SMV3: Parker MacDonell on building Unicorns in the Heartland

Rev1 Ventures’ Parker MacDonell shares how venture ecosystems in the heartland are birthing Unicorns and more!  Rev1 Ventures has invested close to $100 Million into 210 companies and completed 15 exit events - all in the Heartland. 

In this episode, you will learn:

1. How public/private partnerships have birthed Unicorns and more in the Heartland of America! 
2. How Rev1 Ventures has invested in 210 companies, 55 Lead Investments and completed 15 exit events primarily in Ohio. 
3. Why Myonexus Therapeutics is such a success story of tech transfer and early engagement with strategic corporate partners. 
4. How Rev1 Ventures collaborates with corporate innovation teams to create strong ecosystems that benefit everyone. 
5. Where you can learn more about the innovation happening in the Heartland of America at www.Rev1Ventures.com. 

Parker MacDonell serves as Managing Director of Rev1 Ventures and Managing Director of OTAF: the Ohio Tech Angel Funds. He served as a Board Member of the Angel Capital Association for 6 years and currently serves on the Boards of MentorCliq, EmployStream, Improveit!360 and RapChat. A banker and a musician by background, Parker brings deep experience and wisdom to the Rev1 portfolio and the entrepreneurial ecosystem in the Heartland of America. 

Transcript

SPEAKER_04 0:07

Welcome to the Smart Money Ventures Podcast, where we highlight active leaders in the global ecosystem of venture capital, entrepreneurship, and innovation. We give you access to insights from successful investors and entrepreneurs that most people just can't get access to. And the only reason they take our calls is because we've been in the trenches with them for decades. Hi, my name is JD Davids, and I'm your co-host for today's episode, along with Dave Burkis, Chairman Emeritus of Tech Coast Angels, and managing partner of TCA's ACE Funds 1, 2, and 3. Welcome, Dave.

SPEAKER_03 0:41

Hey, JD, let's have some fun. This is going to be one series that we're going to interview some people that are important, that have lots to tell us, and uh maybe lots to teach us. Looking forward to it.

SPEAKER_04 0:52

Today we have a very special guest that Dave and I both have a great deal of respect for. His name is Parker McDonald. He's currently managing director of Rev1 Ventures and Medaging Director of OTAF, which is the Ohio Tech Angel Funds. Welcome, Parker. Great to have you with us today.

SPEAKER_00 1:09

Well, thanks. I'm flattered to be on your uh podcast with two people that I have great respect for and uh look forward to the conversation.

SPEAKER_04 1:16

Now, that was a really nice official introduction, but uh, as you might expect, there's more to the story. Uh you see, actually, Parker McDonnell is a singer and a songwriter first, and an amazing business person second. He has a degree in music from Dartmouth, and he followed his dreams to Los Angeles, where he spent about a decade writing and performing music with some impressive names in the music industry, including Chuck Berry and Bo Diddley. And I didn't know that before I did the research. Parker, that's awesome.

SPEAKER_00 1:44

Those were the good old days when I was young and thin.

SPEAKER_03 1:47

Young and thin. Oh, I remember those days.

SPEAKER_04 1:51

That's right. Well, naturally, uh he switched ears from music and went into banking, which most people do. Um he became a uh senior vice president at Bank One and then a regional president for CF Bank. He went in, he went on to serve as a chief financial officer of two different companies. He founded Invergary Partners to help even more people build their businesses. And since then, uh Parker has been a board member of the Angel Capital Association. Uh he's currently a board member or observer at a number of companies who have been successful, mentor click, employee stream, improve at 360, and my personal favorite that we look forward to hearing more about, Rap Chat. He's also published articles on creating board of directors, uh, American Angel Investors, the perfect startup pitch, the jobs act, and how to improve your odds of building a hit company. So we are indeed uh pleased to have you with us, Parker. We're privileged and uh look forward to hearing your insights from all of that experience. Now to tell you a little bit about Rev1 Ventures. Rev1 Ventures is an investor startup studio that helps startup scale and corporates innovate. They build strong, scalable companies, and they have approximately $100 million of assets under management across multiple of their funds. They have invested in 210 companies, 55 of them were lead investments, and they've had 15 successful exit events. And so there's a lot of uh companies that have been started and funded, and certainly a lot of jobs created, and we look forward to hearing about more of those. And 2020 has not slowed down Rev1's march forward. They made 14 investments in 2020, and those companies in aggregate raised $71 million this year. So we're excited to hear more about that. So to kick off the discussion, Parker, obviously you and the Rev1 team have uh accomplished a lot. Um, we'd love to hear you reflect and elaborate a little bit more on where you've been, where you are now, and where you're sort of headed with the portfolio.

SPEAKER_00 3:59

Well, thanks, uh JD, and thanks, Dave. We um we started um we became Rev1 Ventures six years ago. Our predecessor organization, Tech Columbus, was really a membership organization for tech companies, both large and small, on the Columbus market. And oh, by the way, we had a little bit of help to give to entrepreneurs, mostly in the form of renting them low uh market office space at a 40,000 or 40,000 square foot uh incubator facility we have near the Ohio State University campus. When Tom Walker came here from Oklahoma City seven years ago, he transformed what was then Tech Columbus into REM ventures, uh, where our mission statement kind of says it all we have we help entrepreneurs turn their ideas into great companies. Uh so we really are focused very squarely on the entrepreneurs in the belief that that's the right thing to do, not only for them, but for the community and for uh for the limited partners who invest in our investment funds. Um we've come a long way since then. We've built up a pretty uh sizable capability to evaluate and make investments in companies that didn't exist at uh Tech Columbus when Tom got here uh seven years ago. Um part of what's happened during that period of time is that um the Ohio Tech Angel funds, which were founded by my great friend and mentor, John Houston, um, were moved underneath Rev1 Ventures as one of the uh several of the funds that we manage at Rev1 Ventures. So that's also an evolution uh as kind of where we've been and uh where we've gone now. So OTAF is part of Rev1 Ventures, and we've had a lot of great uh synergies and integration as a result of that move that we made five years ago.

