#69: Ray Leach and Hardik Desai (JumpStart)

Ray Leach [00:00:00]:

We used to talk about Jumpstart Ventures back in the Aughts or early teens ten years ago, but that evolved to kind of just being Jumpstart until we came back out, not only to help entrepreneurs understand that Jumpstart is very much in the tech investing game, but also we have $70 million to invest over the next handful of years.

Jeffrey Stern [00:00:21]:

Let's discover the Cleveland entrepreneurial ecosystem. We are telling the story 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 am your host, Jeffrey Stern, and today I had the pleasure of sitting down both with Ray Leach and Hardik Desai to discuss Jumpstart and its role here in the Cleveland startup ecosystem. Ray is the founding CEO of Jumpstart and has been with the organization since its inception, while Hardik is a senior partner at Jumpstart, focused on their investment strategy, and has been with the organization since 2012. This conversation comes off the bat of Jumpstart announcing a new division within the organization branded Jumpstart Ventures, which focuses on Jumpstart's venture capital investment activity. To set the stage, since 2005, Jumpstart has invested $70 million into over 145 technology startups throughout Ohio, with 82% of those startups located in the greater Cleveland area. Jumpstart Ventures now plans to invest $70 million in new capital into startups through 2025. The organization also plans to raise additional capital, expanding current funds and creating new funds in partnerships with corporations, institutions and private sector investors here in Cleveland. To date, Jumpstart has four funds evergreen, Next Focus and the Healthcare Collaboration Fund, providing capital across stages and sectors, which we will cover in more detail in our conversation. The first half of this conversation covers some of the basics, the facts, the history of Jumpstart as an organization, and their investment approach, while the second half of the conversation covers questions and themes that I had sourced from Cleveland founders and from the startup ecosystem at large, and focuses on Ray and Hardick's take and perspective on those questions and themes. This was a really insightful conversation and I hope you all enjoy my discussion with Ray Leach and Hardick Desai.

Jeffrey Stern [00:02:33]:

Ray, Hardick, thank you so much for coming on. Whenever I have more than one guest on at this point, I have learned it's appreciated to listeners who cannot see our faces here to do quick intros so we can all associate names with voices. So Ray, maybe if you can just kick us off with a brief intro. And Hardick, if you follow along?

Ray Leach [00:02:55]:

Yeah. Thanks, Jeff. So I'm Ray Leech. I'm the founding CEO of Jumpstart Land. Have been there from the beginning, but I'm originally from Akron and have been the founder of a couple of companies, so I certainly view myself also as an entrepreneur of sorts.

Hardik Desai [00:03:11]:

Hi, Jeff. This is hardi gasai. I'm a managing partner at Jumpstart Ventures. I've been at Jumpstart for ten plus years now, prior to joining Jumpstart, I'd started a medical device diagnostic test company and that's how I kind of got introduced to the world of venture capital and entrepreneurship. I come from a family of entrepreneurs.

Jeffrey Stern [00:03:32]:

Wonderful. So at this point here in the lifespan of the podcast, have really had the privilege of sitting down with over 70 founders here in Cleveland over the last two years and filling this real incredible auditory library of their. Personal land professional backgrounds, their motivations, how they've navigated the idea maze, the trials and tribulations of company building successes, land failures along the way, their impact and visions for the future. And so I've been very much looking forward to this conversation in particular because here in Cleveland, Jumpstart is at the hub, really at the center of all these key startup spokes that I think we've explored. And so today I think we can take a more holistic view of Cleveland's ecosystem and speak to some of the more structural dynamics and address the founder sentiment that I've collected over the last few years. And very specifically also speak to a series of topics and questions that I had solicited from Cleveland founders for this conversation. So again, really appreciate you both taking the time here to talk through all of this.

Ray Leach [00:04:41]:

That's great. I'm looking forward to it.

Jeffrey Stern [00:04:43]:

I think we can dive into it. As always, I think it's important to start with some context before we get into the heart of it. So I'd love if you could just set the stage here with an overview of Jumpstart, a little bit of its history and we'll work towards the present day.

Ray Leach [00:05:01]:

I'll try to do it briefly because we've been around for 18 years, so that's a long time. But the original vision for Jumpstart I would describe is was as much from the community as it was anything else. So going back now, 20 years ago, there was a whole bunch of energy, perhaps in some ways similar to today, that the Northeast Ohio economy, land, entrepreneurial ecosystem needed something new, something new and different. And I got involved in 2003 in that thinking and it was really coming from the philanthropic and corporate community. So while of course there were entrepreneurs interested and engaged and wanting to see some things new and different, a lot of the founding energy actually came from an organization called Nortech that had just a few years earlier had created Bio Enterprise. So now there was this new effort to create an organization that would be focused on industries outside of the biosciences, but also that would have an investing function. Land the concept at the time was there certainly were angel deals happening in Greater Cleveland, the city of Cleveland back in the early 2000s, but there certainly wasn't a group investing in 610 1215 companies a year. And the idea that there would be a fund in Cleveland that would be very focused on investing in first time entrepreneurs and founders was kind of the original vision. Land in many ways, Jumpstart was modeled after an organization that had had a lot of success in Pittsburgh called Innovation Works. And at that time, Innovation Works was 20 years old. So 20 years ago, so IW and the Pittsburgh ecosystem has been going at it for 40 years. I think it's fair to say that about 18 years ago, cleveland decided to or leadership in Cleveland decided to try to create something. Over the last 1718 years. There's been things that have been consistent about Jumpstart, certainly, and that's been with various levels of activity. But we've been an early stage investor in pre seed seed, and now over time, into Series A companies. So we've invested in 146 companies since 2004. Land invested about $72 million total. But one thing, unlike a typical fund, is Jumpstart. Given that the Third Frontier has been such an important partner of Jumpstart and has been a catalyst to a lot of our investing activity, that those early dollars and dollars up until today are still very much leveraged by the state money. So it's not like we invested $72 million equally over the last 1516 years. In fact, this year we'll probably have an all time high for investing in companies. But there's been some fits and starts based on not just how the Third Frontier is engaged with entities like Jumpstart across the state, but also by the fundamentals of the economy. So I wouldn't have thought that we'd go through all the ups and downs. None of us would have thought that back in 2004, but that certainly has impacted things along the way. But probably for your listeners, we did have this announcement which might have been a reason for you reaching out to us, and that is the announcement of Jumpstart Ventures. So over time, Jumpstart is doing a lot more things now than we were originally envisioned to do back 1617 years ago. So we thought it was really important to reorganize ourselves internally and also kind of have a new coming out party, so to speak. We used to talk about Jumpstart Ventures back in the Aughts or early teens ten years ago, but that evolved to kind of just being Jumpstart until we came back out, not only to help entrepreneurs understand that Jumpstart is very much in the tech investing game, but also we have $70 million to invest over the next handful of years. So we're going to invest the same amount of money in the next couple of years that we've invested in the previous 17 years. So that's clearly going to take a different approach in order to deploy that capital more efficiently. Land we are very hopeful and working on a handful of things kind of in the background that will allow Jumpstart Ventures to invest significantly more capital than 70 million over the coming years. Nothing to announce today, but that's certainly a huge focus of ours. We're not stopping at 70 million because I do agree with many of your listeners and the founders in town that the most meaningful thing that could evolve and change in Cleveland to advance entrepreneurs is having a lot more capital to invest at all stages. So that's a little snapshot on over our history, particularly as it relates to investing.

