dollar Market By The People, For the People. Even verticalized platforms such as FundRise have already begun claiming dominance.

This isn’t to say I would never invest in a crowdfunding platform. On the contrary, I am maintaining an acute eye towards an unconventional approach to the space that has failed to connect over the past seven years. The single best lesson I’ve learned from working with Gil Penchina over the past few months is: what has fundamentally changed in the world recently that enables this idea to succeed now when it has always previously failed? This is a nuanced variant of Chris Dixon’s famous “what’s your secret and how did you earn it?” Effectively: Why now? Why you?

This is one of the reasons I remain so fundamentally bullish on digital commerce. With a mere 6% of US retail sales happening online, does anyone reading this actually believe that figure will be less than 12% in a decade? Especially as millenials become the dominant household purchasers?

If I tracked the public markets, I would be shying away from e-commerce: Wayfair is trading at approximately 50% of its IPO price. Zulily is down 60% just in the past 6 months. The sector looks like it’s falling apart.

I remain bullish on digital commerce because I remain bullish on literally every macro factor that could exist. The market will double in the next decade. Friction is fast disappearing across digital checkouts – from single click to bitcoin to Apple Pay. While some traditional retailers may have figured out paid digital marketing, they deeply trail the market on content, community, curation, and concierge services. In 5-10 years, when millenials represent the plurality of GDP, which platforms win? What does the world look like then? If legacy incumbents can’t innovate and millenials spend more online than ever, it sure seems like a lot of whitespace.

Similarly, I remain beyond bullish on bitcoin. While momentum investors have laughably shied away because of the digital asset’s price drop, all the macro factors stack up: Interest amongst world class engineers has never been stronger. A powerful ecosystem is building around influencers. And global figures and corporations from Larry Summers to Docusign to entire countries are experimenting with the technology.

But like everything in life, predicting the future is a balance. Not all actors in the funding ecosystem are rational. With a $40M fund, we can only support world changing entrepreneurs so far. And because pre-IPO investors are affected by public markets, and late stage investor are affected by pre-IPO investors, and expansion stage investors are affected by late stage investors, etc etc, it all funnels down – all the way down to seed stage investors like Chicago Ventures. And sometimes we regrettably, frustratingly need to work within the delusion.

Consider it a work in progress for now; a balance of sorts between predicative imagination and investing into strong secular trends and tailwinds. That’s part of what makes this job so challenging – and so much fun.

Moving Beyond Spam: E-Commerce’s Latest Chapter is Rebuilding Relationships & Trust

The following article was originally published on VentureBeat on January 8, 2015

In a December 11 Bloomberg interview with Emily Chang, legendary venture capitalist Bill Gurley reiterated his belief that “e-commerce is a dangerous game.” He first made the case in a 2012 article, “The Dangerous Seduction of the LTV Formula,” where he argued that customers don’t exist in a vacuum and that many companies poorly estimate the actual economics of the formula.

The public markets might agree; 2014’s most lauded e-commerce IPO, Wayfair, is down nearly 50 percent from its open price, and flash-sales leader Zulily was down 40 percent in 2014 and over 65 percent from its March 2014 high. At the same time, brick and mortar retailers such as Williams-Sonoma and Nordstrom, with their strong online performance, have surged to all-time highs. And in the middle, the next generation of e-commerce startups from Rent the Runway to Instacart to Stitchfix have raised financing at high valuations, while Trunk Club was acquired for $350 million at barely four years old.

So what’s the truth? And what’s going on? It’s my belief that customer acquisition for commerce companies has never been more competitive and is causing considerable drag on traditional players. At the same time, connection focused e-commerce platforms are leveraging network effects for reduced acquisition cost and sustained engagement. Their success is rooted in an authentic voice and restoration of consumer trust — a trust that was broken by an exceeding amount of email and retargeted marketing spam. But e-commerce is cyclical, and early indications suggest that storytelling and content could be the major drivers in the next generation of e-commerce.

To understand the current state of online commerce, it’s important to take a quick look at its history.

evolution of e-commerce

Commodity: Early players such as Amazon and Overstock built their businesses carrying a catalog of SKUs wider than traditional brick and mortar retailers while undercutting aggressively on price, leveraging their lower overhead costs. They had early access to now dominant affiliate platforms, allowing them to quickly acquire customers at scale.

Curation: But that same catalog of infinite SKUs caused real pain for all but the most specific of product searches. This pain led to the birth of discovery- and push-curation focused platforms — from Gilt to Zulily to Wanelo — whose focus was to highlight and promote intriguing products, often specially selected by an editorial team.

This curation focused model succeeded in generating dozens of businesses with hundreds of millions in revenue, but it also suffered from the same macro-factors as e-commerce 1.0. Why?

