VIEWPOINT THE ART+SCIENCE OF INVESTING IN PRIVATE COMPANIES

PRIVATE EQUITY PE & VC Key Stryker Rich: to Strong MDP’s Sage Decision Led Returns to Happy Exit Why IBM Was Drawn to Cleversafe

Q & A Selecting the Best Performing PE & VC Funds THE ART+SCIENCE OF INVESTING IN PRIVATE COMPANIES

Facts Are Facts

Reality Versus Myth For the past three IVCA Viewpoints, we have sought to dispel the common myths that give private investing in private companies -- investments in mature businesses in particular -- a bad rap. But the misrepresentations persist, and not just because of election-year antics of Maura O’Hara uninformed critics. IVCA Executive Director As you may recall, we have explored through real situations the topics of “Private Equity, Public Good,” the true beneficiaries of private investing in “I am a Private Equity Investor,” and the collaboration between PE/VC firms and their portfolio companies in “Partnering for Growth,” our last Viewpoint. This edition of Viewpoint strives to help people grasp the nuanced processes and methodologies behind investing in private companies. We explain through case studies how PE and VC firms go about the business of choosing a startup or established company to invest in, helping advise them, and assisting in actualizing their future -- whether as an independent company or as a unit of another company or investment firm. We also offer a rich dialogue with two Illinois pension funds and an investment consulting and asset management firm that manages or advises on trillions of dollars of holdings to illuminate how the net returns from PE and VC investments outperform their general portfolio or benchmarks. Here are the takeaways -- and we hope you will pass them along to the skeptics, cynics and nonbelievers. Growth is the key component and objective of both PE and VC firms. Improving the operations of their portfolio companies or investments is uppermost -- so their investors will benefit as well as the other essential stakeholders: employees, customers, suppliers, and the communities in which their employees work and live. For that latter evidence, peruse the case study of Madison Dearborn Partners’ investment in Sage Products, a mainstay corporate citizen in McHenry County.

Some More Realities Job creation is almost always an outcome. Yes, some jobs are lost early on but as the strategy executive director’s comments director’s executive and operational changes take hold, new skill sets are required and overall employment increases. Operational improvements are the key to success. They take a liking to an investment prospect for the chance to make needed operational advances. Yes, they want to buoy an investment, but they desire that the investment remain stable in the market -- for their own reputations’ sake, if nothing else. Value creation is the mission. Let’s relate these stories and facts -- and celebrate the Art+Science of Investing in Private Companies. Investing in Private Companies –PE & VC–perpetually misunderstood Too often, PE firms are labeled as “job killers,” disparaged as “vultures” that strip their portfolio companies’ assets or borrow heavily against them. A New York Times series on PE in mid-summer perpetuated that notion. As for VCs, detractors blame them for hyping their startups in search of billion-dollar-plus valuations for their “unicorn” investments. Regulators are tightening their scrutiny.

Adams Street Partners’ Terry Gould, who heads the global with the U.S. As a result, over the last two decades, the U.S. PE firm’s venture and growth equity investments, admits he share of venture capital investment worldwide shrank to 54 often uses a familiar four-letter profanity when he hears percent from 90 percent.1 someone disparage private investing. “We’re not trying to cut It’s A Global Battle For Investment Funds jobs; we’re trying to create things,” he asserts. IVCA Viewpoint has devoted the past three reports to “This innovation arms race is a virtuous competition where the illuminating what private investing in private companies byproducts are new technologies that improve the way we live, nurtures and achieves. Their titles say it best: “Private Equity, new jobs and economic opportunities, greater productivity and Public Good,” “I Am a Private Equity Investor” and “Partnering greater economic growth,” Scott Kupor, managing partner at for Growth.” Still, the defamation persists too frequently. VC firm Andreessen Horowitz, told the Senate Committee on This report strives to show, not just tell, how PE and VC Small Business and Entrepreneurship in July. firms make a real difference for the private companies they As for PE firms, they are laser-focused on creating value invest in. Through case studies, filled with rich detail that through actions that will improve operations and spur growth. help relate how the investors and the private companies they They conduct rigorous analysis, put the right management invest in grow and prosper while adding -- not slashing jobs team in place, and identify and monitor the critical metrics -- and, yes, how the investors also benefit while strengthening for driving value. Even public companies acknowledge they their companies. can learn powerful lessons from how PE firms employ real What’s a counterpart? Think how British restaurateur and and sustainable operating and productivity improvements TV personality Gordon Ramsay saves struggling restaurants at their portfolio companies. And during a window of 3-10 on ”Kitchen Nightmares“ and horrid lodgings in “Hotel Hell.” years, usually. What’s especially worrisome is this reality: The move It’s All About Growth to impose more regulations on private investing is reshaping Of course, VC and PE firms differ. VC firms finance startups the investment landscape, locally and globally. Disruption and entrepreneurs in hopes that over a number of years, ensues. And as profit margins tighten, private investment usually 5 to 10, the startups will blossom and, eventually, lure firms must center even more on operational superiority to a buyer or go public. PE firms typically invest in relatively achieve their investment objectives. mature companies, aiming to grow them and later exit -- again The following case studies make clear that for private for seven years on average -- at a profit. investments to succeed, PE and VC firms and their portfolio Still, growth constitutes PE and VC firms’ overriding companies concentrate on how to improve their companies mission. They each play a vital role -- VC in the entrepreneurial so, yes, they can exit at a profit to willing buyers or investors. ecosystem and PE in building effective and efficient companies It’s time to stop demonizing the private investment through an engrained platform for change. For PE, especially. community. What critics fail to grasp is that in today’s global 1 nvca.org investment landscape, other countries are directly competing

IVCA VI EWPOINT | 2016 1 THE ART+SCIENCE OF INVESTING IN PRIVATE COMPANIES

What We Do, How We Do It

When I was incoming IVCA chairman, I expected that my 18-month term would be an “active” time. It certainly has been. Being that active voice on behalf of our members has been essential at a time when the state’s financial strife persists and when a sustained misconception continues to be held by some about the investment objectives of private equity and venture capital firms. Bob Fealy This explains our association’s vigor in advocating for our industry to legislators, government IVCA Chairman officials and the public at large. It also explains why this Viewpoint focuses on dispelling the myths Founding Managing Director, around PE investments by telling specific stories that illuminate the art + science of private investing Limerick Investments in private companies. In short, PE is about growth and adding value, not “greed” and slashing jobs, as the rhetoric might suggest. As I began my chairmanship, I listed four principal areas of focus, and I want to give you a progress report on each of them because it underscores what IVCA firms and their members have achieved toward our vital objectives: Engage. In supporting an entrepreneurial spirit in Illinois, we continue to meet with state legislators and government officials in Springfield and elsewhere in an effort to promote a better understanding about private company investments in the state. We made our voice heard on a number of fronts, and it played a critical part in the Illinois Treasurer’s new $222 million Illinois Growth & Innovation Fund, which will support Illinois-based VC and PE firms over the next six years. Our opposition to a bill that would disadvantage Illinois public pension funds led its co-sponsor to establish a task force, that includes IVCA representation, to consider the bill’s ramifications; no action was taken on it in the recent session. Thanks to our IVCA Political Action Committee, we raised a record $105,000 to support our legislative activities. Many thanks go out to Lee Mitchell, Chair of the IVCA Political Action Committee, and Campaign Co-chairs Darren Snyder of Prairie Capital and Jim Tenbroek of Growth Catalyst Partners for their exceptional efforts. Enlarge. We have worked to grow our membership, particularly among large family investment

ivca chairman’s comments chairman’s ivca offices in Chicago and Illinois, many of which have direct investment strategies in addition to investing in PE and VC funds. They can benefit from our programming and from networking professionally and socially at our events. Existing IVCA members will gain from better understanding the strategies these groups employ in making their investment decisions. Expand. The association has been involved actively in increasing diversity in our industry, especially among African Americans and Hispanic Americans, and Executive Director Maura O’Hara continues to drive this essential effort. Educate. IVCA sponsored educational programs and luncheons in the past year on topics ranging from private equity valuation and mitigating reputational risk, to negotiating roll-over equity and clos- ing a growth financing round. Thanks to our members and member firms for assisting in developing and conducting these sessions and for sponsoring them. It’s been a pleasure to serve this association and to work with our two exceptional leaders, Maura O’Hara and Association Coordinator Kathy Pyne. We also thank Neil, Gerber & Eisenberg LLP for providing our office space. The IVCA will continue to constructively and thoughtfully advocate for our membership -- and to build an understanding of the vital role private equity and venture capital play in improving our Illinois business environment and growing our economy.