Jeffrey Stern [00:09:59]:

So with this recent announcement, kind of the rebranding the unveiling of Jumpstart Ventures so there isn't any additional capital that has been raised. This is capital that has already been allocated land under the purview of Jumpstart but now under a specific division to help really kind of from a marketing land branding perspective, help entrepreneurs understand where to go within Jumpstart and all of its ancillary services.

Ray Leach [00:10:27]:

Well, that's in part because if you went to Jumpstart's website a year ago as a startup tech entrepreneur, it might be really hard to find, quote unquote, the money or harder to find than it should be. So in part it was a marketing or a repositioning. It's also kind of an operating update, but more importantly it's preparing both the organization and we're hopeful, the market and our partners that we'll have a lot more capital under management in the coming months and years. And some of that capital could very well have an alternative investment thesis or maybe a particular industry focus. So these are conversations that we're having with limited partners across corporations, institutions and private investors that really see both Jumpstart land, cleveland and Northeast Ohio and Ohio as being a target rich opportunity to deploy capital. To some degree it's a reset but it's also kind of preparing for bigger and better things is our hope land expectation.

Hardik Desai [00:11:31]:

Just to clarify, because you mentioned it was existing capital and not new capital, I think it's important to clarify. So we have been investing from two seed funds for the last four years, evergreen Fund and Focus Fund. They continue to be active and we are investing from those funds. We did launch two new funds last year, a healthcare collaboration fund in partnership with University Hospitals and Next Two Fund, which is a late seed Series A fund that's investing larger checks throughout Ohio and potentially outside Ohio. So they are new funds. The are not funds that we were investing two years ago. They did not exist two years ago.

Ray Leach [00:12:15]:

Yeah, these funds really closed over the fall. Well, one fund, the larger fund, the next two fund hasn't closed yet. We did a first close last summer and we've got a handful of investments. Not all of them have been announced yet. But that fund has been very active. And that also, I think, is the next two. Fund is a good example of jumpstarts, or at least the capital at jumpstart can play a different role in that we're being much previously, we weren't very active at Series A because we didn't have the ability to write large enough checks to be meaningful at the Series A round or a Series A in Cleveland, let's say between eight and 15 million. Well, now we have a fund that is very much focused on investing at that stage and working with the company as it raises its B round and beyond. And I know the numbers are confusing. 70 million in 17 years and now 70 million of new money. And we'll probably commit to all the companies in three years. Maybe all the capital won't be deployed in three years, but we'll have made all the commitments to companies likely within three years or less because the deal flow, we've been super encouraged by the deal flow. The deal flow is up in Ohio and in Cleveland.

Hardik Desai [00:13:33]:

Yes, just a quick example of that would be Dan German was on your podcast from Arthur Brain sometime back. So next to fund invested in Arthur Brain's $9 million kind of series, right?

Jeffrey Stern [00:13:47]:

So there are a few components here I just want to go a little bit deeper on just to understand how it is that Jumpstart is making decisions land kind of measuring success. Land this is a sentiment we'll come back to, but I think one of the confusions that I've kind of gathered from the community is the nature of the Third Frontier involvement. Land some of how do you mix government and public land, private capital and kind of the makeup of the fund, if you will. So I'd love if you could just speak a little bit to that and then maybe more holistically if you could kind of just take us through the investing process from soup to nuts. Like, what are the literal steps here? You mentioned the deal flow that happen throughout the funnel as you manage that flow and how ultimately you discern when to make an investment and the sizing of those investments.