SPEAKER_03 5:49

So, Parker, we have uh probably uh crossed uh forces many times in the past, and John Houston is a mutual friend, and certainly what he had created at the beginning has uh turned into something really special with REV 1. So uh glad to see it. I've been to Columbus, I've met you guys, obviously at the ACA as well. Uh it's a uh wonderful thing that uh you do for an awful lot of entrepreneurs.

SPEAKER_00 6:19

Well, thanks, Dave. Um I appreciate that. And when John started OTAF, it was kind of the only organized seat capital here in the central Ohio market. And I'm happy to tell you that there are other uh uh funds that have been formed here, most notably Drive Capital, which is uh which is a true VC fund. It's got the largest amount of assets under management between Chicago and and New York last time I looked. Uh so we are no longer alone. John was a real um uh real innovator in that field and got an awful lot of people in our community, 330 of them to be exact, interested in um not only helping entrepreneurs but learning more about how angel investors can do that.

SPEAKER_03 7:02

Right. Prolific as well. Wrote a lot, plot a lot.

SPEAKER_00 7:08

He did, and I'm happy to report that he's alive and well here in Columbus and uh working on all kinds of interesting projects. Right.

SPEAKER_04 7:16

And Parker, one of the things that caught my attention when I attended the Angel Capital Association meeting in Boston, um, and there was a lady next to me that I could tell just by the way she was dressed, that she was kind of like uh upper Arlington old money would be something uh that we might relate to. And uh she was telling me about how in Ohio there was this amazing matching funds program where if she invested as an angel investor, $150,000 in a company, that uh there was a public-private partnership that enabled basically matching the $150,000. Talk a little bit about how that was able to stimulate a jumpstart of innovation in what a lot of people unfortunately refer to as flyover states.

SPEAKER_00 8:07

Well, uh thanks for bringing that up, J.D. Ohio's been really lucky to have a strong public-private partnership. Um, 17 or 18 years ago, about the time that John Houston was forming the Ohio Tech Angel Funds, then Ohio Governor Bob Taft, um, director to Senator William Taft, uh, uh, and his administration took a look at what was happening with the economy in Ohio. And they said, folks, these manufacturing jobs that have left and gone overseas, um, they're they're not coming back. And we need to do something to replace those jobs. We've got an interesting heritage as an innovation economy, going back to the Wright brothers and John D. Rockefeller and Standard Oil. Uh, let's let's invest uh in the innovation economy of Ohio. So in two separate um tranches, uh the state raised about three and a half billion dollars worth of money to go into something called the Ohio Third Frontier Fund. That fund started out um doing a number of different things with that money, but pretty quickly realized that almost all of the success metrics, including job creation, were coming from two different parts of uh two different users of those funds. One was programs like Rev1 Ventures, then called Tech Columbus, who were who were essentially training entrepreneurs in a more or less formal way uh to be successful. And the other was a series of angel funds that had cropped up around Ohio, uh, one in Columbus, but others in Cleveland, Cincinnati, Dayton, Akron, and Toledo. And so the the Ohio Third Frontier Fund provided matching funds both for the operations of the incubators and for the investment funds put together by Angels. So what they said is you go find a dollar of private and public money to match our dollar of grant money, and um and we'll have a partnership. So it's worked really well. It it has accomplished what uh what Bob Taft and his team intended for it to accomplish, which is it created a lot of jobs, also created a lot of investment in the state of Ohio. Uh uh like follow per as an example, the follow-on investment that you mentioned uh that Rev1 Ventures got from our uh 14 investments this year.

SPEAKER_03 10:24

Yeah, so very few states have done that. That was really forward thinking. Uh Oklahoma did that with its own venture fund, and not many more. So as I traveled the country, I was shocked to see that Ohio was way above everybody else in public-private uh partnerships.

SPEAKER_00 10:41

Dave, I like you, I I've been surprised that um more states didn't copy our playbook. Uh of course, every state starts from a different starting point. Uh, some states have tried their own forms of this. Um Minnesota tried something, as you know, Michigan's got a little something, Indiana now has something. Nothing as broad and extensive as the Ohio Third Frontier. And uh and so you know sometimes it's better to be lucky than good. I I'm a native buckeye. I was in California for years. I was out in New England twice for undergraduate and graduate school, but I've been here most of my life and very fortunate to be able to do that.

SPEAKER_04 11:23

Good. I'm glad you mentioned that, Parker, because as I was researching your background and seeing that you went to Los Angeles and came back, and you also spent some time on the East Coast and came back. You were the original boomeranger, right? You you went to the coast. You got your education, you went to the coast, and then you eventually came back. And so uh we'll have to put you on the nomination list for the boomeranger awards.

SPEAKER_00 11:48

Be happy to be nominated.