2 Private Equity is Essential to Public Pension Funds

For public pension funds, including PRIVATE EQUITY PORTFOLIO ANNUALIZED Illinois’ four major pension funds, private RETURNS (10-YEAR) NET OF FEES equity continues to deliver superior net returns compared to all other asset classes over the longer terms. It helps explain why the appetite for the asset 11.6% class has risen in recent years.

An Illinois Venture Capital Association study of the 10-year Investors have noted the performance. Preqin said that performances of the four Illinois public pension funds found 94 percent of pension funds and other investors it spoke to that they realized annualized returns from their private equity felt that the performance of their PE portfolios had met or portfolio of 11.6 percent, net of fees, compared to 6.9 percent exceeded expectations. The other six percent felt returns from their overall portfolio return. had fallen short of their expectations in the past 12 months. Over five years, three of the pension funds’ private equity What accounts for these superior long-term net holdings outperformed the overall portfolio return by a range returns from PE & VC? To find out, IVCA conferred with the of 110 to 720 basis points. The other fund posted a 10-basis Private equity chief investment officers of the Illinois Municipal Retirement point improvement. The pension funds’ assets ranged from is an important Fund and Teachers’ Retirement System of the State of Illinois $15.8 billion to $46.2 billion and averaged nearly $29 billion. component within the public as well as an associate partner, private equity, at Aon Hewitt PE is an important component within the public pension pension funds’ Investment Consulting that advises on or manages $35 funds’ portfolios. It provides diversification of returns besides portfolios. billion in PE & VC assets on behalf of institutional clients. often outperforming the public market’s returns, net of fees. It provides Nationally, Preqin, the alternative assets industry’s leading diversification PARTICIPATING WERE: data source, also found in a study that on a net return basis, of returns R. Stanley Rupnik------after fees and carry, PE has been the best-performing asset besides often of the state’s Teachers’ Retirement System, with its $46 billion class for pension funds over three and 10 years ended Dec. outperforming in assets at year-end Fiscal 2015 on June 30, 2015, and whose 31, 2012. Over a five-year time horizon, PE has been beaten the public private equity staff of four serves 400,595 members. only by fixed income and, significantly, this was during a period market’s returns, of generally falling interest rates, a phenomenon unlikely to net of fees. Dhvani Shah------be repeated in the near future, Preqin noted. of the 77-year-old Illinois Municipal Retirement Fund, with CalPERS, manager of the nation’s largest public pension its $34.7 billion in assets as of June 30, 2016, and whose four- fund, recorded a similar result over a 20-year period. It member private market team serves nearly 3,000 employers. realized a 12.3 percent annualized return, net of fees, from Shari Young Lewis ------its PE holdings over a 1995-2015 period vs. 8.2 percent of Aon Hewitt, which advises hundreds of clients on building from its public equity portfolio. tailored private equity investment portfolios.

IVCA VI EWPOINT | 2016 3 THE ART+SCIENCE OF INVESTING IN PRIVATE COMPANIES

In a Q&A format, the three investment professionals AON HEWITT: We build diversified portfolios for our clients weigh in on a number of specific issues pertaining to across strategies, geographies, and industries. We recommend their PE and VC investments. they invest relatively equally each year to take into consider- What percentage of your assets do you invest in PE/ ation risk. Our goal is to build downside protection Q VC, and talk a bit about the history for such investing. as well maximize their upside potential. As a consultant, we function as “matchmakers,” seeking to find great opportunities TRS: We have a 14 percent target, which amounts to a that fit each client as well as cover different risk tolerances. little more than $6 billion of our ($46 million) asset base. We also manage discretionary assets. Typically, we target $1-1.6 billion of new investments in a given year. Our initial PE and VC investments date back to the mid- What do you look for in the PE/VC firm and manager? 1980s with a more formal institutionalization of the program Q TRS: We emphasize working with partners based on a in the early 2000s. consistent balance between risk and return. Top performers IMRF: Nine percent is our alternative investments target, serially repeat. Having an award-winning Emerging Manager which includes PE and VC, hedge funds and the like. Three program is a valuable tool to learn about new managers. components comprise PE/VC: , two evergreen As with many large plans, the key challenge is finding and separate funds and our direct PE/VC portfolio. We began sourcing opportunities that aren’t widely shopped. In the making these investments in 1986, but I started our direct current environment, we focus particularly on general PE and VC portfolio in 2012 and it now includes 14 firms with partners with a demonstrable track record of successful exits. $753 million in commitments from 28 mandates. IMRF: We make qualitative and quantitative assessments AON HEWITT: In the last 10 years on average, we invested to determine management skills, attractive of investment $2.5 billion a year. We focus on funds that are raising $100 strategy and fit with our portfolio. As for qualitative, which comes from interviews, we assess managers’ skills, expertise, “PE/VC are expected to generate long-term strategy -- there’s no substitute for evaluating their team. returns in excess of publicly traded equities. On the quantitative side, we consider a lot of data points; That is best accomplished by investing in we look at track records along multiple dimensions and unrealized investments. And some managers can be perfect underlying businesses in growing markets but don’t fit with our portfolio. A due-diligence visit can with defensible strategies led by the best make a difference; I didn’t move forward with an investment management teams.” after one, concluding that “only time will tell” whether it will be a solid investment. AON HEWITT: We focus on six areas in our due diligence million or more. Since our clients are making large commit- plus an independent area. The independent area is ments to funds (typically $15 million to $100 million per fund), operational due diligence. If the first six are great but the we tend to invest in mid-size to larger funds. There are a lot firm is not operationally adequate, then we don’t invest. The of incredible $25-150 million micro VC opportunities and we other six are: would love for our clients to invest in them, but their check Business: Who owns the firm and how is it allocated sizes are too big. among the team, composition and retention of LPs, how many What is your general investment philosophy products they have, back office, etc. Q regarding PE and VC? Team: Mix of skill sets, turnover/new hires, depth of team TRS: PE/VC are expected to generate long-term returns in resources, network, skin in the game, etc. excess of publicly traded equities. That is best accomplished Performance: Consistency, realizations, returns, write- by investing in underlying businesses in growing markets with offs, length of track record, etc. defensible strategies led by the best management teams. Investment process: Market opportunity, competitive IMRF: When it comes to PE/VC standalone evaluations, advantage, ability to create value, deal sourcing, valuation a return of 2x investment at 20 percent is the rule of thumb. discipline, etc. If it’s a debt-like strategy, it might be in the low teens, and Risk management: Investment committee process for if it’s a value creation situation, we want more. It all new and follow-on investments, monitoring, ability to work out depends on what strategy we’re applying to each individual challenged companies, etc. situation. Right now, we’re looking at funds with a broader Terms and conditions: , distribution rather than specialty or niche approach. waterfall, preferred return, key person, LP approvals, etc.