Ray Leach [00:14:36]:

So let me talk about the Evergreen and Focus funds, and then I'll pass it over to Hardick to talk about the other two funds, but originally just to kind of go all the way to the beginning because that'll be helpful to your listeners. Originally, the way the Third Frontier worked with a precede fund was the state asked one to write a proposal. And there's been 70 or 80 entities across the state that have won Third Frontier money for a fund since 2003. So we're certainly not anywhere near the only one. There's probably been at least a half well, there's probably been a dozen in Northeast Ohio that have won money from the state since 2003. So if you go way, way back, you'd write a proposal and the state would issue a grant to add money to a fund that also had to have matching capital. So no one can go to the Third Frontier for a fund and just say, hey, I want public money. And that's all the money that they're investing, the have to raise depending on the RFP or the proposal, they're responding to, you have to raise either one to one match, or in some cases, up to three to one match of private money or non state money. So for the first seven, eight years of Jumpstart's existence, and the monies that we invested out of our Evergreen Fund, which from 2004 to 2013, we invested $28 million in 76 startups, all in Cleveland, all in Northeast Ohio, let's say, and those companies, first, it required match. Our average check size was a little under 500,000 per company. So it was a relatively meaningful amount of money in those businesses. Land when returns are generated, or were generated from those funds, all the returns would be kept distributed to the entities that provided the match. In Jumpstart's case, we were able to match all the state money with our own money or with monies that Jumpstart raised as a 501. So unlike other funds in the state that raised money as a grant, a lot of times their match came from private investors. So the distributions of those returns ended up going distributed to private investors. About ten years ago, the state changed the rules on the funds, and those monies from the state are no longer grants, but loans. So when anyone writes a proposal to the Third Frontier and gets money from the Third Frontier for a fund, they are obligating to pay that money back, plus interest over the life of the fund. So the risk profile of the state money was reduced, because anyone taking money from the state, whether you generate returns or not, you're obligating to pay that money back to the state. And of course, you also have to still raise the match. So today, of the 18 million that we're investing out of the current Evergreen Fund and the Healthcare Collaboration Fund, in partnership with uh, there was state money invested in those funds, and 100% of the match to the state money was provided by Jumpstart in uh, as opposed to private investors. Now, I'll pass the mic to Hardik. He can talk a little bit about the net, the next one and next two funds.

Hardik Desai [00:17:47]:

Yeah, but just one more comment on kind of the Evergreen Fund. So that First Cohort that Ray mentioned of 28 million invested in 76 companies, because I know one of the questions was like, what's the ROI on Jumpstart's investing history? That $28 million has returned, realized and unrealized combined. Because we still have active portfolio companies, it has generated 77 million in returns to Jumpstart, 62.5 million is realized returns. So that's money we have already received from around 20 exits. And exits are in various flavors from covered my meds to wireless environment or Mr. Beans, Cardio, Insight, and a handful of others. And we have an active portfolio of 20 Ish companies that makes up the unrealized returns, which we should expect will generate significant returns for us. So that's kind of the phase one, as I always talk about in jump starts investing history.

Ray Leach [00:18:44]:

So with that hardick in the media, it's been talked about that jump starts returns from our early investments are two and a half X. And I think that is very conservative. I think the exits could actually be larger. But before we go on, another thing that I think is incredibly important to your listeners is that what does the state want with that money? What the state wants is it wants entities like Jumpstart or funds that are managed by Jumpstart to invest in Ohio early stage companies that can do one of three things. Either, first, typically raise a lot of private capital after the state money. That's number one. Number two is generate as many jobs as possible in the state of Ohio. And three is to generate as much revenue in the state of Ohio. Now, I think it's very fair to say Jumpstart's orientation is not necessarily around jobs or revenue. At least those aren't our principal priorities because one, we're investing in really young companies, land. Some of the companies that are going to have the greatest success and follow on funding may or may not generate a lot of jobs, particularly if it's a biopharma company or something like that. But from the state of Ohio's point of view, the way we are graded by the state is have the portfolio companies we've invested in raise significant follow on capital. And I know the 70 million we've invested so far, the portfolio companies have raised over 1.5 billion of follow on capital. It's actually a little more than that now, but I know it's at least 1.5 billion. And they're employing lots of people land, generating a lot of taxes, and the state keeps track of all this. Every six months we survey all the companies, so that's very much something. Now of course, they also want to get paid back. So another element which wasn't there maybe in 2003, but is absolutely there now, is they also want to be able to, they have an expectation to get paid back and the only way they're going to get paid back is if the funds generate returns. But the one thing again, before I pass to heartache that is unusual, most every other fund in the state of Ohio that's been supported by the Third Frontier, most, if not all of their matches come from the private sector. Whereas in Jumpstart's case, we were able to raise the match from philanthropy and from investment returns. So that's a different dynamic. So frankly, the better Jumpstart does as an investor and also staff at Jumpstart doesn't get a carry. It's not like if we invest in a company and it generates a huge return, the people who work at Jumpstart don't get a piece of that return, at least not at this stage. Our for profit funds are getting to the point where I do anticipate that people who work at Jumpstart will get carry in the future. But up till now, it hasn't. Like, okay, when Jumpstart gets a big return, that's money in the pocket of an individual that works at Jumpstart.

Jeffrey Stern [00:21:45]:

Right. I'll just actually jump ahead because it's topical, but it's one of the questions that surfaced from founders, I think, which is how? Because I think, like you mentioned most traditional VC firms, the incentives at play are really, I think, driven in a lot by Carrie and the idea that those operators at the fund share in the upside of the returns and how that missing incentive, if you will, maybe affects Jumpstart's decision making behavior. And how you think about that.

Ray Leach [00:22:15]:

Yeah. And I would say it absolutely doesn't say we're looking to invest in entrepreneurs that can be wildly successful for them to get wealthy. And the reason why we are so focused on that is because that follow on funding number, if there is a true north at Jumpstart, from the state's point of view, it's the follow on funding number that is the most. Because again, we were put in place to create economic development, economic outcomes, and it's other people's money that's typically coming into the companies, at least historically, that allows the company to go out and hire a dozen people at a time, or in the case of COVID My Meds, hundreds of people. But we were there at the beginning. We were the quote unquote Jumpstart. We were the early investor. And that created we were a catalyst of sorts. If Hardick and my motivation was to get rich, we wouldn't be working at Jumpstart. But at the same time, we're very much incentivized. We're competing with other funds across the state and so we're very much incentivized to make sure that what we're investing in does generate great outcomes, great returns, so we can pay back the state. And obviously now we have private investors. So jump starts evolved now where our number one priority in investing across our funds is also returns, where maybe it wasn't that in 2005, 2006, we were investing in things that were very early that would take years to get to their first customer. So the ecosystem has evolved and our role is continuing to evolve.