SPEAKER_04 11:50

You know, Parker, I'm glad that you mentioned that one of the goals of Bob Taft and the entire program initially was not only to stimulate the starting of new companies, but the ultimate goal is to create sustainable high-paying jobs, uh, to replace jobs uh from what we would call typically the the older economy uh jobs. And uh one of your exits at Rev1 uh that I've had the opportunity to talk with the former CEO of that company, uh, Mayo Nexus. From what I understand, I mean, I really want to hear you tell the story of the exit, because from what I understand, it was a tech transfer success uh by a female scientist. It was a success in getting it funded and through the initial clinical trials. And what I understand, the structure of the exit actually not only guarantees that the purchased company is going to stay in the area, but that they're going to invest more. Tell us about that story because I know there's a lot of great uh benefit to everybody.

SPEAKER_00 12:51

Well, I'm glad that I'm glad you brought that up because it really does have a win-win-win win kind of uh feel to it. Uh you know, first of all, for those of us who invest in in high-growth high-tech companies, uh, you know, we typically uh invest in companies across several industries, the biggest of which are IT and life sciences. And while it's exciting to see a IT business grow and sell and help uh maybe hundreds of thousands, if not millions, of people, it's particularly uh gratifying to us when a company that helps improve or perhaps even save the lives of patients uh can go on to be a success and can whose products and can be exposed to a broader number of patients. So Myonexis is in that latter category. The the uh intellectual property for this company, which which treats um uh muscular dystrophy patients with a particular uh condition called limb girdle. Uh the IP for that was developed with one of our great partners here in Columbus, our nationwide children's hospital research institute. Uh they've really developed a focus on helping um muscular dystrophy patients through immunotherapies, and and in fact, we're building a lab now here in Columbus to help uh testing those and other products uh related to it. And and and uh diversity is really important to us here at Rev1 for a lot of reasons. Uh, one of which is that we know that diverse teams have a better chance of getting to an exit and making everybody happy. So we were really glad to work with the uh uh with the inventor of this uh intellectual property, and we're one of the things we were able to help do there was to bring in a true commercialization CEO named Mike Triplett, who you know had been there and done that before, and so he was able to take this company to an exit. So, as you mentioned, the the funding that we put into the company along with some other investors uh allowed them to accelerate pretty quickly through the clinical trial process and attracted the attention of a company called Serepta, which was a much bigger company and had a broad range of products, but nothing to attack uh or solve this particular branch of the muscular dystrophy uh disease state family. So pretty quickly after we invested, um, Sarepta came in and made a deal with the company to put some money into it to accelerate uh the clinical trials even faster, you know, in a in a fairly sizable amount of money. And that was great. But they also executed an option with the company at that time to buy the company for an undisclosed price at some time in the future. And uh the company took the money, continued to uh accelerate the clinical trials, and about a year later, Serepta exercised its option. Um, and uh so that accomplished a lot of things. First of all, great for the for the uh founder uh who created that intellectual property, great for her hospital system, Nationwide Children's Hospital, because it created more money for the uh the research institute to plow back into like kind inventions. Obviously, you know, great for those of us who were fortunate enough to invest in the company, great for our community because it allowed the company to stay here and and grow jobs. And these are really high-paying jobs, uh over twice the uh average salary of uh of an Ohio worker, uh, probably in this case more like three times uh the salary of an Ohio worker. And and and and last and certainly not least, actually, probably foremost, it it it's a technology that's really helped improve the lives of some muscular dystry patients. So um, so yeah, we we all feel very grateful to have been part of this one and uh happy to answer any questions that I'm allowed to answer.

SPEAKER_03 16:46

Oh there's a great example of doing well by doing good. How about impact investing for one?

SPEAKER_00 16:52

We well, if you if you define impact investing as investing in companies that are either not for profits or are not designed to get to an exit within five to seven years, their answer is we have not participated in that. We've trained some entrepreneurs, Dave, through our startup studio uh who go on to start um impact type companies. We have not chosen to invest in those. That would require a specialized fund whose limited partners understood what the economic returns would be and that they'd be different than the venture type returns that that we are uh offering for uh the investors in in our current funds.

SPEAKER_03 17:32

Great answer. Thanks.

SPEAKER_00 17:33

Thank you.

SPEAKER_04 17:34

So that being the case, Parker, tell us a little bit about what the path forward looks like, both short-term and long term for WebRun ventures. Um, you've already had some successful exits, that's excellent. It puts a more fuel in the tank for everybody, it uh energizes the uh the community, uh, it matures the community. What does the path forward look like?

SPEAKER_00 17:57

The path forward is for us to continue to improve our startup studio process, which is an important part of what we do for entrepreneurs in the community. Um, and uh uh there are a lot of great things about our CEO, Tom Walker, one of which is that he's got a background as an aeronautical engineer. So he is constantly uh doing two things. He's looking at our processes as they exist today, and like a good CEO, he's also looking two or three years out in the future. And so Tom is thinking about the a future that has us uh continuing to raise uh investment funds that are increasingly larger, uh, as we do well for the limited partners in our current and and prior funds. And we think it's likely that they'll come back and not only invest again, but invest more than they have in the past. Um and we're we're also trying to stay ahead of the uh of the curve in terms of helping to attract diverse entrepreneurs who build diverse teams, because uh if you look at any study of demographic trends in this country, that's really as Wayne Gretzky used to say, where the puck is headed. Um and and so that I think that two or three years from now you'll see our diversity statistics, which are already top quartile or maybe decile in the country, are gonna get even better. I think everybody's will get better. I think ours will get better at maybe even an accelerated pace. Um so that that's where we're going. More more more services for entrepreneurs who want to turn ideas into companies, some of whom we'll invest in, most of whom we won't, and more money to invest in the companies that fit the uh investment criteria that we and our limited partners are interested in.

