CC010: the pros and cons of angel funds // a Coffee Chat with Todd Federman (North Coast Angel Fund)

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Todd Federman: 00:00:00

They’re doing it for two reasons, right? One is a financial return. No one would invest in our fund would invest in our group if they didn’t expect financial return. However, if that’s all they expected, no one would show up, right? For a $50,000, $100,000 investment, just having it be a financial investment, there’s no reason to come to monthly meetings. There’s no reason to volunteer. People do that because they want to help companies are excited with what we’re doing and they want to see great companies built in Northeast Ohio and across the state.

Jay Clouse: 00:00:32

The startup investment landscape is changing and world class companies are being built outside of Silicon Valley. We find them talk with them and discuss the upside of investing in them. Welcome to upside.

Jay Clouse: 00:01:00

Hello. Hello, hello and welcome to the episode podcast, the first podcast finding upside outside of Silicon Valley. I’m Jay Clouse and I’m accompanied by my cohost, Mr. Podcast, crystal baller himself,Eric Hornung.

Eric Hornung: 00:01:13

The podcast crystal baller. What does that mean? Does that mean that?

Jay Clouse: 00:01:16

Well, I’m not necessarily calling you a baller I’m just talking about your predictions for the podcast industry that you’re sharing with me this morning.

Eric Hornung: 00:01:25

Oh, because we are sitting here on the heels of an acquisition of both gimlet and anchor by Spotify and I started kind of going into some of my thoughts about where this space is going. I’m calling it the podcast wars, just so you know. That’s my little name for it because I think that we are going to see Apple, Google and Spotify and Scripts. Those are the top four right now. Kind of start battling it out. I also think that there are a couple of really interesting players on the sidelines, Twitter, Amazon, Netflix, maybe a couple others. Facebook, essentially anyone that owns real estate on your phone, I think that they are in a good position because one of the biggest issues right now with podcasts is distribution and all of those have great distribution in. A lot of them are already incorporated with payments, which is something that podcasts are missing. So that’s kind of the trifecta. Content, payments and distribution.

Jay Clouse: 00:02:26

You mentioned Google. I feel like you’re forgetting, forgetting Google.

Eric Hornung: 00:02:29

I said Google during my top four. I have them at number two right now. I have the power rankings are Apple, Google, Spotify and Scripts. And scripts

Jay Clouse: 00:02:39

What do they own?

Eric Hornung: 00:02:39

Scripts owns midroll who owns stitcher.

Jay Clouse: 00:02:44

Yeah, I feel like Google is really, really well positioned because they have the entire android market. Google podcast just became a default app on android phones, which seems like a big deal. Yeah. We were kind of aware of the spotify talks, $230,000,000 acquisition for an hour a week plus now that became kind of common knowledge that they’re in advanced talks with Gimlet. Did not see Anchor coming.

Eric Hornung: 00:03:07

I did not see Anchor coming either. I think it makes a lot of sense though. It’s essentially a funnel for Spotify to pull out the best content by letting more people create content, so it makes sense to me.

Jay Clouse: 00:03:20

Why not buy Spotify if you are Netflix.

Eric Hornung: 00:03:25

Who says they won’t? I think that they are well positioned on the sidelines to do it.

Jay Clouse: 00:03:28

Media. Media production platform.

Eric Hornung: 00:03:32

It’s exciting stuff. Kind of like today’s guest.

Jay Clouse: 00:03:35

Yeah. Today we’re speaking with Todd Federman, the managing director of the North Coast Angel Fund. He’s also a chairman or board member of several companies within the North Coast Angel Fund, including Lipsey, who we had on the show in episode 26, North Coast Angel Fund was formed in 2006, includes three contributed capital funds with 220 plus angel investor members. Their mission is to accelerate technology, startup success and improve the state of early stage funding in Ohio. They focus on early stage technology investments primarily in software and life sciences, and have invested in 51 companies.

Eric Hornung: 00:04:09

They’re also from my hometown, Cleveland, Ohio, so that’s pretty exciting. The closest we’ve got is Lipsey and Lipsey is from Canton, which is the outside of Cleveland, but North Coast angels are from Cleveland and that the General Northeast Ohio area.

Jay Clouse: 00:04:25

Yeah. I think we’re going to have a little bit of a Cleveland run here in the next couple of months getting into another area of Ohio. They are the fifth largest angel fund in the US. In the first Angel Fund that we have spoken to here on the show. We’ve talked to venture investors, we’ve talked to angel investors, but we have not spoken about angel funds specifically other than a quick aside and a conversation with Rachel Carpenter of [inaudible].

Eric Hornung: 00:04:48

And I’m sure that that will come up in this conversation.

Jay Clouse: 00:04:51

And before we get into that conversation, if you guys have thoughts on this interview with Todd, you can tweet at us @upsidefm or email us hello@upside.fm. Would love to hear your thoughts on the interview, which we’ll get into right after this.

Eric Hornung: 00:05:05

Hey guys, wanting to cut in here real quick and let you know about something Jay and I have been getting ready behind the scenes in 2019 when we started this podcast. Jay and I said that you, the listener, will have an opportunity to learn in real time to think like venture investors with us as we meet a wide variety of personalities, examine a wide range of industries. Well now we’re going to share something new and it’s a little different. This new idea is called the update. It’s a carefully curated quarterly publication of editorials, trends, and stories happening outside of Silicon Valley. Jay and I will be writing stories about what we’re learning about on the podcast, have guests editorials on interesting topics and share news and updates from our podcasts. In some cases, we may even share some exclusive content or first looks. Our goal is to stay at the cutting edge and of course bring you along with us. We’re super excited about it and know you’re going to love it. If you want to be the first to hear about our q one launch and subsequent letters go to upside.fm/update to get on the mailing lists.

Jay Clouse: 00:06:13

Todd, welcome to the show.

Todd Federman : 00:06:15

Absolutely. Thanks for having me.

Eric Hornung: 00:06:17

It’s great having you here. On upside, we like to start with a background of our guests. So can you tell us about the history of Todd?

Todd Federman : 00:06:24

The history of Todd? Does this go back to play time to elementary.

Eric Hornung: 00:06:29

Take me, take me all the way back.

Todd Federman : 00:06:31

Well, I guess I to connect the dots. I’ve always had a bit of the entrepreneurial disease or it just a need to try something, make something, lead something and like many entrepreneurs at work sometimes and it doesn’t work other times for some reason you’ve jolted my memory and I’m thinking back to seventh grade selling candy out of my saxophone case. That’s a shaker middle school and having a whole group of people actually if you. Interestingly if you bring in candy and ask other people to sell it, they will do so and the people with the larger instruments in Bam sold more and we all got in a lot of trouble after awhile, which is kind of funny because these days with everything going on in school, I think you’d get a medal or a trophy for selling candy, doing something entrepreneurial, but back then it was something he got in trouble for.

Jay Clouse: 00:07:18

Having bigger music cases as the original shelf space.

Todd Federman : 00:07:21

Apparently. Yeah.

Jay Clouse: 00:07:23

Interesting. Okay, so sorry, I might’ve missed this. Where did you grow up?

Todd Federman : 00:07:27

I grew up in Cleveland, a suburb Shaker Heights, which is on the east side of Cleveland. Just kind of regular regular kid, very entrepreneurial. Starting things, playing hockey, playing Lacrosse, trying to stay out of trouble and have been in Cleveland for most of my life. Spent about 10 years up and down the east coast and GC Durham back to DC, Baltimore in Atlanta before coming back to Cleveland and roughly 2006.