Hardik Desai [00:23:58]:

Maybe I'll just add one more thing. So since 2015, every single fund that Jumpstart has launched, jumpstart is a significant LP in that fund. So it is in our best interest to generate returns outside of everything else that they mentioned. We are putting significant capital from our balance sheet as limited partners in each of the funds. So we need those funds to be successful so that it can return capital back to the mothership and the can decide how best we deploy that capital and put more money into startups.

Jeffrey Stern [00:24:32]:

How are those funds distributed over time back to LPs? What's kind of the general makeup of the LP universe for Jumpstart?

Ray Leach [00:24:42]:

Yeah.

Hardik Desai [00:24:43]:

So again, let's just break down the funds because it's important to clarify what funds we are talking about Evergreen Fund and Focus Fund. You can think of them as Jumpstart Inc. Balance sheet fund. So it's jumpstart SDLP and the GP. We don't have outside capital in those.

Ray Leach [00:25:00]:

Funds other than the state.

Hardik Desai [00:25:02]:

Other than the state. Right.

Ray Leach [00:25:03]:

But we're obligated to pay that back.

Hardik Desai [00:25:05]:

Right, so we have to pay the state back, but any returns after we pay the state back come back to Jumpstarting. That's on the Seeds fund. The healthcare collaboration fund. It's Jumpstart and, uh, ventures. So we are partners in that. And we have a distribution based on the dollars that each fund has invested. Land we have to pay the state back, so the distribution is based on capital committed. We don't have anyone else outside of those two entities. And then Next Fund that's about for 2015 was when we launched Next Fund. It was a $20 million fund with outside capital, both from corporations as well as individual angels who put money into the fund. And that follows a typical traditional 220 80 20 kind of a rule. So we're structured very similar to any other venture fund. Distributions follow the same process. So Able, which Jeff Gerald, when Able had an exit, that was our first exit from Next One. We have 15 portfolio companies in Next One. Able was our first exit in that fund. And so when we got proceeds from that, we distributed it pro Rata to all the LPs who had invested in that fund. So no different at all. And then Next Two, from which we just started investing, that's a $50 million fund. We have done four investments, and we'll soon announce a fifth investment. That fund again follows a very typical traditional venture fund model, where we deploy capital over the next three to five years and the returns get distributed pro rata. We still have money from the state, so we have that obligation. But that obligation is to Jumpstart Inc. Not to the LPs to return capital back to the state.

Jeffrey Stern [00:26:53]:

What are some of the variables that you measure when you think about success? KPIs like, what's driving the business beyond kind of the core ROI? What are some of the variables that drive decision making at Jumpstart?

Hardik Desai [00:27:11]:

Decision making for how we invest in companies?

Jeffrey Stern [00:27:14]:

Yeah. Is it thesis driven generally, or are we thinking about quantity of startups?

Hardik Desai [00:27:22]:

I think the primary objective for us with Jumpstart Ventures is to generate returns. We want to invest in great founders and we want those companies to be successful so that it can generate returns for the founders and returns for us. I mean, it may sound very cliche, but that's how we work every single day. How can we generate returns from our investment? That's kind of the primary motivation. In my ten years, I can't think of any single investment where we look at a company and say, is this company a going to create more jobs? And so we should invest in them versus Company B. That is not going to create those jobs. So that's not how we think about investments. That's not how we make decisions. It's all driven by with a big market. Do we believe that the founders have vision for taking company forward? Can there is more money in future because they will need more money in future after we invest the Teachers Precede and Seed Fund. So that's Evergreen Fund and Focus Fund, those are our precede to seed stage funds. We will typically invest first checks of 100,000 to 500,000, depending on how much money those companies are raising. Sometimes they can be pre product, sometimes they have three customers and five employees or something of that sort. We invest predominantly in software and healthcare from that fund. The Healthcare Collaboration Fund is only investing in healthcare technologies, working with uh, and the next fund is investing in late seed to Series A. Pre Series A, if you may. Companies that are raising anywhere from four to six. Arthur Brain was $9 million, and our first check can be half a million to a million and half, or maybe even larger in some cases.

Ray Leach [00:29:10]:

So I think for your listeners, I think what's important is we're walking, talking, acting, thinking like VCs. We're looking for great founders to back and who we believe can get through the Valley of Death and build a great team. So all the things that Drive Capital cares about, Jumpstart cares about. It's just we're writing smaller checks. I think that's our orientation, right?

Jeffrey Stern [00:29:43]:

I'll transition now. I think we can hit some of the Cleveland founder sentiment, specifically for the latter half here. But I'll circle back to Drive Capital because there are some things I definitely want to get your perspective on. So I will say off the bat, transparently, I picked some hard questions here. So appreciate your guys willingness to work through these with me. But the reality is there is a certain tension, I think, when you ask founders about the role of Jumpstart in Cleveland, and it's not like a public discourse, but there is certain feedback that I've heard that's pretty consistent. And so, again, just in the spirit of that feedback and transparency, and with the vibrancy of Cleveland startup scene in mind, I just want to kind of surface some of these and talk through them in the open. But to kind of start. How do you think about this perception of Jumpstart as a gatekeeper in some ways, given the relative dearth of alternative local land, early stage capital, and how that maybe affects the leverage Jumpstart has when Structuring deals with founders?