SPEAKER_03 19:43

Who makes the decisions as far as REV1's investment?

SPEAKER_00 19:48

Um it depends on the fund. Uh, Dave, we manage a series of funds. So we've got um an insure tech fund that we manage for our partners at State Auto Insurance Company here in town, as the name of their company implies. They they do a lot of property and casualty insurance. And uh in that case, the investment committee consists of the senior managers of the company, and we are recommending, we're finding deals, creating diligence, making recommendations. We're also a limited partner in the fund, and the way that they wanted to do it was to have their senior management make the investment decisions. In other cases, um, we have um uh decisions made by a board investment committee of Rev1 Ventures. Um, we've got a very strong and experienced group of uh uh directors, um, some of whom have direct experience in private investing and banking and running companies and being moving from being CFO of a four billion dollar company to CEO, that that that type of background. So, in many cases, above a certain aggregate investment in a company, the decisions are being made by the board investment committee.

SPEAKER_03 20:57

How many members?

SPEAKER_00 20:58

Uh four or five. I think we have five on the on the board investment committee. Perfect size. Perfect size, and and and then and then in some cases, the uh the you know, this the senior management, executive management of Rev1 uh are empowered to make investment decisions uh again, depending on the fund and the and the limited partners that exist in that fund.

SPEAKER_03 21:20

And what does this mean as far as the uh former Ohio Tech Angels as a social group now or as limited partners? How do they meet?

SPEAKER_00 21:28

Glad you asked. The Ohio Tech Angel funds uh consist of five funds, each raised about three years apart. Our most recent fund, OTAF five, uh, was fully invested earlier this year. Last year we decided not to offer OTAF six at this time. We we may do that in the future. Uh, what we do to keep our angels uh involved in our ecosystem is offer them the opportunity to co invest alongside Rev1's funds in the deals that we're either leading or participating in. And we've had Very active co-investment activity. Our angels, uh many of whom are members of one or more of the OTEF funds, have been very interested in continuing to do that.

SPEAKER_03 22:10

There is a parallel, and that's why I asked. Tech Coast Angels is now up to 650 members. I'm a former chairman and one of the first members of it. And uh it's true, I still manage the first three funds, the equivalent of your first uh OTEF funds. But now each of the uh three major networks within TCA have formed their own funds, chapter funds. It's interesting to see the evolution that uh very few of us now invest in pre-revenue companies, and most of us invest at that point. And what you're doing right now is helping to incubate some of those companies to get them to revenue, which is one step beyond what we see in many of the other angel groups.

SPEAKER_00 22:51

Well, thank you. And um, Rev1 Ventures has been fortunate to be able to invest in pre-revenue companies. It's a pretty integral part of our business model here, um, and a good uh source of deal flow for our seed and later funds. OTAF invested in a few of those deals, but not many. Our angels primarily prefer to invest once the company's got the product in the marketplace and some revenue, or is further down, if it's a life sciences company, it's further down the uh clinical approval uh path. We're lucky that Rev1 has these resources, many of which come from the public-private partnership that we discussed earlier. Uh, and uh we we've I think made good use of those for um for a lot of different stakeholders in the community.

SPEAKER_03 23:38

I'm glad you said that. It turns out that angel groups have become uh more risk-averse. They've invested in far fewer early stage deals before the revenue stage than they did 10 years ago. And so uh what you're doing right now is, I think, more important now than it might have been 10 years ago for that reason.

SPEAKER_00 23:56

I think you're right. And we and we do provide a home base for those relatively smaller number of angels who understand the the rewards of taking the risk of getting in earlier. And we've I've got some friends from OTAF who've done really well by picking a couple of early stage companies and helping them. Um, and they've now, you know, these companies have gone on to get to receive Series A funding and um you know, no guarantees that they're gonna get to the exit, but certainly a lot more probability that they will than when they got started.

SPEAKER_03 24:31

Doesn't that bring us to the subject of you and board service and how you specifically as an individual are helping some of these companies?

SPEAKER_00 24:39

Well, yes, I I I'm I'm honored to serve on the boards of some of our companies. That's really part of my job at Rev1 Ventures. And uh and so what what I was taught by you and and uh Dave and John Houston and other um friends and mentors from ACA was that as a director, I've really got three primary duties. Uh one of which is to always evaluate the uh performance of the CEO of the company and suggest changes or make changes if necessary. Number two is to make sure the company never ever runs out of money, which of course works some of the time, but not all the time. Uh and last but certainly not least, it's to uh make sure that we're running the growing the company with with at least uh two outcomes in mind. One one is growth of customers and revenues or growth in the value of the intellectual property if it's a life sciences business, but but also we're we're growing this company for the eventual buyer of the company. So we must always be thinking about that. Uh not easy to do, particularly at the in the earlier stages of a company, but as you start to gather Series A funding and you're really thinking about how how far you want to take this idea, then then being a director and keeping the your colleagues focused on the exit is uh you know it's pretty important.

SPEAKER_04 25:59

Well, and as as we watch the time to exit expand, the topic of syndication becomes, I believe, even more important. Of course, the potential opportunities for recapitalizations under secondaries where early investors could potentially get out uh as the company goes through later stages, but both pathways require uh much more syndication today than they used to in the past. Uh, tell us a little bit about your experience with syndication. Have we made progress? Is there still more work to be done?