Eric Hornung: 00:07:54

What were you doing in all those cities on the east coast?

Todd Federman : 00:07:58

While I was doing a short stint for a political consulting firm in DC, I did business school in Durham at Duke. Then I had met what would become my wife, who would become my wife. And do you see? So going back there after business school, I worked for a company called Diamond Cluster Technology Partners. It’s a technology strategy firm, so was able to basically live anywhere we wanted as long as we were close to an airport. So as things happened with my wife who is in public health, we went to Baltimore for Hopkins, Atlanta for the CDC and ended up coming back to Cleveland. Uh, that was where I was from and we wanted to give that a try. And then I was running a little bit of a business in addition to the consulting that whole time. So all those things were just able to follow us.

Jay Clouse: 00:08:47

Yeah. You started our story here with your seventh Grade Entrepreneurial Expedition with candy. Did that follow through through high school then college before moving onto diamond cluster?

Todd Federman : 00:08:58

I I retired from the candy business relatively early. I think that was a seventh grade side, but the business that followed me on the east coast was a personal care products company called one with nature that I started with someone from business school and it makes a brand of bar soaps, lotions, body washes, bath salts. That’s currently at about 4,000 stores. It’s in the natural products industry. So it was a fun way to cut teeth. Growing a company, building a brand and trying to grow it.

Eric Hornung: 00:09:28

How’d you pick that area? How’d you pick natural products? Because if I’m thinking timeline, this is a decade ago. Natural products weren’t like blowing up at that point.

Todd Federman : 00:09:39

They were not. It was pretty early. So the short story is we were evaluating whether or not an existing company that was based in Jordan could compete in the US in Barstow. And as we looked at it we said, well, they could create brands like coast and dial, which seemed like a terrible idea, right? You wouldn’t want to compete with P and G and Unilever and those, those big guys, they could do private label where there didn’t seem to be a lot of margins. So as we looked at it, we thought, why not natural? It was very early, you know, whole foods was just a regional chain. Kroger’s and the larger grocery stores had no natural products, but it seemed like something that would have legs. And in Jordan there’s the Dead Sea, which is this unique natural resource, lowest point on earth with which causes all these neat minerals to coalesce to Dead Sea. Mineral products are great. What we’ve found and were surprised by was that there were no natural dead sea products. So that’s what we launched and we had pretty good timing as far as when whole foods, wild oats and the rest of the industry was coming together and we kind of rode that growth with the brand.

Jay Clouse: 00:10:44

So did you get those products into those stores, like whole foods?

Todd Federman : 00:10:48

We did. Yeah. So we’re in, we’re in every whole foods in the country. We’re in about 700 Kroger stores that have natural sets, some specialty stores as well, so it’s a different kind of business than the startups we found right. Or a physical product company that sells through distribution and sits on shelves. Very different in a lot of ways, but at the end of the day there are a lot of similarities where you’re really thinking about what a consumer wants and needs and what sort of distribution and pricing and promotion you really need to be effective.

Jay Clouse: 00:11:21

To do that physical product model and distribution model. It seems like it still has a lot of mystique around it for people who have never done it before. How did you navigate that process to understand your supply chain and manufacturing and getting it into big box stores? I’m sure everything was new to you when you first did it.

Todd Federman : 00:11:37

It was a 100 percent new. We didn’t know what we didn’t know. We stumbled a lot, made a lot of rookie mistakes, but I think some combination of having a good vision for what we wanted to introduce, having a ton of energy right to not stop and also just being willing to ask for help when we asked for help at every turn and a lot of people I think are afraid to ask for help or think it signals weakness, but we had some phenomenal people who stepped up, advised us, took time out of their businesses to give us perspective. That looking back was really crucial to our success.

Eric Hornung: 00:12:14

I have a question before we kind of pivot into your role as an investor board member. So one thing that I always find interesting is when there’s kind of like a gap that pops up on a resume or Linkedin, and as I was preparing for this interview, I saw that you have Kent State listed twice in your education, one from 92 to 94 and one from 97 to 99. So what happened in that in between phase?

Todd Federman : 00:12:42

So I, I was so good at Undergrad. I did it twice in the slightly longer answer is that I never enjoyed being a student before the second turn of Kent State, you know, as an entrepreneur, as somebody who was ADD plus just sitting there listening, absorbing stuff I felt I would never need again in my life was not of interest. So I was there for two years. I didn’t do great. A friend of mine was doing a summer job at that point where he was seal coating driveways or painting them black and I was leaving school. He said, hey, why don’t you just help me the first week? So we decided to do that and knocked on doors, made flyers and lots of people said, sure, seal coat our driveway. So the good news was that we had a lot of business, the bad news, we had to spend the next couple of weeks doing all the work and so we did that again and then realized we think we’re pretty good at selling, we think we can get people to want us to do this work. Why don’t we just knock on doors and talk to people and hire people to do the actual seal coating. So the short story is three and a half years later we probably had, I don’t know, six or 10 trucks, 10 employees, dump trucks, rollers, pavers, and we were doing asphalt and concrete work on driveways and parking lots across northeast Ohio.

Jay Clouse: 00:14:00

That’s amazing. I feel like the actual sealing work is the type of work that would make you appreciate going to college again.

Todd Federman : 00:14:06

It absolutely was. It was a lot of hard work. You know, we had multiple steps back towards the end. We ended up getting to a size and being, I think probably mediocre at managing that size that as we grew, bought more complex equipment, we got pulled back into the actual work, especially on larger projects. So it was a lot of fun. It was humbling anytime you have to be involved in hiring and firing, making decisions, which in retrospect were phenomenal decisions and decisions, which in retrospect were terrible decisions. Uh, you learned a lot. I learned just as much from running an asphalt company and a soap company as I have in the startup world.

Eric Hornung: 00:14:42

One of my college roommates for a summer when I was subleasing a place worked, he was one of your type of employees where he would go out and everyday just work these. He would come back and just be so dark from all of the sun he got but also just like so exhausted. And I wasn’t sure if he was tan from the sun or from the asphalt or what it was. But like I just remember him giving me the rundown of what his day is and like how it felt and how hot it was. And all of the pain points of the job. And I was like, man, that sounds terrible. So the fact that you got out of that is just awesome.

Jay Clouse: 00:15:20

So Todd, take us forward here, you’re now on the other side of things as the managing director of North Coast Angel Fund. Help us close that gap to where you are today.

Todd Federman : 00:15:31

Sure. Well I moved back to Cleveland in 2005-2006. At that time I was consulting directly for AOL, which going back in time, you know, that had recently rebranded from America Online after merging with / buying Time Warner. Now that at one point was, it was still a significant entity, but at one point it was a many tens of billions of dollars, probably 15,000 employee company in the Washington dc area. And I was kind of the right hand man to the person who was in brand strategy there. So that consulting. I was flying back and forth to Cleveland every week and I met someone, Clay Rankin who was talking about and was actively founding North Coast Angel Fund. And it was a collaboration between him and their early stage investor network and an economic development venture group in town called jumpstart. And by putting time and energy together, the group decided that we would have a much better chance of being successful investing in companies and helping them grow if there was a structure to put the energy and effort of the angel community together. And it was something I wasn’t terribly familiar with. I had been part of some early stage companies just through partnerships at AOL. There were a lot of billing companies, product companies that we would partnership with through Bizdev there. And I didn’t have the first day though or the investing side of what it was like at a startup. So it was a lot of fun to see. It was a learning experience and I think it was something that was very important for northeast Ohio to be able to get some of our investors off the sidelines and create opportunities to be more successful. Because you know, the only thing worse than people who have the potential to invest in startups not doing it is that they do it, lose all their money, have a bad experience, and don’t engage in it. Again.