4

”...private equity investments outperformed the overall portfolio...”

IVCA VI EWPOINT | 2016 5 THE ART+SCIENCE OF INVESTING IN PRIVATE COMPANIES

What is your general time frame for holding a didn’t get in someone’s first fund, perhaps we can be in the Q PE/VC investment? PE/VC is a second. In the current investment environment, you can’t TRS: PE/VC is a long-term commitment and we underwrite long-term rest on your laurels. new investments accordingly. We model 12-13 years for funds commitment If you couldn’t invest in PE/VC, what would and 5 years for co-investments. In certain instances, we will and we Q be the impact on your pension holders? use secondary markets to rebalance the portfolio tactically. underwrite TRS: The System would miss the plan’s highest net-of- IMRF: We underwrite investments to hold to maturity; new investments fees returning asset class, historically. The plan’s asset we’re not going to be selling in the secondary markets accordingly. allocation model and expected return would look dramatically because you leave things on the table. Generally, 7-10 years different without the risk return profile provided by private and it varies by strategy. equity investments. AON HEWITT: It’s a long-term asset class, and we do a lot IMRF: Every cent we earn more on that dollar, the of client education to explain that they are investing for at employer rate goes down. Payroll for our employers equals least 10-12 years so it is hard to be tactical. We are always $7 billion; if you reduce economic costs, and employer evaluating new funds for clients since we may consider not contribution base by 1 basis point, it equals $700,000 in re-committing to a manager who is not performing as expected. savings per year. The role of private equity is important in We underwrite a manager’s subsequent fund as a new generating the assumed rate of return and the more it can investment. With that said we are cognizant of managing the generate, it helps reduce the contribution rate. number of manager relationships each of our clients have. What are the key differences in evaluating a PE and How do you identify new and prospective a VC investment candidate? Q PE/VC firms to do business with? Q IMRF: With a PE candidate, you can ask questions for TRF: Many managers seek us out, and we’re happy to 6-8 hours. With a VC prospect, you need to have a lot more meet with them. The key challenge is finding and sourcing knowledge walking in about how VC and a venture company opportunities that aren’t widely shopped. So the staff tries work, and you don’t need eight hours. Cash flow and to maintain a proactive stance within the industry and quantitative analysis -- and even qualitative -- looks different manager universe, leveraging resources of our consulting for a venture fund. partner Torrey Cove Capital Partners -- a nondiscretionary AON HEWITT: Buyout, distressed debt, turnaround, specialist advisor that focuses exclusively on PE/VC and secondaries, energy funds, and venture capital funds all real assets -- and continually mining separate account operate differently due to their different investment strategies. relationships as a sourcing mechanism for new relationships. Therefore, during our diligence we focus on different areas IMRF: We have an open door policy and conduct a lot of depending on the strategy. Venture capital firms generally manager meetings in person, on conference calls or over tend to be small (with some exceptions). They mitigate risks video. We need to always know what’s out there. through deal structure and milestone based investing, ”We make qualitative and quantitative whereas preferred equity, use of leverage, and investment timing differ significantly with other PE strategies. asessments to determine management Consistency in returns is valued in , but we could skills, attractive of investment strategy and expect a few home runs to drive the entire return of a fit with our portfolio. As for qualitative, venture fund. An early stage venture capital investor often wants to be physically near its companies to spend time which comes from interviews, we assess with founders, whereas proximity to portfolio companies is managers’ skills, expertise, strategy–there’s less important for other strategies. Although we are always no substitute for evaluating their team.“ evaluating a fund’s unrealized portfolio, with buyout and growth we have more financial metrics to determine how value has been created. With venture capital this assessment AON HEWITT: We’re constantly proactive. We have an is more qualitative. open door policy and are always reaching out. We’re always asking LPs what they’re looking at and sharing bad or good What characteristics are vital in hiring a new diligence. Some have reached out via LinkedIn. We get Q member of your team? attention from papers we’ve published. Placement agents IMRF: Strong skills in due diligence, analysis, underwriting also send people our way. We also keep in touch and, if we and monitoring. Investing in PE/VC is not just finding the next

6 great manager and giving money; that’s just a deal and you So, what if you read bad news –– massive job layoffs, must live with that deal for the next 10 years. Also important: Q etc. –– about a prospective investment for a client’s The role of Does the candidate understand financial statements and what portfolio? private equity issues can come up? Can that person glean valuable insights? AON HEWITT: Our clients are sensitive to headline risk is important and so we consider this potential as we are conducting in generating How do you monitor and keep up with your PE and diligence. Some of these headlines could cause us to stop the assumed VC investments? Q diligence immediately. However, most of the time it is just rate of return. TRS: Our scale lets us sit on many advisory boards noise and not meaningful. where additional insights can be gained. Our partner Torrey Cove Capital delivers an independent quarterly review for What has changed over the past 5– 10 years or even all fund investments and co-investments. Staff also Q more recently as it applies to your private investment portfolio, approach, etc.? prepares updates from advisory board meetings, periodic on-sites in manager offices and formal annual reviews of TRS: PE/VC is a much more mature asset class now. all co-investments. Deal processes are more efficient and the ability to source on a proprietary basis isn’t as easy as the past for buyout Q What about investing in Illinois companies? firms. During the financial crisis, PE/VC developed IMRF: We like it when a portfolio company is based in considerable skill in debt-for-control transactions; that Illinois, especially Chicago. It’s more convenient and is easier market has become quite saturated with capital. The last to think about. Over 40 percent of our portfolio represents downturn also increased the pool of capital for secondary holdings based in Illinois. Of course, under Illinois Code, if funds. As a result, discounts to fair market value have everything is equal between an Illinois-based opportunity and compressed and secondary funds offer limited partners an outsider, the tip-off goes to the homegrown company. such as TRS an exciting portfolio-management tool.

IVCA VI EWPOINT | 2016 7 THE ART+SCIENCE OF INVESTING IN PRIVATE COMPANIES

Funding Naurex Naurex’ compounds target depression, a medical condition often requiring treatment that a™ ects nearly 7 percent of U.S. adults and costs an estimated $83 billion a year.

While each venture capital fund’s investment strategy varies, For its part, Chicago-based Adams Street Partners has one common factor is clear: The fund assumes significant risk Adams Street focused since 1972 on private market investment management with each individual investment. A company may have little or no was the lead and manages over $27 billion of assets. Terry Gould, a partner revenue, a nascent business plan and a founder or founders investor in an for 23 years, heads its Venture/Growth Equity Investments without extensive management experience. Still, venture $18 million and specializes in healthcare investing. capitalists finance early-stage companies they believe can Series A Adams Street was the lead investor in an $18 million fi nancing in have favorable futures and strong potential to build value. Series A financing in May 2011 for Naurex. The company used May 2011 That was the situation in 2011 when Adams Street the funds primarily for a Phase II trial of its lead compound. for Naurex. Partners first invested in Naurex Inc., then a three-year-old Just over four years later, Allergan purchased Naurex for clinical-stage company developing a promising compound $560 million in cash, plus additional future considerations. to treat severe depression. At the time, the startup was in a Gould first learned of Naurex from an acquaintance in clinical trial with its lead compound. The company had grown the industry, and upon a review of the Naurex board, he out of earlier research by its founder, Joseph R. Moskal, Ph.D., realized he knew two of the directors. He had lunch with one and colleagues at Northwestern University’s Falk Center and concluded that it might be worth learning more about for Molecular Therapeutics. the opportunity at Naurex. Gould then asked Bill Gantz, the