SPEAKER_00 26:33

Well, uh great question. Syndication was relatively easy for us in in recent years because uh of one factor, and it's back to the public-private partnership with with Ohio. We uh first of all, that partnership created a number of funds around Ohio that were investing in companies from their particular part of the geographical part of the state. And all of us were basically restricted to only investing in in Ohio-based companies because we had that public money. And and as the state of Ohio would say, look, folks, we're trying to grow Ohio jobs, not jobs outside the state. So for a period of time, you know, our our syndication was primarily with um, at least up through the seed stage, was with the other funds in Ohio, the series of angel funds, and then our colleagues uh in the uh startup studio, investor startup studio world, uh particularly in Cleveland, Cincinnati. And we we were syndicating our deals to them and and they they to us, and that was pretty simple. Now, we've always worked to try to attract uh uh VC capital. Uh there's some of it in Ohio, more now than there used to be, but we we spent a fair amount of time trying to attract VC capital from from outside of Ohio. And we we did have some examples of VCs from outside of Ohio who came in and said, Well, we'll take this one now, folks. We'll we'll we'll become the investor. But critical, obviously, we uh to to have co-investors not just on that first round, but to have enough money around the table, so to speak, so as the company grows and needs more, the the company is not starting from zero every time.

SPEAKER_03 28:10

That's another good question. How much of your fund do you reserve as firepower for second and subsequent rounds?

SPEAKER_00 28:17

Depends on the fund. Um, the the the theory with the OTAF funds was that we reserved um uh uh we basically invested 66 percent of the in um of the uh investable assets of a fund in first-time investments and 33 percent of it in follow-on investments, which sort of meant that we we could on average in make a follow-on investment about half of the companies in which we initially invested. Uh slightly different um approach to that with some of the other funds that Red One Ventures manages, but unlike the much bigger uh VC funds, you know, who who I understand reserve uh one and a half to two times the amount of their original investment for every company they invest in. You know, we our funds are not that big, and we we have to be more selective on our follow-on investing than they are.

SPEAKER_03 29:09

Completely understand and agree. It's a difficult process to figure out when you want to double down.

SPEAKER_00 29:16

Yes, it's not an exact science, that's for sure. Although I you all you both know because you've done this enough, that it becomes fairly clear uh pretty soon after you make your first investment which companies are actually taking that money and doing something to grow their business and and which ones are still struggling. And and the ones that struggle do so primarily because of the lack of a product market fit. We try really hard to solve for that up front. And if we were perfect at it, then you know I'd be flying to Los Angeles to be on this podcast with you in the Rev1 jet, but we're we're we're not we're not uh 100% special. So uh what? No Rev1 jet? That'd be a little tough for a nonprofit organization like Rev1, but we can be yeah.

SPEAKER_04 30:04

Well, you know, the syndication piece also brings up another topic, which is uh I root I refer to it broadly as the capital stack. For example, 10 years ago, the primary resources available or your, you know, where you would source your capital would be the traditional VCs or the angel funds, and maybe a little bit of corporate. I think the potential resources that an entrepreneur can use, uh both dilutive and non-dilutive, are much more broad. For example, you can do uh crowdfunding in three different ways. You do the product crowdfunding, which is essentially customer prepayments, which is a double win. Um, but then within the equity crowdfunding from the Jobs Act, as you know, um Title II is the accredited investors, Title III is the unaccredited investors. But then uh in the Midwest, we've even seen a lot more non-dilutive funding available from federal research organizations, not just the NIH and the science-based organizations, but the Department of Defense in a number of its areas. Ohio is host to the Air Force Research Lab, which manages, I don't know the exact number, but it's it's a big number of money that they are putting into grants that are non-dilutive. And then they also, AFWorks, which is the Air Force uh incubator, actually helps introduce the companies that have been awarded, like we have one here in the Delaware Entrepreneur Center. They basically bring potential customers to them. Um, and so talk a little bit about what you've seen, Parker, in terms of different sort of non-traditional sources of either capital or resources. And has that had the intended effect of de-risking the business and getting you closer to customers?

SPEAKER_00 31:50

Well, you you really cover the waterfront pretty extensively. There's one thing that I would add into what you mentioned the array of um products that are available to entrepreneurs. Um, if you have a uh an IT business that has recurring revenue, there are now a number of specially lending entities that will lend you some multiple of your monthly um recurring revenue. Uh pretty good deal for them uh for a bunch of reasons and and and relatively cheap money for you as an entrepreneur, cheaper than than selling equity for sure. Uh so if your goal is to grow the company but own as much of it as possible on the the day when that wire transfer hits your checking account, then the more non-dilutive capital you can access, the better. Uh, but those are a couple of important sources. The last thing um you know, I would say is that the these uh uh portals, the angel investment portals that have become popular over the last few years uh sound great. We we haven't seen many of our companies be able to take advantage of them. I don't know whether that's because the they're more geared towards companies that are on both coasts, or whether uh we Midwesterners are a little bit more wary of what we call stranger danger. That is, have a number of people on our cap tables that we've never met before and probably never will. Um so I'd just add those couple things that that have worked um and a couple things that we've tried and or or that just haven't really caught fire here in our part of the country.

