Picks From A Multi-Hundred Millionaire Who's Earned 40% For 40 Years

Investors who are not familiar with John Pappajohn should consider the following fact. Immigrant turned entrepreneur turned venture capitalist, Pappajohn's eponymous Pappajohn Capital Fund has averaged 40% annual return during the past 40 years.

By way of background, Pappajohn emigrated from Greece as an infant and grew up north of Des Moines, Iowa. As a teenager he operated a family grocery store after his father passed away at age 16. He graduated from college in 1952, operated an insurance business for a decade, organized Guardsman Life Insurance Company in 1962, and sold his stake in 1969 to become a venture capitalist ("VC").

That same year he met Warren Buffett and has maintained their relationship ever since. (It takes less than two hours to drive from Des Moines to Omaha.)

Against Buffett's advice, Pappajohn backed Kay Laboratories as a VC and soon earned his first million. ("He actually said it was a bad time to become a venture capitalist, but I went ahead and did it anyway.") Pappajohn's success as a VC continued, earning $10 million in American Physician Partners, $12 million in Caremark, $25 million in Quantum Health Resources, and hundreds of additional investments that have amassed him a multi-hundred million personal fortune to date.

Despite his early career in the insurance industry, Pappajohn currently focuses on technology investments. Pappajohn has served as Director at over 40 public companies, launched over 100 startups, and been involved in 50 IPOs. He is also a Horatio Alger Award recipient and has received four honorary doctorates.

Given these credentials, perhaps it would be worth investors' time to peek into Pappajohn's portfolio.

Izea Inc (OTCMKTS: IZEA)

The first pick pulled from John Pappajohn's current portfolio is Izea Inc (OTCQB: IZEA). Izea operates one of the world's largest native advertising platforms that reaches up to 1/3 of the world's population. Izea went public in 2011 and has increased revenue every year since inception. It plans to generate its market capitalization in revenue this year: $23 million.

Pappajohn beneficially owns 4 million shares of Izea, representing about 7% of its common shares outstanding. (Perry Sook, the CEO of a $1.7 billion TV company, recently invested a similar amount in Izea.)

Izea's performance in 2014 was impressive: revenue increased 26%, gross profit margins increased 9%, and its registered user base increased 153%. Izea has a Buy rating from analysts Craig-Hallum ($1 PT), Merriman Capital ($0.60 PT), and SeeThruEquity ($0.80 PT).

"Izea made significant investments in client services and engineering ahead of revenue last year, and that investment is beginning to be reflected in our organic growth momentum," said Izea's CEO. "I am proud of what our team accomplished in 2014 and have never been more optimistic about our future."

Izea is currently debt-free with about $5 million in cash. With a dedicated salesforce of 30 full-time employees, revenues from its advertising platform will roughly double in 2015, according to a CEO forecast.

Cancer Gent (NASDAQ:CGIX)
A second pick pulled from John Pappajohn's current portfolio is Cancer Genetics, which rang the bell at NASDAQ on August 28, 2013. He is largely responsible for its IPO, having recruited its current CEO Panna Sharma and investing $12 million before the company went public. When asked why he became so involved, he summarized his rationale in three points, "good technology, good management and right timing."

Note that Cancer Genetics has morphed considerably during the past 1.5 years. With significant M&A activity since going public and a stock price down approximately 50%, Pappajohn has not publicly updated his view on Cancer Genetics within the past few months. According to a SEC filing, Pappajohn sold 2 million of his shares in March pursuant to a redemption agreement.

With this deal and other equity transactions since the IPO, Pappajohn owns just 1.5 million shares today, representing 15% of Cancer Genetics' common shares outstanding- far lower than his original stake. He nevertheless remains Chairman at the company and has continued participating as one of the company's financiers.

Privately Held Investments

Pappajohn also invests in privately held companies. In August 2014, he invested seven figures into Rock Health-backed TelePharm, but mostly focuses on startup investments. He also remains President at the profitable Equity Dynamics, Inc., one of the nation's oldest consulting firms.

Because he founded five collegiate entrepreneurial centers, he enjoys a steady supply of deal flow from the founders who graduate from his programs. Startup investments, which often result in "all-or-nothing" outcomes, can nevertheless return hundreds or thousands of percentage point returns in their rare event of success. Pappajohn's 40% annual returns in his fund, mentioned above, derive largely from these types of outsized victories.

Conclusion

Hpefully some of us will become as lucky as Pappajohn, either in his investing performance or in his humanitarian contributions.

Pappajohn has gifted over $100 million to various philanthropic causes during his lifetime, primarily near his hometown of Des Moines, Iowa. He donates to causes promoting entrepreneurship, medical technology, and artificial intelligence, with his largest beneficiaries being five Pappajohn Entrepreneurial Centers that have graduated 175,000 college students to date.

A couple years ago, James Altucher described Pappajohn's work ethic, "An 83 year old man is in his suit, traipsing through the blizzard of Manhattan, making deals, negotiating contracts, trying to get IPOs going for investments he (and I) have made. He'll put in 15 hour days every day next week in five different states and three different plane rides. He'll use his rolodex built over 50 years in order to, ultimately, generate money for me while I'm enjoying myself in India. I'm feeling a little guilty now as I write this."

Indeed.