Eric Hornung: 00:17:26

What’s your pitch to those investors who have been hesitant their whole lives to invest in a startup like how do you go to an investor and say, hey, join this network. What’s the pitch to say, here are the pros, here are the cons.

Todd Federman : 00:17:39

Well, the pitch is very different today than it was 12 years ago when we started and that’s because we haven’t experienced set and some track record we can point to. What we know for is that investing in startups is very risky and most of the time that startups will not achieve the results that we envisioned. At least half of the time they’ll fail maybe more and when they fail, we’re going to lose all our money. So part of it is getting people comfortable with the idea of failure and losing all your money. The good news is that you can only lose all your money once, right? You can’t lose your money five times over and startup when they win you can make your money five times over, 10 times over, and we now have a little bit more of a track record to see exits we’ve achieved where we’ve had a seven x five x a five and a half x four x, right These are solid exits. These aren’t Grand Slam home runs by any stretch, but it’s showing people that you can build companies over time in northeast Ohio and across the state where you’re building something that people want customers buy and then ultimately you find a way to create an exit opportunity to acquire. That’s really it right now. Letting them know that this is happening. Letting them know candidly what our performance has been, why we think what we’re doing is working and why we think our most recent efforts are more successful and going to be more successful when we started because we’re working up that learning curve ourself.

Eric Hornung: 00:19:04

So when you think about venture capital or were you. When you read about it, because everything is kind of silicon valley focused, do you think about the 100 x, the 10 exercise, you mentioned a seven x as being potentially your, your highest exit to date. How come there hasn’t been a 10 or 100 x out of the North Coast Angel Fund?

Todd Federman : 00:19:22

Well, you know the term is Unicorn of course, right? For the billion dollar exit and they happen. They certainly happen. You know the part of the dirty secret on that is on the billion dollar exits. Oftentimes the early investors don’t get any better return than seven x 10 x 15 x. A lot of things have to happen in order to get a 50 x 100 X. I’m not aware of a case in Ohio that investors have achieved 100 x and we. We try to exchange stories and talk about these winners, but you need a company that not only is wildly successful, not only grows and exits for more than a billion dollars, maybe much more, but you need a company that has been incredibly efficient in raising money and that’s really where the rub is, that there are lots of companies that are successful that will achieve great commercial outcomes and will exit, but if there hasn’t been a ton of capital efficiency early on, it impacts the return for everyone along the way because there’s dilution. You know, there’s nothing wrong with dilution. We expect it. We expect we’re going to raise money, but our hope is that we’ll be able to only raise how much money we need and that each round subsequently will have higher and higher valuations. So we’re raising at a higher share price. Even when those things happen, it’s just hard and it’s just rare to achieve that kind of exit returned. We can do very well in our fund by having five x’s and 10 x’s and I do suspect we have a couple percolating now that will be greater than that, but I think if anyone is really planning for that kind of grand grand slam home run, either they know something I don’t know or they’re being overly optimistic.

Jay Clouse: 00:21:05

You know, you talk about the UNICORNS and the billion dollar companies being based here in Columbus. First company comes to my mind is cover my meds and I think cover my meds. They didn’t raise a whole lot of capital to my knowledge. I think jumpstart might have been involved at one point, but from your perspective as someone who’s in the investment community in Ohio, I’d love to hear your perspective on an exit light cover my meds and what that means for the ecosystem or doesn’t mean for the ecosystem.

Todd Federman : 00:21:32

It’s a really big deal. It’s a really big deal. So cover my meds is the closest that I’ve seen to the kind of exit that you were talking about, right? It. It is clearly a billion dollar play. They did raise significant capital later on, but it was in more of a growth VC orientation so they didn’t minimize dilution. They have a substantive company that appears to have a real advantage and is growing and part of what we see now is people who have left that company and are starting their own businesses and that’s part of the magic right, is where success and culture starts to create more companies. We haven’t had as much of that in Ohio as other places. We’ve seen that with cover my meds. We’ve also seen that with a Cleveland based company called on shift, which recently went through a major private equity transaction where many of the early investors were taken out where this company is now growing quickly as more than 250 people and we just funded the company within the last two months that the entire team, eight out of 10 people at one point worked for on shift and they didn’t leave on shift over the years because they didn’t like it. They didn’t have confidence in the company. They left because they got the bug. They had the idea to start this company, they wanted to start something on their own. That company was supportive of it and driving that kind of culture is really the most important thing because that culture is not just driven by desire, it’s driven by learning how to build great companies and if people have the experience right, that kind of Grad School of working in a startup of seeing what it takes for it to be successful and then go out and start their own company, they’re at a great advantage over entrepreneurs who might not have been part of that before.

Jay Clouse: 00:23:18

Todd, we’ve had angels. We’ve had funds. We have not yet had an angel fund on the show , so I’d love to hear from you the similarities and differences between an angel fund, an individual Angel and a venture capital fund.

Todd Federman : 00:23:34

Sure. So angel funds are really a different animal. A first word angel. Let’s start there. So our investors are also members of a fund in a venture capital fund. The investors tend to be passive. They might be large, they might be small, but they basically will sit back, look at reports from the company and evaluate how they do. It’s a, it’s a purely financial investment in Angel Fund. We ask our in our members to invest as well. They’re investing perhaps 50,000, perhaps $100,000 in our fund, but what we also ask them to do is to show up, to pay attention and to engage wherever possible. So the Angel Fund model is really built around engaging high potential members to help the fund and we do that a couple different ways. One is we want people to be out there in the community to see these opportunities, to refer deals to mentor companies to help us understand which opportunities we should be talking to. Our members volunteer in, a subset of them are on our screening committee, so there’s a group which has more of a product orientation, more of a software orientation that helps us apply our filters to decide what companies are in our sweet spot. We should evaluate at which ones are not a fit. Ultimately, we recruit people from the membership to serve on diligence teams and I can provide a couple examples of how that works and then ultimately our members vote so our members have an active say in what we invest in. Ideally for most of these companies where we tend to lead the investment. We’ll also have one of our members serve on the boards of directors, so it’s a very different orientation for an investor. They’re doing it for two reasons, right? One is a financial return. No one would invest in our fund would invest in our group if they didn’t expect financial return. However, if that’s all they expected, no one would show up, right? For a $50,000, $100,000 investment, just having it be a financial investment, there’s no reason to come to monthly meetings. There’s no reason to volunteer. People do that because they want to help companies are excited with what we’re doing and they want to see great companies built in northeast Ohio and across the state and that combination, right of expecting it to work and being willing to put in time and efforts and make it work is really what defines an Angel Fund.

Eric Hornung: 00:26:00

So this vote is interesting to me. Am I understanding you correctly that the money’s pooled into a fund and let’s say the three of us are the only members of an angel fund. If Jay and I vote, then your money is contributed to this idea as well, but indirectly. Okay. So what is, what is quorum for that kind of vote? Is it 51 percent? Is it something higher? Like what? Ha. What threshold has to be reached for everyone’s money to be put at risk for a investment.

Todd Federman : 00:26:29

So it is a majority of the members who show up. So if you show up, you get a vote, you’re able to send a proxy in. Proxy can vote for you. If you invest $50,000 in the, you get one vote. If you invest $250,000 in the fund, you also get one vote, so it is not driven by the amount of capital that anyone puts in and on paper we can have a member meeting with as little as five people. We tend to average at least 50, 60, 70 people who attend our regular monthly meetings and those people who are members and those people who show up get to vote.