Hardik Desai [00:30:46]:

Yes, perception is reality. So I understand how some of those questions might come, but I'll just share kind of some of the data. So, over the last twelve months, we have invested in 24 different companies, and 18 of them were new investments. For first time, Jumpstart was writing a check in those companies. Half of. The time, or maybe less than half of the time, we were the leads. The remaining half, someone else was presenting a term sheet. Right? So if someone else is presenting a term sheet we are looking at a term sheet and we are saying whether we agree with that and write a check or we don't. We look at industry benchmarks, we look at what's happening with valuation trends throughout our region, throughout the state, nationally, and we present terms that kind of reflect what we think is fair and appropriate. I don't think Jumpstart I can speak for me, for Ray, I don't think anybody jumpstart wants to be the gatekeeper. We would love to have five different funds in Cleveland who are all investing in early stage startups. Because the reality is, even when Jumpstart is leading around, we are investing the hundred thousand dollars as part of a million and half seed round. So we need other funds and other angel investors to write checks in those companies. So we would very much welcome and appreciate more access to capital that is not run by Jumpstart.

Ray Leach [00:32:09]:

Yeah, I think one of the biggest frustrations of my time at Jumpstart is that there haven't been more funds created. And I know this is something that Jeff, you and your listeners and your interviewees have talked a lot about. It's extremely frustrating to be perceived as a gatekeeper when 146 companies in 17 years. When Jumpstart has to raise, I am constantly raising money. Just like entrepreneurs. I'm raising the from different sources in many cases. So I'd say we're probably as frustrated that Cleveland isn't as further along as everyone else. And so I think one of the goals that's not to say we're not proud of what we've done and to the point of what Hardick just shared, I mean, to do this is not easy to raise the capital, invest the capital wisely, put it in companies that have great success, doesn't happen by accident. But at the same time, the whole angle to Jumpstart Ventures is whatever we have to do with whomever is willing to do it, we are open for business. So if there's listeners out there who want to create new funds, partner in new in different ways, jumpstart is very interested in doing that. Land will not only intellectually or emotionally, but financially, because getting more actors, more investors in the game is job one. Because Cleveland and Northeast Ohio entrepreneurial ecosystem isn't going to strengthen or advance without a lot more capital. We're going to invest this year, around 12 million we expect in future. Next couple of years it's going to be materially more than twelve to get 70 out in three years. But that's a drop in the bucket. That is nothing compared to what's going on in other markets. Obviously we're not the only ones that are investing, but they're relatively small group.

Jeffrey Stern [00:34:13]:

Right. I'll pull on that thread a little bit. This is where I'll pull back in Drive capital as well. And maybe just using Columbus as a comparison point here. But I think one of the reasons I've collected that we don't have the risk seeking angel investors that typically fill out that precede void that Cleveland has is because we haven't necessarily kick started the wealth generating flywheel as some of the more successful Cleveland startups at some point in their respective journeys ultimately left Cleveland. Maybe for a variety of reasons, but none of which I think you can really fault the organizations themselves for. Founders are going to go where the have the best chance of success. But those exoduses haven't I think allowed us to mint the angel investors that are a requisite for the kind of growth that you see in Columbus. And it really only takes, I think, one or two real exits to create the kind of founder and early employee wealth to get those affected bought into perpetuating that startup. Flywheel land I'm mentioning Drive because one of the measures they have that they track is how many employees are made millionaires from their portfolio companies. And I think that's a pretty powerful KPI that they're measuring. That's a little atypical but I think gets that starting that flywheel. And so I guess a few questions here. And I know Ray, this is something you've thought a lot about and talked about before, but your perspective on the importance of Cleveland retaining its most successful startups and why that has kind of transpired in the past and how you've seen that maybe evolve over time and maybe just your thoughts generally on this topic.

Ray Leach [00:36:03]:

On one hand, I'm surprised we haven't lost a lot more founders. There's a handful of folks that have left town that have had significant success. We haven't had a whole lot that actually at least the ones that we've invested in. Of course there's folks living in Cleveland who decide to start or living in Ohio who decide to start something elsewhere. So that's been interesting because I thought that'd be a more important driver. As somebody who's been very close to the ecosystems across Ohio and also kind of looked at Pittsburgh back 1718 years ago, the difference between Cleveland Columbus land cincinnati ten years ago or twelve years ago was very small. In fact, Cincinnati, I would say had the strongest entrepreneurial ecosystem twelve years ago. But the impact that Drive has made the other thing land I've been spending more time with Mark Kwami of late just through opportunities that we've had to co invest and partner. And of the first dozen plus companies that they invested in and fund one, almost all of them were outside Ohio. But it's when those companies raised their B round drive was an investor at Series A or the Seed round. But when that company raised its significant B round, drive made them an offer they chose not to refuse and that's to move to Columbus. And it's that action or outcome that's been such an incredible catalyst for Columbus. Now, of course, we wish Cover My Meds stayed in Twinsburg, where they were founded. And if Cover My Meds was in downtown Cleveland, my guess is we would all be feeling a little better about the entrepreneurial ecosystem in Cleveland. But to your comment earlier, we had no control over what they decided to do or where they decided to do it. It's a blessing that it happened in Ohio, but we'd very much like to have it happen in Cleveland or Northeast Ohio. I hate to keep being I sound like I'm hitting on the same issues, but capital, capital, capital. Whatever leaders in Cleveland can do, corporate, institutional, private, philanthropic can do, to aggregate greater amounts of capital I think is the most meaningful thing. I won't belabor with your listeners, but I've been involved in this project called the Cleveland Innovation Project, which is a collaboration of the Cleveland Foundation and Team Neo and GCP, the Fund for Economic Future and Jumpstart. And it's focused on a bunch of what we think are the most important drivers to equitable economic opportunities. So one example of that is the digital divide. And we started this before COVID of course, when COVID came up, we understood how much the digital divide is an impediment to our community. But one area that I am quasi in charge of or being asked to provide leadership is in capital. And we need at least $4 billion of new capital in Cleveland by the end of the decade or raised over the course of the decade if Cleveland's entrepreneurial and innovation ecosystem has any chance to dramatically move forward. So I'm talking to all the corporations, all the institutions, all the high net worth family offices around this issue, challenge and problem, and using places like Columbus as an example. Because I do think if we are able to it took Drive five, six years to really make a really meaningful impact, maybe even a little longer to Columbus. So if we get started now and are able to attract one, raise more funds at Jumpstarter with the team at Jumpstart to raise more funds and or attract more capital, that's the easiest way. None of it's easy, but that's the quickest way to try to move the needle.

