#28: Todd Federman (North Coast Ventures)

Todd Federman (North Coast Ventures) [00:00:00]:
You gotta write a check. Right? If you're if you're not writing a check, you're not a very useful investor. So, I think it's it's important that those of us who are investors and the individual angels in the region are being clear and open about and company, I think it really comes down to how we as investors can help entrepreneurs be more successful. In some cases, it's just getting out of the way. Right? It's, and it's us getting out of the way, and in some cases, helping to remove barriers for the company.

Jeffrey Stern [00:00:40]:
Let's discover the Cleveland entrepreneurial ecosystem. We are telling the stories of its entrepreneurs and those supporting them. Welcome to the Lay of the Land podcast, where we are exploring what people are building in Cleveland. I'm your host, Jeffrey Stern. And on today's show, we're swinging the startup pendulum from the world of founders back to the world of funders. And we're talking investing. For this conversation, I had the pleasure of speaking with Todd Federman, who is the managing director over at North Coast Ventures, which recently rebranded from Northcoast Angel Fund. Today, Northcoast comprises a Cleveland based investor group that includes over 300 individual investors, includes 6 funds, and has closed more than $65,000,000 of capital in 60 early stage companies since 2007.

Jeffrey Stern [00:01:32]:
Prior to joining Northcoast, Todd launched a consumer packaged goods company of his own called 1 with Nature, and had worked for a technology consulting company called Diamond Cluster. We cover a lot of topics that we have explored on the show from the perspective of Cleveland entrepreneurs, but this time from the perspective of investors. I really enjoyed this conversation with Todd and working through his understanding of the Cleveland startup space, and I hope you all do as well. Before we dive straight into the the world of investing, I I did wanna start with just an exploration of your own entrepreneurial journey and and really your own personal interest in startups and and what kind of ultimately drew you to the world of investing?

Todd Federman (North Coast Ventures) [00:02:18]:
Absolutely. So, you know, thanks for having me. And, you know, I've always been in the entrepreneurial world, my own and other people's. I think the experience you're referring to is 1 with Nature, which is a company that I co founded. It's very different than the kinds of companies that we invest in today. It's a personal care products company. So physical, bar soap, lotion, body wash, bath salts. And we put it through distribution.

Todd Federman (North Coast Ventures) [00:02:43]:
So it went through probably 40 points of distribution, sold into 4,000 retail stores, and kind of gave me the experience of building a real product, a real brand. In retrospect, making some terrific decisions, some terrible decisions, good hires, some bad hires. Right? Along the way, you learn a lot. And being able to see consumers react to what you put in the market was just a lot of fun. And I think that's something that I've, you know, taken into North Coast in the startup world here and really just an ethos for, you know, you kind of learn from the customer. You learn from the real world. And as terrific as you think what you put out there is, if people aren't picking it up off the shelf or in a software world, they're not clicking and buying. It's obviously not as good as you thought, and it doesn't mean it's over.

Todd Federman (North Coast Ventures) [00:03:34]:
It just means back to the drawing board.

Jeffrey Stern [00:03:37]:
Yeah. And so at what point through your own, you know, entrepreneurial journey did you realize that investing in other founders and start ups was something that you wanted to pursue?

Todd Federman (North Coast Ventures) [00:03:48]:
Well, after I went to to business school. After business school, I worked for a technology strategy firm, Diamond Cluster, out of Chicago, and spent time with some healthcare companies, Time Warner in New York, AOL in DC, and especially at AOL. I spent time with a lot of startups in their ecosystem. Right? So all their premium services, a company like AOL was partnering with billing players, you know, UI players, ad networks. Right? There's a whole host of people in that ecosystem. I just really enjoyed that culture, that style, and, you know, getting to to go out and and partner with them. And when I came back to Cleveland, I didn't expect a, you know, a lot necessarily of doing something like that here. I was still flying back and forth to DC for AOL every week, but I met some people doing early stage investing.

Todd Federman (North Coast Ventures) [00:04:36]:
I spent more time with people with startups here, and there was more here than I thought. So, you know, it just seemed like a lot of fun, something I couldn't really resist and wanted to, dive into.

Jeffrey Stern [00:04:47]:
Yeah. So let's talk about about Northcourse, Ventures. And really what I want I wanna start with there because I think we can kind of hit some of the more macro ideas here is, you know, recently North Coast has rebranded from formerly North Coast Angels to North Coast Ventures today. And I would love to get, you know, how you think about the difference between Venture Capital and Angel Capital in a startup ecosystem and what this kind of shift means for the organization and for what you guys are trying to do going forward.