Eric Hornung: 00:27:06

So Jay and I are big fans of Josh Wolfe from Lux capital. I don’t know if you’re familiar with him. He has an anecdote and a story that he believes that the best investments they make are the ones where people are fighting on both sides of the table and pounding their fists on both sides of the table because someone’s saying this isn’t going to work and someone saying this is. Have you guys done any analytics to see like, all right, this was a 100 percent buy in from the membership that was there. This was a 52 percent buying. What’s the return profile when we are more in agreement versus less than an agreement?

Todd Federman : 00:27:42

We haven’t done any analytics. I think I can share a couple of things which are anecdotal and the reason we haven’t done the analytics is I’m just not sure that the n is big enough because you know, we, we’ve invested in 53 companies over the years. We expect half of them to fail. We expect many of those who have some level of success to have very modest level success and we expect a very small subset to have the breakout type of results that drive success for our fund. So when you’re only looking at, you know, handful per fund, we have three funds of companies that achieve that level of success. I think it’s hard to feel like there would be statistical significance for us, you know, maybe others feel like they would have a better sense of that. Anecdotally, where there tends to be lots of table pounding and lots of just opportunities to dig in and and constructively disagree is in our due diligence process where we have a subset of our members actually rolling up their sleeves and doing the work so the idea isn’t really where the work gets done in our fund is not just a bunch of people in a room hearing the presentation in deciding which way to vote, where the work really gets done is on diligence and we try to recruit people who have domain expertise in the technology who have expertise in the industry, who have expertise in the functional areas that will be responsible for success with the company and that’s where there’s a lot of debate and push back. That’s where we really try to test the hypothesis of the companies we try. We talk to customers, we get feedback, we try the product. We just try to pressure test the opportunity and the team as much as possible. Once our diligence team, they’ll come to a recommendation. It is a nearly universal that the full membership supports that recommendation and most companies that go into diligence do not result in a investment and most companies certainly that are presented us do not result in an investment historically about two percent of the opportunities that we’ve seen end up being an investment by our fund.

Eric Hornung: 00:29:47

So it sounds like diligence is kind of part of your bread and butter. Obviously the pooling of assets is a huge part of your competitive advantage as well. But the diligence process sounds like it’s very important. So could you walk us through an example of what the diligence process looks like maybe more tangibly, and if we could use Lipsey as an example, I think that that would be fascinating for the listeners since Lipsey was episode 25 of upside.

Todd Federman : 00:30:14

Sure. We’ll use Lipsey but I’ll also go off off road a little bit because it was a bit of a hyper unusual example for us. So the, the, the real sweet spot of a fund like ours in the Midwest tends to be business to business software as a service. And Lipsey is a platform, right? Which provides expressive content to social media and messaging apps, so they’re they’re very different. On Lipsey, the biggest thing we were vetting was just the, the broader opportunity of did the market in that case want to and need to see expressive messaging which has rich video and sound right. Whereas today most people will send Jeff’s stickers, emojis to communicate and we looked at that broadly. We talked to people in the industry, we talked to some of their potential channel partners. I won’t mention which ones we talked to, but they’re, you know, the types of channel partners they would have would be everything from, you know, facebook and instagram to skype and twitter. In Europe a company like viber. So we tried to get perspective from those platforms as far as what they wanted to do, what they wanted to see. The other big piece of it was just vetting the team. In this particular case, what really got us excited about the opportunity and what caused us to invest outside of our sweet spot was the team, Chris Nicholas and Matt too both came out of this industry. They both did a lot of the same things on product and delivering of this kind of a Ui and Ux for expressive messaging within a messenger platform. They were at Kyc for several years. They were early on my space so they really knew what they were doing. They had credibility within the industry. We made a little bit of a bet outside of our suite spot based on that, what is a little bit more standard for us though is looking at a company that might have a handful of customers, they might have less than $100,000 of revenue and us spending a lot of our time talking to those customers, understanding what problem they’re solving, how the software helps them address it, how they think about buying and the value prop over time, how it integrates in with their broader system and essentially why this is really as good as the company thinks it is. We don’t ask any trick questions. Now these are all very common sense questions of what problem is it solving? What else did you look at now? How would you think about this solution and we can get a lot of insight from asking those questions and usually customers are willing to share quite a bit and at that stage we’re really trying to understand how close they are to product market fit, how close they are to being able to execute on repeatable, scalable sales tactics. Right. When you see a company with $100,000 in revenue, they’ve done something right. They’ve built a product that somebody wants to buy, but there is not necessarily evidence of repeatable, scalable tactics there and we try to understand that because if we’re going to lead around where they’re raising a million dollars or $2,000,000, we need a really good sense of how they’re going to deploy that money in order to grow the company. Now it’s a lot of what we look at and diligence.

Jay Clouse: 00:33:33

How do you determine which members due diligence for which companies is a kind of a volunteer basis? Do you proactively reached out to some that you think, hey, this seems like as your wheelhouse, do you have time?

Todd Federman : 00:33:44

Yeah, so the first opportunity is volunteering and that some people volunteer and some people are voluntold, right. Which is when we ask them really nicely, hey, we’d love to have you volunteer for this project because your background, because you bring a lot here so we fill in a lot of the gaps that way there are some people who are just too good and our membership to not have on some of these teams, so we try our best to to suck them in to get them involved and usually the highest impact members are also those with the most intellectual curiosity about these opportunities, so it’s usually not a hard sell.

Jay Clouse: 00:34:18

The pooling of resources has always made Angel funds make a lot of sense to me both money and time. We spoke to one entrepreneur who was anti angel funds and I’d love to share that perspective and get your reaction on it.

Todd Federman : 00:34:34

Sure.

Jay Clouse: 00:34:35

For her, she mentioned that she had a friend who was getting close to an angel investment with an individual and that individual had a very strong background and exactly what that other individual’s company was in. He joined an angel fund instead of directly investing in that company and now his $100,000 investment is spread across the entire, you know, funds portfolio or potential portfolio, and so he’s less incentivized to spend more time as an advisor and mentor to that company. That does also make sense to me. So I’d love to hear how you guys think about that and approach that.

Todd Federman : 00:35:12

So most people in northeast Ohio do not write six figure checks to individual companies. So let’s start there, right? How many candidates are there to do what this potential investor was thinking about doing? So if you’re going to have any chance of being successful in angel investing, you need to build a portfolio, right? Because most of these companies are not going to be wildly successful. So if you assume that are going to need to invest in at least 10 companies, which it’s probably a little higher, but let’s say 10 and you’re talking about investing $100,000 in a company that’s obviously a million dollars. Well, no, investors should assume that the first check they write as the only check they’re going to write, most people who angel invest in, certainly vcs will have to soft circle and reserve one to two x on top of that. So if you’re allocating $300,000 per company over the life of the company and you’re saying I’m an invest in 10 companies, that’s $3,000,000. Most of our members do not say I’m to invest $3,000,000 in startups over the next few years. They say I’m going to invest a couple hundred dollars or 100. So the idea of pooling assets in an angel group makes all the sense in the world because you’re getting diversification across companies and across rounds. That said, if any entrepreneur has an opportunity to work with individual angels who will write big checks and add value for their company, they should do so all day long. There’s nothing wrong with that. And we often will invest with other early stage angels as well. Our average check size as a fund is only $250,000 initially. So for a million dollar round, we need friends, we need syndication partners, we’re always willing to co invest with other angels, Angel Groups, family offices, seed Vcs, as long as we have some level of comfort with them that they’re constructive in the process and that they’ll be good co-investors.