SPEAKER_04 33:21

Well, you know, certainly getting the resource stack or the capital stack right is a test of the leadership of the CEO of the company. And uh to talk about more current trends, um, obviously COVID uh and all the uh things that have come along with it have produced what what Dave and I call a leadership stress test. And uh it has brought with it a host of challenges. In fact, Dave and I co-hosted a program where we talked about uh navigating through the storm of COVID. I mean, we jumped on that in March or April, I think it was. We would love to hear some of the experiences and examples of what you've seen, both good and bad. You know, what did we learn? What did we do, right? What would we do differently next time when it comes to you know a black swan event like COVID?

SPEAKER_00 34:05

Well, thanks. I'm glad you brought this up because it's really should be foremost in everybody's minds right now, uh, starting with the with the public health risks that we're all facing. So, like the two of you may have, uh when this when I realized the uh impact of COVID-19 on our economy and our nation, I was uh worried that uh like a forest fire does, a number of our a number uh of our companies would go out of business pretty quickly as a result of this. Uh I'm happy to tell you that if not the opposite impact, and pretty close the opposite impact has happened. Uh, and that's because something like 85% of our portfolio companies uh applied for and were granted uh what are known as the PPP loans, paycheck protection program loans. And and that's you know, for those companies that were able to uh use those primarily to continue to keep people employed, it's been a godsend. It's been like another form of non-dilutive capital. Now, many of them are still waiting to find out how much of the loan balances will be forgiven. But that that's been a very uh very positive situation. It's also the case that another economic development organization in the state of Ohio, which is known as Jobs Ohio, uh, any questions about what they do, folks? Uh um they decided to put some of their economic development money into our asset class for the very first time. They came to those of us around the state who do what we do at RAID one and said, uh, we want to put a little bit of extra money into your very best companies uh to make sure that they don't get uh uh demolished by this COVID crisis. So so that was uh a nice thing to have happen. Um I'll take it down to the micro level. I mean, we saw uh portfolio company CEOs react in a pretty wide range of uh ways. Uh one of them, one of our strongest companies, uh got a uh uh had just raised a series A in the not too distant past. Uh and that CEO decided to use this as an opportunity to actually trim jobs rather than add jobs, which is really part of uh of the CEO's uh call to action with the with the series A money, that you know, add jobs you know, primarily to promote revenue growth. And so he did a really nice job of handling that whole situation. I thought showed showed a great leadership. Um another portfolio company who whose business model got completely demolished because it was a ride sharing, a form of a ride sharing, a shared ride uh software, and they they actually were leasing vehicles and and employing uh drivers on a W-2 basis. That company that that company has completely pivoted to being nothing but a software company, uh, which is kind of what I was hoping they would do all along, a lot a lot less capital intensive. And and that was the that was the first company that I thought might get wiped out by this forest fire. And uh and they've taken this opportunity to to refocus and pivot. So great leadership on the part of that person. Then I'll I'll give you one other example. One of our uh companies got an offer to be purchased about two months before before things really started uh uh appearing to be bad with COVID-19. The deal, the negotiated deal was put on hold as a lot of deals were. The CEO of that company was able to get back with the buyer and and renegotiate the deal uh in a in a form that in some ways was better for us as investors than the initial deal that was uh and and and that and that deal closed in June, uh, you know, right in the heart of COVID. Was it our very best exit? No, it was not. But our our the CEO of that company had great help from two board members who are both avid angel investors, one OTAF member and one uh member of Queen City Angels down in Cincinnati. So um so those are a couple examples of what's happened to our companies during COVID.

SPEAKER_03 38:11

And that's good to hear. And in my uh experience, most every company has pivoted in one way or another. But I think that uh we all ought to be a little aware and wary of the fact that if there isn't another PPP, that uh probably in the middle of 2021, we're going to see some uh early deaths of some of these young companies that were fragile.

SPEAKER_00 38:35

I think that's right. I I I believe, and now we're about to start talking politics, which is always a dangerous thing to do in private, much less in public. Um, I believe that there'll be some form of stimulus package that will be released. Will it be as beneficent as the PPP or the CARES Act? Probably not. Um, will it have money like the PPP loan money? Uh that that uh that cost of money, so to speak, probably not. Um but we have to count on the fact that the that there's a lot of pent-up demand in the consumer economy that'll get released once the vaccines are become distributed and people feel safe about going out and spending money again. And and every prudent company, every company whose board I sit on is planning for a downturn in revenues in 2021 because we just don't know that any of that's really going to come true. The stimulus, the vaccine, and resume consumer confidence.

SPEAKER_03 39:29

I understand. Many of the online companies are doing the opposite, and so uh it is really a division of the economy.

SPEAKER_00 39:36

It is.

SPEAKER_04 39:38

There's a thread that kind of weaves through everything that we've talked about here, and that is that it's important to get people in your deal that are bringing more than just cash to the table. Parker, you just cited an example where one of the angels from Queen City Angels jumped in and was able to sit next to that CEO to help guide them through what was probably something they'd never navigated before. Obviously, this particular entrepreneur was very opportunistic, which good entrepreneurs are. But at the same time, if you've never been to the Super Bowl before, you might want to talk to somebody that has probably negotiating the largest uh transaction in their life, certainly larger than their house, and they may do bigger deals later on. But if it's kind of your first at-bat with a large figure transaction, a lot of people's jobs and investors, and you know, there's a lot at stake. And that's been the thesis of smart money ventures overall is that don't just get money, get smart money. People that bring more than just cash to the table. You can get a $100,000 check from a ruana, a lot of different early stage potential investors. But $100,000 from a person that can help you negotiate an acquisition and close it in the middle of COVID, you can't buy that. That's worth twice the money, right? And and you weaved it also into the conversation about being able to get the right investors into the yield. Talk about how important it is for younger entrepreneurs to understand that it's not just the money, it matters who it comes from.