8 former president of Baxter International and a veteran of ”The Naurex investment fits the profile several venture-backed success stories, to meet with the Naurex team. that investment firms such as Adams Street Partners seek in a startup. We’re That Initial Meeting After a two-hour meeting in the Naurex office in Evanston, Ill., not buying established businesses. the two men felt that the company had interesting data We’re trying to create things, to build regarding its lead compound and a potential, large market companies.” opportunity. Gould decided to pursue his diligence further and learn more about the trial data and the management team. After a number of months, he started to put together the As Naurex’ clinical trials continued, and as results $18 million Series A financing. showed promise, the company needed additional financing. Its lead compound to treat depression was going to be Offering Counsel entering its final testing phase in 2015. If all went as planned, In addition to the investment capital provided by Adams Street Naurex hoped to release the product commercially in 2019. Partners, Gould provided counsel to Naurex on a number of Company management and board members began issues -- from personnel and clinical trial design to spending preparing for a third round of financing at the time as well. plans, compensation and other possible sources for capital. In addition, in January 2014, board member Riedel was Gould and Gantz became directors, with Gantz serving named the company’s president and CEO, succeeding as board chairman. They attended board meetings and spoke interim CEO Derek Small, who continued as a director. regularly to Naurex officials. In addition, Gantz dedicated one In December 2014, Naurex raised $80 million in the day a week to work with the company after the initial financing Series C funding. Five new investors joined this funding round, in which Gantz was also an investor through his firm round along with Adams Street Partners and a number of PathoCapital. previous investors. Naurex management then began a dialogue with Financing Round II investment banks and pharmaceutical companies to Naurex’ Phase II trial results put the company in a position to consider the path forward. raise additional capital. In December 2012, Naurex completed a $38 million Series B financing that was led by new investor Allergan Acquisition Baxter Ventures, which Baxter International had established On July 26, 2015, Dublin-based Allergan, a leading global in 2011 to invest up to $200 million in promising companies. pharmaceutical company, bought Naurex in an all-cash Adams Street Partners participated in the Series B financing transaction. and played a major role in lining up up additional investment “We were quite pleased with the transaction,” says partners for the Series B round. Gould. “It met the firm’s objectives in terms of the Naurex used the Series B proceeds to fund several multiple of invested capital returned.” key programs that included conducting a Phase IIb trial of Gould adds that the Naurex investment fits the profile its compound, and further developing second- and third- that investment firms such as Adams Street Partners seek generation programs for other central nervous system in a startup. “We’re not buying established businesses. disorders. Norbert G. Riedel, Baxter’s chief science and We’re trying to create things, to build companies.” innovation officer, joined the board in conjunction with Gould is hopeful that the Naurex project may be the Baxter’s investment. beginning of future success in the biotech/pharma space in the Chicago area. A number of former Naurex employees Looking Ahead are now leading Aptinyx, a spinout of the Naurex technology Naurex management continually considered possible scenarios platform. Gould and Adams Street Partners provided for its future, including going public or entering into an seed capital to Aptinyx and then helped the company raise acquisition or strategic partnership. This is common practice $65 million in Series A financing in early 2016 to advance with promising startups, especially in the pharmaceutical therapies for neurological disorders. industry where Big Pharma often looks for drugs or compounds “Perhaps Aptinyx will build on the success of Naurex that could help fill their new product pipeline needs. and become another notable success in the Chicago biotech marketplace,” Gould says.

IVCA VI EWPOINT | 2016 9 THE ART+SCIENCE OF INVESTING IN PRIVATE COMPANIES

ApplyingApplying VCVC Art+ScienceArt+Science Dunbar High School. Its headquarters, to Nonprofit for all practical purposes, was at the to Nonprofit co-founders’ apartments in Lincoln Park. Work Over the first five years, he and his co-founders and others evolved the Work after-school program into an in-school, three-year model used today. The Lincoln Park apartments are gone, but OneGoal continues to thrive! In brief, OneGoal identifies students, called Fellows, who have potential and commitment to college but, without academic, family and peer support, would have very limited college prospects. It starts as a for-credit class during Fellows’ junior and senior years in high school. During their freshman year at 22 colleges and universities that are OneGoal partners, the students receive intensive coaching delivered remotely. From an initial 32 Chicago Fellows served in 2007, the program will serve an estimated 9,300 Fellows in Chicago, Houston, Massachusetts, Metro-Atlanta, and New York by the end of the 2016-17 school year. In the midst of its next five- Venture capitalists and private equity investors year strategic planning process, OneGoal has its sights set on dramatically increasing that number in the next five years. are savvy at helping startups and established Ten years ago, OneGoal was one staff member, three schools companies flourish. But could they apply with 32 Fellows and a $180,000 operating budget (half of which was raised from just eight of Lou’s friends). Today, the their knowledge and know-how to starting full-time staff numbers over 100, with more than 180 schools and developing a successful nonprofit? and an operating budget exceeding $10 million. So what VC “steps to success” can help start and sustain a nonprofit? Here are Lou’s VC learnings: The quick answer: Yes. At least if you adopt the blueprint OneGoal will serve an of Chicago venture investor-turned-entrepreneur Eddie Lesson I: Operate the nonprofit like a business. estimated 9,300 Fellows Lou. His own for-profit startup, Shiftgig, is growing rapidly The only difference from a for-profit enterprise is that the in Chicago, Houston, -- raising over $35 million in venture capital funding and management team doesn’t have financial equity in the Massachusetts, Metro- doubling its markets by year-end -- as the digital market- business, but they possess social equity. A legitimate business Atlanta, and New York place that connects people to work shifts via a smartphone plan is essential to scale and grow. Many of the same rules by the end of the 2016- expands. 17 school year. of a for-profit apply to a nonprofit. The business plan In 2004, he co-founded OneGoal, a nonprofit that today provides a high-level view of the organization, combining guides students in low-income communities in five major basic marketing, strategic, operational/management and metro areas to enroll and succeed in college. Lou, who arrived financial tactics. It also includes the nonprofit’s mission, in Chicago in 2001 to work at OCA Ventures, an early-stage values, strengths and assets. VC firm, got OneGoal started as an after-school program in