Todd Federman (North Coast Ventures) [00:05:19]:
Yeah. I'll I'll start with the shift. I think sometimes when you rebrand something, you're rebranding because you're indicating where you want to go in the future. And sometimes you're indicating the changes you've already made, and you want your your brand and your name and your look and your feel to reflect who you've become. And for North Coast, it really was the latter. So over, I'd say, the first 5 years of our growth, we were, in experimenting mode. We were trying to figure out what we were good at, trying to figure out where the opportunities were. We made a lot of really good investments.

Todd Federman (North Coast Ventures) [00:05:51]:
We made some bad investments. We gave some helpful advice to some companies, probably some unhelpful advice to others. And we built an experience set which I think allowed us to be more successful. It allowed us to attract better investors, people who could really add value, industry expertise, functional expertise. It allowed us to attract more competitive companies. And as we did that, we found we had really kind of transcended in our operations from an Angel Group to closer to a VC. And by that, I mean our professional management had grown. We were co leading or syndicating deals with early stage VCs and other groups across the Midwest, and we were raising larger amounts of capital.

Todd Federman (North Coast Ventures) [00:06:35]:
So we've gone from funding companies in $1,000,000 rounds in some cases to 2 to 5 or more. And we had built a small venture fund where we were deploying money at the half $1,000,000 or $1,000,000 level. So before we knew it, we kind of looked more like an early VC. We were still doing seed investing, but that's really why we wanted to make sure that there was kind of a uniformity to our name and how we presented ourselves to encompass both the seed investing and a little later stage work that we do. You know, to your question on the distinction with VC and angel. In some ways, there are a lot of similarities. Right? There are people investing capital in early stage companies, but that's really where it stops. Angels are investing their own capital.

Todd Federman (North Coast Ventures) [00:07:19]:
VCs are investing primarily other people's capital. Angels could have a whole host of different motivations. Right? They may just like the founder. They may like an industry. They may like to give back in venture. They may be a purely for profit motive. For VCs, they need to drive return to their LPs to have another fund. So it's really a different mindset, and I think you probably see more uniform culture and style from VCs than you may from angels, where in reality, if you've met 1 angel, you've met 1 angel.

Jeffrey Stern [00:07:52]:
Right. They're all quite different. Structurally, though, when you look at, you know, the just the the breakup of what North Coast Ventures looks like today coming from, you know, a syndicate of of angel LPs. Is the structure of the fund still the same in terms of the LPs and the breakdown of that?

Todd Federman (North Coast Ventures) [00:08:13]:
It's similar, and we really started as a fund from day 1. So of the the 3 to 500 angel groups in the country, most of them are clubs. They're organizations of people who connect. They look at deals together. They talk about deals together, but they make individual decisions. From day 1, we were a contributed capital fund. So if you look at our founding documents, the the LP agreement that investors signed, it really looks more like a venture fund. So our individual investors, many of them continue to invest with us today.

Todd Federman (North Coast Ventures) [00:08:44]:
But whereas in the first fund, we had people investing at 25 or $50,000, Today, we have people in the Fund toward a half 1000000, a 1000000, and upwards of a couple $1,000,000. So it's, a different level of investment, and it allows us to deploy more capital into the ecosystem. And I think it reflects people's, greater comfort with the economic proposition that we had. At the beginning, I'm sure everyone wanted us to be successful. They wanted to see this kind of activity in the region, but they probably weren't willing to write larger checks until they started to see some of these, companies grow and started to better understand the story for why we could all be successful.

Jeffrey Stern [00:09:21]:
Yeah. So so one of the things that you actually had just mentioned before we we hopped on the mic here was the importance of, you know, fundamentally, there needs to be this alignment of investors and startups in the larger startup community for for there to be a thriving startup community. You know, just some some personal reflections here over the last, you know, 5 years thinking a lot about startups just that being what I am currently pursuing and the role that investors play in that endeavor. To me, you know, startups are ultimately some kind of bet that the the future will be radically different than the present in some capacity. And they are valuable on the way up because effectively, they are some call option on that future coming true. And investors get to get in and invest at a discount to that future state where the reality converges with that vision of the startup in a successful scenario. And, you know, one day they might become those giant cash gushing businesses that we all, you know, hear about and and and strive for in this space that we're we're working in. But not not in the present moment and not often that that's the case.