Eric Hornung: 00:37:06

Is there any restriction on. So one of your 220 members, let’s say that they love and opportunity that’s in front of them and they don’t want just their portion of the Angel Fund, they want to put another 100,000 behind this. Is there any restriction on that?

Todd Federman : 00:37:22

No, that happens all the time. So we call those sidecar investments. You may see people put in $25,000, $50,000 into deals they like. So our the engagement in north coast gets them a front row seat. They get to see all these deals and opportunities and then they can consider making a follow on either initially or sometimes they may have an opportunity to participate in the next round. Once a company has gained a little bit of traction and one thing I’ll go back to when you are giving the last example of what are the shortcomings of an angel group, what I thought you were going to say and what I hear most often is that angel groups are slow, right? That it is just not a fast way to go through the process and you can burn a lot of time and energy answering questions, sending information in, going through a process of an angel group and by and large that’s true. That’s just one of the aspects of dealing with a large group of people that said, our group has gotten the diligence process down to 30 days. So from our perspective, you know, an entrepreneur needs to be able to talk to investors early, share what they’re thinking, have enough time and runway in front of them to run a process, whether it’s with us, whether it’s with vcs now, the idea of someone saying I need to raise money two weeks. It’s dead in the water. Right. There just are not investors that will do that. Institutional investors, individual investors. So I think planning a process and a timeline makes a lot of sense, but if people are talking to angel groups, I think they do need to be aware and be communicative with them about what their expectations are on time because time is the smallest asset that a company has, right? It’s really limit that they need, need to move quickly and sometimes larger groups might not be structured to move as fast as the entrepreneur needs.

Eric Hornung: 00:39:07

So from the time that I submit an application as a founder who’s looking for funding, where are the major milestones where I hear yes or no for north coast is it two weeks after I submit I get a yes or no, you’re onto the next diligence phase and then like what’s the total time it takes to actually receive funding from north coast?

Todd Federman : 00:39:30

Sure. So in what I’ll share is what we do today, what we’ve done for about the last year, because our process has been overhauled countless times to try and make it better. So today once an entrepreneurial reaches out to us, we send them a standard email and say, thanks for reaching out. We’d like you to fill out a one page form and send us your executive summary. This is the first screen we can usually get to it within that week and for companies that are not a fit, we let them know it’s not a fit. Sometimes it’s not the right industry, it’s not the right stage. It’s a technology we don’t invest in. That’s the easiest screen. What we then do is set up a 30 minute screen call or that can happen really fast to where we just want to hear their voice, hear how they present, share the slides, let us know if it’s worth our time and also if it’s worth us taking their time to ask them to come in and sit down with us for an hour, hour and a half to really dig in. So this happens in a monthly cycle around our member meetings, so every month we’re looking for one or two companies to go to our screening committee. An entrepreneur may meet with us one week and then the next week is our screening committee. If they’re a fit and they’re ready for the screening committee, they are put on the calendar and then the next week they would present to a group of 10 to 12 people take q and a and that’s the group that decides whether or not they go into diligence. If they go into diligence, it’s 30 days, 30 days to an answer, and then if the answer is positive, you know, could take another 30 days to pay for a deal to find co-investors. That’s where we really need the entrepreneurs to work with us to try to fully syndicate a deal. You know, we, we won’t close on $250,000 of a million dollar round. We need to work with other investors. We need to bring people to the table. But the core diligence happens in 30 days.

Eric Hornung: 00:41:18

So you have over 220 individual investors who all have their own area of expertise. Obviously you’re giving these companies capital, you’re being a lead investor and those are two things that really mattered to companies, especially an early stage. But we just had a conversation with Stephanie Manning of Lerer Hippeau and she talked a lot about the platform role of venture capitalists and we, I’ve read a good amount by Andreessen Horowitz, which talks about venture capital as a service and how it can’t just be capital. So I’m curious how or if North Coast Angel Fund, in addition to the board seat that they take leverages those 220 plus individuals in providing advice or service or potential customers or recruiting assistance to the portfolio companies in North Coast Angel Fund.

Todd Federman : 00:42:14

We try very hard. We try very hard to leverage our 200 plus members to help our companies. Candidly. Sometimes we do a bad job at it. Sometimes we do a great job. It takes a partnership with the CEOs. They have to want to spend the time and energy to help us understand what they need, whether it’s industry insights, solving a functional problem, like better standing up a sales team, addressing a marketing problem, like running attribution models to understand how search is going or if it’s just a connection, I need to meet the CEO of x. If we can have those kinds of conversations with our companies, it is highly likely that we can find help within our membership. In a small city like Cleveland help is really one phone call away. I feel like we can get to the head of any company in Cleveland to the right people and most companies in Cleveland, if we have an ask, that makes sense. We’ve seen lots of examples of this over the years where because we have relationships that people will absolutely pick up the phone, talk to us and try to be helpful. It doesn’t mean they’re going to buy the product. It doesn’t mean they’ll partner with the company, but the listen and I think that’s the most you can ask for. That’s really the primary value of our membership is to leverage their background, technical expertise, functional expertise and networks to help our company. The money, the money is great, but it’s the people that can really help accelerate the growth of our companies.

Eric Hornung: 00:43:41

Well, we are not a portfolio company, but I do have an ask if anyone in your group has connections to Baker Mayfield once gave me a signed jersey. I’m 100 percent in.

Todd Federman : 00:43:51

I will see what I can do. Challenge accepted.

Jay Clouse: 00:43:56

All right, so Todd, I wanna I wanna change gears here while we still have you. I see on your website that you are a capital partner with the Ohio Third Frontier Program and being from Ohio, we’re a little familiar with the third frontier program, but a lot of our listeners are not and it’s a pretty innovative model I think so I’d love to hear you kind of explain for our listeners what the third frontier program is and how you interface with it.

Todd Federman : 00:44:20

Third Frontier Program is unique and it is powerful. It has taken hundreds of millions of dollars and applied them into innovation and into startups. The fund started with capital from a large tobacco settlement. There was a voter initiative several years ago which put more money in it in addition to funding some direct research oncology universities. What’s most relevant to us as a program called the pre seed fund program where a certain amount of capital and it might be 40 to $50,000,000 in a cycle. You’ll cycles come every couple of years is made available to investors in the state. It’s a competitive RFP process, so angel groups, economic development groups, venture capital funds all apply for these funds and its investment capital now, so it’s in the form of a loan, but those monies are invested directly into companies, so it provides a lot of leverage. Our Third Angel Fund has $4.6 million dollars in it that a state capital, so we are deploying that money into startups. It’s a loan. We have to pay that back to the state, but any return on those loan funds accrues to the benefit of our investors. So it provides an incentive to investors to take the significant risk in these companies and I think that has gotten some investors off of the sideline. It’s pumped many more millions of dollars into the early stage world in Ohio than would be otherwise and I think created thousands more jobs simply because we have more resources to invest in these companies and the state through the third frontier has learned and has documented that over the years. If they provide money to funds like ours, we deploy them and we deploy them into early stage startups. We try our best to help them be successful. I think they viewed that as a really good investment in the state.