10 Lesson II: Build in a scalable fashion. 82percent classroom teacher at an inner-city Chicago school (and Many nonprofits develop a high-touch operation that now OneGoal’s CEO). “Jeff (who is 34) had passion and vision; usually isn’t all that scalable and costs too much. That’s why he had all the potential of being a great entrepreneur such we don’t offer scholarships or one-on-one counseling for as resourcefulness, leadership and sales,” says Lou. “Jeff Fellows. Every aspect of our model reflects how to build soaked up knowledge like a sponge; he was exceptionally the business in a scalable fashion. OneGoal knows coachable.” that after joining Here’s a recent problem OneGoal fixed: When some Lesson III: Insist on building toward strong metrics. the program, Fellows who got into college didn’t go, it was discovered students increase Nonprofits often forget about measuring their progress in their parents hadn’t filled out required tax forms. As a result, their GPA and their children couldn’t qualify for scholarships and financial fulfilling their mission. They track their performance such as school attendance aid. OneGoal now partners with a nonprofit that offers free dollars raised, membership growth, people served and and improve tax help to low-income people. Parents also now sign an overhead expenses, but they don’t measure the real progress their SAT/ACT in achieving what matters. As with a for-profit operation, test scores. It also agreement that if their Fellow gets into college, they must OneGoal sets targets and scrutinizes its metrics monthly, knows that at complete the necessary paperwork for them to get assistance. focusing on Fellows’ performance over the three-year Chicago high Lesson V: Insist on active board participation. program. It examines attendance rates, grade point averages, schools, 16 test scores, as well as the number of Fellows we help and percent of Few, if any, decisions for a nonprofit are more important the schools that partner with us. We amass a lot of data. freshmen go on than whom to choose to help lead it, and that applies to to get a college OneGoal knows that after joining the program, students directors. Legally speaking, they are accountable for diploma; 82 increase their GPA and school attendance and improve overseeing the organization’s purpose. What’s essential? percent of They should care deeply about the nonprofit’s purpose; their SAT/ACT test scores. It also knows that at Chicago OneGoal high understand principles of good business practices; be high schools, 16 percent of freshmen go on to get a college school graduates diploma; 82 percent of OneGoal high school graduates enroll enroll in college strategic thinkers; grasp that their role is governance, not in college and 78 percent are on track to earn their degree. and 78 percent management; have integrity; and be willing to give of their are on track to time and money. Lesson IV: Build a great management team and staff. earn their degree. OneGoal’s national board of seven nonmanagement Just as at a high-growth, for-profit organization, talent is directors comprises Lou, a founder of an investment bank, critical for a nonprofit. From past experience, Lou has found the chairman of a private equity firm, a Facebook executive, that many volunteers quit after two months. This is where it a former executive of Teach For America, a lawyer- pays to focus on a scalable organization, where volunteers philanthropist, and retired NBA star Earvin “Magic” Johnson, can be coached and trained to succeed. As for staff, he whose Magic Johnson Enterprises is rooted in service. recommends taking time to really think hard about what OneGoal directors are expected to attend 3 of 4 board talent is needed. Look for people with passion, purpose, meetings, get involved in a committee and give at least pride and brainpower. $25,000 annually. One of its directors donated $1 million. Lou says it pays to follow “your gut” in making personnel Lesson VI: Leverage technology choices, which he did in selecting OneGoal’s executive director in 2007. After reviewing dozens of resumes and Since using metrics and compiling data is critical for a talking to more than a handful of finalists, he tapped Jeff nonprofit to succeed, it’s increasingly vital to leverage Nelson, a Teach for America star who was an elementary technology in a number of ways. OneGoal uses a customized platform that delivers up-to-date information to teachers and staff and reports that track each Fellow’s progress. Technology helps OneGoal to differentiate instruction, to assist Fellows in finding their top match colleges, to send Fellows text messages to nudge action over the summer, and to track their progress in college.

IVCA VI EWPOINT | 2016 11 THE ART+SCIENCE OF INVESTING IN PRIVATE COMPANIES

Madison Dearborn Partners’ Sage Decision

Private equity investors identify portfolio prospects in a The MDP Health Care team -- assisted by three of its plethora of ways. But a casual comment at a charity dinner At a charity advisory Round Table members, including former Baxter hosted by Rita Canning, wife of Madison Dearborn Partners’ dinner, a casual International CEO Harry Kraemer, former Gambro CEO Chairman John A. Canning, Jr., sparked the firm’s interest comment sparked Thomas Glanzmann, and former NorthShore University in Sage Products LLC. At the event in June 2012, Sage Madison Dearborn Health System President Jeff Hillebrand -- believed it could Chairman Vincent Foglia mentioned to the Cannings that Partners’ interest create value at Sage through additional new product in Sage Products. Sage’s four co-founders were mulling a possible sale of innovation, domestic growth and international expansion. the Cary, Ill., maker and provider of infection control and Talks ensued and MDP, competing with a Sage rival for the preventive care products. acquisition, prevailed with its overall price and package. Six months later, on Dec. 12, MDP acquired Sage for Consequently, before year-end 2012, MDP with Sage’s $1.06 billion. Last February, 38 months later, Sage and MDP management team and MDP limited partner co-investors announced a sale to medical device maker Stryker Corp. acquired a 67 percent stake in Sage. for $2.78 billion. Sage’s 2015 sales had risen to $430 million. Initially, Sage’s founders hadn’t expected a PE firm to buy The acquisition closed on April 1. MDP itself generated it. “We were dealing with some misconceptions of PE,” says $1.5 billion on behalf of its investors, a gross return of 4.2x CEO Brown. “So we did our due diligence.” They talked to invested capital and an internal rate of return of roughly several people, including Kraemer, about PE firms’ practices, 60 percent. wanting to ensure that Sage -- a prominent charitable and civic-minded McHenry County employer -- wouldn’t have to A Front Row Seat diminish such local support, among other issues. What happened between that serendipitous June dinner What they heard alleviated their misconceptions. About conversation and February 2016, as recalled by the principal MDP, “they’re great believers that by giving back to the players, offers a front row seat into how an established community where you live and work and bringing jobs and and experienced PE firm offers guidance, resources and hiring local suppliers, you build a strong, healthy community,” money (of course) to a portfolio company to help it grow, Brown says. prosper and exit its control. When considering acquiring Sage, “the first order of bus- The Partnership iness was recognizing, ‘let’s not kill the golden goose,’” recalls Lead director Sullivan and MDP Health Care team colleagues MDP’s Lead director Timothy Sullivan, a co-founder and Nick Alexos and Jason Shideler spent a great deal of time in managing director of the Health Care team. Over more than regular communication with Sage and CEO Brown. They four decades, Sage: established a veteran and experienced would touch base weekly to every 10 days, particularly as management team; built a track record of creating new markets within hospitals; possessed a well-defined pipeline of new products that typically launched a new franchise every 3—4 years; focused on both internal R&D for new products and acquiring early–stage products; and sourced ideas from clinicians. Talks and visits to Sage also illuminated to MDP, Sullivan says, the vast pride and retention rates of Sage employees, all of whom knew Vince and Scott (CEO D. Scott Brown); Sage’s new “tremendous” warehouse; and that the company “knew sausage making” in consistently introducing new products.

12 they worked with Sage management and managers on strategy review and on certain initiatives, such as an international sales summit MDP helped develop. They also held several meetings at Sage on the issue of sales force expansion and the 11-member board delved deeply into that and other matters. Says Brown about Shideler, in particular: “I could call Jason and tell him, ‘I’m thinking about this and what do you incentives in place to drive growth, and it set up an think.’ He would say, ‘Let us run the numbers and we’ll get international advisory board. As a result, international sales MDP itself right back to you.’” climbed above expectations. generated $1.5 Growth, of course, is an essential goal for investors in billion on behalf private companies, and MDP has an arm that specifically Awakening Opportunities of its investors, helps portfolio companies look at growth investments. That MDP also helped Sage in the human resources area after the a gross return of 4.2x invested experienced group helped Sage look in particular at growing retirement of its HR director. MDP encouraged hiring a strong capital and an international sales, the number of its own new products and HR VP who would report directly to Brown. The department internal rate of the number of new commercial products it could acquire. became more robust through centralized hiring -- which return of roughly On the international sales front, MDP figured it could freed up sales managers -- and more intimately involved in 60 percent. help Sage open up distribution channels abroad, especially successfully expanding the sales force while preserving the in Europe, to grow sales. Historically, less than 10 percent company’s culture. of sales came from outside the U.S., although sales had Culture shift and sales force disengagement could easily increased in the few years before MDP’s investment. Sage have occurred since Sage expanded its sales territories and, established a European headquarters and relocated its as the broader sales team grew, shrank the average number international director to Switzerland. of hospital beds (a common metric used by medical product MDP Health Care team advisors Glanzmann and Kraemer providers’ sales teams) each sales person commanded. Sage helped Sage’s sales team understand that the approach to and its HR team focused on communicating that change doing business in Europe differed from the U.S. Suppliers clearly and transparently. The upshot: The typical sales rep there deal much more heavily with large national health made more or the same total compensation than in the services. The two advisors helped Sage hold an international previous year despite shrinking their respective territory. summit with industry veterans. MDP also convinced Sage, which always had created its Subsequently, Sage increased its focus on adapting to and products, to consider acquiring new products. Jason Shideler building its European markets by hiring a number of sales worked closely with a Sage product-development manager reps or country managers and new product-development to look at smaller opportunities of commercial products executives as well as product-development and marketing ready to sell. One such acquisition identified was in the patient teams. It put minimum purchase requirements and volume mobility space that helps nurses lift heavy patients onto a (continues on page 16)