Jeffrey Stern [00:39:56]:

Yeah, it was one of the other questions I was going to raise anyway, which is as far as 70 million can go. We're going to need a lot more capital. Are you optimistic about that?

Ray Leach [00:40:09]:

I'm optimistic that the leaders in town understand the opportunity I think they have seen. I get asked the question all the time. Would intel have come to Columbus if it wasn't for Drive? Well, in all reality, intel made that decision to come to Columbus. Not to say Drive wasn't in the laundry list of reasons, but 3000 acres of continuous land probably had a big part to do with it attached to New Albany. So there's lots of land, lots of opportunity to grow, but of course, there's Ohio State, the talent in Columbus, the energy, the corporate engagement, certainly the Columbus partnership in Jobs, Ohio, and all the things that are there. I think Cleveland has that same opportunity. But we've got to figure out a way to really come together across our economy, across the stakeholders and partner in a way that Cleveland has yet to be able to demonstrate. So that's a big part of my job, in addition to working with Hardick and other folks on the Jumpstart Adventures team, is to make that happen. And whether that happens housed out of an institution. I mean, we're not saying that's going to happen at Jumpstart. I mean, that's not the point. It probably won't happen out of Jumpstart. We need others to lead in such a way that can accelerate this capital aggregation.

Jeffrey Stern [00:41:38]:

Yeah, capital is one piece of the puzzle here, I think. Another one that I want to call out is the kind of capital that you're talking about. And one thing that I think you'll just hear, Land, I'm sure you've heard it many times, is this general sentiment, not even specific to Jumpstart, but just kind of with Midwestern Capital, about it being highly risk averse relative to the capital that you can access on the coast. And at this point in the remote world we live in, anywhere in the world, it's important to call out, I think, because particularly in the earliest precede seed stages of companies, where the investments that need to be made to get those companies off the ground are far more bets on people than they are on traction or even ideas mentioned. Some of the earlier bets that you've made, it takes a few years to even get to the first revenue. Rarely is the business that a company is founded on, the business that a company succeeds with. And so it is really this bet on people and their ability to execute and survive long enough to find the right idea than it is a bet on the idea itself or any milestones that these early stage company has achieved. And that is inherently there's a lot of risk baked at that stage, and it's risk that there seems to be a lot more appetite for outside of Cleveland. And there's my own just personal take here, but the way I've kind of thought about it is it's kind of the difference between those writing checks asking like, what can go right? Which I think is really the predominant question driving decision making for VCs on the coasts. Land what drives, I think, both urgency and higher valuations compared to asking what can go wrong, which is, I think, more representative, this risk averse approach, it drives lower valuations, it allows for prolonged decision making, and maybe is perceived from the founders perspective as a little less friendly when we talk about founder friendliness. So risk aversion, what is your assessment of kind of the disparity in valuations and tolerance for risk from the type of capital that is available.

Hardik Desai [00:43:47]:

So we are certainly trying to do everything we can to try to address that gap. When I mentioned that we invested in 24 different companies, I would say the vast majority of them were pre seed and seed stage companies. So for us, we are doing everything we can. We obviously need partners who can invest alongside us, because even if we invest 100,000 or 200 or $300,000, that's not enough for the companies to get to the milestones that they need. Land to me, milestones really is what's the pitch to the next round? Have you done enough to be able to raise more money? That's the only thing we are looking for. We are not looking for how much revenue will you have or how many jobs will you have created, will you survive long enough to your point to raise the next round? That's how we really think about investments. That's our only criteria that we look at when we are kind of investing in early stage precede companies.

Ray Leach [00:44:45]:

So one of the angles that I wish I could, this isn't going to relieve your frustration, but I think it speaks a little bit to the dynamic. We have an incredibly active state that's invested hundreds of millions of dollars into funds in Ohio that requires match. So obviously the state's not going to put out any money unless there's match there to be there. But after doing that for 19 years at various levels of energy and dimension, I mean, I haven't gone to look, but my guess is the state of Ohio has done more of this than any other state in the country in the last 19 years. And so if I'm a private investor in those deals or in those funds, I get a huge benefit because even if it was a grant, I get a huge premium. But even if it's a loan, the lay, the funds work is once the state's paid back, the upside that the state would have gotten their pro rata goes to the privates. So there's private investors investing in these funds that have a great deal and in earlier areas, they also got tax credits. So, I mean, the tax credit thing is wound down. It speaks to the culture of our state, land our community. And so one of the things that I'm sure founders are incredibly frustrated by, we're equally frustrated by, and that is how do you change the culture of a community? How do you change the mindset of private capital? I think where we are, given everything that's gone on over the last, whether it's the eight downturn or obviously the pandemic and all the things, it's like generating returns is the only way I can see. Land it takes so long. I mean, the average time to exit for a Series A deal last year was almost seven years and in seed. So it's nine years. So we've kind of gone through two cycles. If Jumpstart is 18 years old, we've gone through two complete seed cycles and have had the craziness of what's going on. So to that point, what we're very again interested in, if there are people out there who have risk capital and want to partner with folks who've been there, done it, done a lot of it, have generated, I think, solid returns, given our investing focus and where we've been writing checks. And it can't happen soon enough. So hopefully 2023 will be a meaningful year where we'll have either convinced some funds to be formed in Cleveland who are based with investors, who maybe aren't from Ohio even who are relocating to Ohio, who are creating new funds, allah drive capital. Because obviously Mark and Chris weren't living in Ohio before, at least not for a long period of time before that was founded. So that's one approach. Another approach is getting corporations and institutions more in the game, even if it's focused on their strategies. That's fine. So it's this how can we accelerate the flywheel on the capital side? And another thing I'd emphasize is we're completely open to anyone's ideas because if we could have fixed this, we would have fixed it years ago. This is a Rubik's Cube that we are trying to play a role in moving the ball on.