Jay Clouse: 00:46:15

You mentioned that that’s a fairly competitive process, RFP process for different organizations in the state. I’ve I’ve seen and heard of almost, you know, a perverse incentive there or outcome there because what is normally a very collaborative environment for this period of time where they’re applying for these state funds can be kind of competitive. Do you, in your eyes, do you see that the institutions in Ohio do a good job of keeping that in perspective and continue to collaborate after those funds are distributed?

Todd Federman : 00:46:46

Absolutely. So that hasn’t been my experience. I haven’t seen any impact of those funds that would cause groups to not collaborate to not work together because at the end of the day we have to be successful. We have to make money for our investors and if we don’t, nothing else works. So we still have to find the best companies. We have to fund those companies. We have to work with them and help them be successful and that’s something that’s better done with a village, so I fortunately have seen nothing but good collaboration from a lot of these groups across the state and we’re an open book on that front. We’re happy to let people know what deals we’re looking at, what we’re investing in and create opportunities for them to work with us.

Eric Hornung: 00:47:28

Ohio third frontier is effectively a program. Just kind of jumping back into that is a program that is set up to give to incentivize investment in smaller companies. There’s a lot of regulatory programs like this or tax rules and regulations. Can you just kind of walk through some of the other maybe regulatory or state sponsored or federally incentivized programs that are geared at benefiting investors in small potentially growth businesses that you guys might use or leverage?

Todd Federman : 00:48:02

Sure. You know, I don’t have a lot of direct experience outside of the state of Ohio, but there are some states that have an investor tax credit where essentially there’s a credit given off of state taxes to induce individuals to invest in these companies. In many states, there’s plenty of money to invest, right? The problem is that people don’t have the background knowledge or awareness or interest if some of these opportunities, and a lot of states have found that by creating an incentive, they’re more likely to get companies to invest more likely to get individuals to invest in these early stage companies, so there are some states that have those incentives, some states that have tax credits. There has been some talk of a federal tax credit, which we haven’t seen yet, and then we’ve recently seen some opportunities zone regulations come out, which will apply to many areas across the country that are designated opportunity zones. We haven’t been part of anything like that yet. We’re trying to better understand that the state of Ohio has had a tax credit in the past. We’re hopeful that’s something that might come back again because we do need to do everything we can to get more capital into these companies. In Ohio, I think there’s a meaningful deficit of risk capital available through venture capital funds. We’re fortunate enough to have a handful, but we don’t have nearly the types of funds that some other cities have once we invest at the seed stage in addition to the Ohio funds, we’re often looking at regional and national funds where there’s nothing wrong with that. We should be sourcing these deals to vcs across the country in order to find the best investors to try to find as much money as we can for these companies, but it would be immensely helpful if we could have more sources of early stage capital in our own backyard.

Eric Hornung: 00:49:52

If the North Coast Angel Fund got a $100,000,000 investor today, put in $100,000,000. You guys have a lot more money. What would change?

Todd Federman : 00:50:01

Are you offering?

Eric Hornung: 00:50:03

Not yet. Not yet, Todd.

Todd Federman : 00:50:05

Okay. We should continue this conversation because I’m intrigued. We haven’t yet had a $100,000,000 check land on our doorstep and I guess I’d say a couple things. One is, you know, the exact investment model we have today that we use to deploy a $10,000,000 fund would not work for $100,000,000. What we would end up doing though is deploying more money into our companies that we think are proven winners. Participate in more a rounds and b rounds when institutional venture funds come in. There is a related fund which we started to North Coast Angel Fund called North Coast Venture Fund. It’s a $15,000,000 venture capital fund and that entity makes larger investments in companies later on so that that fund has million dollar investments. One company, we have $2,000,000 invested in it, so those are the types of investments we could deploy, which would be very helpful for our company companies. What we would probably do is try to use capital like that to invest alongside other investors, not to be the sole investors in these companies because it’s an important proof point to be able to bring in other partners at a later stage and as these companies grow, they’re going to require a lot more capital. Companies like on shift raise many tens of millions of dollars. One of our exits, assurex a Cincinnati based company, raised over $100,000,000. So sometimes the more successful these companies are, the more capital they need for growth. We don’t expect to be able to fully fund it ourselves, but if we had more capital to deploy and the early and mid stages we would be more impactful investors and I think the entrepreneurs of the state would really benefit.

Jay Clouse: 00:51:43

I would love to hear a little bit more about Cleveland in particular because we haven’t talked about it a ton on the show. Cleveland, you know, a big industry giant in the late 1800s, early 1900s. Now, a lot of those industries have shifted. What does it mean for a city with so much history to try and join sort of the tech boom was that look like.

Todd Federman : 00:52:12

So part of Cleveland’s identity is definitely anchored in the past. I think part of it’s anchored in the present and the future. Cleveland was the fifth largest city in the country in the fifties. It was growing quickly. There was a industrial manufacturing base here. Some of that was tied to the auto industry. Others to the steel industry and advanced manufacturing industries and things have changed, right? Things that have impacted cities like Pittsburgh and, uh, other areas. Pittsburgh is probably a little ahead of Cleveland now in terms of their pivot. We need to do a lot more to make sure that we’re developing companies and skills and technologies that will help us grow into the future. I think the skills gap in Cleveland and in Ohio is pretty significant. There’s a meaning full number of companies in Cleveland that have scale now, publicly traded companies like keybank and progressive insurance and Sherwin Williams, Eaton, Parker Hannifin know these are all companies with 10,000 plus employees, national footprints, publicly traded companies and they need to continue their growth path. That’s an important part of our economy and I think we’ll continue to be, but we also need more on shifts. We need more a sure xs and you know that the future of a city like Cleveland is going to be built in the information economy. It’s going to be driven by technology and we need to provide some combination of a carrot and stick to help make sure that we’re training the right people. That we’re not leaving major parts of the city and the region behind. And that there’s a really thoughtful plan for us to continue to grow as a city. If not, I think it will be really challenging to maintain the momentum that we have, but there are a lot of good things happening now in the city, a lot of quality companies growing, a lot of collaboration across a civic and business partnerships that you may be aware of the blockchain solutions conference that occurred in Cleveland in December where we had 2000 people here with a pretty cutting edge blockchain conference. What jumpstart is doing in terms of deploying a much larger amounts of capital now into some of these companies is significant and we’re recruiting more companies and more technologies here, so I think there’s a lot of good things, but it can’t turn a battleship on a dime. It’s definitely going to take time and take more resources to be successful.

Jay Clouse: 00:54:33

It’s something that we hear when we talk to entrepreneurs all over the country and really all over the world. We’ve talked to people in Alberta or I’ve talked to someone in Alberta and we just interviewed someone from Tulsa. There are a lot of cities that have this identity that’s rooted in the past, and so as a up and coming tech entrepreneur, it’s hard to get people to think about this as a type of investment or asset class, whether it’s oil and gas or whatever the history was in. You’ve mentioned a few times here getting investors off the sidelines. You’ve mentioned a couple of things that have helped to do that. Whether it’s the third frontier program, whether it’s an angel fund or whether it’s an angel tax credit. Is there anything else that you’ve seen to be successful for helping to convince wealth that’s been in families for awhile to enter into this type of investment class?