Jeffrey Stern [00:10:28]:
But the goal is really to grow and explore and earn the right to keep growing and exploring. And so it takes this alignment, I think, a vision from both the investors and the founders in the space to support startups. And so with that kind of context and framing, I want to go a little deeper on, you know, the role, that you feel early stage investors play and what really makes a good a good early stage investor?

Todd Federman (North Coast Ventures) [00:10:54]:
That's a it's a fair question. And I think a lot of people would answer it differently. I'll I'll kind of answer it from maybe the entrepreneur's perspective first, which is you got to write a check. Right? If you're if you're not writing a check, you're not a very useful investor. So, I think it's it's important that those of us who are investors and the individual angels in the region are being clear and open about where they want to play, how, and at what left. But assuming that there's money to be invested and that there's a fit between investor and company, I think it really comes down to how we as investors can help entrepreneurs be more successful. In some cases, it's just getting out of the way. It's us getting out of the way and in some cases helping to remove barriers for the company.

Todd Federman (North Coast Ventures) [00:11:42]:
We'd like to think that these early stage companies, should have boards that, you know, there should be a level of governance, but that ultimately it's, the team and the founders who are leading and driving the the the strategy and the vision of the company. Many of our investors will have, that industry and functional expertise. And in my mind, that's where you really add value. So just 2 hours ago, we were on a investment screening call and we were working with a company that has an ERP system for a very specific vertical. And on our call, the person leading the questions was Tim Reynolds, who, you know, recently sold his company Tribute, which was a vertical ERP system, and it's owned by private equity. He spends time with this private equity trying to build the platform for vertical ERP systems. So Tim knows more in his little finger about this space than, you know, I do and, you know, my 10 plus years of doing that. So sometimes it's up to a group like us to find the right people who will provide that industry expertise.

Todd Federman (North Coast Ventures) [00:12:43]:
But to hear him talk about it, it was really powerful to watch him and the entrepreneur. She immediately gravitated I think to some of those perspectives and he had more credibility. So I guess our hope is that, you know, the individual investors will play where they're the strongest and that they'll back off and let things develop in areas where they're not strong.

Jeffrey Stern [00:13:05]:
I think we could take it from there to to talk specifically about Cleveland and, you know, how how we are, like, you know, kinda taking stock of the the Cleveland startup ecosystem. You know, what what in your mind are are we doing well here? And we'll we'll start there.

Todd Federman (North Coast Ventures) [00:13:19]:
You know, we have some really interesting founders here at Chow. There's a a a group. Many of them are people who've been repeat founders. The CEO of, for example, a Charlie Lougheed, his experience at Explorus was instrumental to him getting his next company funded as early as he did. So Charlie was able, because of that experience set, to break the rules of how basically pre seed companies get funded because of his background, because he'd started and run companies, and because he had run a company in a sufficiently similar space, had a ton of credibility, and had no trouble raising $3,000,000 like that. So I'd say, you know, that's that's an asset having people like that. One of the downsides is that if you don't have that background, you need a lot more traction. You need a lot more demonstration.

Todd Federman (North Coast Ventures) [00:14:15]:
And in some ways, it's probably unfair. Right? Because in in some ways, it's a loss for us because we're missing opportunities to invest in people a little bit earlier. But also, you know, after doing this as long as I have, and you see all the different ways companies can and do fail. Sometimes when there's a team that doesn't have as much experience, doesn't have as much understanding of the market problem they're trying to solve, you just wanna see another card or 2 on the table. You wanna see things at a little later stage. So I think that's that's one of the the things we we go back and forth with in in the region and we'd love to have more entrepreneurs, more startups. I think the the volume is low. For a group like ours that looks at deals in Columbus and Cincinnati, I'm not sure we're moving the right direction on volume over the past couple years.

Todd Federman (North Coast Ventures) [00:15:04]:
I think that's a challenge. We'd like to see, more of that. But there's also some, you know, quality sources of capital, both for profit and nonprofit that are here that I think provide a a baseline level of support. And then, you know, lastly, on the VC side, it's few and far between. Right? We we don't have very many VCs here. Can companies get funded at the seed level? Absolutely. Right. And we've we've made invested in 60 some companies, and we invest in a a subset of the bit the companies that are here.

Todd Federman (North Coast Ventures) [00:15:36]:
So, you know, it's certainly doable, but I'd love to see more capital. I'd love to see more co investors, and I'd love to see us all doing more things to try to attract some capital from the coast. You know, in some of our most successful deals, you know, we've got Sequoia in a deal, General Catalyst in a deal, Gray Cross in a deal. It happens. Right? It's it's not that it doesn't happen. It's just not as frequent as, we'd like to see. And I think we probably all need to get a little bit better at getting companies to the point where they're gonna be more successful attracting coastal capital.