IVCA VI EWPOINT | 2016 13 THE ART+SCIENCE OF INVESTING IN PRIVATE COMPANIES

Idea + Execution = $1.3 BILLION Why IBM pursued Cleversafe

When a venture capital fund invests in a new company, its Chris Gladwin’s “Better Idea” investment horizon spans years so it sets one primary For NEA, the motivation to go with Cleversafe -- whose founder, $400M mission: growth. serial entrepreneur Chris Gladwin (with an engineering degree That was New Enterprise Associates’ objective when from MIT) had a better idea for how to store mountains of NEA has invested the global venture capital firm led the then-fledgling data- data -- encompassed these principal factors: nearly $400 million in storage company Cleversafe’s small Series B financing round Chicago companies Founder: “We had a familiarity with Chris through one of in August 2006. Ten years later, NEA was the lead investor in the last decade, his earlier companies, MusicNow, so in determining which in Cleversafe’s $55 million Series D financing round. the most of any is most important -- the horse or the jockey -- we didn’t have metropolitan area “We’re about growth,” says Peter Barris, NEA’s managing to choose. We had a great entrepreneur (the jockey) who outside of Silicon general partner, who joined the Cleversafe board of directors we knew was brilliant, had the ability to assemble a strong Valley. It considers after the Series D round. “Building critical mass is important, team and possessed a unique technology concept in a Chicago notable for its especially to differentiate yourself and build competitive data-storage field (the horse) that was exploding and that central U.S. location moats around a company.” played to his background.” and business model The firm’s journey with Cleversafe until its sale in early Leadership: “We were Cleversafe’s largest shareholder innovations. October 2015 to IBM for over $1.3 billion serves as a case but we didn’t have a controlling interest and didn’t look for one. study of how a private investor selects a promising company We bet on a board of reasonable people making reasonable for its funding and continues to invest until its exit years judgments and getting everyone on the same page. As a later. For the most part, all VCs follow some iteration of director, I viewed my role as making sure the board members NEA’s selection process and investment strategy and the were all rowing in the right direction.” various types of assistance it provided during its union. “Big Idea”: “Ours was a bet on technology. Chris had a theory that storage was where it was happening but that

14 He felt he didn’t have the challenge startups have in Silicon Valley where there’s little loyalty and very high human capital costs.” NEA has invested nearly $400 million in Chicago companies in the last decade, the most of any metropolitan area outside of Silicon Valley. It considers Chicago notable for its central U.S. location and business model innovations, 35-100x citing Groupon. RETURNS For NEA, a bit of risk existed, of course. While it was a Peter Barris Chris Gladwin diversified, multi-sector investor with two-thirds of its 250 JOBS NEA’S MANAGING GENERAL PARTNER FOUNDER, CLEVERSAFE investments in technology, it didn’t have a lot of experience in the data storage field. But it had studied the storage CREATED MORE typical storage systems that relied on a centralized file space and knew in general how it was evolving. NEA partners directory weren’t going to be sufficient and would be a also believed that Cleversafe’s data security feature was THAN 80 NEW bottleneck. His theory that object-based (think pictures a huge advantage to drive sales because companies didn’t MILLIONAIRES and videos) data storage software and appliances offered a have to invest in a separate security system. better solution proved valid, thanks to his distinct information Barris and others at NEA, Cleversafe Chairman Chris Galvin Early investors saw dispersal algorithm and Tier 1 storage system to slice up and the other Board members helped guide the company returns of 35-100x data. It actually got better as the size of the system grew. by offering the counsel and key introductions. their initial investment. The more you stored, the more the system got faster, more For Gladwin, the impact A “Lord of the Rings” Turning Point reliable and more cost effective, while others’ systems got of IBM’s acquisition slower, less efficient and less reliable the bigger they got.” For the board, a key turning point came at a meeting in 2008 of Cleversafe had an Intellectual Property: “Cleversafe had a differentiating when Gladwin showed directors a “Lord of the Rings” movie especially joyous e™ ect. technology and protected technology. At the time we sold on an iPhone receiving the content from Cleversafe servers. “We created fantastic it to IBM, we could count 350-plus issued patents. By one Still, NEA and investors had a particular challenge: jobs for over 250 measure, it ranked in the top 10 global companies with the Cleversafe perhaps had introduced its technology too early. people.“ most potent patent portfolio, along with IBM, Apple, Samsung While Cleversafe servers could store terabytes of data at and the like.” lower cost, not a lot of customers cared then about petabytes. Talent Pool: “Chris was convinced that Chicago had One petabyte is roughly 1,000 terabytes or one million advantages (as Cleversafe’s home) and that he could find the gigabytes and can hold about 500 billion pages of standard talent he needed to continue and scale the business in printed text. Today, hundreds of companies care about Chicago or he could attract it to the city. Chicago has lots of petabytes. It took Cleversafe five years before it signed its talent and a huge supply source from Midwestern universities. first client.

Now IBM Cloud Object Storage, Cleversafe was founded in Chicago in 2004 by S. Christopher (Chris) Gladwin, who had developed distinct data-storage software that stockpiles petabytes of pictures, videos and other objects in both in-house and cloud-based servers. It was sold to IBM for more than $1.3 billion in cash.

Among the world’s largest and most active venture capital fi rms, New Enterprise Associates is a diversifi ed investor, but with most of its investments in technology and health care. Founded in 1977, NEA has invested nearly $400 million in Chicago companies in the last decade, including Cleversafe for which it was lead investor in its Series B and Series D fi nancing rounds.

IVCA VIEWPOINT | 2016 15 THE ART+SCIENCE OF INVESTING IN PRIVATE COMPANIES

Cleversafe Article Continued from Page 15 MDP Sage Article Continued from Page 13