Todd Federman : 00:55:21

I think the biggest thing is just to help them understand that we have opportunities here that are worthy of investment and many times these opportunities don’t look exactly like what we see on the coast. The entrepreneurs in Cleveland starting companies and in smaller cities across the country tend to be older, older, more likely to be in their forties that are in their twenties. They’re more likely to have some sort of business or corporate experience behind them, and oftentimes what’s really interesting is the entrepreneurs starting companies in northeast Ohio tend to be intimately familiar with and engaged with a real business problem that they’re trying to solve, and that’s something that resonates with investors. Just as one example, one of our companies stream link software, the CEO was the Chief Operating Officer of a large nonprofit in Cleveland. He saw a lot of inefficiencies that were just naturally rooted in the nonprofit ecosystem. He started a company with no technology background, but he had industry expertise in the problem he was solving, and right now that company is really the leading grants management solution in the country. We have multiple seven figure contracts with states and territories, major cities and that insight from understanding a real business problem translated into successfully building a company and we have that all the time. You know, we have people at key bank right now I’m sure, who have phenomenal ideas and insights into new opportunities. Who could start companies, people at progressive insurance who have phenomenal expertise on insuretech and what they’d like to see in the industry, who can start companies and what we need to do is to help show those entrepreneurs and our investors that we have the resources here to help high potential people with great ideas be successful.

Eric Hornung: 00:57:08

So on that point of deep business expertise. I’m from Cleveland, so when I think of Cleveland, I think of obviously finance and insurance, which you mentioned and I’m going to pop that to the side for a second. Same with healthcare. The other area I think of is just kind of like industrial almost. So you have a ton of automotive parts manufacturing. You have swagelock who’s like industrial fluid systems or something like that. You have Sherman Williams who’s paint. You have Parker Hannifin who’s pretty much, if it’s big and it moves, they make the parts that do that. You have all these kind of companies that are, for lack of a better term, like forging steel and making us big parts. How does tech fit? They’re like, how are their companies coming out of there that aren’t just redoing their internal systems? How are they actually talking to or innovating on the core product or business?

Todd Federman : 00:58:04

Well, we went to be talking to those types of companies. We actually have an innovation council program where many of the names you just mentioned are part of our program where they show up to our meetings where they engage with our group because they want to be closer to innovation in many of the technologies we invest in are not pure software players, right? There’s a, uh, hardware and electronics component to it. One example is a Columbus based company called exactor. To make a long story short, they invented, they invented a magic box, a small box that gets transported around in vehicles. It sniffs the RF signals coming from electric utility lines, and that identifies problems, identifies impending failures that saved money for companies. They work with a lot of major utility companies. This is something that works, that delivers value as an ROI and has a hardware software component.

Todd Federman: 00:59:01

That’s the kind of company we can create here in northeast Ohio. We have another interesting company called Satellitics, which is based in Toledo. They have a product which applies a very nice algorithm and spectral imaging analysis to satellite photos and it tells pipeline companies, oil and gas pipelines whether or not they have issues, whether they have leaks, what the temperature of water is, whether or not there are algae blooms in water. It provides a really nice automated information that is best in class. They work with many of the big players, the pipeline companies, the oil and gas producers and refiners. Now these are Ohio based companies. I don’t think they fit into the standard mold of consumer software or social media or what a lot of people think of venture capital, but these are real companies solving real problems that businesses are willing to pay for and I think our entrepreneurs and our investors can get behind those all day long.

Jay Clouse: 00:59:58

This has been great. Todd. Really appreciate your time here this morning. After the show, if guests want to learn more about you or about North Coast Angel Fund, where should they go?

Todd Federman : 01:00:06

They should go to our website, which is a long website. www.northcoastangelfund.com. When we first started, I think the acronym NCAF.com was $25,000, so we decided to go with the nice long address, but people can find information on us, the fund contact us, and just as importantly contact some of our portfolio companies if they see opportunities of companies they want to work for, they can see partnering with where they see opportunities for introductions. We’re always trying to help our companies and we are appreciative of any insights or connections that others might have.

Eric Hornung: 01:00:48

Alright, Jay, we just spoke with Todd Federman in the North Coast Angel Fund. What are your first takes on our first Angel Fund on the podcast?

Jay Clouse: 01:00:58

He brought up something that I had never really understood or thought about, which was on billion dollar exits. Early investors don’t tend to exceed a seven x return anyway, and so he spoke about the angels in the fund investing at an early stage because even on billion dollar exits, the early investors don’t get more than a seven x return anyway, so they’re not necessarily looking for a billion dollar exits for them to have the financial return that they’re expecting with this investment vehicle.

Eric Hornung: 01:01:28

And that’s kind of crazy to me because I think it just shows that the venture industry or space has changed. I’m reading a book right now called how the Internet happened and it talks about everything from netscape to the iphone and in it it talks about how I believe it was benchmark invested in either Yahoo or Ebay and their $1,000,000 investment went to $4,000,000,000 and a lot of these kind of .com era investments that were so small in the amazons, in the ebays, in the Yahoos really like skyrocketed when they’ve had these billion dollar exits. One theme of the book so far has been that most founders that did well resisted taking on investment early on, which I found kind of fascinating, but also might play to this idea of kind of how the venture space has developed today. I’m not really sure.

Jay Clouse: 01:02:27

Well, you know, despite doing this podcast, I work with a lot of founders still and I just talked a lot of people who are thinking about starting companies and thinking about finding investment and I almost never recommend going down the investment path until it’s like an absolute must have. And I also recommend finding product market fit and showing customer traction before trying to do that investment round. Because for one you’re probably not going to get investment if you can’t show some sort of product market fit or some sort of traction and two, even if you could. It’s not going to be on great terms. So from the entrepreneur’s standpoint, it does behoove them, in my opinion, to wait to take investment until they have some sort of black box. They say, I put a dollar in and $10 comes out.

Eric Hornung: 01:03:09

And I think that that’s what gets to returns is that this new environment is all right, I have an idea. I go through an accelerator, I go to an angel fund, they give us money. Then we go in, we get our seed extension, and then we get a series a, then b, then c, then d, and I think when I compare and contrast kind of that new venture setup to the .com space, I can see where Todd’s point of, okay, there’s a lot more people investing in. The growth is more challenging and the space is more concentrated so the variance isn’t as large and when you’re early on in it’s going to be affected by that.

Jay Clouse: 01:03:45

I also was struck by Todd’s candor or what I assume to be candor related to how their process works, how the process can continue to improve. I mean for one their website, it actually walks through a very specific process of here’s how you interface with North Coast Angel Fund and how you can get investment from us. Here’s exactly the first few steps to submit your information to us, the information that we want. We will reach out to you in this number of days to give you some sort of response that was very transparent, but he was also candid about the fact that it does still take longer than they would like it to take and they’re actively trying to make things shorter so that if it’s going to be a no, they can get to a no faster for the entrepreneur and I think it really points to just the gray areas that exist in just about anything or the nuance that exists in just about anything. You know, if you. If you talk to an entrepreneur who has pitched to an angel fund and didn’t have a good experience, they’re gonna complain about how long it took to get a yes or a no or how much time they put into it to get nothing out of it. And it’d be easy to take that data point and say, Angel funds are bad. Angel Funds are slow. Angel funds don’t work. Then you go and talk to someone the other side and you know, you hear, yeah, we’re, this isn’t really full time for any of us, but we’re trying to support growth in this area of the state and so we donate a lot of our time. We dedicated a lot of our time and capital and we’re trying to improve that and we recognize it can be better, but got to start somewhere. It just, it just points the nuance involved when there are two sides to any story.