SPEAKER_00 41:13

Well, um, we uh we have a series of what we call learning labs for our companies in our startup studio. One of those, not surprisingly, is a capital access learning lab. And we we talk a lot about how important it is to pick your investors wisely. First of all, for the reason you just mentioned, JD, because if you go looking for people who want to help you and actually have the ability to do that in ways beyond writing checks, then you can certainly find them. They they are out there. Uh, in fact, I'm I'm constantly amazed and gratified when somebody calls me and says, I'm ready to help, put me in, coach. It's also true that if you're an entrepreneur, you're going to be in business with these people for a long time. And in Dave's case, the average uh time to exit is 11 years, successful exit, which means in some cases, people have gotten the benefit of Dave on their cap table for more than 11 years, and some of them must. That's not a median number, I know, Dave. But and and and it and for every Dave Burkus who can help in in a lot of ways, there there may be somebody else out there who didn't quite understand that not only were they not going to get their money back for 11 years, but but thought that somehow they could take their stock and sell it to some other investor in the company. They didn't understand just how illiquid these investments are. And so it's tempting to take money from somebody who might appear to be a little bit inexperienced, even naive. Um, that typically does not pay off in the long term for investors that have told me uh some of their tales of woe.

SPEAKER_03 42:44

Completely agree.

SPEAKER_04 42:46

So let's talk a little bit about deals in the heartland. I just moved back from California about a year ago and have been watching with great interest uh what's been happening. And and uh when Mark Kwame moved back and set up in central Ohio and started drive capital, and and certainly uh Revolution, the Rise of the Rest bus tour. Uh, that certainly got my attention. And and some recent uh there's unicorns in the heartland, shockingly. Um, and uh and for a long time, the Midwest and the Heartland have suffered from this label of being flyover states. But I think that Steve Case and Revolution and the team there, uh Drive Capital and a variety of other people, including Dave, has talked about the attractiveness of investment opportunities in the Heartland. And we would love to hear you unpack your observations on uh that there is actually uh opportunity.

SPEAKER_00 43:40

Well, thanks. I mean, I'm I'm proud to be uh uh a capitalist. Uh I don't think that's a bad word. I think uh it's it's a very positive thing for a lot of people. And and and I love being part of a market economy, uh, which investing certainly is. And so we've seen that over the years a high percentage of uh VC. And even angel money invested as happened in two or three pretty concentrated geographies in Northern California, now Southern California is really creeping up in the day. Great to see. And uh Boston, New York, places like that. Um, Austin has been a hotbed. And so people like Mark Kame saw the opportunity. They saw underserved markets. And I don't know, I can't tell Mark's story for him, but I can paraphrase it. He saw a tremendous percentage of the manufacturing economy of the United States happening in the Midwest. He also saw that there were a lot of big universities and private colleges that were turning out highly qualified graduates who in the main wanted to stay in the Midwest and make their careers there. And he saw that because the cost of living was was lower here in the Midwest, that a person who wanted to start a company could probably not only exist on less capital and therefore have more of the company when she sold it, could uh be closer to potential customers. So uh so Mark, who came here to actually to privatize economic development for the state of Ohio, he created that entity I mentioned earlier called Jobs Ohio. I mean, he he saw that opportunity, and when he did what he promised our governor he was going to do to privatize economic development, he said, gee, I think I'm gonna stay here in Columbus because I see this opportunity. Uh, was able to raise money from the coast with the promise that uh there'd be great opportunities here. And I, you know, again, I can't tell Mark's story for him, but one of their portfolio companies just had an IPO less than a month ago and initially went out at a seven million dollar, seven billion dollar valuations. So that was great validation for his theory. And and might might dare I say that there's some other ones probably to follow. Um, can't tell you that I know which ones, but I think there'll be others behind that.

SPEAKER_03 45:51

So you know that's interesting because it's kind of a game like gambling. In my case, it's uh three percent of all of my investments make 90% of all of my wealth. And you're saying that uh as if that one and maybe one to follow would justify the entire fund.

SPEAKER_00 46:08

Well, that's certainly true, Dave. We we are in a hits business, and uh you know, those of us who who've been in it for a while recognize that and try to play to that um aspect of it. Other people may not realize that and may think if I only make two or three investments, surely one of them is gonna come in. And uh as we know, it takes a few more than that for the law of large numbers to work for you. Um but yeah, it's it's it's worked out well for him. Uh I I haven't done the math yet. I can't imagine that that there that drive capital's investment in in route insurance won't more than return the fund just with the one investment. And so that that creates all kinds of opportunities for us. We it's created a series of people who are now millionaires who and will have liquidity um eventually after the six-month holding period, and and and it it inspires other people here to maybe leave their their day jobs and turn their their night and weekend job into their primary job. And that that's that's how you grow an innovation economy.

SPEAKER_03 47:10

Yes, the baby puppy effect. The big dog finally has enough puppies that uh those puppies turn into big dogs themselves, and we've seen that in many areas of the country.

SPEAKER_00 47:21

I love that. That's a great metaphor.