Jeffrey Stern [00:16:08]:
Yeah. So you you introduced a few threads there that I I definitely wanna pull on, and explore more. I'll I'll kind of outline the ones that I heard and we can start with maybe the startup quantity. But I really, especially in comparison to some of the other cities you mentioned, even just here in Ohio, but also the coastal cities as well. I wanna touch on that idea of the quantity, maybe the difference in valuations and the difference as well from the investor perspective of kind of risk aversion and, you know, the stage of capital that we have available in those cities. But but starting with with quantity, I can empathize with with the sentiment that there's not the abundance of of startups that we we have here as there there are in in some of the other startup ecosystems that I think more people are familiar with the Bay Area and New York City. But I wanna kinda dive in here because it's kind of this this chicken and egg problem, but how do you think we surmount it? Because obviously, I would love as well for there to be more of both sides of that equation, but how do you think it is that we actually get over over that hurdle?

Todd Federman (North Coast Ventures) [00:17:14]:
Yeah. Well, we'd love to see more sparks. So it's not all incubators, but talk about incubators for a moment. So Cleveland does not have a traditional incubator program right now. Right? What Venture for America is doing is really cool, really interesting. It's a couple year program, and it goes into different cities. We don't have a Techstars. We don't have a a generator affiliate here.

Todd Federman (North Coast Ventures) [00:17:41]:
I think Cincinnati has 7. 7 right now. So that's one of the ways companies get created or at least incubated. And without those early resources, I think it's just harder for people to to start something. You know, I refuse to believe, though, that, you know, there aren't a 100 people at Hyland, at Progressive, at Key, at OEC, at MRI. Right? All of these medium to larger size companies working on really cool things with great insights into their industry that the larger company is not interested in. Right? I know VCs in the Bay Area who will go to the Uber cafeteria to look for deals. Right? Because they'll just talk to people, and all those people wanna start something.

Todd Federman (North Coast Ventures) [00:18:26]:
So Right. There's a little something missing here in in the water, right, that that everybody isn't quite drinking and seeing. And without that that catalyst of something starting, it's really hard. Now I I think many of the highest potential opportunities are getting funded. Obviously, I sit in a position where I may or may not have a bias on that, so I will acknowledge that. And the whole valley of death, you know, depends on where you sit. Right? You sit in a slightly different place. You see the valley of death slightly differently.

Todd Federman (North Coast Ventures) [00:18:58]:
But there is so much capital in the region. Right? The the capital is not the problem. We need to get people to, get excited about the opportunities to reimagine how they might deploy capital and and to also try to get our institutions here in Cleveland to be the, LP investors in the funds that are based here. So most institutional venture capital the risk of stating the obvious, institutional venture capital is funded by institutions. So we need our institutions here, which have tens of 1,000,000,000 of dollars on the balance sheet to support venture capital funds that are investing here in the area. And if that doesn't happen, we're just a massive net exporter of venture capital. It's not unique to Cleveland. It happens in a lot of cities in the Midwest, but that's one of the things we need to change.

Jeffrey Stern [00:19:48]:
Yeah. And I think it's kind of the perfect bridge to talk about kind of the difference in capital, that risk aversion and maybe the difference in valuations that we're seeing. But to get on the other side of that coin, you know, just in my experience watching, you know, startup ecosystems across the country and in cities, like the ones we've mentioned already, that it seems apparent to me like the true source of that early stage capital that that really thrives is it comes from liquidity events of other startups, right? Angels who have made their initial wealth from founding or growing a startup of their own understand the game that other founders are playing, because they've played it themselves. And they want to keep playing it because they like it. And angel investing is ultimately the the vehicle to continue that, that that journey by investing in other entrepreneurs. And so, I just I think a lot about this chicken and egg problem because we need kind of we need to kinda build it at the same time. It really kind of needs to come together. But that's what's been really one of the exciting things about just the podcast and exploring people who are building things here is, you know, the the amount of companies, at least just in the last 5 years that are getting past that series a mark here, I it feels like at least anecdotally is is on the rise.

Todd Federman (North Coast Ventures) [00:21:05]:
I I think it is. You know, we're seeing a lot of companies get to that point where sometimes a1000000, 2,000,000 is that magic number where you can raise a larger round. But then you think about how you grow your team from 15 to 40, right, over the next 18 months. And with those additional resources, if depending on the industry you're in. Now keep in mind, we tend to, invest in b to b software. But in those industries, it's kind of a math problem. Right? You know, there's a customer acquisition cost, and you know your margins. We're happy to, invest in money losing enterprises as as long as the customer acquisition cost and the gross margin give you a reason to believe in the future.