Hardik Desai [00:48:03]:

Yeah. And I guess just one thing I would add to that is at least from my experience, there is significant family office capital or private capital in town and it's also getting invested in startup companies. It's not like they're not writing checks. They're writing significantly larger checks. If we can figure out collectively a mechanism to create more awareness and visibility about startups, about investing in those startups, I think it's a win win for everyone.

Ray Leach [00:48:34]:

Yeah. So even to that point, what is a more robust marketing and communication effort that raises the profile of startups, whether jump starts invested in them or not? That's not the point. The point is how do we raise the profile of these founders to make it easier, better, faster for them? Because that is absolutely our goal. Our goal is their goal. We want to generate returns. They want to do well. So what are the levers that we can continue to work on and to move to make that happen?

Hardik Desai [00:49:05]:

Yeah.

Jeffrey Stern [00:49:05]:

It's always this tricky chicken or egg problem where maybe it's harder to change behavior of people who already have capital than it might be to, through some successful exits, have the newly minted capital that understands that game much more. So having played it themselves, my assessment is more anecdotal, I think. But you don't have to convince an early stage employee who's had a successful exit. Why? Angel investing makes a lot of sense. It's just a difference of contact capital is coming from.

Ray Leach [00:49:43]:

It's the context. To your point, how many millionaires are there in Cleveland who've left an early stage tech company in the last five years. We started counting. There's not more than 20, there may not be more than ten.

Hardik Desai [00:50:03]:

Capital obviously is a component to it. I do think another significant component to it is the experience that leads to new startup formation. So think about Covered My Meds and we speak about this a lot, but there have been twelve different companies that have been started by early employees who used to work at Covered My Meds. So the flywheel is not just on capital, it's also on the idea generation side of it.

Jeffrey Stern [00:50:27]:

Oh, no, absolutely. We kind of mentioned before how Jumpstart in many ways is competing with other VC firms for participation in these rounds. I imagine again, over the last few years, as Remote has really proliferated that that competition probably has only increased. From your perspective, how is it that you guys are thinking about Jumpstart's competitive differentiation as a capital provider? And what is that advantage?

Hardik Desai [00:50:58]:

Yes, we always say it's capital services and connections. That's kind of the foundation of Jumpstart. Right. So unlike a traditional venture fund where if you had 70 million to deploy, you would have three people working for the fund or four people working for the fund. Jumpstart as an entity is a little different because we do have access to resources that we can bring outside of just us being a check writer. Whether it's helping our companies with recruiting for key hires that they might need to make, or connections with our corporate community that we might be able to make, or a couple of our portfolio companies. Staff members at Jumpstart are really acting as their interim CMO because they are literally managing every aspect of marketing for that company. So we go deep with companies that we invest in. We spend significant time in trying to figure out how best we can be a value added partner. And because of the structure of how we are funded, we are able to afford that as an organization. So I would say that is different compared to most traditional venture funds.

Ray Leach [00:52:12]:

I guess another angle too on this is we have the ability to write checks from 100,000 to 3 million. We didn't always have that ability. Now we have that ability. So if a company is raising a million dollars, or let's say they're raising a million dollars now, so we could invest 250 to 500, but if things go well, they know they could get another two, 3 million because these are in different funds. So the next fund is a $50 million fund. So probably the largest check it would write in any single company is three to 4 million. So this idea that we can now if you're starting at Series B, Jumpstart is irrelevant because you're raising a $70 million round and we're not relevant in that case. But if you are a precede seed stage or even an early A company, we have the ability to write checks from multiple funds that are relevant, which isn't always the case. At the same time, I don't know, I'd be curious how hardik would answer we are spending most of our time building investment syndicates. So we're not competing with VCs, we're the ones bringing them here to co invest in the deals with us. Of course, other VCs land other markets or VCs that are particular industry focus who maybe don't know Cleveland, they view us as a great source of deal flow. So at this stage, given kind of the dynamics of the venture market in Ohio, generally speaking, and they have changed somewhat, but we're not in a huge fight over getting our $300,000 into a company or $500,000 into a company in most scenarios. And that will change, frankly, if it does change, that's a good thing for Cleveland. So it's kind of an odd scenario of quote unquote competition, particularly at the earliest stages.

Hardik Desai [00:54:09]:

Yeah, we would love to be in scenarios where we are multiple term sheets for the same company. Predominantly we are having to bring investors together to help close out around. So we spend lay too much time, effort and energy in trying to build that syndicate to raise whatever the right amount is that the companies need to raise.

Ray Leach [00:54:31]:

But we're doing that obviously, so the entrepreneur doesn't have to do that. So a huge part of our value add is not just that we can help in these different dimensions, but that we can shorten the time. And of course our ability to write bigger checks enables that that much more quickly. Not that we can write a $10 million check yet. Hopefully we will be able to write a $10 million check in a year or two. Raising the Money the greatest one of it on talent is another huge frustration now too, just because you can't acquire talent fast enough. Talent is maybe as much as of an impediment, if not more of an impediment in capital is. But that's another area where Jumpstart wants to try to make a bigger difference going forward.

Jeffrey Stern [00:55:17]:

This is not one of the questions I fielded, but this one's off the cuff. So I'm just curious again, this is pretty anecdotal, but from what I see, there are companies now and I'm sure that the trend is a little less than this, but they're raising a $70 million Series A. These round sizes are incredibly inflated, but just much larger than they used to be. Does that market dynamic really affect what's happening here locally? Given that it's possible that one of these Series A raises is the entire size of the 70 million that's trying to be deployed?