For Cleversafe, the critical milestone came with the signing gurney through a novel method using inflating blowers. Sage of Shutterfly as a customer in late summer 2011. At the time, was able to successfully negotiate and consummate that the 12-year-old Internet-based social expression and personal transaction in January of 2015. publishing platform needed a leading-edge tech advance for Sage’s Brown articulates why MDP’s assistance proved scaling data. It also wanted to find a storage provider that could so helpful: “I learned in a short period of time how to think help it realize cost savings of over 60 percent for storage. about our business differently with MDP’s counsel,” he says. “We were a company owned by the same founders for 41 A Shutterfly Moment years, and MDP asked all the questions we never asked The contract with Shutterfly proved the spark for other ourselves. Simple things like ‘Have you ever thought about lighthouse deals. Signing up were enterprises such as KDDI, doing this or that?’ They were engaged every step of the way the Tokyo telecommunications giant, and Sky Television, the and so committed to success.” pan-European broadcaster. Barris and other board members assisted Gladwin and The Exit Scenario the company with its go-to-market strategy in seeking to Sullivan notes that, typically, MDP invests in a portfolio identify and foster customers to compete, especially against company for around five years. In the health-related sector, its biggest rival EMC (now Dell EMC). Reflecting the expected the average hold has been seven years. In Sage’s case, he sales surge, Cleversafe and its investors used much of the says, the company had always maintained an open door proceeds from the August 2013 Series D financing round to in terms of talking with possible suitors -- and in the latter boost the company’s sales operation. part of 2015, the company received strong interest from a About growth, Barris explains that investing firms often couple of prospective strategic acquirers. At the time, the encourage entrepreneurs to grow faster and spend faster health-related market and public companies’ stocks were than they’re comfortable with. With Cleversafe, though, trading at historic highs. NEA was “very sensitive to expense growth because it was MDP’s view about Sage was to have a very quick and pretty capital intensive to develop and patent its technology private process by keeping the matter to a very small group and because early sales were slower than desired. We had of internal managers and potential strategic buyers who had to make sure we weren’t out of sync with those issues.” indicated a strong interest in Sage. “And if they offered the With each round of financing, what board members right value, OK, great, and if not, the company’s done well and offer management differs. “In the earlier stages, it may be will continue to execute on their strategic plan,” says Sullivan. credibility or access to expertise. Later, you want to offer The process identified Stryker, one of the world’s leading real experience that might help in identifying companies medical technology companies, as the as the next Sage that might acquire the firm,” Barris says. steward. Based in Kalamazoo, Mich., Stryker has a strong In 2015, talks with IBM heated up and on Oct. 5, it culture and values similar to Sage’s as well as a decentralized announced it was acquiring Cleversafe -- which had tech- organization that would let Sage continue to do what it did nology and client relationships valued at $364 million and $23 best. Additionally, while Sage sales abroad had risen to $20 million, respectively -- for undisclosed terms. The transaction million in 2015, the company and MDP wanted to increase that closed a month later. (In February 2016, an SEC filing by IBM growth. Stryker’s strong international sales force was viewed revealed that it had paid over $1.3 billion in cash for the as a positive for Sage. company, including $1 billion in goodwill.) Before it was The transaction was struck. As for MDP, at its exit, it set up acquired, Cleversafe was valued at slightly over $200 the Sage Legacy Fund with a $1 million contribution from MDP million based on its 2013 financing, according to estimates to assure charitable contributions would continue to McHenry by research firm Pitchbook. and other local organizations. It was a good fit. The strategic acquisition strengthened IBM’s leadership positions in storage and hybrid cloud and helped its clients drive their digital transformation. Early investors saw returns of 35-100x their initial investment. For Gladwin, the impact had an especially joyous effect. “We created fantastic jobs for over 250 people. When I look at our employees and investors, we returned over $1 million to more than 80 people, many of whom we hired out of college.”

16 ivca events

IVCA VI EWPOINT | 2016 17 THE ART+SCIENCE OF INVESTING IN PRIVATE COMPANIES ivca educational events

IVCA/NVCA Annual Luncheon to use to consider real situations faced by valuation April 13: Attendees acquired a rich behind-the-scenes story Four major specialists and auditors. of Chicago’s Cleversafe related to the 10-year rise of the programs on The panelists exploring the perspectives of the SEC PE and VC object-based storage software and appliances company and both limited and general partners about recent issues through its acquisition to IBM in October 2015. valuation developments included Quintin Kevin, partner drew lively and chief financial officer of Adams Street Partners; Nabil Cleversafe founder Chris Gladwin, initial investor Jim discussions Sabki, regulatory attorney at Latham & Watkins LLP; Senior Dugan of OCA Ventures and growth investors Peter Barris in 2016. of New Enterprise Associates and Chris Galvin of Harrison Vice President Adam Freda of 50 South Capital Advisors; Street Capital related milestone events for the company. and John Kneen, partner, chief financial officer and chief Thoma Bravo’s Lee Mitchell was moderator for the event, communications officer at Beecken Petty O’Keefe & Co. sponsored by Baker Tilly and Ropes & Gray LLP. September 13: Private equity was in the spotlight at the In addition, NVCA President and CEO Bobby Franklin luncheon for “Structuring and Negotiating Rollover Equity.” delivered “A View from the Hill” in which he discussed his Saul Rudo, national head of Katten Muchin Rosenman LLP’s impression of Washington legislative activity as it affects Tax Planning practice, assisted by Steve Jarmel, founder of venture capital and private equity issues. Periscope Equity, provided attendees with a deeper grasp of how to best structure rollover equity to minimize tax IVCA Educational Events – Highlights issues. Katten Muchin Rosenman sponsored the event. April 26: “How to Use Communication Planning to Mitigate Rudo discussed key questions that must be addressed Franchise Risk,” sponsored by IVCA service provider member when deciding rollover equity. He also talked about possible Edelman, explored how VC and PE firms can anticipate and structures for such a transaction, including LLC, C Corp mitigate reputational risk for themselves and for portfolio with LLC Holdco and S corporation. companies. Jeff Zilka, general manager of Financial September 27: “Closing a Growth Financing Round” was Communications and Investor Relations at Edelman, moderated the topic for a lively IVCA luncheon forum. It featured a panel that included a general counsel, Mark Tresnowski of entrepreneurs who shared their experience and insights into Madison Dearborn Partners; two investing partners, Bob Fealy the “growth round” of financing, which goes beyond the initial of Limerick Investments and Kim Vender Moffat of Sterling investments and took their companies to the next level of Partners; and a crisis authority, Andy Liuzzi of Edelman. growth. Michael Gray, Partner at Neal Gerber & Eisenberg Attendees gained an awareness of the importance of LLP, the event’s sponsor, served as moderator of the panel assessing reputational risk in due diligence and of completing that included: a crisis assessment at the time of investment and ensuring Talia Mashiach, founder and CEO of EVED, a spend that portfolio companies develop crisis mitigation and management platform purpose-built to manage the event response plans. They also took away a high-level checklist category. EVED is on its third round of financing. for a due-diligence and crisis plan. The panelists’ consensus: Aashish Dalal, CEO of PARKWHIZ, an online platform for Thoughtful preparation for a possible future crisis proves reserving parking in real time. On its fourth financing round, very helpful. it raised $37 million. May 4: “Navigating the Dynamic Regulatory Landscape Justyn Howard, founder and CEO of SPROUT SOCIAL, a of Private Equity Valuation,” sponsored by KPMG, captured provider of a suite of scalable software products that the attention of attendees as KPMG audit partner Sean drives customer and business engagement. It is in its fifth McKee and a panel moderated by KPMG Managing Director financing round. Brian Bouchard delved heavily into the issue. Jason Weingarten, co-founder and CEO of YELLO, which McKee delivered an update on the AICPA Fair Value provides web and recruitment software plus services Task Force, which he co-chairs, that is producing a more associated with the software. It is on its fifth financing round user-friendly guide to measuring fair value with examples and has raised $61 million.

18 ivca awards dinner

Five hundred guests attended the December 7 event, which Paylocity, the leading independent provider of online honored individual award honorees, two Portfolio Company Portfolio payroll and human resources services for thousands of of the Year recipients and the first Legislative Appreciation Company of clients with 25—1,000 employees, as the venture-backed Award recipient. the Year company recipient. IVCA member Adams Street Partners recipients were invested $10 million in the company in 2008 when it employed Honored were: VC-backed 192 people. In 2015, Paylocity employed 1,320, including 635 Warren E. Holtsberg, co-head of Portfolio Management Paylocity and in Illinois. at MVC Capital, who received the Richard J. Daley Award PE-backed Sterigenics International, a provider of contract for his outstanding civic contributions. Sterigenics. sterilization services, as the private-equity portfolio company Lee M. Mitchell, managing partner at Thoma Bravo LLC and winner. IVCA member GTCR and two of its former executives former IVCA chairman, who received the IVCA Fellows Award. acquired the company in March 2011 and sold a majority stake Peter J. Barris, managing general partner at New in it to Warburg Pincus in May 2015. In 2015, it employed Enterprise Associates, who received the Stanley C. Golder over 1,700 employees worldwide, including 182 in Illinois. Award, which recognizes outstanding success in private company investing.