Todd Federman (North Coast Ventures) [00:21:48]:
And, if we can demonstrate those things at the seed level, we'll have success attracting Series a capital.

Jeffrey Stern [00:21:54]:
Yeah. No. I I I think that makes a lot of sense. So we'll we'll use that to to transition to to the yeah. This idea of risk aversion and valuation. And again, my my sense just from participating in some funding rounds here in Cleveland and watching know, fellow founders go through that process here as well as that just at a high level. The perspective I've gotten and and the take that I I take from others is that Cleveland effectively, there's this hesitation to give out the rich inflated indefensible valuations that you see in the Bay Area or in New York City. And so I'll throw, like, my devil's advocate hat in the ring for a sec, and the argument could definitely be made that you actually maybe need those high valuations to support a critical density of early stage startup creation.

Jeffrey Stern [00:22:41]:
And so I'd love to get your perspective on how how you think about valuation here in Cleveland and what and if you think there's something that needs to be done to lessen that disparity between what we're seeing in those larger startup ecosystems and where we are right now. So feel free to throw something and where we are right now.

Todd Federman (North Coast Ventures) [00:22:54]:
So feel free to throw something at me, you know, through the Zoom here, but I don't I don't think about valuation as much as, you know, you might think a a VC might. I mean, our our view is we only lead half the deal. So half the deals, the valuations, the valuation. You know, there's a a lead investor. They put that on the table. We're either in or we're out. And in in that case, we just wanna get into the the deals that we think will be really successful.

Jeffrey Stern [00:23:22]:
Right. Right.

Todd Federman (North Coast Ventures) [00:23:23]:
You know, it's pretty basic. In the companies that that we're leading around, we wanna get also into those deals that we think will be really successful, and we want to make sure that the paper we're leading with, right, that term sheet, will be, appropriate and attractive enough to attract other capital. Because we're a small investor. We don't fully subscribe any round, so we need other co investors. If there's more capital, it does 2 things. It makes it easier for us to syndicate rounds, making it possible for valuations to go up a little bit, and it probably provides some more competition to us to get into the best deals. So I think it really is a supply and demand function. We are thrilled to invest in more expensive deals that we think are more likely to be successful or further down the path to be successful.

Todd Federman (North Coast Ventures) [00:24:15]:
You know, there are companies where, you know, the the series a, it is meaningfully large enough that you know how it's gonna drive the valuation. So I I think in some cases, you know, you probably look at, you know, PitchBook and Senawaken West, right, all the other Sure. Data sources out there. But if you you kind of throw out the the the averages. Right? Because the means are influenced by these crazy valuations on the outside. You look at the medians, you know, we're definitely off by 20, 30%, but it's not a 100% we're off by. So Right. You know, I'll I'll give you that the valuations here are lower, could be higher.

Todd Federman (North Coast Ventures) [00:24:52]:
And if they were higher, maybe we would get into some deals we're not. But nobody pays the price more than the investors who lose those deals. So we assess every time we lose a deal that we wanted to be in, and we assess every time a company is wildly successful that we didn't get into. And, you know, we don't want valuation to be the difference. So for, you know, for what it's worth, I don't think it's just that, investors here don't think they need to pay more or investors here aren't willing to pay more. I think it's a function of supply, demand, ease, and what people are used to. But with a fund like ours, one other thing I'll mention is that even at our seed fund, we like to invest in our best companies 3 or 4 times. So the first valuation is just the first valuation.

Todd Federman (North Coast Ventures) [00:25:40]:
Right? It's it's not necessarily the most important valuation. And as we've invested more in follow on, that's changed our view on valuation. So I would say we're less sensitive. People probably would have wanted to throw things more at us at the very beginning. Right? Because we are probably more valuation focused, more terms focused. I think we've probably learned a little bit and take a bigger picture approach today.

Jeffrey Stern [00:26:03]:
When when you're evaluating companies at at the stages you are in and thinking through their likelihood of success and growth, what what are the risks that you're willing to take as an investor? And what what do you want to see founders have derisked?