  • Traditional retailers such as Nordstrom and Williams-Sonoma drastically improved their digitalmarketing teams and presence, making the costs of customer acquisition more expensive. [The systemic problem of paid acquisition is illustriously outlined by Josh Hannah of Matrix Partners.]
  • Although curation models benefited from limited-time sales and the power of refreshed experiences, the majority of revenue still came from email remarketing — a continual competition with every traditional retailer under the sun for inbox attention.

Connection: Which brings us to the present — the era I’ve labeled “connection.” On a macro level, the move towards connection makes a lot of sense. Consumers are overwhelmed by email, social, and retargeted marketing, while at the same time flocking to platforms such as Uber and HotelTonight, whose focus is on constraining choice and cognitive noise. It is the overwhelming noise that I believe created a loss of trust amongst consumers — a trust that can only be rebuilt either via a personal concierge, a welcoming community, or in-person interaction in the next generation of retail stores (Warby Parker, Bonobos, BaubleBar, etc).

The Cycle

In the web curation stage of e-commerce, email continues to drive the majority of revenues by leveraging existing customers. But as email became noisier, mobile focused curation apps such as Poshmark, Tophatter, and Spring emerged to leverage push notifications, attempting to bypass the existing clutter. Push is now undeniably cluttered as well. The same cycle will repeat itself with home-screen notifications.

And this, in my opinion, explains the proliferation of human connected businesses — platforms that are able to cut through digital noise and connect in a real, interpersonal way. As our lives incrementally become more automated and digital, we increasingly crave real relationships in life areas that matter deeply to us — our hobbies, our families, what we eat, how we look, etc.

But this cycle will ultimately have its limits too. Consumers will only have bandwidth for a certain number of personal concierges (many of whom are financially incentivized to sell). Individuals will only have time to engage with so many interest-specific digital communities. As these models inevitably become more competitive and margin-compressed, the increased pressure to sell will break that same consumer trust that was so recently restored. Though human relationships are more secure and long lasting than brand affinities, I predict that in the next downturn, these commercial relationships will be upended in favor of those focused on family, physical health, emotional health, or even nutrition.

The Future: Content, Media, and Stories

In September 2013, eBay acquired an under-the-radar e-commerce startup, Bureau of Trade, whose sole thesis was to build powerful stories, content, and context around items that were otherwise available on Amazon or eBay and see what happened. Would consumers become highly engaged with those stories and shop on the site? Would they alternately search around for the same items at cheaper prices? What effect would rich content have?

A lot happened. CEO Michael Phillips Moskowitz, commenting at the time of acquisition, noted: “The average good on eBay will sell at X purchase price. That same piece of merchandise when covered by the Bureau — when written about by us — created in many instances a 50 to 100 percent price increase. That’s profoundly valuable.” These results speak clearly to the power of storytelling above and beyond the personal relationships of a concierge, physical store, or community.

Moskowitz and the Bureau of Trade aren’t alone. In 2011, Natalie Massenet, founder of Net-a-Porter and former fashion editor for W magazine noted that “Media companies are going to become retailers and retailers are going to become media companies.” Matt Rutledge, who sold Woot.com to Amazon in 2010 and recently launched Meh.com, told Business Insider, “The underlying premise [of Meh] is that we’re building a store that you don’t need to buy anything from to have fun” — effectively, content-enabled commerce.

This January, in a chat I had with Moskowitz, now Chief Curator and Editorial Director at eBay, he stressed the challenge facing e-commerce companies: “One thing I can say about the American consumer is that they’re constantly under an artillery barrage. What do you do when everyone is demanding of your attention? You default to the one thing which provides solace, be it drink, TV, movie, or friends. You lose the thrill of finding out about the new thing because every thing is a new thing.”

The answer? One theory: If platforms can manage to keep you entertained, informed, educated, or otherwise engaged, you’re more likely to transact. The intriguing aspect of the content/story focused model is that it provides many of the practical benefits of the connected models — instruction and assistance, for example — while reverting closer to the pull functionality of e-commerce 1.0, in that consumers are more likely to be exploring on their own, unguided. [Chris Dixon has a great recent post on pull versus push.]

Effectively, these stories and content provide the credibility and legitimacy of connected experts and the entertainment of an active community, but without the overwhelming push pressure and noise.

Having held a variety of marketing roles since 2003, my experience suggests there’s no right or wrong model — rather, e-commerce is a dynamic ecosystem that adapts to the psychological and sociological realities of consumers as preferences evolve; it is a fluid reality. As the era of connected commerce continues to blossom and we move into content commerce, entrepreneurs and investors should be paying close attention to which approaches are becoming cognitively overwhelming and track the historical cycle of commerce.

Ezra Galston is a venture capitalist with Chicago Ventures and the former Director of Marketing for CardRunners Gaming. Follow him on Twitter @EzraMoGee and his blog BreakingVC.

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