SPEAKER_04 47:24

Yeah, they some so some people refer to it as growing a venture forest, right? And and if you have one tree that's big enough, um in San Diego, you know, Qualcomm was the quintessential, you know, it started as Linkabit, you know, multi-billion dollar company. I mean, the number of people that are driving around in a really nice Mercedes with a license plate that says thanks, Qualcomm, um, is all over the place. And if you did a diagram of all the people that did well at Qualcomm and then started their own companies, and then they tell two friends, it really creates not just a wealth effect. It's not even about that. It's about creating a bunch of really high-paying jobs that stimulates more and the rising tide lifts all boats. And I think that's that's great to see that happening in the Midwest. And because it's a little bit delayed in timeline from what has been happening on the coasts, that's actually a good thing because you can leverage the lessons learned and some of the problems with hyper concentration, which is a whole different thing to talk about. And I don't want to divert in that direction too much unless you had a comment, Dave.

SPEAKER_03 48:28

Just to think that uh in the coasts, the average pre-money valuation has gotten that looks like we're talking about having to invest in eight to ten million dollar free monies in early stage. And I am happy when I find one and a half to two million dollar free monies in the flyover states. And some of those great companies that are coming from places like Ohio at those kinds of valuations. If you think of an exit at 40 to 50 million, which there have been books button about that being a great average, if you're at a one and a half to two million free, you'd be very happy compared to having to go to Northern California to buy into a 10 million free and have to worry about a hundred million to 200 million dollar exit to make that same amount of money as an individual.

SPEAKER_00 49:11

Well, JD, I want to uh touch on something here that's an important part of a model at Rev1 Ventures. When you think about the success of Silicon Valley, um part of it is that many of the companies that get started out there get bought by larger companies that are also located in the valley. Right. And that's really what we're looking to try to do here in Columbus. Um, we have developed some wonderful partnerships with the very best of the Fortune 500 companies here in Columbus. And they serve on our board of directors, they contribute to our nonprofit entity, they become limited partners in our funds. And over the last couple of years, we've really focused the time and resources from Rev1 Ventures on going to those companies and other corporations in Columbus and saying, we want to help you with your innovation programs. We don't want to start and run your innovation programs. That's not we do. But to the extent that you want to understand what's happening in the world of startup companies that might either help you or more likely disrupt you, we we can help you with that. We can introduce you to some startups. And we do that really in service of our startups because it's gonna help them as much or more than it's gonna help the large corporate entities here. And and and we'll know that that we've really succeeded um in becoming less of a flyover state, so to speak, when the larger companies in Columbus really start to buy the innovation companies that they have helped in part to create. So corporate innovation and working with corporates is uh an increasing focus of ours here at Rev1.

SPEAKER_03 50:43

Great definition of a good ecosystem and the building stage. Nice to hear.

SPEAKER_04 50:48

I completely agree. And I think it's great. Uh, you know, I've always been a firm believer that a rising tide lifts all boats. And that applies not just to revenue or capital, but experience, knowledge, relationships. No company or industry exists in isolation or is in its own little closed loop ecosystem. And I think it is important for the larger corporations with the more quote unquote stable revenue streams and slower growth, many of them actually have good reason to be scared of potential disruption. And so there's an educational aspect for both sides to better understand, okay, well, you know, how do you get recurring revenues that last for 50 years like that and you can manage the company? And how do you also not get your clock cleaned by a new software company that comes in and basically cuts the labor portion out by 90% of your cost? I think that kind of collaboration is important because, you know, I think it Dave can attest to this as well, that educating the different constituents in an innovation ecosystem, including uh job development and workforce development, it's important to have all of those uh ingredients together. Would you agree, Dave?

SPEAKER_03 52:05

Absolutely. Well, you know, Parker, we rang your doorbell a while ago. And I guess the question is, do you have any final thoughts for us?

SPEAKER_00 52:13

No, I think um, you know, what I'd stress is that the the if to the extent that people want to try to um learn from from the Red One model, I mean, I I stress a couple things. First of all, I think our focus on the entrepreneur is is paramount. It's it's really what gets me up out of bed every morning. You know, I've I it's maybe a cliche to say this, but I'm doing this because I really want to, not because I have to. Uh now I have to feel like I'm doing something useful for society. And getting up and working for the entrepreneurs every day is great. I think I think uh focusing on increasing diversity is really important to anybody who's uh who's listening in. And and last but not least, the the the more you can help out your the corporate partners in your ecosystem, the more they will help your startups and therefore you know increase your probability of success as an investor or an entrepreneur. Good summary.

SPEAKER_04 53:04

Thank you very much, Parker. I uh I really appreciate you joining us today. Thank you for your insights. If people want to learn more about Rev1, where do they go?

SPEAKER_00 53:13

Be happy to have you look at our website, which is uh RevONVentures.com. And the number one is actually a numeral one, not O N E, uh Rev1ventures.com. And uh on that webpage, you'll if you want to contact me, you'll you'll be able to dig into the staff section of the website and figure out a way to contact me. So happy to help out, answer any questions you might have or further elucidate well some of the things we've talked about.

SPEAKER_04 53:40

Sounds great. Glad to have you, Parker. Dave, thank you for co-hosting with me today.

SPEAKER_03 53:45

It's a lot of fun. Let's just do this again sometime soon.

SPEAKER_04 53:48

Absolutely. Sounds good. Well, that's a wrap for this episode of the Smart Money Ventures Podcast. Our guest today has been Parker McDonnell of Rev1 Ventures with my co-host Dave Burkus. We're going to sign off for now, and we hope to see you on our next episode of the Smart Money Ventures Podcast.

SPEAKER_03 54:04

Bye, everybody.

SPEAKER_04 54:13

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