Todd Federman (North Coast Ventures) [00:26:18]:
So whether they derisk it or we are just derisking it from our own knowledge and homework, we wanna be sure that the problem they're addressing really exists. And that's something that often falls apart under scrutiny. Right? When you talk to potential customers, you talk to people in the industry, you realize the status quo wasn't so bad. The substitutes and the competitors aren't so bad. And that a product you know, there's always room for a new better product. It's just a product has to be a lot better for it to really support a startup investment. So I think that's one of the areas of risk that we don't want to take. Right? It's just validating a market.

Todd Federman (North Coast Ventures) [00:26:58]:
We're absolutely willing to take commercial risk. We don't generally take a lot of technology risk, but it's more so because we're just not investing in cutting edge tech. Right? I mean, we're we're investing in companies that are using, AI and ML and, you know, other cool technologies, but it's generally solving problems that have been solved just in different industries, different ways, different monetization models. You know, we're not looking at an all new video compression technology that no one's ever done before. So I'd say that kind of tech risk is probably something that we don't like to do. We don't you know, traction is a funny thing. Right? And, I mean, that's probably the knock on Midwest, investors that they expect too much traction. And that's could be could be fair.

Todd Federman (North Coast Ventures) [00:27:41]:
I think we at least want to get a whiff of product market fit. We want to get a sniff that, hey, there might be something there. There's some customers we can talk to. 1 or 2. Give me 1 or 2 customers that love what you do. You know, we don't need a hundred. We don't need renewals. We don't need white papers.

Todd Federman (North Coast Ventures) [00:28:01]:
But if we can't talk to somebody who says what you've built for them is changing their world and that they buy into the vision, that's probably a risk we don't wanna take.

Jeffrey Stern [00:28:10]:
Right. Right. And when and you mentioned that maybe a predominant focus on some of the B2B SaaS play, but more, you know, high level, is there a thematic approach that you guys are taking? What is the kind of high level strategy and and thesis, if you will, from investing perspective?

Todd Federman (North Coast Ventures) [00:28:27]:
Well, in most cases, we're doing something vertical. So we're we're doing something that applies to a specific industry and beachhead first. It may be applicable horizontally, but it's typically not a horizontal play right out of the gate. Like a CRM might, right, be something that's super broadly applicable. And so there's a known entry point, a known pain point, an addressable customer base that for us we think is sufficiently attractive to deploy a couple $1,000,000 against at the early stages, and it's gonna be bigger than a bread basket. Right? So we wanna be able to, invest in companies that we think are in, you know, half $2,000,000,000 industries that, have the potential to double every year. If a company doesn't have the potential to double every year, it's probably just not a venture path company.

Jeffrey Stern [00:29:20]:
Got it. I'm curious because you mentioned you kinda take stock of the, you know, the deals that you didn't necessarily get into. I feel like I've come across the term and anti portfolio before. Yeah. I what what does that look like for you? And and what are some of the reflections and learnings that you've taken from that anti portfolio?

Todd Federman (North Coast Ventures) [00:29:40]:
Well, what's what's interesting is several of of the the companies as we look back, well, I'll I'll say I'll say this a couple a couple different ways. 1st, I truly wish there were more companies in the anti portfolio. I think if, if if the region and the state had a more robust startup ecosystem, there would be 20. Right? So Bessemer is the VC famous for their anti portfolio, and they missed deals like Apple and LinkedIn. You know, we don't have a lot of those here. You know, CoverMyMeds was, you know, probably the the biggest deal in the state. When they went out for funding, they ran a small convertible note round. Some people who are close to the company invested.

Todd Federman (North Coast Ventures) [00:30:24]:
Jumpstart invested. They weren't widely out circulating for around. You know, we we didn't diligence them and walk away. And I think what what those founders probably would have told you was that CoverMyMeds at the precede stage probably wasn't screaming, this is gonna be a $1,000,000,000 company. Right? Just like Apple probably wasn't screaming it was gonna be a $1,000,000,000 company. So, you know, you look for those signals of, great teams. Right? Teams that you just don't wanna walk away from. People who are crazy smart, who are crazy committed, who are just gonna do what it takes, to win, who are ultra high integrity, who you feel you can count on and bet on.

Todd Federman (North Coast Ventures) [00:31:04]:
I'd say as we look at some of the deals that we would have liked to be in in retrospect, those are probably the common denominators that we see. And I'm hopeful that as, you know, we continue to grow, there are more great startups that the number of deals that we're in that win and are successful will be balanced by many in that anti portfolio. And, I think that's just a indicator of being in a robust ecosystem.

Jeffrey Stern [00:31:31]:
Yeah. I'll let I'll let you fill in the the flip side of that and speak to some of the companies that have really kind of sparked inspiration and along their success. What are some of the companies both now that you would, you know, keep an eye on but also just in the past of your investment portfolio that have really you know, impressed you here in Cleveland?

