Jonathon Triest, Founder and Managing Partner at Ludlow Ventures, had been working with startups well before he started investing in them. After
graduating Michigan University, Jonathon worked with entrepreneurs as a designer. In the face of better designers and lower price of design, he realized that if he wanted to continue working with startups he would have to find a different way to do it. So, in 2009, he raised his first seed fund and has been investing in startups ever since.
Jonathon talked to us about the venture industry as a whole, what he looks for in startups and the difference between coastal ecosystems and Midwest ecosystems.
Cintrifuse: Will you tell me a little about your background?
Jonathon Triest: I don’t know how far back you want to go. In elementary school I was a magician.
CF: Can you still do magic?
JT: Oh yeah. It’s a nerdy hobby, few people know this about me and now I’m opening up to you after I just met you.
CF: Can I ask you some questions about magic then?
JT: Go for it.
CF: Who’s your favorite magician?
JT: That’s a good question. I probably saw David Copperfield 15 times. It was my birthday present every year, to go see him, but I like close-up, sleight of hand magic more. I used to have a lot of fun doing it. I lost a lot of interest after my early teen years.
Now, I have three kids so it’s a hobby that’s super fun with them. Kids are sponges, they pick up everything so quickly. They’re limited by the size of their hands but my daughter can do false cuts now. I can’t even do those.
But more recently, I went to the University of Michigan and got involved in the design community, specifically working to help design and implement mostly front end work for tech startups. I fell in love with working with these startups.
The energy and the possibility of doing anything, at least conceptually, was exciting to me and there’s a certain amount of mischief in the community that I thought was fun too. I worked with these companies for a while and then there came a point when I realized that my design work was far inferior to a lot of designers that were coming up in the community.
So my design was weak in comparison and I was charging more because the price of design dropped substantially at that time. I had to make a choice real quick. If I wanted to continue working with these companies it was going to have to be at a different capacity than as a designer.
I kind of had this mad scramble to figure out what I could possibly do to maintain these relationships in the ecosystem. I didn’t have the skills to be a founder – to be a founder you have to juggle so many things at once. It’s a logistical nightmare and that’s probably my weakest skill set, logistics and managing many things at once. So that quickly got taken off the table. I’m not a developer or an engineer so that quickly got taken off the table. I’m too honest to be a good salesman so that quickly got taken off the table. One glaring thing was left and that was the only way I could continue to work with these companies. That was to invest in them. With a slight caveat of I had no idea how to invest.
I didn’t know the first thing about investing in private markets. I didn’t know the first thing about who does what in the ecosystem. I didn’t know how seed funding works I didn’t even know what seed funding was but I knew I wanted to do it.
In 2009 I scraped together a very small amount of capital from primarily friends and family who were either trying to get me to stop bothering them or naïve enough to think I knew what I was doing. So I started investing in tech companies in 2009 and I haven’t looked back since.
CF: Is that when you started Ludlow Ventures?
JT: Yes, we ended up putting about $1 million into the marketplace. At the time, there was far fewer seed investors. We were making really small bets and the goal was to understand what it meant to be a seed investor. I spent a giant chunk of the time investing in companies but really trying to build relationships with veteran venture capitalists. People who knew one billion times more than I knew and had been doing it since I was in diapers.
Most of those people were not very interested in talking to me and really I didn’t have anything to offer them so I can’t blame them. A few, however, became big mentors to me and started teaching me what it meant to be a venture capitalist. What to look for in deals but, I think more importantly, they plugged me into their deal flow and gave me a chance to test the waters.
That was 2009 and in 2013 we had a little bit more of a track record so we raised our first traditional fund of $15.5 million and invested in about 52 companies all across the country. We just launched our new fund which we are now currently raising for.
CF: Does Ludlow have a particular investment thesis or strategy? What do you look for when you go looking for companies to invest in?
JT: At the early stage there’s not a whole lot of data. You have to look at other things. Obviously, the lowest hanging fruit are the things you look at first to be competent. Is this a product that people really want/need? Is there a big market and will people or companies pay for something like this eventually?
Once you get that out of the way, then it becomes more can you really come up with a repeatable system to identify founders who you think are exceptional? Everybody I meet is more impressive than myself, everybody. The question then is who is the most impressive from that bunch of people?
We’ve narrowed it down to a litmus test which is, can we see an individual we’re potentially investing in captivating an audience and telling the story really, really well. So much so, that when they’re done talking two things have to happen. Either everyone in the audience needs to want to work for them or buy from them. Or they just have an ability to make other people excited and passionate about what he or she is working on. That’s our test.
That person could need ten years of experience plus coaching to get to that point but if we can see them in that scenario, that’s potentially a founder we’d be interested in.
CF: How have you seen the Midwest ecosystem evolve from when you started investing to now?
JT: The whole ecosystem in every geographic region has changed dramatically since 2009. I imagine people doing this well before me know a couple of things are true across the board.
It’s never been less expensive to start a company, infrastructuraly speaking, than now. Geography has become a little less relevant. Also, the amount of capital out there to acquire companies is larger than ever. There are certain other things that contribute to this market that makes it difficult to liquidate but we’ll talk at a higher level. What would take someone tens or hundreds of thousands of dollars maybe millions of dollars as recently as 12-15 years ago to start a company now takes 150 dollars and a computer and a basement.