Hardik Desai [00:55:58]:

Absolutely. It has an impact and just like every other fund, what it has meant for us is we are writing larger checks early in companies. So these are in some cases without a proven business model. And in some cases maybe even without a first customer. But we are writing a million and a half $2 million check into those companies because we see the big platform potential with what they are doing. And we see that if this large $6 million seed round, let's call it, is successful, those companies are going to raise significantly larger capital in the next twelve months because we haven't closed off rounds that you will hear that you'll hear that soon in the next 30 to 60 days.

Ray Leach [00:56:45]:

Yeah. And I think the driver to that is the founder or the team jumpstart is not going to write a $2 million check to a seed stage company that doesn't have an incredibly compelling founder or team. But if they do, we're willing to do it to your larger there was no such thing as a series, a round of 15 20 million in Cleveland three years ago and that's happening now in Cleveland. So of course in California it's 70, could be $100 million. But these things are all interconnected. They do impact each other for sure. And I do think we still have a valuation in the Midwest, not just Cleveland, we have a discount startups in the Midwest. Investors are able to buy larger portions of those companies for less money. There still is a big delta in that regard. Now maybe that delta goes away with the impact of COVID and kind of the democratization of venture. That delta could diminish, it probably will diminish over the next three to five years even more than it is now. But a big motivation to drive's ability to raise billions and billions of dollars of capital is they're still focused on the Midwest and there's a discount in those firms and the LPs love that because they're already invested in all the California funds. So that's a big differentiator for them.

Jeffrey Stern [00:58:12]:

So cognizant a time here. I want to kind of book end the conversation with a few closing questions, this one being a little bit fictitious, but if you could wave a magic wand to change one thing about the Cleveland startup ecosystem that you believe would have the largest impact on its overall success, land longevity, what would it be? And what is your diagnosis, really then, of the biggest challenge that we face?

Hardik Desai [00:58:42]:

Yeah, to me we have spoken about it throughout this conversation. It's capital begins with capital. We need more capital. I think what we can do way better job of is storytelling. I'm a firm believer in that we need to tell more of our stories. I don't think, yes, we have lots of issues and lots of challenges, but I don't think we do nearly enough job telling the stories that we do. Podcasts like yours are great to tell those stories out and there are plenty more stories to tell.

Ray Leach [00:59:11]:

Yeah, I wholeheartedly agree with those. Land the one I would add is collaborate. There's nothing that Cleveland can't do. We have the money. We have most of the talent, if not all the talent, but if you have the money, you can attract the talent. Sometimes it's as important, if not more important, on how you do something is what you're trying to do. And I've seen, for whatever reason, an increasing willingness to collaborate and partner across institutions and corporations and organizations and funds and investors. We need that times 20 because no single organization, or at least 99.9, there is an organization or two that if they decided to do something of scale that could transform Cleveland, someone like the Cleveland Clinic, but outside of an institution of that size, it's going to require collaboration. So people's readiness, willingness, interest in figuring out what's in the best interest of the entrepreneurial ecosystem for the community. We're very interested in those ideas and very interested in partnering with others to try to make that happen.

Jeffrey Stern [01:00:26]:

Awesome. Thank you. Thank you again for fielding these questions. Happy to do it. I want to close out with our closing question that we have everyone address on the show, which is not necessarily for your favorite thing in Cleveland, but for a hidden gem, something that other folks may not know about.

Hardik Desai [01:00:47]:

So because I am a big believer in stories and I listen to plenty of podcasts on founder stories and that's kind of top of my mind every day, I'm going to go with that. We have so many stories to tell. So, for example, Key Factor is headquartered right here in Cleveland, and it's a billion dollar company that very few people in Cleveland know about. It's right here, downtown or wherever they are located. So to me, the hidden gems are the key factors. The vidantries, the island software, the RV shares, the drips of the world. We need more stories.

Ray Leach [01:01:19]:

Yeah. And for me, I guess in some ways, I would sink to that land that is not just the stories now, but the stories over the last 160 years in Cleveland. We have. Obviously, John D. Rockefeller founded Standard Oil. Here, you would never know where the landmarks are. So one of the things I hope to work on in the next ten years in Cleveland, the corner of east 14th and Carnegie, is where Rockefeller's childhood home was. It's a parking lot. So no one understands. I drive by it all the time. No one understands. There's iconic stories, not just of the companies that Hardick mentioned, but incredible entrepreneurs. Garrett Morgan is another incredible entrepreneur. But the list goes on. Land on and on. How can we leverage our history and our current history and our long term history to catalyze culture change? Because we have incredible things for people to understand and talk about, and the heat needs to be turned up on that, at least for me. I'm a huge history person. It can inform our future and motivate people to behave differently if they're inspired by what built Cleveland in the first. Place.

Jeffrey Stern [01:02:40]:

Well, Ray, Hardick, again, thank you so much for your time and for going over this. If folks have anything, they'd like to follow up with you about Jumpstart Ventures, Jumpstart, Cleveland entrepreneurship, whatever it is, what is the best way for them to do so?

Hardik Desai [01:02:56]:

For me, they can reach out to me at my email address anytime. It's hardick. Desi at jumpstart VC.

Ray Leach [01:03:04]:

Yeah. And they can reach out to me at ray. Leach. Leach@jumpstartinc.org.

Jeffrey Stern [01:03:11]:

Awesome. Well, thank you both again very much.

Ray Leach [01:03:14]:

Good deal.

Jeffrey Stern [01:03:15]:

Appreciate it.

Ray Leach [01:03:15]:

Thanks, Jeff.

Hardik Desai [01:03:16]:

Thank you.

Jeffrey Stern [01:03:18]:

That's all for this week. Thank you for listening. We'd love to hear your thoughts on today's show, so if you have any feedback, please send over an email to Jeffrey at layoftheland.fm or find us on Twitter at podlayoftheland or @sternjefe. If you or someone you know would make a good guest for our show, please reach out as well and let us know. And if you enjoy the podcast, please subscribe and leave a review on itunes or on your preferred podcast player. Your support goes a long way to help us spread the word and continue to bring the Cleveland founders and builders we love having on the show.