Todd Federman (North Coast Ventures) [00:31:54]:
You know, there there are a bunch. You know, one of the companies I'm most excited about is a company that started in Cleveland, went to New York, and is now back in Cleveland, and that's Remesh. Remesh is a a company where the the founders were just rock solid, committed, and had a vision. We were confused by that vision at the very beginning. Right? It was it was so broad. It was, peacekeeping. It was using this what eventually became a market research platform to solve some real problems in the world. So I don't think we got it initially.

Todd Federman (North Coast Ventures) [00:32:29]:
They went through flash charts here. They went to Techstars. We invested in around a $3,000,000 VC round. So we were around them when they had, you know, 5, 6 people in the company, $10,000 a month in revenue. You got to see that vision and that commitment turn into $100,000 a month in revenue. And at that point, you say, okay. There's there's something here. Right? They're, they've delivered a product.

Todd Federman (North Coast Ventures) [00:32:54]:
Their customers are buying the product. They seem to be getting good feedback. It seems to be differentiated. And they go out and raise a $10,000,000 series a, and they hire a bunch of smart people. Right? The vision gets sharper. You get a little more inspired by that team. Right? Because now there's a VP layer. Right? There's there's not just the founders.

Todd Federman (North Coast Ventures) [00:33:12]:
There's a whole group. And after a couple of years, they're at $1,000,000 a month. And you realize, wow. The companies that were buying, you know, $250,000 a year are now buying $1,000,000 a year. And you see just how a company like that stayed true to what they wanted to build. And that that was really cool to see. You know, they they still got a lot of work to do. They're growing.

Todd Federman (North Coast Ventures) [00:33:35]:
They're raising capital. I think they hired 40 people last quarter. So they're growing like crazy. And for us, it's it's, you know, one of our very best, companies. But, you know, that's the kind of company vision team we would love to see more of, and I am a 100% sure that the family tree of that company will turn out to be, really, rich over the next couple of years and that we'll see multiple companies founded from it. And one of these days, we'll be hanging out in the Ramesh cafeteria trying to find great deals.

Jeffrey Stern [00:34:10]:
Yeah. I feel like I would be remiss if I didn't ask you about the shift to remote over the last year. And, you know, I've talked about it and thought about it a lot from a company perspective, but I would love to get your take on it from the perspective of investing. Are you now competing for deals that you weren't before? How has it kind of played out from the investing landscape over the last year?

Todd Federman (North Coast Ventures) [00:34:33]:
Yeah. I I think it's probably been hardest and most relatable just as human beings, right, who are trying to live our lives personally and professionally in this new world. You know, we've had all these relationships and companies and groups and friends and boards that we were active with. Right? We would sit down with companies regularly, and to not be able to do that, is a challenge. The culture doesn't just switch over to virtual. It's it's been as tough on us as it has been on many people, just in terms of, you know, personally, professionally trying to manage it. But I'd say for the most part, you know, VCs have been less impacted. We can kinda walk out of the office with our laptops, still have the kinds of conversations we want to, but you lose the person.

Todd Federman (North Coast Ventures) [00:35:24]:
You can't walk around with your co investors. You can't have in person board meetings. For diligence, you stare at a person on a screen, and you don't have the tells. Right? That as a human being, you've learned how to work with people and assess people and understand what you're hearing and why why things are a certain way. So it's really tough to have the same spidey sense virtually that you'd like to think you do, in person. So it's it's been a loss. There's no question that it hurts all of us. Now I don't think we've lost deals because of it.

Todd Federman (North Coast Ventures) [00:36:00]:
Because in most parts of the country, investors are impacted in the same way. At our stage, seed deals most seed deals are still funded by people in their backyard. We'd love to see more companies here in Cleveland working with seed VCs from across the country. We'd like to co invest with seed VCs from across the country too. We've seen some of that, but not a ton. I think what it's gonna take there is not a pandemic, but really substantive relationship building so that they have a reason to invest time and energy in people who are not in their backyard. Because in places like you know, the Bay Area, New York, but also Boulder, Austin, even DC, there are so many startups on the ground there. I just don't think those seed VCs have a tremendous incentive to look elsewhere.

Jeffrey Stern [00:36:51]:
Yeah. I'll I'll double down here on on the pandemic questions. I know they don't age as well. But I am just really curious, you know, given the exposure you have to the portfolio companies you're working with, how have they fared over the last year? What have you kinda seen across the board?