Honorees (left to right): Presenter Bob Fealy and Daley Award honoree Warren Holtsberg; presenter Jim TenBroek and Fellows Award honoree Lee M. Mitchell; Golder Award honoree Peter Barris with presenter Bon French; PE Portfolio Company of the Year Sterigenics’ CEO Michael Mulhern with presenter Sean Cunningham; and VC Portfolio Company of the Year Paylocity CEO Steve Beauchamp with presenter Jeffrey Diehl.

IVCA VI EWPOINT | 2016 19 THE ART+SCIENCE OF INVESTING IN PRIVATE COMPANIES ivca membership

KDWC Ventures Water Street Locke Lord LLP Duchossois Capital Investor Healthcare Partners Lockton Companies Management Members LaSalle Capital Limerick Investments, LLC Waveland Investments Martin Partners The Edgewater Funds Linden Capital Partners Wind Point Partners Mayer Brown LLP EY Madison Dearborn Partners Winona Capital McDermott Will & First Analysis Management 50 South Capital Advisors, LLC MATH Venture Partners Emery LLP Frontenac Company WP Global Partners 7wire Ventures Mesirow Financial Private Neal, Gerber & Mesirow Financial Adams Street Partners, LLC Equity Wynnchurch Capital, Ltd. Eisenberg LLP Private Equity Agman Mid Oaks Investments LLC Zebra Ventures PEF Services LLC Mid Oaks Investments LLC Anderson Pacific Corporation MK Capital Perkins Coie LLP MK Capital Arbor Investments Moderne Ventures Plante Moran, PLLC Polsinelli PC Motorola Solutions ARCH Venture Partners Monroe Capital Academic Venture Capital and Service PricewaterhouseCoopers Baird Capital Motorola Solutions OCA Venture Partners Venture Capital Provider The PrivateBank Beecken Petty O’Keefe & Co. Members Prairie Capital MVC Capital Ropes & Gray LLP BlueCross BlueShield Pritzker Group Venture Venture Partners New Enterprise Associates RSM US LLP Capital CapX Partners NIN Ventures Andersen Tax, LLC Sidley Austin Silicon Valley Bank Chicago Teachers’ OCA Venture Partners Baker Tilly Virchow Silicon Valley Bank Sterling Partners Pension Fund Krause, LLP Origin Ventures Simon Compliance Svoboda Capital Partners Chrysalis Ventures CBRE Group ParkerGale Capital Square 1 Bank, Thoma Bravo, LLC CME Ventures Patriot Capital Citizens Bank a division of Pacific Western Bank Wind Point Partners Cressey & Company, L.P. PPM America Capital Deloitte LLP Stern Cassello & Associates Duchossois Capital Partners DLA Piper, LLP (US) Management Thompson Flanagan & Co. Prairie Capital Edelman Dundee Venture Capital University of Chicago Booth Pritzker Group Private EmPower HR The Edgewater Funds Capital School of Business Sponsoring EY Members Financial Investments Pritzker Group Venture University of Illinois Freeborn & Peters Corporation Capital University Technology Greenberg Traurig, LLP First Analysis Prospect Partners Park at IIT Heizer Center, Frontenac Company RCP Advisors Vedder Price P.C. Northwestern University, Provide outstanding GE Ventures River Cities Capital Funds Kellogg School of William Blair support for IVCA in the Golder Investment Romar Partners Management Winston & Strawn LLP form of services and/ Management, LLC RoundTable Healthcare Horwood, Marcus & Wintrust Commercial Bank or the highest levels of Berk Chtd. Growth Catalyst Partners Partners event sponsorship GTCR LLC Sandbox Industries Houlihan Lokey Baker Tilly Virchow Harrison Street Capital Jenner & Block LLP Shore Capital Partners Krause, LLP Healthbox Global Partners Jones Day State Universities Founding Edelman H.I.G. Capital Retirement System JP Morgan Members EY High Street Capital Sterling Partners Katten Muchin Rosenman LLP Greenberg Traurig, LLP Hyde Park Angels Svoboda Capital Partners Kelley, Drye & Kirkland & Ellis, LLP Hyde Park Venture Partners Teachers’ Retirement 50 South Capital Advisors, LLC System of Illinois Warren LLP Kutchins, Robbins & Illinois Municipal Kirkland & Ellis LLP Adams Street Partners, LLC Diamond, Ltd. Retirement Fund Thoma Bravo, LLC KPMG LLP ARCH Venture Partners Neal, Gerber & Illinois State Board of Tribune Company Baird Capital Eisenberg LLP Investment Valor Equity Partners Kutchins, Robbins & Diamond, Ltd. Beecken Petty Ropes & Gray LLP IllinoisVENTURES, LLC Victory Park Capital Latham & Watkins LLP O’Keefe & Company Silicon Valley Bank Jump Capital Vistria Group ivca governance

sta™ Supporting Members Maura O’Hara Maura has been Executive Director of IVCA since 2003. She oversees all aspects of the Association and represents IVCA in the community. Have sponsored at least one event Kathy Pyne during the year Kathy is the IVCA’s Association Coordinator and is responsible for events, member communications and Adams Street Partners, LLC database management. Kathy joined IVCA in 2005. DLA Piper, LLP (US) Duchossois Capital Management Frontenac Company 2016 o«cers GTCR LLC Katten Muchin Rosenman LLP Robert Fealy KPMG LLP Chairman: 2015-2016 Vice Chairman: 2014 Secretary: 2012-2013 Latham & Watkins LLP Limerick Investments, LLC Limerick Investments, LLC Madison Dearborn Partners Walter Florence Vice Chairman: 2015-2016 Secretary: 2014 McDermott Will & Emery LLP Frontenac Company OCA Ventures Origin Ventures Lee M. Mitchell IVCA–PAC Chairman: 2015-2016 Plante Moran, PLLC Chairman: 2013-2014 Vice Chairman: 2011-2013 Secretary: 2010-2011 Pritzker Group Thoma Bravo, LLC Private Capital Pritzker Group James TenBroek Venture Capital IVCA–PAC Co-Chairman: 2013-2016 IVCA–PAC Chairman: 2012-2013 RCP Advisors Chairman: 2010-2012 Vice Chairman: 2009-2010 Secretary: 2008-2009 RSM US LLP Growth Catalyst Partners Shore Capital Partners Square 1 Bank, Anthony Palcheck a division of Pacific Secretary: 2015-2016 Western Bank Zebra Ventures Sterling Partners Thoma Bravo, LLC Jeffrey Piper Winston & Strawn LLP Treasurer: 2015-2016 Wintrust Commercial Bank Svoboda Capital Partners Illustration: Roy Scott, cover, page 8; Michael Austin, pages 5, 7 & 11 Design: Avila Creative Inc. Illustration: Roy Scott, cover, page 8; Michael Austin, pages 5, 7 & 11 Design: Avila Creative Inc. A bout IVCA IVCA advocates for Midwest Venture Capital and Private Equity funds who invest private dollars into private companies on behalf of Institutional Investors including: pension funds, endowments, foundations, and companies. IVCA membership includes investors at all stages of private companies from the largest private equity firms in the Midwest to some of the smallest early stage venture investors. IVCA advocacy includes Illinois government affairs, educational programming, sharing of best practices, media outreach, and collaboration with entrepreneurs and the groups that represent entrepreneurs.