Eric Hornung: 01:05:11

I think that that was a takeaway from me as well as this nuance because I had thought or my mind immediately went to this idea that angel funds, we’re kind of scooping up all of the angels and putting them in one basket, and again, this is two sides of the story, but I’m sure that the true answer is somewhere in the middle. Todd said that they aren’t doing that so much because angels need to make at least 10 angel investments and not many people are going to be putting half a million dollars at risk. Plus having saving for follow ons. It’s just not very logical for most people to do that, so their pitch to the ecosystem is this money and maybe there are some people that would do that, that filter into an angel fund instead because it’s easier. Sure, but the money that comes into the Angel Fund is more often than not money that would not have entered the startup ecosystem.

Jay Clouse: 01:06:03

I also liked talking to him about Lipsey and his perspective on Lipsey since they’ve been on the show and he said something about Lipsey that is also sort of the answer I’ve heard about rap chat from investors here in Columbus, which was, yeah, this is totally outside the wheel house of what we do. Pretty unique circumstance in that the team really knew what they’re doing. They came from a place of really good experience for this particular industry, this particular opportunity and we bought we bought into the team and we we believe in them, which I think is a good sign. Still a little slow, I think to change behavior and the type of risk investors are willing to take on things that are outside of their wheelhouse, but I think it’s a good sign to say we will stretch into things that are uncomfortable and rare and different here in this geographic region. If the entrepreneur convinces us the entrepreneur has experienced, we will bet on the entrepreneur in some cases, even if the opportunity is far outside of what we typically look at.

Eric Hornung: 01:07:00

I think he’s definitely an outlier still though it. I think that he said our sweet spot is B2B software. They look at market size industry, the partners that they have and the team that they’re going to be investing in. That was the order he laid things out. I think that the flexibility is definitely a limitation as well, so speeds have limitation, flexibilities limitation. There’s obviously some benefits that we’ve already listed out as well. The biggest of which is they call this structure to align the energy of a region, which I think is nice and kind of goes against my idea of angel funds as a gatekeeper.

Jay Clouse: 01:07:35

Tell me more about your idea of angel funds as a gatekeeper.

Eric Hornung: 01:07:38

I think I’ve developed it over time. Talking with a lot of founders is kind of what you referenced earlier. A lot of founders who don’t get Angel Fund investment or even who do, maybe they had a bad experience where it took a long time and it seemed like this is the only way that I can go because this is the preeminent funding mechanism for coming out of an accelerator or coming out of some sort of incubator program is okay, now you go to the Angel Fund and you see because this is the biggest pot of money in the city and if you don’t get accepted by that biggest pot of money, now you have to go find someone else to fund you. So you effectively have talked to every angel in the city or it feels like it when you’ve talked to the Angel Fund. So it feels like to the founder, that is the gatekeeper to success in that city. And if you don’t hit that, maybe you have to go elsewhere. Maybe you have to go to a neighboring city. Maybe you have to go to the coast, maybe you have to go more one-on-ones and find some friends and family money, so it’s an idea that I have developed from talking with people, but I like that Todd doesn’t see it like that. He sees it as a structure to align energy.

Jay Clouse: 01:08:40

The other side of that coin as the entrepreneur is if I pitch this angel group and they tell me they’re not gonna, give me anything from the pot of money they have. That’s also a very efficient mechanism for getting your opportunity in front of a lot of angel investors. You mentioned that investors will do a sidecar investment pretty frequently, but I have also heard of entrepreneurs who pitch to angel groups didn’t get the angel group funding, but that was the start of a relationship with an individual angel who said, actually, I still buy into this. I have experienced here I want to help out. Which I think is super valuable as an entrepreneur, pitching potentially hundreds of investors. To be able to do that in one swoop and have a first touchpoint I think is a really valuable mechanism.

Eric Hornung: 01:09:32

I wonder how often that happens though because it sounds like to me from Todd walking through their due diligence process specifically for North Coast that the group tends to go with whoever, whatever the due diligence committee pulls up. And I understand that maybe that there are one off exceptions. But if they have a sweet spot of B2B software and they have this due diligence committee that effectively comes back with a recommendation one way or the other. It feels like they have that sweet spot because of their partners and their LPs. They have that due diligence committee because they are the ones who are most inclined to understand the space that the entrepreneurs in. So if you’re getting turned down by the people who are most likely to understand your space in the LP community, what are the odds that there’s someone else in the crowd that just happens to know a little bit? Or like the idea? I think it’s just smaller as all I’m saying. I’m not saying it’s not possible, but.

Jay Clouse: 01:10:20

Yeah, you would definitely need someone who is able and willing to think for themselves about your opportunity. But I mean, the inverse of that also would be if you think that’s a bad thing or a potentially disadvantageous thing you’re banking on, otherwise you would do these one to one meetings with angels and they would be uninformed and invest in you in an uninformed way, which is possible. Sure. But that’s not necessarily the smart money you want to take. Well, we’d love to hear your thoughts on this episode, guys. Our first Angel Fund here really enjoyed having Todd on the show. You can tweet at us @upsidefm or email us hello@upside.fm. If you enjoyed this episode, send it to a friend, rate it on Itunes, all those things really help us and bring on high quality guest to the show. We’ll talk to you next week. That’s all for this week. Thanks for listening. We’d love to hear your thoughts on today’s guest, so shoot us an email at hello@upside.fm, or find us on twitter @upsidefm. We’ll be back here next week at the same time talking to another founder and our quest to find upside outside of Silicon Valley. If you or someone you know would make a good guest for our show, please email us or find us on twitter and let us know and if you love our show, please leave us a review on itunes. That goes a long way in helping us spread the word and continue to help bring high quality guests to the show. Eric and I decided there were a couple of things we wanted to share with you at the end of the podcast, and so here we go,Eric Hornung and Jay Clouse are the founding parties of the upside podcast. At the time of this recording, we do not own equity or other financial interests in the companies which appear on this show. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinions of Duff and Phelps Llc and its affiliates unreal collective llc and its affiliates or any entity which employ us. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. We have not considered your specific financial situation nor provided any investment advice on this show. Thanks for listening and we’ll talk to you next week.

Interview begins: 06:10
Debrief begins: 1:00:45

Todd Federman is the Manging Director for the North Coast Angel Fund.

Todd has served as the Executive Director of North Coast Angel Fund since its founding in 2006. Prior to joining NCAF, Todd worked as a full-time independent consultant for the brand strategy team at a leading web services company, co-leading efforts in developing word-of-mouth marketing and experiential marketing initiatives. Previously, Todd worked for DiamondCluster, a global management consulting firm subsequently acquired by PWC. At Diamond, his work included managing the development and launch of a consumer software product, assessing the cost/revenue implications of an enterprise architecture strategy for a leading health insurer, and architecting a new continuous improvement organization for a regional Blue Cross Blue Shield provider.

Previously, Todd co-founded, and remains active with “One With Nature,” an all-natural line of body care products carried in 4,000 retail locations. Todd currently serves on the Boards of Directors for NCAF portfolio companies StreamLink Software, DecisionDesk (formerly CitizenGroove), and Petbrosia. He also serves on the Board of Directors for Youth Opportunities Unlimited, a Cleveland non-profit that empowers urban teens through job training, placement and entrepreneurship education. Todd holds a bachelor’s degree in Finance from Kent State University and an MBA from the Fuqua School of Business at Duke University.

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North Coast Angel Fund (NCAF) includes three contributed capital funds with 220+ angel investor members. Their mission is to accelerate technology startup success and improve the state of early-stage funding in Ohio. The Funds focus on early-stage technology investments, primarily in software and life sciences, and have invested in 51 companies.

Founded in 2006, North Coast Angel Fund is based in Cleveland, Ohio.

Learn more about North Coast Angel Fund: https://www.northcoastangelfund.com/
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