Todd Federman (North Coast Ventures) [00:37:06]:
So, we've gotten lucky is the the short answer. One, because we invest primarily in b to b software. Those companies have not been as influenced, by the pandemic as others. They have more stable customer bases, recurring revenue and simply a more repeatable scalable acquisition model. So that's been fortunate. We've also been lucky because we our b to b SaaS companies are not invested in areas that are particularly impacted by the pandemic, so travel, sports, entertainment. So I think portfolio wise, we got lucky. And we got lucky because we primarily invest in b to b SaaS.

Todd Federman (North Coast Ventures) [00:37:51]:
Those companies are a little bit more resilient. They have, stable recurring revenue streams. They tend to have more reputable, scalable models for customer acquisition. And fortunately for us, we had relatively little exposure to companies that sold into the most affected industries. Right? Travel, entertainment, sports. One of our businesses, NaviStone, in Cincinnati, turns out that a quarter of their business was travel. And, obviously, that part of the business was slow, but the company was growing meaningfully in other areas. So they still had an up year.

Todd Federman (North Coast Ventures) [00:38:25]:
It just wasn't, as attractive as we might have hoped.

Jeffrey Stern [00:38:29]:
That's good to hear. Closing out here, one of the things I did wanna get your your perspective on more from the the founder's perspective, but from seeing all the pitches that come through is what do you see from the founders who run really great fundraising processes and how is it that they tell their stories in a way that resonates and and makes you want to invest alongside them?

Todd Federman (North Coast Ventures) [00:38:55]:
Yeah. I think it's a a couple things. One is that there's a there there. Right? So it's not smoking mirrors. It's not just a story. You understand who this person is, why they're doing what they do, why they're passionate about the challenge, and ultimately, why they're going to be successful. Right? The pieces and parts just have to fit into the story for why that company wins. And they have to present that in a compelling way.

Todd Federman (North Coast Ventures) [00:39:19]:
And it's not about theater, but it's about being able to have confidence as an investor that they'll talk to you the same way they'll talk to the employees they're trying to recruit, the same way they'll talk to their potential customers. Right? They've got to paint an attractive picture that causes lots of people to wanna get involved with them, not just, the investors. Then lastly, you know, they've gotta be able to execute. There's just nothing better than being followed up with when someone says they're gonna follow-up, sending what they said they're gonna send, being consistent. So I think the founders that are just focused on delivering and delivering in a credible way and wanting you to be part of their mission. That gives you a sense of, I don't want to miss this. This could be the real deal. And when you feel that, you end up leading forward.

Todd Federman (North Coast Ventures) [00:40:08]:
You know, you end up getting your checkbook out and more often than not, you end up investing in the company.

Jeffrey Stern [00:40:13]:
Yeah. So to actually, close down here, you know, one of the the things that we ask everyone on the show is as we try and paint a a collective collage here of not necessarily people's favorite things in Cleveland, but things that other people may not know about. So with that, I'll ask you about, you know, what are what are some of your favorite hidden gems here in Cleveland?

Todd Federman (North Coast Ventures) [00:40:35]:
Well, I'll give you a a different one because I'm guessing you've probably heard a lot of interesting restaurants, places to visit, and things like that. And I would just say that the hidden gem of Cleveland from an entrepreneur's perspective is the enormously accessible leadership level of the city. And that is that if you tell your story in the right way and you work to get to the right people, you can open just about any door. If you wanna get to the right people of civic leadership, political leadership, corporate leadership, People are willing to have these conversations. People like to make introductions. They like to share interesting stories. And I think it's there's just part of Cleveland's culture, which is collegial and, collaborative that helps people make those connections and gives us as investors and gives the entrepreneurs here, a leg up if they're willing and able to take advantage.

Jeffrey Stern [00:41:38]:
Yep. Now

Todd Federman (North Coast Ventures) [00:41:39]:
I Did the dog did the dog get it?

Jeffrey Stern [00:41:42]:
Oh, I know it. I think it's fine. It's, yeah. It's just a conversation. Yeah. But Todd, if if people have anything they wanna follow-up with you about, where's the the best place for them to reach you?

Todd Federman (North Coast Ventures) [00:41:54]:
Sure. Todd.federman@northcoastvc. Happy to

Jeffrey Stern [00:41:59]:
chat. Right on. Well, Todd, I really appreciate you coming on and sharing your perspective on on the whole ecosystem here, and, thank you very much.

Todd Federman (North Coast Ventures) [00:42:07]:
Happy to. Appreciate it, Jeff.