Again, across the board, it’s easier to start a company and more companies are getting funded now. Specifically around the Midwest, I think that the biggest shift is coastal investors who have traditionally been the biggest and best investors in the country have shied away from investing in regions that they weren’t very close to geographically. Sometimes that makes sense. They want to be more hands-on and geography is an issue for that.
But, as we see more and more interesting companies spin out of the Midwest, spin out of the South, spin out of the less dense areas of the East, I think you’ll find coastal investors shifting and opening up towards these companies they wouldn’t have looked at in the past.
That’s a big deal because technologies are bringing them closer together. You can have a video conversation with someone, it’s not necessarily as good as being next to someone, but it’s still really good. I also think you can find some real value investments in the non-coastal regions.
Right now we have these ecosystems on the coasts that drive up the price of companies and it doesn’t trickle to other regions. This makes Midwest companies much more grounded. They have more realistic valuations.
The biggest thing is you can operate a company for less capital and you can do it remotely. In years past, it was much more difficult.
CF: Are there specific verticals you think Midwestern ecosystems should focus on?
JT: I’m from Detroit. So, if we look specifically at Detroit, I think the notion of making it the next Silicon Valley is silly. It wouldn’t be a good use of time or resources. Silicon Valley is an anomaly and it’s strange what’s happened there.
But Detroit has some core industries we can take advantage of to build the next enormous business. We have fantastic manufacturing processes in place, we have a really strong and intelligent workforce that wants to stay in Michigan. The right people who are building real businesses, specifically in our region, are people who know what our strengths are and leverage those strengths. Versus trying to build something from nothing. There are some really cool opportunities for companies here.
We have a portfolio company out West that would benefit from a centralized distribution hub like Detroit. It would also be cheaper for them to manufacture their product in the Midwest as opposed to the West Coast.
That’s a company that we should be going after versus an all tech consumer play where you need tons of early adopter buy-in. I think it would be a waste of energy to have that built here.
Overall, we need to focus on the core industries that we have and leverage the heck out of them.
CF: Why is Cincinnati interesting to you?
JT: Honestly, I don’t know enough about Cincy to have an intelligent answer. Ludlow is very opportunistically driven. We’re going to find a way to work with companies that excite us. Geography is not important to us but it happens to be that a lot of the impressive things we’re seeing are on the coast.
That said, one of the best preforming portfolio companies we have right now is in Omaha, Nebraska. Everyone overlooked them, no one wanted to fund them. They saw Omaha and thought it couldn’t be that interesting of a company. Meanwhile, they’re one of the best company we have. So I think it’s up to investors in general to realize that great companies can blow up anywhere.
It’s really short sighted for investors to ignore places like Cincinnati or places like Detroit or places like Omaha. If you want to be relevant as an investor you have to be open to investing in these areas. There are some really talented people here. People who don’t want to leave their families, who recognize how wonderful a place it is to raise a family and how great the cost of living is. These are very important things.
CF: Is there a difference in mentality between the entrepreneurs you meet with in the Midwest as opposed to the entrepreneurs you meet on the coasts?
JT: Not always, you’ll find exceptions to the rules, but I tend to think that the environment out West and East right now fosters larger thinking. There’s a mentality that you can do anything no matter what and no one is going to hold you back. The idea of think big and create enormous things and solve big problems is pervasive. That feeds into an entrepreneur’s psyche and they feel like they can build those things.
One of the things that’s holding back some Midwest cities in particular is that that message hasn’t trickled down to the founders. They’re creating more traditional, brick-and-mortar businesses. There is a mentality that if it hasn’t been done, then you shouldn’t tinker. The Midwest is way more risk adverse and that really has an effect on someone building a business. We need to convince entrepreneurs outside the coast that they should be building enormous things and solving enormous problems.
That’s the message being driven home out West.
CF: How would you go about communicating that message to the entrepreneurs?
JT: Take out an ad in the Yellow Pages? Does that still exist?
CF: Physically and digitally I think.
JT: Really? There is a building in Detroit that used to be an old Yellow Pages building. It’s huge and had a big yellow sign. Now it’s nothing.
Anyway, it will eventually get here. The tech community, in general, is becoming a nice, cohesive community. You certainly have pockets but there is a broader community where every technologist engineer and project manager all feel like they’re a part of this thing. The more exposure they get to some of these people solving big problems out West, they will start thinking that way as well.
Also, some of the responsibility falls on the mentors and the business men and women here in the Midwest to encourage people to think big and go big and take risks.
I don’t have a perfect answer in terms of other ways to really getting that message across. Maybe paint it across the sky? Probably more effective than Yellow Pages.
CF: What didn’t I ask that I should have?
JT: One thing you’ll see written about everywhere over the next coming months and in the next year or two is that the market is tightening up a lot. That has a wide trickle effect.
Companies that could have got funding as little as six months ago will not get funding today. Venture investors are more risk adverse today and they’re going to be looking specifically for companies producing revenue and that operate in a lean fashion and don’t have huge burn.
I think you’ll find a lot of companies launching with much more strategic plans with how to start generating revenue early, offsetting the necessity for venture dollars.
In a down market companies can’t exist with venture money alone. They’re going to have to produce some revenue themselves.
Feature image credit TEDxDesMoines. Image has been cropped.